Real Interest Rate
Source: CMIE Economic Outlook, 1 Finance Research
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What does Real Interest Rates data represent?
- The Real Interest Rates data represents the interest rate (repo rate) adjusted for inflation. It is calculated by subtracting the inflation rate (measured by Consumer Price Index) from the nominal interest rate (the repo rate set by the RBI).
- Real interest rates provide a more accurate measure of the cost of borrowing and the real return on savings, as they account for the impact of inflation.
What is the significance of Real Interest Rates data?
- Real interest rates are a key consideration in monetary policy. Central banks adjust nominal rates to manage real rates, aiming to control economic activity and inflation.
- Real interest rates impact the profitability of banks and financial institutions, as they affect the real cost of funds and the return on assets.
- The level of real interest rates affects the attractiveness of saving versus spending, capital flows, exchange rates, and overall economic activity.
- The difference between nominal and real interest rates can indicate market expectations about future inflation or interest rates.
How to interpret the Real Interest Rates data?
- The trends in real interest rates reflect the changing cost of borrowing and the real return on savings over time. Higher real rates can encourage savings, while lower rates might stimulate borrowing, spending and investment.
- The impact of real interest rates on the central bank's monetary policy (particularly in terms of managing inflation and stimulating or cooling the economy) and the financial sector, including banks' lending practices and profitability, can be assessed by analysing the trends.
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