Financial repression is the policy of Govt.. As per this policy, Govt. tries to keep low interest rate on saving. Every investor who invests money in the form of deposit in banks will get low interest return on the saving. This interest will also less than current inflation rate.
Example
For example, you have saved Rs.15,00,000 in Govt. banks and getting Rs. 10,000 per month interest on your saving. But as per current inflation, your per month expenses are Rs. 20,000. You do not want to take the risk of loss of your saving in real world of business. So, you have still kept your saving in Govt. bank. Govt. has taken the benefit of your saving in the form of debt. So, you can see interest rate is decreasing from 13% p.a. to 7.5 p.a. in India.
With this financial repression policy, Govt. and business persons gets loan at cheep rate of interest. They have to give less interest on debt. Because banks are giving less interest on saving. So, repayment of loan will easy. But due to coward nature of small saving people, interest on saving is decreasing day by day. This is also exception of rule of calculation of interest under supply and demand of money.
How Financial Repression Works?
We can also say it as "How financial repression policies affect on rate of interest on saving?
1. Through Central Bank, Govt. control on the rate of interest on saving. If interest rate will decrease. More people will get debt at low rate. But it is big loss of saving community because they can not survive in the inflation time.
2. Govt. can take big tax amount on banking service. This is direct expense for banks. For this, bank will increase the charges on depositors. So, real interest on saving will decrease.
Reference of Books
Example
For example, you have saved Rs.15,00,000 in Govt. banks and getting Rs. 10,000 per month interest on your saving. But as per current inflation, your per month expenses are Rs. 20,000. You do not want to take the risk of loss of your saving in real world of business. So, you have still kept your saving in Govt. bank. Govt. has taken the benefit of your saving in the form of debt. So, you can see interest rate is decreasing from 13% p.a. to 7.5 p.a. in India.
With this financial repression policy, Govt. and business persons gets loan at cheep rate of interest. They have to give less interest on debt. Because banks are giving less interest on saving. So, repayment of loan will easy. But due to coward nature of small saving people, interest on saving is decreasing day by day. This is also exception of rule of calculation of interest under supply and demand of money.
How Financial Repression Works?
We can also say it as "How financial repression policies affect on rate of interest on saving?
1. Through Central Bank, Govt. control on the rate of interest on saving. If interest rate will decrease. More people will get debt at low rate. But it is big loss of saving community because they can not survive in the inflation time.
2. Govt. can take big tax amount on banking service. This is direct expense for banks. For this, bank will increase the charges on depositors. So, real interest on saving will decrease.
Reference of Books
- Financial Repression and Economic Reform in China
- Monetary Policy and Financial Repression in Britain, 1951 - 59 (Palgrave Studies in Economic History Series)
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