Of Rupees and Paise...and DOSA, if you like

February 2, 2016

Of Rupees and Paise

The cut in the selling prices of petrol and diesel by 4 paise and 3 paise by public sector oil marketing companies on February 1 has attracted more ridicule than acceptance or praise. Earlier couple of revisions in fuel prices were also in ‘paise’ terms only.

Coins up to 25 paise have been withdrawn from market and 50 paise coins have been pushed out of circulation by market. In the circumstances, GOI and RBI should consider making absence of coins with denominations below one rupee official and guide the market to fall in line by pricing all products in rupee terms only.

Now that dollar is accepted as the name of the currency accepted in international market, and we are in the process of ‘branding’ India, GOI could think in terms of introducing an Indian New Rupee(INR) worth the present value of Rs50 or so which could be named Indian Dollar or Bharat Chakra or any other attractive name that could be decided after conducting a competition.

M G Warrier, Mumbai

Dosanomics

Excerpts from the C.D. Deshmukh Lecture by Dr. Raghuram Rajan, Governor, Reserve Bank of India at NCAER, New Delhi on January 29, 2016.

 “Before I turn to the main body of this talk, a word on interest rates. Industrialists grumble about high rates while retirees complain about the low rates they get today on deposits. Both overstate their case, though as I have said repeatedly, the way to resolve their differences is to bring CPI inflation steadily down.

Let me explain, starting with the retiree. The typical letter I get goes, “I used to get 10% earlier on a 1 year fixed deposit, now I barely get 8%”, please tell banks to pay me more else I won’t be able to make ends meet”. The truth is that the retiree is getting more today but he does not realize it, because he is focusing only on the nominal interest he gets and not on the underlying inflation which has come down even more sharply, from about 10% to 5.5%.

To see this, let us indulge in Dosa economics. Say the pensioner wants to buy dosas and at the beginning of the period, they cost `50 per dosa. Let us say he has savings of `1,00,000. He could buy 2,000 dosas with the money today, but he wants more by investing.

At 10% interest, he gets `10,000 after one year plus his principal. With dosas having gone up by 10% to `55, he can buy 182 dosas approximately with the `10,000 interest.

At 8% interest, he gets `8,000. With dosas having gone up by 5.5%, each dosa costs `52.75, so he can now buy only 152 dosas approximately. So the pensioner seems vindicated: with lower interest payments, he can now buy less.

But wait a minute. Remember, he gets his principal back also and that too has to be adjusted for inflation. In the high inflation period, it was worth 1,818 dosas, in the low inflation period, it is worth 1,896 dosas. So in the high inflation period, principal plus interest are worth 2,000 dosas together, while in the low inflation period it is worth 2,048 dosas. He is about 2.5% better off in the low inflation period in terms of dosas.

This is a long winded way of saying that inflation is the silent killer because it eats into pensioners’ principal, even while they are deluded by high nominal interest rates into thinking they are getting an adequate return. Indeed, with 10% return and 10% inflation, the deposit is not giving you any real return net of inflation, which is why you can buy only 2,000 dosas after a year of investing, the same as you could buy before you invested. In contrast, when inflation is 5.5% but the interest rate you are getting is 8%, you are earning a real rate of 2.5%, which means 2.5% more dosas. So while I sympathize with pensioners, they certainly are better off today than in the past.”

Q. E. D