India`s natural rate of interest now at 1.4%-1.9%, says Central Bank
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India's natural rate of interest has moved higher in the post-pandemic era and is expected to edge up further, driven by the growth of potential output, the Reserve Bank of India said in its monthly bulletin released on Thursday.
The natural rate of interest is associated with an economy operating at full capacity without generating inflationary pressures, the central bank explained.
The estimate of the natural rate is at 1.4-1.9% for the fourth quarter of 2023-24, the central bank said.
It was 0.8-1.0% for the third quarter of 2021-22, the last time the RBI made an estimate, it said.
Though the natural rate is not observable, it serves as a reference for gauging the stance of monetary policy, the central bank said.
"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 said.
Currently with inflation at 5.1% and the central bank's key lending rate set at 6.5%, the real rate in the economy stands at 1.4%.
The RBI expects inflation to average 4.5% for the current fiscal year, suggesting 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 said.
The RBI also estimated growth of potential output to lie somewhere in a range between 5.9% to 8.3%.
