With the Reserve Bank of India (RBI) on Tuesday cutting the policy repo rate by 25 bps to 6.25%, India is now a close second to South Africa on the list of BRICS economies with the lowest real rates, also called neutral rates.
Inflation, as measured by the consumer price index (CPI) being 5.05% in August, a repo rate of 6.25% makes the neutral rate in India at 1.2%, just 10 bps higher than that in South Africa. Unlike India,
which adopted inflation targeting only recently, South Africa had adopted the same in 2000 with a target inflation range of between 3% and 6%.
However, despite inflation in South Africa staying above the target since the start of the current calendar year and dipping to 5.9% only in August, the South African Reserve Bank has kept its policy rates unchanged since March, resulting in the lowest neutral rates in the BRICS.
Among others, while the neutral rates in China, the only BRICS nation which hasn’t adopted inflation targeting, is 3.05%, the same in Russia is 3.1%, given the fact that consumer inflation in the country in August was 290 bps above its inflation target of 4%.
Brazil, which has a target inflation of 4.5% with a tolerance of 2%, has seen consumer inflation levels above this range since the middle of 2014. In fact, year-on-year consumer inflation in the largest economy of Latin America has several times shot into double digits during this period, forcing the Banco Central Do Brasil to keep neutral rates elevated.
“With the risk-free rate, i.e, the rate of interest on treasury bills at 6.5% and inflation expectations, best exemplified in the RBI’s own projections, at 5%, neutral rates are at 1.5%. But we need to take into account the global situation, wherein the neutral rates are declining. So, it could be about 1.2% or thereabouts,” said RBI deputy governor Michael Patra.