What is Economic Growth? Economic growth is the process by which a nation’s wealth increases over time.

But everyone has a different perceptive on economic growth.

A person who is in his late 50s and is going to retire next year, he is worried about fluctuating interest rates, mainly because he will be going to invest his hard-earned money in Fixed Deposits and Senior Citizen schemes.

For a housewife with a limited source of income, the rising cost is a concern. For the home buyer, the interest rate on a home loan is a concern, while for the laborer, it is about the two times meal for his family and himself.

And for the nation, it is all about the GDP growth number.

Controlling Inflation and GDP Growth

Inflation & GDP growth rate are inversely related, which is the main cause of fluctuating interest rates. Hence, the interest rate on FD and the economic health of the nation are interrelated.

The rising interest rate on Fixed Deposits may make you feel good, but is it really good? Well, the answer is No! We have to consider the Net Return, which is FD Interest Rate minus Inflation. These numbers show the real picture. No matter how high FD’s interest rate is, if the net return is negative, in the long term, it will only decrease the purchasing power.

The above flow chart shows that when GDP Growth Rate is low with respect to the desired level, measures are taken to increase the demand and liquidity in the market. This is done by decreasing the repo rate so that the loans become cheaper and people take more loans for spending.

Hence, the demand and supply will increase, leading to a boost in economic growth. Simultaneously, it will also decrease the rate of FDs. If the liquidity continuously floats, it will pressurize inflation, and the policymakers will have to take measures to control inflation, as explained below chart:

In the tug of war of GDP Growth rate and inflation, the government typically has a relatively short term view when it comes to growth, but as an institution, the Central Bank has a long term view where low inflation would eventually lead to high growth scenarios.

We need to trust that our Central Bank will take care of all the GDP Growth Numbers. As an investor, we need to watch the market closely and follow our goals and invest accordingly. Avoiding market noises is the key!

Happy Investing!!

Neeru Seal

Alpha Research