Inflation in India is dropping faster than interest rates. So, real interest rates have gone up in a slowing economy—precisely what the doctor did not order.
The International Monetary Fund (IMF) points out in a note on its website that the so-called TED (treasury eurodollar) and commercial paper spreads in India “remain elevated”.
TED spreads are a closely watched parameter in developed markets, since it is a useful way to measure how investors perceive credit risk in an economy. IMF defines India’s TED spread as the difference between the three-month Mumbai interbank offer rate and the yield on three-month treasury bills.
The Reserve Bank of India has been doing its level best to bring down interest rates and increase the flow of credit in the economy. But the elevated TED spreads show that more needs to be done.
There are two obstacles. One, the government’s borrowing binge has rattled the bond market. Two, there are worries about the financial strength of Indian companies. Neither is easy to overcome.