Ever heard the term ‘Dosa Economics’? No, it’s not about food. It isn’t even about anything related to South India. Dosa Economics is a term coined by the ex-RBI governor Raghuram Rajan in 2016; he used one of India’s most popular foods to explain an important concept in economics.
So what exactly is Dosa economics or Dosanomics?
Raghuram Rajan coined the term and explained the effect of inflation on a person’s purchasing power. The concept of Dosanomics states that high inflation and interest rates will not benefit an investor as much as low inflation and interest rates do.
You may believe that high interest rates will reap you better returns but don’t forget the factor of high inflation rate as well. Things won’t get cheaper for you as the value of goods will remain the
same due to increase in inflation rate.
Let’s understand this with an example:
If you are investing Rs.1,00,000 in fixed deposits for one year with an interest of 10%, then at the end of the year, your returns are Rs.10,000. With this money you will be able to buy a good amount of products in the beginning of the year but as inflation rate increases month by month you will be able to buy those products at the same value as you would have in the beginning of the year. So basically you don’t have a good value addition to your income.
Contrary to this, the concept of Dosanomics believes that the lower the inflation and interest rate is, the better return and value an investor will get.
Suppose you invest Rs.1,00,000 in an FD with an interest of 10% and the rate of inflation is high at 10%. The price of one dosa is approx Rs.55 so a person will be able to buy 1818 dosas with the principal amount and 182 more dosas with the return.
Suppose the inflation rate falls to 5%. So the price of a dosa falls to Rs.52 and the rate of interest also falls at 8%, as the investor you will now get a return of Rs.8000 which will allow you to buy only 152 more dosas. You may think that this will cause you a loss but don’t forget the principal amount here. With the fallen price of dosa you will be able to purchase 1923 dosas plus 152 from the returns.
So over all you will be able to buy 2000 dosas during high inflation and 2075 dosas during low inflation, so obviously you gain more during low inflation and low interest rates.
In conclusion, this is what Dosanomics is all about. Being wise with your money and understanding the economy can be a tedious task but breaking down such concepts will help you the most in the long run.