Sunday, January 01, 2017

Modi's announcements

Demonetisation, despite its theoretical merit, has inconvenienced the layman enormously. So, the prime-mover, Narendra Modi, had to come up with some pacifiers to lull people's anger at least for some more time. Thus we now have interest subsidy (subvention) on some housing loans, conversion of Kisan cards into Rupay cards, interest waiver on some agricultural loans for 60 days (!) and 8% interest deposit scheme for senior citizens.

Modi has dared to commit his political capital for the bold move of demonetisation. RBI has let him down terribly by dearth of planning for introduction of new notes. Modi's new year-eve announcements are not a free lunch.

It is not clear how long the subvention on home loans (upto Rs.12 lac) will last. Those gullible borrowers who do not factor this uncertainty in their calculations may end up under-estimating their EMIs for the longer period. This may lead to sub-prime crisis. It was funny to note some TV channels mistaking 3% interest subvention as 3% interest rate on home loans. That would have been a bonanza for borrowers.

8% Fixed rate interest may look attractive for senior citizens now. Once inflation reasserts itself and interest rates resume their northward journey, depositors may feel tricked and trapped in a low-return long-term investment. 10-Year period for deposit is too long for depositors' comfort.

Modi is caught in a cleft stick though his bold moves are interesting and justifiable.

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