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Informist, Thursday, Jul 18, 2024

 

--RBI paper: Natural interest rate in Jan-Mar for India was 1.4-1.9% 

--RBI paper: Must accurately measure, update natural interest rate 

 

NEW DELHI – India's natural rate of interest – the real interest rate that is neither expansionary nor contractionary for the economy – rose to 1.4-1.9% during Jan-Mar from 0.8-1.0% during Oct-Dec 2021, a Reserve Bank of India staff paper said today. The natural rate of interest of 0.8-1.0% for Oct-Dec 2021 has also been revised upward to 1.1-1.3%, reflecting the revisions in GDP data, the paper said.

 

"Monetary policy divergence across jurisdictions has reignited the debate about the level of the natural rate of interest," the paper authored by RBI official Harendra Kumar Behera said. The views expressed in the paper do not necessarily reflect those of the central bank, the RBI said.

 

The rise in the natural rate of interest for India is mainly driven by growth in potential output, the staff paper said. "These estimates are centred in wide bands of uncertainty, warranting careful interpretation in the assessment of the monetary policy stance," the paper said.

 

RBI Governor Shaktikanta Das said in April that the central bank would undertake a study after the release of the final GDP numbers for 2023-24 to assess potential growth and the real rate. 

 

Real interest rate is defined as the rate of return over and above the expected rate of inflation in an economy. With a 6.50% repo rate and the RBI projecting CPI inflation at 4.5% in 2024-25 (Apr-Mar), the real interest rate would be 2%.

 

Two external members of the Monetary Policy Committee have said that the real interest rate of around 2% is too high and had voted for lowering the repo rate in the June meeting, even as the other four members voted to keep the rate unchanged at 6.50%. Ashima Goyal, external MPC member, has said that neutral real policy rate, or natural rate of interest, is around 1% in Indian conditions of high unemployment and an ongoing transition to higher productivity employment.

 

Das last week said that the neutral real interest rate is a theoretical construct, and monetary policymaking must be guided by observable numbers in the economy. The RBI governor said the neutral interest rate was constantly subject to structural changes in the economy, as evidenced by the fall in the neutral rate during the pandemic. Influenced so strongly by the period it is calculated for, and the associated uncertainties in that specific time period, Das said the neutral rate had many issues as a guidepost for policy, he said. 

 

According to the staff paper, the growth of potential output was around 7% during Jan-Mar. "The wide credible bands at different phases represent large uncertainty about the estimates. Accordingly, the growth of potential output at present could lie somewhere in a range between 5.9% to 8.3%," the paper said. The RBI has projected India's GDP to grow 7.2% in 2024-25, slower than 8.2% last year.  End

 

Reported by Shubham Rana

Edited by Saji George Titus

 

 

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