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BofA: RBI raises estimates for India’s natural interest rate and potential output

Investing.com -- Bank of America (BofA) Global Research, in a note on Monday, highlighted the recent study by the Indian central bank on potential output and the natural interest rate.The study reveals a significant upward revision in the neutral rate, driven by an estimated increase in potential output to around 7% in Q4FY24.

The report notes a post-pandemic reset for India's potential output, with estimates ranging from 5.9% to 8.3% year-on-year in Q4 FY24. This revision is attributed to improved productivity, new investment opportunities, and credible fiscal consolidation efforts.

The revised natural interest rate estimate for Q4 FY24 is now between 1.4% and 1.9%, compared to the previous range of 0.8% to 1.0%. This upward shift reflects the higher potential output and underscores the significant structural transformations and demographic shifts underway in the Indian economy.

The Reserve Bank of India (RBI) notes that while the natural rate serves as a reference for gauging monetary policy stance, informed judgment is needed to navigate the broad range of model estimates and avoid excessive tightening or loosening of monetary policy.

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