Actually speaking deflation is used for reduced commodity prices, but I am specifically using the term here for you to understand that today you are giving money to banks to keep money with them. How?
Real interest rate is the differential between the interest rate that you earn on your money ( we are talking fixed income here) and the rate of inflation in the economy.Today for investing in a 5 yr deposit with any bank , you are paid 8 % per annum. The rate of inflation in todays economic condition is running at 10%.
Hence the your money earns 8- 10 = - 2% real interest !!
so for every paisa that you keep in the bank , you actually are paying them 2 % to keep the money with them!
Not good at all, the government and everyone else has been praying that the inflation rate comes down . The RBI has already taken some steps to increase interest rates in the economy and hence bring down inflation.
Usually such a situation doesnt continue for long. Real interest rates need to balance out.
It is quite a contradiction. Some of the economies of the world are facing deflation ( the US being one) and others are facing Inflationary pressures, mostly the emerging markets.
For people who are in the US or developed world, the interest rates in India are quite attractive compared to the low interest rates scenario in their countried. It would augur them well to invest their money in NRI accounts which gives them at least twice the interest rates vs the US at Zero risk! If you havent yet opened an NRI account- please do so immediately. Invest for the lower time frame, because interest rates are on the way up in India!
For others in India, with almost a zero percent increment in the last fiscal for a lot of the companies in the IT or export sector, you should ensure even more carefully that every penny is sweating it out and earning some good returns on your hard earned money.!!
Take Care!
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