RBI report says India’s neutral interest rate has risen after pandemic
Reserve Bank of India economist wrote, providing long-awaited commentary on a key gauge that is used to predict the future course of borrowing costs.
“The natural rate of interest estimated earlier for Q3:2021-22 is revised upward from 0.8 -1.0 per cent to 1.1-1.3 per cent, reflecting revision in GDP data. The current estimates suggest a wide range between 1.4-1.9 per cent for Q4:2023-24,” wrote Harendra Kumar Behera from the RBI’s Department of Economic and Policy Research in the central bank’s July Bulletin.
The views are personal and do not reflect those of the central bank. RBI Deputy Governor Michael Patra provided guidance for the article.
The natural, or neutral rate of interest, is the real interest rate arrived at accounting for inflation. It is generally associated with the rate of interest at which an economy runs at optimal capacity without stoking inflation. A higher real interest rate has been perceived as bringing down the scope for cutting interest rates.
According to Behera, the difference between the real policy interest rate and the natural rate measures the monetary policy stance. When the policy rate – the RBI’s repo rate – is set below the natural rate, the stance is accommodative, while a repo rate that is higher than the natural rate represents a restrictive stance.
At present, the RBI’s repo rate is 6.50%, while the central bank’s inflation forecast for the current financial year is 4.5%. This implies a real rate of 2%. Behera’s article provides a range of 1.4-1.9% as the current range
