India's natural rate of interest has increased in the post-pandemic period and is anticipated to rise further, fuelled by the growth of potential output, according to the Reserve Bank of India's (RBI) monthly bulletin released on Thursday.
The central bank explained that the natural rate of interest is linked to an economy functioning at full capacity without causing inflationary pressures.
The central bank stated that the estimate of the natural rate is between 1.4% and 1.9% for the fourth quarter of 2023-24, Reuters news agency reports.
The RBI noted that the last estimate, made for the third quarter of 2021-22, was between 0.8% and 1.0%.
Furthermore, although the natural rate is not directly observable, it serves as a benchmark for assessing the stance of monetary policy, the central bank added.
“When the policy rate is set below the natural rate, the stance is regarded as accommodative, and the converse signifies a restrictive stance. The policy stance is neutral when the real policy rate is at the level of the natural rate,” the RBI stated.
With inflation currently at 5.1% and the central bank's key lending rate at 6.5%, the real rate in the economy is 1.4%.
The RBI expects inflation to average 4.5% for the current fiscal year, indicating an average real rate of 2%.
“Several forces propelling rising investment demand are expected to increase the natural rate of interest going forward,” the central bank commented.
The RBI also estimated that the growth of potential output lies within a range of 5.9% to 8.3%.
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