India Experiencing Negative Real Rate of Interest

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Mar. 24 – The government of India should address the fact that the nation’s nominal interest rate is lower than its rate of inflation to strengthen India’s economic fundamentals, Martin Feldstein, a professor of economics at Harvard University, told the Times of India.

Economists call this situation a “negative real rate of interest.” It occurs when money, if sitting in a bank, actually loses value because inflation is making each individual unit of money lose value faster than the bank can add interest to the deposit.

Feldstein, however, remains very pleased with India’s progress thus far.

“I’m very impressed with India,” Feldstein told the Times of India. “Despite so many institutional flaws, like terrible infrastructure, terrible primary and secondary education system, the GDP is growing at 9 percent annually, there is a variety of industries, so many entrepreneurs, it’s a miracle,” he said.

Professor Feldstein is also an advisor to a Dutch asset management firm, Robeco, and considers India as a very favorable destination for foreign investment. Part of the available opportunity in India may come from the fact that it is—overall—in its earlier stages of development relative to that of China.

“China is much more open than India,” he said. China has done an “incredible job” of growing its economy over the past three decades, but India has room for much more growth, he said.