Before heading to the subject, Let’s see what Investopedia mentions.

Negative interest rates refer to a scenario in which cash deposits incur a charge for storage at a bank, rather than receiving interest income. Instead of receiving money on deposits in the form of interest, depositors must pay regularly to keep their money with the bank. This environment is intended to incentivize banks to lend money more freely.

Negative interest rates are a perfect example of why many financial thinkers said the 2008 crisis made an entirely new world.

INTEREST RATES ARE playing many roles in the world of finance. First, they show the level of risk. They are the way of earning in fixed income. they are the way to reward the government. Recently, when I was going through an article about the interest rates and asset classes, I learned that few countries are now rewarded for keeping deposits. At least in India, where banking is way better than the debt market, we don’t think much about negative interest rates. For Indians, it’s easy. Go to the bank. Deposit the money either with Fixed deposits or savings accounts. We will receive interest on the money. But all over the world, it does not work that way.

As Bloomberg perfectly mentions, “In this upside-down world, savers are penalized, and borrowers get paid to borrow money. Crazy as it sounds, the 2008 financial crisis created a lingering economic slump that drove the European Central Bank to experiment by cutting benchmark lending rates below zero in 2014. Then Japan followed. Some 500 million people in a quarter of the world’s economies ended up living with rates in the red. The idea is to jolt lending, spur inflation and reinvigorate economic growth by pushing through the floor after other options are exhausted. Instead, half a decade later, what once seemed unorthodox has become entrenched and hard to shake.”

So what are they? To understand it, we need to understand what simple interest rates are.

Interest rates are the way to reward the depositors against some risks. Let’s take ten years of Government bonds issued by the Indian government, paying 6.585% ( While writing this). Why is it producing only that much? There are some reasons.

  1. The government of India is not having the luxury of printing $. So instead, it prints something called the rupee, which is not used mainly as currency in global trade.
  2. India has inflation. We are not japan or the US, where inflation is meager.
  3. We are not in Europe. We are in India. The infrastructure is not developed like in Europe. The government is supposed to be spent on it.
  4. The current account deficit for India has been negative for quite some time. To cover it, the government of inia needs to invite more and more capital. To reward them, we need to pay interest.
  5. Political risk, payment risk, and liquidity risk are also there. Global credit rating agencies like S&P, Moody’s, FITCH, etc., decide the rating for India, BBB-.

this and little more things justify the interest rates of 6.585%

but there are some cases where this all went wrong. Inflation, to be specific. Sometimes inflation is needed. Because inflation is negative, growth is not taking place. Right now, inflation targeting is part of the policy for many central banks, so it makes a global attack on inflation. That also affects the cost structure of many things. Overall this creates a picture like inflation is not growing in large parts of the world, and central banks are trying to increase by subsidizing growth. one way is to make negative interest rates. In the early days, it was limited for excess funds kept with central banks by commercial banks. But then it spread to Home loans, Government rates, and even more types. Right now, around $3 trillion in debt has negative interest rates.

The worst-hit is are banks, financial institutions, and some other lenders.

I am going to end this with one line.

Warren Buffett always said that what we learn from history is that we don’t learn from history.