Are Rates Stressful or Are We Barking Up the Wrong Tree?

'Unfortunately...': Nithin Kamath explains why India's middle class stays broke despite earning more

savings. Typically we associate rising interest rates with declining stock, real estate, and bond prices. If most of our wealth consists of these three kinds of assets, then higher interest rates should be associated with a decline in our wealth, and because we feel poorer, we reduce our consumption rate. This seems fairly plausible too. When we fe

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If it is the wealth effect, and not the consumption-postponement effect, that really drives changes in savings and consumption rates, then raising rates would reduce consumption only if there was a negative correlation between interest rates and wealth. There clearly is in the United States, where most household wealth consists of real estate and s

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Putting Them Together

The United States is running larger fiscal deficits than most other countries, and its private sector has a higher proportion of long term fixed rate debt than most other countries. This means that in an interest rate hiking cycle, the United States has been rather de-sensitized to rising rates compared to other countries tha

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For several years before the pandemic, the Indian banking sector was embroiled in a crisis that manifested in the form of rapidly rising non-performing assets (NPAs) on the balance sheets of banks. NPAs were triggered by large-scale defaults in the corporate sector, with the bulk being reflected on the balance sheets of inadequately capitalised pub

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