Negative interest rates on bank deposits. This is happening!

Can negative interest rates of the central banks lead to negative interest rates in bank deposits?

The deeper prospects of having long period of negative interest rate on the Central Bank's policy rate.

  Shubham Saxena
  B.Tech. IIT Dhanbad

Charging negative rates on bank deposits by public is fortunately not a common practice by now. This is a feature born out of a scenario of keeping negative policy rate by the central bank and a economy characterized by low-inflation and low growth tendencies over a long period of time.
Well, it is happening in some of the banks of Europe. Generally banks bears the impact of negative interest rates, but it can sometimes be passed on to the depositors if the banks find it hard to sustain with their margins. In Denmark, negative central bank rates have started to lead to some bank customers being charged a negative rate on their accounts. In Denmark, Danske Bank is doing that for large professional depositors with large deposits.Interestingly, Danske Banks have even charged negative interest rate for some short term loans!

Could it become a widespread practice with other banks in Europe and Japan?

Here is a thing to understand, why most European banks won't do it soon what Nordic banks have started doing- charging depositors with negative interest rate.

Sweden and Denmark have some particular reasons other than combating deflation and stimulating demand. Nordic countries are becoming almost completely cashless economies. The Central bank of Sweden, Riksbank don't want this practice to become absolute.

Even sellers of Sweden’s version of the Big Issue magazine - Situation Stockholm - are able to accept payment via debit or credit card. Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATM machines from rural areas,annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: "If you have to pay in cash, something is wrong."

Therefore charging negative rates would push people to pull out some money and keep it in cash form. However it is unexpected to be done largely.

Another important reason is that recent ECB actions have led the currencies of Switzerland, Sweden and Denmark to appreciate strongly against Euro which has further deepened the deflationary tendency in these countries. So their central banks are forced to further cut down the rates to a higher negative value. Recently in 2016, Sweden further lowered rates. Pressure is also building on Denmark to cut down rates further.

What moves Indian Rupee? —Effect of FDI, FII in deciding Indian Rupee exchange rate.

In case of India, it may seem that FIIs and FDIs, which makes a lot of headlines, have a great role in moving Indian Rupee exchange rates. But it is quite far from reality. In last 5 years India has received very high inflows both in FPI and FDI while INR has moved structurally downtrend during the period. It is an important factor but not very dominating in long term movement of INR. 
There has been a fundamental change taken place in recent decades in respect of the importance of exchange rate movements due to capital flows as against trade deficit and economic growth rate. The latter do matter but the former is primary determinant of day-to-day exchange rate movements.

Yearly FPI (FDI) and NRI flows in India: FDI, FII flows failed to lift Indian Rupee; Capital flows

It is very clear from the table that even high FDI and FPI inflows couldn't save INR from depreciating in long term.

So what is actually moving Indian Rupee?

It is the trade balance, notably the movement in crude oil and gold prices and export growth, that wields a greater influence on the Indian currency. 
For instance, in 2014, the country received the highest ever FPI and FDI inflows at $42 billion and $34 billion respectively. NRIs fused another $11 billion into bank deposits. But the INR lost 2.7 per cent against the USD. In 2009, when $18 billion of FPI flows lifted Indian equity prices from bear-market lows, INR gained around 4%. It implies that there are other more dominating factors taming Indian Rupee.
In 2012, a sharp increase in gold imports to $56 billion was one of the reasons why the INR reeled down. Moreover the crude oil, having greater share in imports, has more impact on INR movement than that of gold.

Interest rate hike by US Fed plus falling brent crude oil prices did support INR which was over however compensated by the low exports due to weak global demand especially in Europe (interestingly China doesn't have high impact on India as we have only around 3.8% exports to China) and exiting FPIs.

Future of Interest Rates in Global Economies. Are falling interest rates in structural downturn?

A perspective on interest rates in global economies in next 2-3 decades.
 
author- Shubham Saxena

The world economies are entering into a deflationary period. 
Interest rates is more likely to fall over a long

term for next 1-2 decades. As economies mature interest rates inevitably fall.The US Fed is still grappling with near zero interest rates. Japan and many European countries have kept their policy rate near or below zero. The interest rates of most emerging economies- South Asian countries, India have already been on structural downtrend for last 2-3 decades. 

For instance, in 90's Indian commercial banks used to offer 12-13% on 3-5 year fixed deposits and now it has substantially fall in the range of 6-8%. US Fed in 80's used to offer interest rates as high as 19%, crushed over 3 decades. 

Global trend of interest rates; Eurozone- ECB, Britain, US- US Fed, Japan- BoJ, India-RBI, Engand- BoE

After near zero interest rate, QE is often used as an instrument of last resort by the central banks to spur growth in the economy. Now, FTA (Free Trade Agreement) blocks are assuming overriding positions in order to spur global growth rate. Trade blocs like TTP, TTIP, RCEP and various bilateral and multi-lateral FTAs are taking new shape in the globalised world to prevent it from sliding into the state of protectionism.

To maintain growth, inflation and competitiveness, central banks readily manipulate interest rates as a primary tool. The desperate fall of interest rates is signal that all the other tools, from traditional policies to moral persuasion, have already been explored or are now ineffective to prevent the economy from slipping into deflation and subsequent spiral fall of prices. 
As a last tool to make recovery, central banks resorts to either ultra low interest rates/negative interest rates or QE, qualitative easing. We have seen bond buying program in Japan and US to stimulus growh. The ECB chose to experiment with negative interest rates first before turning to the bond buying program.


Aging Population

Interest rates in any economy is a function of number of savers relative to the number of borrowers. In nations where numbers of savers outnumber borrowers, interest rates are bound to dive down. Such is a case of countries like Japan and Singapore. With continually growing medical science and tech. and supportive old age facilities the life expectancy of both developed and developing countries is increasing. 


Flaw Government Policies

There is another important aspect that is crucial in influencing the interest rates i.e. government policies and regulations. History has witnessed many governments introducing flawed-ineffective policies in the name of social-welfare, de facto political dividends, which actually drains public money for unproductive output. Unworthy people readily get their hands over it; if corporations and individuals frequently find and exploit the loop holes like tax evasion and avoidance, benefits etc. and the system don't take appropriate steps to curb them, the system gets strained resulting an intangible pressure on interest rates to rise. Latin American countries has shown very well how un-orthodox monetary policies and excessive unproductive government policies can plunge the economy.

You will get a good insight in this answer
Jose Geraldo Gouvea's answer to Why are real interest rates in Brazil so high?
For instance if there are frequent cases of tax evasions in a country, government will not get enough tax receipts and this makes government resort to more borrowings to raise money for expenditures.
In a falling interest rate regime, government of some countries tries to shield the investors by introducing various small saving schemes which offers attractive interest rates. It's consequential effect can be seen in case of India, Why, in spite of RBI reducing its repo rate, aren't other banks reducing their base rate?