India’s real interest rate has turned positive after headline retail inflation eased below 6% for the first time in 2022.
- The RBI has hiked repo rate by 225 basis points since May, taking the terminal rate to 6.25%, to curb inflationary pressures.
- Inflation had stayed above the central bank’s repo rate for this year, implying a negative real rate.
- India returned to a positive real policy rate in Nov, 2022, and this month’s 35bp (basis point) rate hike to 6.25% has moved the real (inflation-adjusted) repo rate even more emphatically into positive territory.
- A real interest rate is an interest rate that has been adjusted to remove the effects of inflation.
- Once adjusted, it reflects the real cost of funds to a borrower and the real yield to a lender or to an investor.
- A real interest rate reflects the rate of time preference for current goods over future goods
