‘Real rate of interest must be positive for savers’

Former RBI Governor and chairman of the 12th Finance Commission, Dr C. Rangarajan, on Sunday said the real rate of interest (the nominal rate of interest adjusted for inflation) at the minimum must be positive for savers. He also called upon banks to take a re-look at the organisational structure of their rural branches so that they go beyond providing credit and extend a helping hand in terms of advice on a wide variety of matters related to agriculture.

‘‘Despite controversies relating to the impact of interest rate on savings, it is obvious that the real rate of interest at the minimum must be positive. The level at which it should be kept is an important decision variable. Also the real rate of interest in a country which wants to grow at 7 pc to 8 pc per annum must necessarily be higher than countries which treat 2.5 pc to 3 pc as the potential,’’ Rangarajan said at the post-graduate convocation of the National Institute of Bank Management.

Rangarajan observed that while nominal interest rates must move in tandem with inflation, it was necessary to have a view on the appropriate level of real interest rate on deposits and advances. He added that these (nominal interest rate and inflation rate) must have a relationship to the expected rate of growth of the economy.