BS Poll: Majority sees neutral interest rate between 1% to less than 2%

Days after two external members of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee favoured lowering of the policy repo rate, citing high real interest rates, a majority of the respondents to a Business Standard poll said the neutral rate should be between ‘more than or equal to 1 per cent’ and ‘less than 2 per cent’.

The real rate of interest, or the neutral rate, is the difference between the policy repo rate and year-ahead inflation projection.

Bank of Baroda Chief Economist Madan Sabnavis said “…need to have a balance between savings and investment. Savers need to get a return of at least 1 per cent plus to be enthused to save in conventional savings instruments”.

A debate on real interest rate has picked up steam as the repo rate has been kept unchanged at 6.5 per cent since February 2023 despite inflation prints showing a downward trend.

The RBI has projected the Consumer Price Index (CPI) -based inflation rate for 2024-25, as well as the January-March quarter, at 4.5 per cent. “The headline inflation projection of 4.5 per cent for 2024-25 gives an average real repo rate of 2 per cent, implying that the real repo rate will be above neutral for too long if the repo rate stays unchanged,” said external MPC member Ashima Goyal, adding the neutral rate was around unity in Indian conditions, according to the minutes of the June monetary policy meeting.

Goyal, along with Jayant Varma, another external member, voted for a 25-basis-point (bp) rate cut in the June policy. The other four members of the MPC were in favour of the status quo.

The central bank is also conducting an internal study of the neutral rate. RBI Deputy Governor Michael Patra said during the post-policy interaction with the media in June that the neutral rate would be published in the RBI’s monthly bulletin.

Economists said the neutral rate dropped below 1 per cent during the pandemic but it should now have gone over 1 per cent. “Earlier, during the pandemic, things had slowed down because of which potential growth slowed down and the neutral rate as estimated by the RBI dropped below 1 per cent,” said Sakshi Gupta, principal economist, HDFC Bank.

“Now there have potentially been recoveries, and growth has been stronger. There has been an increase in productivity. So, the neutral rate would have gone up from 1 per cent,” said HDFC Bank Principal Economist Sakshi Gupta.

What should be the neutral interest rate for the Indian economy?

More than or equal to 1% to less than 2%
 

Bank of Baroda

Nomura

Indusind Bank
Emkay Global

ICRA

IDFC First Bank

HDFC Bank

Bandhan Bank

STCI

More than or equal to 2%

I Sec PD