Natural Interest Rate: Assessing the Stance of India’s Monetary Policy under Uncertainty

Using a theoretical framework that combines the essence of Ramsay’s growth model and the New-Keynesian macrodynamics, and applying the Kalman filter estimation technique, this paper finds that India’s natural real interest rate in Q4 of 2014-15 lied in a range of 0.6 per cent to 3.1 per cent, even though core estimates point to a narrower range of 1.6 per cent to 1.8 per cent. These estimates indicate that the real interest rate gap was negative in India for a major part of the last about ten years when CPI inflation was persistently high, implying that monetary policy stance of the Reserve Bank was largely accommodative rather than anti-inflationary.