Last one year has been an exceptional year for Indian Interest rates. While Policy rate viz. Repo Rate has been cut by 25 basis points, the official stance of monetary policy is neutral, and market yields have jumped more than 100 basis points. This behaviour could be the function of rising US yields, the hawkish tone of the Monetary Policy committee, fiscal slippage, expected rise in inflation, absence of bank treasury in Gilts market or combination of all the above factors. This has resulted in above average real interest rates in India which are higher than nominal interest rates in most parts of the world. High real interest rates are benefitting savers but hurting investment. Despite the annual oil bonanza of more than $50 billion, investments are falling as demand is subdued. High real interest rates are resulting in an overvalued rupee which has attracted more than $120 billion plus of carry flows in last three years from global debt investors.
