DOSAnomics

By Raghuraman, P

28th April, 2016

On one side we all want lower Home loan and Car loan EMIs and on other side we feel miserable when we see that interest rates for FDs and RDs going down drastically. But RBI governor Raghuram Rajan actually says that lower interest rates can actually end up in giving us better returns. Sounds counter-intuitive, isn’t it. He went a step further and used DOSANOMICS to explain it.

 

Before we begin, we are making couple of assumptions here basis facts and past trends, which are, higher interest rates normally results in higher inflation, while lower rates result in lower inflation.

 

Now, over to DOSANOMICS

 

Scenario 1: Interest rate of 10% on your FD with inflation at 10%

 

Assuming you have Rupees One Lakh and you need to buy DOSAs costing Rs 50 each, you can buy 2000 DOSAs for your principal amount. Instead you put it in an FD, which gives you 10% interest, returning you Rs 10,000 end of the year. But in the similar period, the inflation rate has gone up by 10%, which means everything is more expensive by 10% including the DOSA, which now costs Rs 55 each. Now with your Rs 1,10,000 you can buy the same number of DOSAs i.e 2000 only (1,10,000 divided by 55). So, your investment has technically given you zero returns.

 

Scenario 2: Interest rate of 8% on your FD with inflation at 5%

 

Assuming you have Rupees One Lakh and you need to buy DOSAs costing Rs 50 each, you can buy 2000 DOSAs for your principal amount. Instead you put it in an FD, which gives you 8% interest, returning you Rs 8,000 end of the year. But in the similar period, the inflation rate has gone up by about 5%, which means everything is more expensive by 5% including the DOSA, which now costs Rs 52.50 each. Now with your Rs 1,08,000 you can buy 2057 DOSAs (1,08,000 divided by 52.50). So, your investment has technically given you 57 DOSAs additionally or about 2.85% in returns after adjusting for inflation.

 

Moral of the story: Don’t get psyched by interest rates alone, but also get psyched by inflation rates!

 

Gastronomic moral of the story: Keep watching your DOSA consumption. If it has gone up, means you are making lot of money!

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