The world is becoming a topsy-turvy place where savers are being charged a fee. The interest rates on long term investment plans such as bonds are dropping. The yield on 10-year bonds globally is showing a divergence from 3-month yield rates and the central banks are taking accommodative stances to steer the economy towards the consumption side. In the falling interest rate scenario, the cost of future pension promises is ballooning for governments and pension funds.
This makes one question the shrinking of the global economy. Is it due to trade war tensions or due to no deal Brexit issue? Do you think Donald trump and John Morris are the villains behind the slow down?
Unattractive Government Bonds
Somehow, to a little extent, the fundamental reason of this continuous decline in long term interest rates is the aging populations and the integration of ‘savings-rich’ China into the world economy. Generally, banks and insurance companies put a significant portion in safe and liquid instruments like government bonds, but now these are yielding low returns and do not look very attractive.
The real rate of interest is decided by balance of supply and demand for the pool of global savings. A billion Chinese who put more than 40% in savings are putting a load on the supply desk.
Increased Size Of Elderly Population
On the demographic front, the size of world population belonging to the peak earning group i.e. people in the age bracket of 40-64, is rising over the past decades. Along with this, skewed income means rising income primarily for the already rich segment which combined, brings an increase in savings.
Globally the Chinese saving rate is the highest. Keeping this in mind, should the emerging economies or other developed states stop saving and start consuming more to stay away from the slowdown?
On the Indian side of events, our fiscal deficit touched Rs 5.47 lakh crore in the first quarter of 2019-2020, which is 77.8 percent of the budget estimate for the current fiscal year. In this situation, the government’s fiscal stimulus actions that were taken recently are in coherence with the monetary policy to narrow the current account deficit through offshore borrowing which can bring some positive stance for the economy. The bond market’s biggest worry of fiscal slippage is thus taken care of soundly, on the macroeconomic front.
According to estimates, the revenue growth is running short by almost Rs 1 trillion (Rs 1,00,000 crore). Thus the 1,76,000 crores payout by RBI will narrow the revenue shortfall and allow the government to keep the fiscal deficit to the budgeted 3.3% of GDP.
Moving forward, we can expect Indian market to become a safe haven for global funds because of our varied demographics, less per capita savings and proactive fiscal stimulus activities.