Fall in interest rates

I am writing this article focusing on individuals, not corporates.

If interest rates fall, the reward from saving falls. It becomes relatively more attractive to hold cash and/or spend. This is the substitution effect – with lower interest rates, consumers substitute saving for spending.

However, if interest rates fall, savers see a decline in income because they receive lower income payments. A pensioner relying on interest payments from saving may feel s/he needs to save more in order to maintain the income from savings.

Usually, the substitution effect dominates. Lower interest rates make saving less attractive. But, for some, the income effect may dominate, and people may respond to lower interest rates by saving more in order to maintain their standard of living.

In my case I decided the substitution effect would be to save more and spend less. After all the reality is I need to make up the loss on the decline on the 'return on my investments'. 

The first course of action should be to invest in the various kinds of Government Bonds (Shanchaypatras) provided you have not utilised the full quota you are allowed to. The interest on these bonds are still the best, however the sooner you do it the better as there is talk of revising these rates too. 

The second course in my opinion would be to open a separate savings account and start saving there, do not touch this account for withdrawals (unless it is an emergency) and keep on putting any extra money you may have into this account.

Some banks give interest of five percent (subject to certain conditions) and the interest is calculated on a daily basis. The plus side is your money is not 'locked in' and you can take it out if there is an emergency.

Alternatively, a lower interest rate may encourage other forms of saving and investment. With very low bank rates, it has encouraged people to look for better yields in the stock market. Before investing in the stock market you must understand it fully and then approach a reputable organisation to assist you in this. 

This is risky business where returns can be very high depending on the market scenario, but then you may also make huge losses. 

Remember there is a positive side to low interest rates– it is a good time to take personal loans to do 'home improvement' or even purchase an apartment!

Lastly, but importantly, many of us are guilty of committing the cardinal sin of living beyond our means. My advice – please do not, especially in times like these!