Recent Cutting interest rate on Bank Deposit in Iran

Posted on Posted in Business Guidelines

Depositing money in banks in Iran have been one of the Iranian routine ways for investing because of high interest rate. The economy of Iran has been experiencing new situation after president election in June 2013. Rouhani’s main policy in economy is controlling inflation rate. After 3 years the inflation rate decreased from 35 percent to a one-digit rate according to recent report which is released by Central Bank of Iran. So, this provides a great opportunity for decreasing bank deposit interest rate as a trigger for economic growth. Bank deposit interest rate was about 22 percent officially in the begging of Rouhani`s presidency. However, any investor could invest their money with rate of 27 per year in most of private banks (negotiable rate). According to private banks club recent approval, interest rate on deposits, decreased to 15 percent. In addition, the president of central bank of Iran announced in his recent press conference that this rate would be decreased to 13-12 percent in near future.

One of the worst consequence of high interest rate on banks` deposits is increasing the cost of production, therefore investors prefer to deposit their money in banks instead of investing in infrastructure and producing goods. It is important to note that return on deposited money in banks is tax free and these two important issues made this kind of investment much attractive for risk averse investors which may cause deeper recession in economy. The recent agreement among banks has a great influence in capital market in long term too, this may lead to entrance of fresh money to Tehran Stock Exchange and because of low volatility in other parallel market like gold and foreign currencies, our prediction seems more realistic.

Theoretically, as the interest rate on bank deposits is one of the benchmarks for risk free rate ratio, cutting this rate leads to a higher no growth price to earnings ratio from 4.5 to 6.66. The mentioned significant increase in price to earnings ratio may cause a growth in stocks market price.

To conclude, it seems that significant decrease in inflation rate and cutting bank deposits rate can rescue Iran’s economy from stagflation but there is a big concern about liquidity. According to central bank of Iran`s last report which is released in April 2016, total liquidity in Iran’s economy was about 9,251 thousand billion Rials in December 2015 and it is estimated that liquidity reach to more than 1,000 thousand billion Rials at the end of last Persian calendar year (20th March 2016). The mentioned liquidity could derail economy from its way, the question is how could Iran’s government deal with this important issue.

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