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Why Bank Interest Rates Depends On Inflation

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Bank of Japan‘s monetary policy is out. BOJ will keep its rates unchanged for the time being. It is keeping its deposit rate unchanged at negative 0.1 percent. Yes you read that right they have a negative return on investment which means if you deposit your money there in Bank of Japan, you will get 0.1% less than what you deposited. Compare this to what our banks give in a Fixed Deposit – right now it is at 7.75% average a year.

You must be thinking we are so lucky to be living in India. Actually the fact is the rates depends a lot on current inflation.

India’s inflation in July 2016 was 7%. And banks gave a Fixed Deposit return of 7.75%. So if you did an FD your money beat the inflation by just 0.75%.

Now let’s go to Japan. In July 2016 Japan’s inflation was -0.5%. Yes minus 0.5%. So if they keep their money in bank in a savings account all they might get back is may be around -0.3%. So basically if they keep their money in bank they will beat inflation by 0.2%. But if they do a fixed deposit according to Bank of Japan rates they get a return of 0.5-0.1 = 0.4%. Which means their money beats inflation by 0.4%. So in economics terms it is getting a return of 0.4% a year. In India a FD gives a return of 0.75% a year. Do you see a major difference? No.

So my point is that education makes a difference. Those who just read the news that BOJ has kept the interest rate at -0.1% must be thinking to be very lucky to be born in India to get a FD return of 7.75%. So in their minds the difference is 7.85% but the real fact is, keeping the inflation in mind the real difference is only 0.75-0.4 = 0.35%.

Do not forget in a negative inflation prices of everything goes down. It includes prices of land, houses, food items, clothes and everything else that we buy to live. I do not have the knowledge of the salary they get in Japan but frankly salaries also goes hand in hand with inflation slightly beating it. Like in India salary increases anywhere from 8-10% a year I am sure in Japan the salary increase will be negligible or just 1%.

If you compare to inflation vs salary increase of India and Japan, you will see there is not a major difference between the two countries.

This is the difference good education makes. Short term traders read one or two lines news and react instantly – buy a call or a put and force themselves into trading then never read the news again thinking they have done a great trade. Some might have bought calls to day some puts and both are losing money. Long term traders think what may happen next few days or even month or two, then do some more research based on that they take a trade fully hedged.

The results are obvious: Short term traders make 5% return a day next day they lose 10% and this continues for years.
Long term traders make 3% or more return a month and one or two months is a year they lose 2 or 3% – but overall they grow their wealth and are happy.

In fact it effects their health too. Short term traders keep looking at Nifty every second from 9.15 am to 3.30 pm effecting their eyes and heart and increase in stress. Long term traders look at the performance of their trades just once or twice a day and carry on with their jobs or business. The effect is low stress, happiness and good health.

I still fail to understand even now from the people, 90% of the calls I get ask me the same thing – Sir how long it will take to make a profit? I reply 10-15 days average. Then they say why can’t we convert it to Intraday? My reply is name me one Intraday trader who has accumulated a lot of wealth in ten years time but the condition is all the profits has to come from Intraday trading. Then they say Sir we do not know. Then I say do you think you will do it. Then they say not sure. Then I say then why are looking for Intraday trade? They keep mum.

My point is learn to live in real life do not get sucked into virtual world which has a lot of show off elements but nothing in real.

For example a lot of people spend more than 2 hours every day on FaceBook and WhatsApp with friends, but compare this to a person who spends 2 hours every day with friends in person not virtually available on a mobile phone. Who is much happier? Obviously the one who does real socialization not the one who does a virtual socialization.

Same thing applies in stock market trading. Most Intraday traders except people like Ravi, are living in a virtual world where there is no happiness and money, but almost all long term traders live in real world where there is happiness and money.

Therefore I request you to educate yourself as much as possible before taking a trade. Else you know the results. Hope this article teaches you to be more patient with a long or medium time horizon in investing and stock trading, and not become an impatient very short term trader.


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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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