Neutral rate raised on shift in potential output

Estimate of 1.4-1.9% increase for Q4FY24 sparks debate about possible policy repo rate cut

- MANOJIT SAHA

A Reserve Bank of India (RBI) study has estimated the neutral rate of interest in India between 1.4 per cent and 1.9 per cent for Q4FY24, which is a sharp upward revision from the previous estimate of 0.8-1.0 per cent for Q3FY22, sparking a debate if the central bank can cut the policy repo rate.

The report pointed out that updating the estimates of natural rate of interest for India with post-pandemic data, the study found an upward shift driven by growth of potential output.

"With headline GDP growth rates trending higher after the pandemic, a step-up in the natural rate estimates appears appropriate," said Aditi Nayar, chief economist, ICRA.