Fed's 25 bps rate cut assumes significance: Business Standard 1st Aug 2019

The rate cut by the US Federal Reserve (US Fed) is significant for four reasons. The first is that it was widely expected and hence was a not a surprise. In a way, it is a victory for President Donald Trump (the $1 trillion tax cut has not quite worked?). The second is that it comes after 10 years, which is a fairly wide hiatus and could be the beginning of another rate cut cycle. The third is that the cut has been invoked at a time when there is no recession or any sign of it, and even though the economy has slowed down from 3.1 per cent in Q1 to 2.1 per cent in Q2, the unemployment rate is healthy (at a 50 year low) and inflation is close to the 2% target. Fourth, for the first time, it appears global concerns of slowdown have also played its role.

The reason for such a cut ostensibly seems to be to secure the future growth path, or what is being called an ‘insurance cut’ to ensure that it should not be affected due to interest rates being high. This sends a positive signal to the developed world in particular, as in a way it induces other central banks to pursue such policies. With the US-China trade standoff still to be resolved and with Brexit also in limbo, a cut in rates should help to assuage sentiment.

Lower interest rates not accompanied by a recession do not signal that there is a slump in the world economy, and hence, global trade should not be affected to begin with. However, if the US economy does start to slip in Q3 further, then the implication would be that conditions are going get harder. The International Monetary Fund (IMF) has already signalled lower growth in the world economy though US is still projected to be at 2.6%. As ECB has also signalled easing further, this can be read in tandem as good news for the markets.

What about the dollar?

A rate cut cycle means a weaker dollar, which is good for the US but may not be so for the rest of the world. It has been seen in the past that as the dollar weakens due to lower growth tendencies, the rupee has tended to strengthen which will pose a conundrum for us as exports will come under pressure with a double whammy – slower demand due to lower global growth and a stronger rupee. This will not be good for the current account deficit (CAD).

However, normally a weak US economy with lower rates tends to move investors away to other markets, especially the emerging ones, and this is something that has brought in the dollars for us. This is where the aftermath of the Budget should be put in context because there has been an exodus of FPI flows from the equity market post July 5th. The question is whether or not we will be able to bring these flows back.

Also, the view of the Monetary Policy Committee (MPC) will be important because if the decision is to keep lowering rates, the difference in yields will diminish thus blunting the edge that the Indian market offered.

Lower interest rates and a weaker dollar also means stronger gold, as the metal will continue to shine under such circumstances. From the Indian point of view greater investment demand for gold can surface putting pressure on a pressurised trade deficit. Therefore, there will be more volatile conditions in the markets for sure which we have to be prepared for.

OMOs: A tool to finance budget? Economic Times Aug 21 2019

FY19 was quite unique in so far as it witnessed the highest level of open market operations (OMOs) in India’s monetary history. At Rs 2.99 lakh crore of purchase of securities, it exceeded the previous high of Rs 1.54 lakh crore in FY13. OMOs are a tool of monetary policy whereby the RBI provides durable liquidity to the banking system by buying government securities held by banks or absorbs liquidity by selling such papers. Can this be interpreted as a case of monetisation of deficit? In FY19, incremental deposits were Rs 10.5 lakh crore while incremental credit was Rs 11.4 lakh crore. Incremental investments were Rs 0.62 lakh crore. Considering that banks hold on to around 50 per cent of total G-Secs with issuances of Rs 5.71 lakh crore, the incremental investments should have been much higher even after adjusting for repayments. The answer is that the RBI had bought back Rs 2.99 lakh crore of G-Secs, thus providing liquidity to the system. Is this the right thing? Two issues come up here. First is that we may be moving back to the system of monetisation of fiscal deficit. When the FRBM was introduced in 2003, it was decided that automatic monetisation of deficit by the RBI (through 4.6 per cent adhoc T-bills) would be done away with from April 2006. But, it was silent on RBI buying securities in the secondary market as part of monetary policy which implied monetisation through the backdoor.

The table gives the OMOs conducted in the last 8 years, gross borrowings of the central government and ratio of OMO/borrowings. In 6 of the 8 years, the RBI was buying G-Secs from banks and hence plugging the liquidity gap

In FY19, a little over half of the gross borrowings has in effect been financed by the RBI through OMOs. This has also led to an increase in reserve money of Rs 3.67 lakh crore while the rise in net RBI credit to the government was Rs 3.70 lakh crore. Government lending was the main driver of money supply this year. The RBI support has been around 10-50 per cent of total borrowings. There is a direct linkage between deficits and monetisation. While primary issuances are being subscribed, the RBI does step in to provide funding to banks by buying back other G-Secs under OMO.

The second issue relevant from the point of view of the market is that the RBI has actually helped to keep bond yields artificially down. Counterintuitively if liquidity was not supplied through OMOs, G-Sec yields would have increased sharply. On a point to point basis, GSec yields were almost unchanged – 7.42 per cent end-March 2018 and 7.34 per cent end-March 2019. By continuously intervening through OMOs, the RBI facilitates government borrowing at a lower cost. As a corollary, higher borrowing does not quite lead to private sector getting squeezed or crowded with automatic RBI support coming in as there is an implicit view that yields should not move up sharply. Ideologically, OMOs should be used for supplying durable liquidity when the system has deep shortfalls. The 2018-19 ‘episode’ appeared to be one where the system could not generate funds because bank deposits did not grow as financial savings were down. As demand for credit picked up, the private sector had to compete with the government’s borrowing programme and the market equilibrium would have justified a higher rate of interest if not for RBI OMOs. In this context, can we really say that there has to be some limit on the OMOs by the RBI so the true G-Sec yields are determined in the market? High government borrowing should lead to prices moving down and interest rates going up. However, with assured support from the RBI, the interest rate structure has been retained at a lower level. Whether this is right or wrong is hard to say, but for sure the case made out of high government borrowing crowding out the private sector can be contested.

Financing budget expenditure through RBI surplus is novel financial engineering: Financial Express Aug 15 2019

The focus of attention is once again on the Jalan Committee as it is to be seen how much money can possibly be transferred to the government and the modalities of the same. This addresses the issue of utilisation of RBI’s excess reserves, which have not been touched so far on the balance sheet side though surpluses generated on account of income and expenditure are transferred almost fully to the government. The other issue is how balance sheet entries will be drawn up to accommodate such drawls.

RBI has a balance sheet size of Rs 36.3 lakh crore. The liabilities include a large part of issued currency, which, as of June 2018, was Rs 19.2 lakh crore. Another part, of around Rs 6.5 lakh crore, is deposits kept with RBI, of which Rs 5 lakh crore is under CRR stipulation. These two components are tangible. The ‘other liabilities’ constitute the second largest part of the balance sheet at Rs 10.4 lakh crore, and is the Committee’s target.

Within this category, there are four significant components: contingency fund (Rs 2.3 lakh crore), asset development fund (Rs 0.22 lakh crore), investment revaluation (Rs 0.13 lakh crore), and currency and gold revaluation reserve (Rs 6.91 lakh crore). It looks likely that the contingency fund and currency revaluation funds will be the ones targeted for transfer to the government.

The contingency fund has remained virtually unchanged in the last five years at Rs 2.2-2.3 lakh crore and is supposed to be used in case of revaluation of securities held by RBI. With yields coming down, the value of securities would go up and so would these funds, becoming one potential source of funds. The other is currency revaluation—quite high at Rs 6.91 lakh crore. If the rupee declines, the fixed set of dollars would be valued higher in rupee terms on the assets side, increasing the reserves on the liabilities side. However, if the rupee appreciates, as is the case today, the reverse would occur and the rupee value of reserves will come down.

Hence, one is really looking at these Rs 10 lakh crore of reserves, a part of which can be potentially monetised by RBI and passed on to the government. Since this is legally permitted, there can be no questions in this regard. Some of the questions that the Committee will address are the following.

First, what is the quantum of reserves that can be monetised and drawn out of the balance sheet? Is the contingency fund adequate or too high. However, if we go back another five years, a level of Rs 1.5 lakh crore was also witnessed in 2009. Therefore, depending on how far back the Committee looks, there is still potential to draw down this reserve on the grounds that one could manage with a lower amount, as there has not been an instance when the level dipped sharply. Prima facie, keeping a limit of Rs 2 lakh crore could be a safe level that releases RS 0.3 lakh crore.

The currency revaluation reserve has been more volatile—Rs 5.3-6.9 lakh crore in the last five years, with the lower end being reached in 2017 and a low of Rs 1.2 lakh crore in 2010. Here, the Committee can think of lowering the reserves by a considerable amount—by, say, around Rs 1.5-2 lakh crore—and keeping 15 lakh crore as the floor. Overall, around Rs 2-2.2 lakh crore can be drawn from these two reserves.

The second question which follows is that if reserves were to be lowered, how would adjustment be made to the assets side of the balance sheet? If the liabilities get reduced by, say, Rs 2 lakh crore, the assets, too, should be lowered. This will be interesting, because if the currency revaluation reserve is reduced, it means that some part of the forex should drop out of the system. RBI has been buying forex from banks to supply liquidity and, hence, any drawdown of forex will mean selling the same to banks, which will create a liquidity problem. Therefore, it is more likely that the dollars have to be kept in a separate suspense account to balance the accounts. Even if the contingency reserve is reduced, it could mean lowering the stock of GSecs (through OMOs), which will impact liquidity in the system as well as GSec yields. This, too, may have to be held in a different account, much like the MSS bonds. The Committee’s call on this aspect is something that will be awaited.

The third question is whether the transfer will be done in one stroke or over a period of time. The indication is that it will be done over a period of three to five years, which, being more manageable, has the advantage of reducing market volatility. A one-shot transfer can mean a major shock for the financial market because if RS 2 lakh crore is taken out from, say, the currency revaluation account, the shock for the forex market can be a matter of conjecture. Alternatively, if the contingency fund is being lowered, a call has to be taken on RBI’s GSec holdings, which can create disturbances in bond yields. This is something RBI has to consider finally.

Fourth, would the transfer of funds would be conditional or not? Economists would argue that if the RBI reserves are used for financing the budget and are treated as a revenue/capital receipt, depending on how the Committee sees it, it would resemble the disinvestment receipts that are used for general expenses. On the other hand, if they are earmarked for, say, bank capitalisation or specific infra projects, it would be targeted and easier to accept. Unlike disinvestment, which can spread over decades as the government can potentially sell stake in various entities, in this case, it would be almost limited by the target amount decided by the Committee. This is so because the recent experience has been that all RBI annual surpluses are transferred to the government as non-tax revenue. Hence, scope of these reserves increasing may be limited. This will subsume the concept of a macro norm being applied on the desirability of reserves and surpluses in relation to the balance sheet size, which can be 15% or 20%.

Using RBI surplus reserves for financing the budget expenditure is definitely novel—more akin to recap bonds that finances expenses through a different financial engineering. With fiscal pressures mounting, it is natural that new sources of finance are explored as traction in tax revenue is always uncertain. Sale of assets, like land or property, can be the next frontier, and the Railways could open up space for discussion.

It’s the manager: Here’s how will offices operate in coming years: Financial Express 11th Aug 2019

It's the Manager: This book focuses a lot on what employees want and how managers have to work to ensure that the best is gotten from employees.

All companies run for profit, it being the raison d’être for doing business. Success is ultimately linked to customer engagement as this is the way to improve profits, because at the end of the day someone has to buy the goods or services.

Some people feel profits can be achieved by cutting costs, but such an approach is not sustainable as it can work only in the very short run. And often reducing costs by cutting down on staff is self-defeating. This way, companies lose out on experienced staff who are always on the lookout for opportunities outside once such a culture is created. In such a situation, even the high-performing staff members feel insecure and tend to leave. To successfully engage with customers the answer is to have very good employee engagement. Engagement is a stronger term than satisfaction, as the latter helps to maintain interest, while the former works to make them a part of the company’s plans.

This book focuses a lot on what employees want and how managers have to work to ensure that the best is gotten from employees. Machines can do the menial part of work, but finally it is the employees’ minds that work to ensure that business moves ahead. How does one understand what employees want? Here the Gallup Surveys show that millennials don’t just want remuneration, but to grow meaningfully with the company. They keep looking for an exciting career where they are mentored by their manager and allowed to grow and hence use their talent. A surprising finding is that they do not really look out for freebies like free food and indoor golf courses in office. Long working hours are agreeable, but it has to be meaningful. In a way they are judging their managers all the time and hence the latter, too, have to take on the role of grooming the workforce. That’s why the title of the book is It’s the manager, as finally everyone’s boss has a role to play.

The interesting finding is that if there are 50,000 employees, there will be 5,000 managers at different levels of hierarchy. Of them, 30% will be excellent and 20% lousy, while the rest will just about exist. If one doubles the 30% to 60% and reduces the 20% to single digit, the firm will do well and the CEO does not really matter.

There is a playbook for managers where their role changes from boss to coach. They need to meet the high expectations of the employees and have to work in this direction. It is a continuous process and in doing so, they have to give employees more responsibility. Managers have to continuously converse with the employees and give them feedback and direction. Therefore, progress reports are important and cannot be kept just for the end of the year when the appraisals are done. They need to be transparent in the way in which promotions and pay hikes are given so that the employees understand the reason. Democratic functioning where everyone gets the same reward for differential work no longer works in successful organisations.

Let us look at elements of a successful team that emerges from these surveys. Employees should know what is expected of them and have access to all the tools required to do their work. They should be given opportunity to take on projects and receive fair feedback along the way, including remuneration. The supervisor should be interested in their work and aware of what they are doing. Employees need to be involved in the decision-making process at all levels so as to feel important. If these elements get a tick mark from the employees, then the company is on the right track.

Gallup Surveys in USA since 2001 show that over two-third to 85% of employees have never felt an engagement with their work. Clearly the onus falls on the managers at all levels to ensure that this is rectified. The responsibility starts with the CEO, who should take it upon herself to engage the immediate echelon reporting to this position, which, in turn, will percolate downwards.

There is a section on the future of work where some very interesting concerns are raised. The first is diversity in terms of gender and race that has to be balanced by all companies as there are laws which ensure fair play but have to be followed in spirit. Here the Me Too movement and differential pay and representation on management have been taken up. Second is remote working where employees can work from home. There is no clear answer here as to what is the best situation, as there are different views on working from home all the time, as well as being in office all the time. The clue given is that it depends a lot on the kind of job that is involved where remote working works. Where customer interaction is required or strategic planning, it has to be in the office space.

Third is the role of technology, which is scary as humans become less relevant. Here, too, it is felt that to run robots one will require differently skilled people to guide them and write algorithms. An example has been given of Amazon hiring more people, even as robots can be seen in their warehouses. Trainers, explainers and sustainers will still be required in this environment. Fourth is the growing prominence of gig workers who work part time with less commitment to the company, and which is also going to be a thing of the future.

Hence, going ahead, the workplace needs to change and the practice of management has to adapt to the change. The workforce wants a mission and purpose and not old-style command and controlling bosses. It wants people who can guide and mentor them and this is how the future of successful organisations will look like.

HDFC 2.0 | The story of how HDFC has adapted to remain a frontrunner: Financial Express 4th Aug 2019

Did you know that probably the most successful bank in the past 25 years which has an almost unblemished record actually does not like to speak of itself? It does not celebrate any landmark and may not appear to be most employee-friendly organisation. But it is still a company people like to work for because it is extremely professional. This organisation is HDFC Bank which is run to near perfection and has been delivering shareholder value incessantly. You get to know about all this and more in the book titled HDFC Bank 2.0 by Tamal Bandyopadhyay.

HDFC Bank 2.0 – From Dawn to Digital
(By Tamal Bandyopadhyay)

Tamal has a way of telling a story which makes you want to flip the pages one after the other, even when he talks of the13 people who started the bank a quarter century back and who may not be corporate celebrities. The bank is known by the face of Aditya Puri, whose photo is also on the cover page. Is this a biography of Aditya Puri or HDFC Bank? In a way, it is hard to tell, because while there is a section on the man and his style of work and some personal insights, the rest of the book is on the bank but with Puri’s shadow looming on almost every section.

It is quite appropriate that this book (the second on HDFC Bank by the author) by Tamal comes out on the 25th anniversary of the bank, which may not have had formal celebrations internally. But this for sure is a good chronicle of everything that went in right from the time Deepak Parekh first approached Puri and then created the team. The last part of the ongoing story which surely will have further twists would be the thrust on digital banking and the move from conventional modes to digital. The digital bank now believes that it is a financial marketplace and everything can actually be done online or through various applications. This goes for getting loans in 10 seconds to shopping using various devices that embed discounts with merchants while making payments without the use of money. Curiously, Puri was a staunch defender of demonetisation.

So how is Aditya Puri as a leader? The fact that he has been at the helm speaks a lot of the faith of the board on the person. The bank has been the frontrunner in every innovation and though ICICI Bank may have been more aggressive, HDFC Bank has been more than steady, as the numbers show. His leadership style is to delegate but hold everyone responsible for the result. Hence while there is no interference with the heads of departments, there is serious rebuke when people slip. There is a clear carrot-and-stick policy. Most of the initial team members have left for better jobs, but Tamal quotes extensively to show that they had taken Aditya Puri into confidence and hence there was little friction.

Now coming to the bank, there has been quite a transformation in the business path which started off with corporate banking and moved to the retail space to capture smartly the market by also blending with parent HDFC when it came to taking on home loans with a business equation. Corporate banking focused on leveraging the supply chains of customers. The strategy then moved on to SMEs, which is the next big thing in Indian industry. Relentless pursuit of business, howsoever small, and never compromising on regulation and quality of assets has been the hallmark of the bank.

Any big-bang moves by the bank? Yes, there have been two very big mergers which have been detailed by Tamal, including all the action in the board. There are details of how Times Bank and Centurion Bank, which had earlier taken in Bank of Punjab, became part of HDFC Bank.

Any false steps? There have been times in its journey when the bank got on the wrong side of regulators. There was the famous IPO scam and the name Roopalben Panchal will ring a bell with most readers. The derivatives scam was uncovered by the RBI, and then there was the more recent advance remittance against imports scam of 2014. But this can also be seen as parts of business that can go amiss in any system, especially if it is as large as HDFC Bank. Otherwise, the bank has been one with the least blemishes, which is remarkable. There has never been a single controversy relating to the management, which speaks of the high governance standards pursued by the organisation.

Tamal’s narration of anecdotes involving babies being brought to work in the initial days or the senior team eating at a roadside stall – which was a quirk of Puri — is quite interesting. Readers get to know about the seniors taking dogs for a walk in Lonavla! However, the questions that remain unanswered are: Who after Puri? Which brand is bigger, HDFC or HDFC Bank? Who built the bank — Puri or Parekh?

The Space Barons | Big men, big money Financial Express 28th July 2019

When you start reading The Space Barons, you could mistake it for a work of fiction, as it has stories of how some bright adventurous minds went about trying to get man to space, sometimes not really for scientific purposes but on a ‘holiday’. There are several books on space where stories are centred on various larger-than-life personalities making this attempt within the realm of fiction. Considering there are an equally large number of movies that deal with such themes of space and space creatures or men going beyond earth, there is some sense of deja vu while reading this book, even though it talks of real people doing real things.

The book by Christian Davenport deals with largely successful entrepreneurs who have built great enterprises like Amazon, Tesla and Virgin looking to conquer space. The storyline is all about how these men have boldly gone where normally only governments venture and how their perseverance is remarkable, as they have not given up even when faced with failure. Davenport has been covering issues dealing with space and defence- related industries for The Washington Post for long and hence has the expertise to write a rather fascinating book on the ventures of these businessmen.

Jeff Bezos’s Blue Origin and Elon Musk’s Space X occupy the core of this book and Davenport goes into the details of their trysts at conquering space. Whether it is West Texas or Cape Canaveral in Florida, these two adventurers have it all to deliver rather swashbuckling enterprises. Right from discovering the land to set up these missions to the eventual fructification of the launches, the author takes us through a diverse range of incidents involving several players. The idea is to make man fly to space and back successfully. Space ventures are unconnected to running enterprises in the fields of automobiles or retail, and hence such ventures are more a reflection of their giant egos, lofty ambition and determination. Such enterprises cost a lot of money and getting investors to believe in them is always a challenge, even if they are using their own funds.

Both Musk and Bezos had this fascinating goal about doing extraordinary things since childhood and TV shows like Star Trek made an impression on the former, who always believed that it was all possible. As everyone knows, Musk is one of the staunchest supporters of colonising Mars, and his company is working toward it. Bezos was always disappointed that the government has not done much on space after the Apollo exploits and in a way started his enterprise to challenge the realm.

The thought was that what the government could not do, would be achieved by individuals with a vision. These men have believed in disruption of a large scale and their business enterprises bear testimony to this idea, as they have changed the way we live our lives. But now their eyes seem to be set on space, which has literally become the last frontier, if not an immediate one. Interestingly, their personalities are quite different. Bezos is patient and low profile, while Musk is brash and does not mince words and actions. But both love to talk of their exploits and dreams and are skilled in execution.

In between, there is also the story of Richard Branson and how his adventures fared. The Virgin story has been quite amazing and the rise from humble music to an airline and space has been covered well by Davenport , as Branson will also qualify as a space baron. Virgin Galactic was Branson’s banner for transporting people to space, which has had a fairly tumultuous journey with considerable failure along the way.

A question that may be asked by the reader while going through this book is whether all these trysts are really worth the money and effort. One normally associates space with the NASA and government outfits, as it is normally within the realm of governments to work on such programmes which is more an extension of scientific research. Commercialising space and promising travel to high net worth individuals is another story that has been built by these entrepreneurs.

The book is heavy in research as it captures moods and human emotions of not just the protagonists but also others involved with these experiments. It delves into their lives and how they have evolved into successful businessmen who can seriously think out of the box. Based on interviews with several persons, the book is made to read like a novel. Davenport is able to make the narrative exciting with insights as he has had access to several of the main players, which makes the storytelling interesting.

At another level one may actually question whether such adventures are called for, as it involves a lot of money. This has become a habit of the rich where the indulgences go beyond luxury as they expend their energy to do something different. We have heard of such billionaires spending on purchasing jewellery, mansions, art and islands. This is probably a new way of how the ‘big men’ spend their ‘big money’

The real interest rate conundrum: Business Line 29th July 2019

Arguing for lower interest rates when inflation is declining can be misleading. Prices actually fall only when inflation is negative

An error that is often made when we talk of real interest rates is the failure to distinguish between ‘change in prices’ and ‘absolute prices’. This becomes important when we go back to the basic approach to credit policy.

Monetary policy has always been spoken of from the point of view of the borrowers and hence it is argued that lower interest rate helps borrowing, which can lead to higher investment and hence growth. This is the nominal interest rate one is talking of.

Now when inflation comes down it is argued that the real cost of borrowing goes up if interest rates remain unchanged and hence there is need to lower the nominal rate, which is done by lowering the repo rate.

Hence if the repo rate is 5.75 per cent and inflation is 3 per cent, the real interest rate is 2.75 per cent. If inflation comes down to 2 per cent then the real interest rate increases to 3.75 per cent. This is the logic.

The household view

Let us look at this phenomenon from the point of view of a household. When interest rates on deposits come down there is decline in income which affects purchasing power and, hence, demand for various goods and services.

Let us assume that when the repo rate is 5.75 per cent, the deposit rate offered is 7 per cent for one year when inflation is 3 per cent. If the RBI were to lower the repo rate to 5.5 per cent if inflation drops to 2.75 per cent and the deposit rate comes down to 6.75 per cent, the income received as interest comes down. Therefore this is not an optimal situation for the saver.

But here the economist points out that this is not really the case because inflation too has come down and the real rate in both the situations is 4 per cent.

If the household does not recognise this fact then it is in a state of money illusion that needs to be set right. This is the argument of real interest used by the economists who advocate rate cuts commensurate with inflation changes.

However, it should be noted that inflation is defined as the rate of change in prices and is hence the first derivative change in absolute numbers. Therefore when we say that inflation is coming down, it is not that prices have fallen which would be the case if inflation is negative.

It is just that the rate of change of prices is lower than what it was earlier, which gives a feeling that they have eased. By juxtaposing an absolute number with a first derivative number of a variable which is an index, we have created this anomaly.

 

 

Saver’s angle

The same can be presented in a different way. Let us look at an individual who has say an income of ₹5 lakh that was put in a deposit in 2013-14 (see Table).

Let this amount be put in a bank deposit of one year, which changes every year based on how banks react to RBI policy.

Therefore, the income received on this amount would be the interest payment. Alongside is juxtaposed also the CPI index which is recalibrated based on how inflation moved over the years with 2013-14 as the base.

The interest income earned could then be transformed into an index which shows how income for the individual would have moved.

Now the table shows some really interesting points. First, the individual has actually seen erosion in her income which has come down by almost 25 per cent on a point-to-point basis.

This is because interest rates have come down almost continuously on one-year deposit (which have been taken to be the mid-point of the deposit rates in the RBI database for the year) from 9 per cent in 2013-14 to 6.80 per cent in 2018-19.

Second, when economists say that inflation too has come down, which is a fact, from 9.3 per cent to 3.4 per cent on a point-to-point basis, it gets misleading because prices are still rising, while income is falling.

The price index has been recalibrated at 2013-14 being the base and inflation reckoned over this number which shows that inflation has actually gone up by around 25 per cent during this period cumulatively.

Third, the last column looks at the traditional real interest rate concept where the CPI is deducted from the deposit rate, which indicates a real return of 2.4-3.4 per cent, which appears a fair rate.

However, no saver would be happy with this situation because there has been a double-whammy with interest rates coming down income has come down sharply. At the same time, cumulative inflation has eroded purchasing power, and one would be rightly aggrieved in this situation.

The economists’ view that real interest rates have gone up will not be accepted when purchasing power is eroded.

This conundrum is not hard to solve as there is something amiss in the premise when we interpret declining inflation to mean declining prices, which is not the case. Prices do continue to increase at different pace which gives the feeling that we are paying less for the commodity basket — which is not true.

Therefore, it is necessary to probably keep aside the argument of real interest rates when arguing for lower interest rates in an environment of declining inflation.

We need to go back to the famous words of Ayn Rand: “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.” It is in the concept.