Real Interest Rates and Economic Growth in Post-Inflation Targeting India: An Empirical Reflection (2016–2020)

Real interest rates have been at the centre in the debates of growth and monetary effectiveness in the aftermath of India’s adoption of inflation targeting strategy in 2016. The study examines the connection between real interest rates (which are the difference between the nominal repo rate and the consumer price inflation) and the GDP growth rate in India between the period 2016 and 2020, after the adoption of inflation targeting period. By using quarterly data of the Reserve Bank of India (RBI) and the Ministry of Statistics and Programme Implementation (MoSPI), the paper uses an Autoregressive Distributed Lag (ARDL) model to evaluate both short-run and long-run dynamics. Early evidence indicates that the high real interest rates that prevailed may have had the dampening effect on the growth of the output and this aspect shows the trade-offs the RBI has to consider between keeping the inflation in check and also stimulating growth. These findings have insightful implications on monetary calibration in the future inflation targeting economies.