'Countries with negative real interest rates will..': Zerodha's Nikhil Kamath on inflation

A negative real interest rate can be decoded as the nominal rate minus the inflation rate.

Feb 25, 2023,
Updated Feb 25, 2023 3:30 PM IST

HIGHLIGHTS

Nikhil Kamath predicts countries with negative real interest rates to witness rate hikes in future
Kamath explained the real value of money
He said smart money will hedge against borrowing or holding assets

The world is going through an economic slowdown. Amid this, Zerodha’s co-founder Nikhil Kamath predicted that countries with negative real interest rates are expected to see hikes in rates in order to bring down inflation.

A negative real interest rate can be decoded as the nominal rate minus the inflation rate. For example, if the inflation in a country stands at 3 per cent and the interest rate on a loan is 2 per cent, then the lender gets a return which is less than zero.

While sharing a list of 30 countries with real interest rates, Kamath said that the interest rates of 8 countries are higher than inflation.

Further explaining the real value of money, the entrepreneur and investor wrote on the professional networking platform, LinkedIn, “If the real ‘value’ of money deposited in a bank goes down with time, it would likely lead to bubbles across asset classes (real estate, public equity, private equity). Smart money will always try to hedge against this by borrowing/holding assets instead of bank deposits/cash.”

Kamath also mentioned Brazil, where he said that one can debate inflation in the country. “In Brazil, one could argue that #inflation is likely higher than the 5 per cent reported number,” he added.

Kamath’s post garnered a lot of likes and comments. One user wrote, “In the economies that allow negative real interest rates two curious phenomena occur ie: high consumption and high risk entrepreneurship - because for consumers it’s smarter to spend than to save; and for businessmen money is practically ‘free’ so high risk investments can be made at ‘no capital cost’! Though optically these may look good for a while the Austrian economists calls this ‘mal-investments’. Now if the economy is basically large and resilient such a gamble can pay off in the short term. But if economy is a small one and if allowed to linger negative rates can kill the currency and embed infaltion permanently…pushing it to precipice of hyperinflation/ stagflation! In India during 2008-2010 we very nearly fell into that trap until RBI took charge and went singlemindedly after inflation control!”

Another commented, “Japan has a negative CBR and high inflation. It’ll be interesting to see if it plays out as a smart money or bubble across various asset classes. Nikhil Kamath, great post!😊”

Also Read: ‘Is it okay to be saddled with crazy debt?’ Zerodha’s Nikhil Kamath questions idea of studying abroad

HIGHLIGHTS

Nikhil Kamath predicts countries with negative real interest rates to witness rate hikes in future
Kamath explained the real value of money
He said smart money will hedge against borrowing or holding assets

The world is going through an economic slowdown. Amid this, Zerodha’s co-founder Nikhil Kamath predicted that countries with negative real interest rates are expected to see hikes in rates in order to bring down inflation.

A negative real interest rate can be decoded as the nominal rate minus the inflation rate. For example, if the inflation in a country stands at 3 per cent and the interest rate on a loan is 2 per cent, then the lender gets a return which is less than zero.

While sharing a list of 30 countries with real interest rates, Kamath said that the interest rates of 8 countries are higher than inflation.

Further explaining the real value of money, the entrepreneur and investor wrote on the professional networking platform, LinkedIn, “If the real ‘value’ of money deposited in a bank goes down with time, it would likely lead to bubbles across asset classes (real estate, public equity, private equity). Smart money will always try to hedge against this by borrowing/holding assets instead of bank deposits/cash.”

Kamath also mentioned Brazil, where he said that one can debate inflation in the country. “In Brazil, one could argue that #inflation is likely higher than the 5 per cent reported number,” he added.

Kamath’s post garnered a lot of likes and comments. One user wrote, “In the economies that allow negative real interest rates two curious phenomena occur ie: high consumption and high risk entrepreneurship - because for consumers it’s smarter to spend than to save; and for businessmen money is practically ‘free’ so high risk investments can be made at ‘no capital cost’! Though optically these may look good for a while the Austrian economists calls this ‘mal-investments’. Now if the economy is basically large and resilient such a gamble can pay off in the short term. But if economy is a small one and if allowed to linger negative rates can kill the currency and embed infaltion permanently…pushing it to precipice of hyperinflation/ stagflation! In India during 2008-2010 we very nearly fell into that trap until RBI took charge and went singlemindedly after inflation control!”

Another commented, “Japan has a negative CBR and high inflation. It’ll be interesting to see if it plays out as a smart money or bubble across various asset classes. Nikhil Kamath, great post!😊”

Also Read: ‘Is it okay to be saddled with crazy debt?’ Zerodha’s Nikhil Kamath questions idea of studying abroad

TAGS:

'Countries with negative real interest rates will..': Zerodha's Nikhil Kamath on inflation

While sharing a list of 30 countries with real interest rates, Kamath said that the interest rates of 8 countries are higher than inflation.

RECOMMENDED

{{title}}