Post Policy Conference Key Takeaway

From the Post Policy RBI Conference, the most important remark came in the context of high Real Rates to which RBI Chief commented that Real Rates are not as high as being suggested. GDP over the last 3 years has gone up by an average of 8% which suggests potential GDP has moved higher. Real Rates should be seen in the context of potential GDP Growth. 

A quick understanding of the concept demands an understanding of the natural rate of interest. The Natural rate is generally defined as the level of the short-term real interest rate that would prevail in the absence of business cycle fluctuations, with output at potential, saving equating investment and stable inflation. The natural rate is commonly thought to be determined by real forces that structurally affect the balance between actual and potential output, or equivalently between saving and investment. 

RBI would undertake a study on Real Rates and Potential GDP after the release of this quarters GDP.

The OIS curve parallelly shifted ~ 2 -4 bps higher with 1Y seen at 6.79%.