Central banks worldwide face an unenviable task: setting real interest rates that neither suffocate growth nor let inflation run amok. For India, this balancing act is crucial. With aspirations to become a “Viksit Bharat” by 2047, the country needs sustained growth of 8-10%. While low rates can induce economic growth in the short term, they also stoke inflation and asset bubbles. Conversely, high rates may slow growth but stabilise an economy during times of high inflation. The key is finding an optimal balance that supports high and sustainable growth.With average inflation at 4.5% and the policy rate at 6.25%, the real rate is 1.75%, which some economists view as steep and a drag on economic growth. Thus, the clamour for a 75-bps cut isn’t mere speculation—it’s rooted in the urgent need to align policy with the economy’s shifting potential. But this depends on controlling inflation steadfastly in the 4%+/-2% range while managing the rupee volatility. This assumes that a 1% real interest rate is optimal for unlocking our economy’s growth potential. However, the relationship between real interest rates and economic growth can vary depending on several economic factors. Even if the RBI acts, the bigger question remains: Will rate cuts alone push India into the 8-10% growth trajectory, or are we ignoring deeper structural fractures?
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