27/10/2026
Real interest rates, a dream for the saving class
Rohit Kumar Parmar
In India, the two borrower groups, Government and Private sector, aided by the Reserve Bank of India, have and can muscle down interest rates at the cost of the Saving (Household) sector. The Household sector normally receives negative real interest rates, and erosion of value of their saving.
This was considered by the Committee to Review the working of the Monetary System (1985), chaired by eminent Economist Sukhamoy Chakravarty. The digital copy of the report, is available at the link
(https://dspace.gipe.ac.in/xmlui/bitstream/handle/10973/52168/GIPE-210011.pdf?sequence=1&isAllowed=y
The recommendations of the Sukhamoy Chakravarty Committee, the name of which is largely unheard of even among students, teachers and practitioners of Economics, follow.
The Chakravarty Committee recommended that it did not support the idea of pricing Credit too low for both the Government and Commercial borrowers, in Public or Private Sector. This is because low rates of Interest, encourages too much monetisation of Government debt, leaves too little for the Reserve Bank of India's refinance of banks (crowding out effect), discourages effective (and efficient) use of Credit by borrowers, discourages financial savings and reduces profitability of Banks and other Financial institutions. Accordingly, the Committee made recommendations on Deposit and lending rate of banks.
Courtesy, the Insolvency Bankruptcy Code and other steps, large private borrowers, seldom repay, either the principal or the interest. Assets of such lending (NPA linked) are available to other business groups at haircuts, of more than 90 per cent. In respect of Government borrowing, it is rolled over, further adding to debt. At times there are issue of perpetual bonds entailing no repayment. The above creates wasteful capital spending ( ).
The Committee's key recommendations on interest rates was:
i. Deposits of maturity greater than 5 years should have a deposit rate which must be fixed at long term Ṗe (Price expectation) + a positive real ' r ' not less than 2% per annum,
ii. One year deposit rate should be marginally positive in real terms. This implies that it should equal the short term, i.e. one year Ṗe + a small positive real ' r '.
iii. Other deposit rates with varying maturity between 1 and 5 years should be left to be fixed by the banks within the limits of the above 2 rates.
iv. The rate of interest on saving deposits should stay at 5% p.a.
v. These rates must be fixed by the Reserve Bank of India.
