India's Monetary Policy Committee (MPC) has experienced significant tightening over the past year, according to a recent commentary and interview with a Royal Bank of India official in the publication Money Control.
"We do track real interest rates, (but) there is no one standard accepted definition for it," said Assistant Governor for Monetary Policy Viral Acharya.
Over the past year, India's monetary policy has tightened significantly, the commentary said. The RBI's Monetary Policy Committee (MPC) increased the repo rate by 250 basis points to 6.5 percent before finally pausing — albeit briefly, it has underlined — in April. By reducing demand, a rise in the repo rate is predicted to bring down inflation. However, a slowdown is not always caused by rising interest rates, the commentary says. "One only has to look at India's high-growth years prior to the global financial crisis, when inflation was regularly above what is now the upper bound of the RBI's 2-6 percent tolerance band."
The nominal interest rate that has been adjusted for inflation is referred to as the real interest rate. It makes sense for a person intending to invest to deduct the inflation rate from the rate of return on, for example, a fixed deposit. If the outcome is bad, the investment was not worthwhile, the commentary says.
The real interest rate computation is not as simple when it comes to making decisions that have a far higher impact, like the RBI's monetary policy decisions. Real interest rates are merely one of the numerous indications that the MPC considers, and they are not the main factor that determines monetary policy. It can also be inaccurate because it is a derived number, which is notoriously difficult to calculate. But there is no denying its significance, and politicians frequently use it as a guiding principle.
The definition of real interest rates has evolved over the years, with the RBI closely monitoring their impact on the economy. While there is no standardized definition, understanding the concept is essential for making informed investment decisions. As the RBI navigates the complex terrain of monetary policy, real interest rates serve as one of many factors considered in their decision-making process, the commentary concludes.
