We are being made poorer.

Eventually the Reserve Bank succumbed to pressure and reduced interest rate by 25 basis points to 7.75% and the Cash Reserve Ratio, which is the cash banks hold to guard against bad loans, by the same amount to 4%. The hope is that if banks are required to hold less cash they will be able to lend more to businesses and home buyers as the fall in interest rate stimulates people to borrow more. That would have made sense had people stopped borrowing because of the high rates, but not so. Bank credit has grown by 16.3% which is apparently above the RBI's comfort zone of 16%. Also, people should be saving more in fixed deposits to take advantage of high interest rates. Just the opposite. Deposit growth has been 13.3% which is below the RBI's comfort zone of 15%. Are people really stupid not to lock in their money in long term fixed deposits if interest rates are as high as the politicians keep frothing about? At 8% interest rate was way below the inflation rate, the Consumer Price Index soaring at 10%, which means that real returns were negative. With interest rate coming down people will be even less inclined to save which is why the RBI has cut the CRR to increase liquidity in banks. While making people poorer a lower interest rate helps the government to borrow at lower rates to manage its exorbitant spending and may help companies to restructure their loans at a lower rate thus helping banks to reduce their bad loans. Seeking to protect their money against inflation people have been buying gold increasing the Current Account Deficit. To stop people from buying gold the government has increased tax on gold from 2% to 6% while giving tax relief on investment in shares. Politicians hope that large numbers of people will buy shares, either directly or through mutual funds, increasing market capitalisation of companies which can then borrow money against shares. However, stock markets in India are highly manipulated with no control over insider trading, front running or price manipulation which means that chances of losses are very high. Strangely the RBI has asked banks to extend duration of home loans of less than Rs 2.5 millions from 15-20 years, as at present, to 30 years. With property prices at record levels Rs 2.5 millions will buy a tiny one bedroom apartment in a small town which means that it is only for people with low earnings. Why does the RBI want to lock poor people into high interest rate loans for 30 years? Yet the same RBI has increased limits of investment by foreign investors in Indian government and company debt from $65 billion to $75 billion and abandoned the lock-in period. This means that foreigners will be able to borrow in the US at 0% and earn over 7.75% in India to take home. Thus our government is making us poorer while making foreigners richer. Aren't we so lucky?