Interest rate and gdp growth relationship

Exploring the relation between Interest Rates and the GDP Growth Rate in an Indian Context

interest rate and gdp growth relationship

They find that nominal interest rates are consistently positively correlated with growth. The correlation between GDP growth and the. Interest rates are on the rise, at their highest levels in over 4 years. find a correlation between the Year Treasury yield and real GDP. relationship between real interest rates and economic growth. example, the projected growth of GDP is the product of the change in the labor force times the.

interest rate and gdp growth relationship

The relation between interest rates and the growth rate is also affected by the behavioural changes of people. People change patterns, from savings to consumption, regardless of interest rates, once they get used to them i.

As savings go down, the available investment goes down, thereby slowing down the economy. The reasons behind why the transmission of a Monetary Policy is not efficient in India, are as follows. India has administered rates, even now, in the priority sector. This decouples the monetary policy and the growth percentage. Also, outside the priority sector, there are a series of concessions provided. These are for commodities like fertilisers, seeds, kerosene and public distribution system food grains.

Do higher interest rates lead to lower growth? - Livemint

These prices are not impacted by varying interest rates. States are free to pursue their own taxation regimes within certain limits. This leads to a difference in taxation and different interest rates on savings in different states, which creates a fragmented market.

interest rate and gdp growth relationship

In this, the effect of the interest rate cut by the RBI is not uniform and sometimes difficult to predict. A major part of the total lending that goes on in the economy, which as per the RBI website is This is especially true in rural areas.

Do higher interest rates lead to lower growth?

Hence, the rate cuts do not affect much of households and the rural industry. This is a typical Indian phenomenon. To conclude, given the specific context of Indian economy and the numerous variables that affect the growth rate, it is not proper to single out the lending rate as the most important variable affecting growth.

On the contrary it is not a major factor at all. While the government, and not the RBI, should be tackling the root causes of problems, which lie elsewhere.

  • Effect of a Real GDP Increase (i.e., Economic Growth) on Interest Rates

He is an entrepreneur, Co-Founder of an e-Commerce start up. Qrius delivers fresh, immersive writing that answers the question 'Why should I care? Of course, some studies in the past have questioned the broader and commonly assumed relationship between interest rates and economic growth.

The Effect of Real GDP on Interest Rate

The authors conceded that the finding lent plausibility to the notion that monetary policy had become less effective. Even if we look at bank lending rates instead of market rates, the relationship seems to be tenuous.

So, what could explain the results and the divide among economists on such a critical issue? The answer lies in one of the fundamental concepts in economics: A Walrasian or competitive equilibrium is a static state of the world in which markets clear because supply equals demand.

The Effect of Real GDP on Interest Rate | Bizfluent

When a market is in equilibrium, prices become the key variables since there are no quantity constraints. Price movements bring about equilibrium in the market and problems in achieving equilibrium are usually attributed to sources of price rigidity.

This focus on prices is the reason why most of the research and policy discussions in modern monetary economics are centred on interest rates. The hypothesis that interest rates are always negatively correlated with economic growth only holds in such a general equilibrium set-up.

The problem with general equilibrium is that it takes several unrealistic assumptions to show that a market can achieve and remain in equilibrium. When markets are in disequilibrium, non-price factors like the quantity of money and credit become important. The short side principle suggests that in a supply-constrained market like Indiasuppliers of credit have market power and get to decide whom to transact with.

Since such markets are in disequilibrium, lower interest rates need not always lead to higher economic growth. While the results of this new study will be heavily contested in the academic world, they would not come as a surprise to many market participants in Japan, where interest rates have been falling for more than two decades without a significant impact on growth.

Even in India, benchmark interest rates have fallen by around basis points in the last three years, while economic growth has slowed down. Many commentators have blamed high interest rates for muted economic growth. The latest research definitely warrants a closer look at that line of thinking.

interest rate and gdp growth relationship