Ultra low interest rate may spark overseas capital flight

Interest rate is not a big issue for govt at the moment, but focus is currently on the distribution of currency

Apprehending the likely impact of surge in bank deposits following demonetisation on an interest rate, a senior government official on Friday said efforts will be made to ensure domestic rates do not fall below a level as it might result in the flight of overseas capital.

"You cannot bring down your interest rate too low that it leads to a flight of capital to the US. Interest rate is balancing act. You cannot bring it too low or raise it too high," a senior government official said.

However, interest rate is not a big issue for the government at the moment, but the focus is currently on the distribution of currency.

Low-interest rate may make returns on overseas investment and Indian bond market unattractive that may trigger a flight of capital.

As it is, there is pressure on the rupee due to various factors, including an expected rate hike by the US Fed in coming days.

On Thursday, the relentless climb of the dollar resulted in the rupee hitting its record intra-day low of 68.86 on heightened fears over capital funds outflows.

Over Rs 6 lakh crore have been deposited in the banks after Rs 500 and Rs 1,000 currency notes were demonetised on November 8. The government expects to collect Rs 15 lakh crore in total.

With regard to advance tax payment, the official said there may be some impact, but these are short-term pain for long-term gains.

"You don't see a quarter or two quarter, but look at 12 quarters or so, which is going to see significant improvement," the official added.