A Reserve Bank of India (RBI) study has estimated the neutral or natural rate of interest in India between 1.4 per cent and 1.9 per cent for Q4FY24.
- The estimate is a sharp upward revision from the previous estimate of 0.8-1.0 per cent for Q3FY22.
- The report pointed out that updating the estimates of natural rate of interest for India with post-pandemic data, the study found an upward shift driven by growth of potential output.
- Neutral interest rate is measured as repo rate minus inflation projection for one year. Currently, the repo rate is at 6.5% and average inflation for Q4FY24 is estimated at 4.5%.
- The neutral or natural rate of interest is the real (net of inflation) interest rate that supports the economy at full employment/maximum output while keeping inflation constant.
- However, the RBI Governor said that even if one can argue that real rates are high, that is not so. The RBI chief reiterated the bank’s commitment to bringing down inflation to its 4% target while keeping in mind the objective of growth.
