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Are real interest rates in India about to plummet?
The International Monetary Fund (IMF) has estimated in its new report on Asian economies that the rapid ageing of populations across the continent will push down real interest rates—as people save more to fund longer lives while investment rates fall. India is no exception. The multilateral lender has estimated that real interest rates on Indian 10-year bonds will fall by 1.5 percentage points in the decade beginning 2020. It is useful to remember that the Reserve Bank of India currently estimates the neutral interest rate at 1.5 percentage points above inflation.
Equilibrium interest rates have already come down sharply in the US and Europe because of lower potential growth as well as ageing populations. Rates are higher in many Asian countries, especially India, because of rapid economic growth and a young population. The IMF analysis suggests that interest rate differentials could narrow in the coming years as the median age of the Asian population continues to climb.