In the accompanying table, we present some average values for the period January to June 2003 for three economies: USA, Euro-currency region (EU-12) and India. In the first column is the yield-to-maturity (Ytm) of government securities (G-Sec) with a 10-year maturity, which we use as a reference for the nominal interest rate. In the next column is inflation, as reflected in producer price indices (PPI), with reference to the corresponding period a year ago. For the USA, we use the PPI for finished goods, for the EU, industrial producer prices and for India the wholesale price index (WPI). Next is inflation as reflected in the consumer price index (CPI). We have taken the CPI of urban consumers in the USA, the harmonised index of consumer prices (HICP) for the Euro-zone and the average of the two commonly used indices in India, the CPI for urban non-manual employees and that for industrial workers.

When we subtract the inflation rate from the interest rate we obtain the ?real? interest rate. Or rather, a range of real interest rates, depending on the inflation rate that we choose to use. From the figures that we have in the table, it is evident that the real interest rate in India through the first half of 2003 was certainly no higher than that in the developed western economies. It is possible to analyse the distribution of the Ytm data over time, as well as other measures of inflation, but I can tell you that the conclusion does not change.

Why should we restrict ourselves to 10-year G-Secs? Why not use short-term (overnight or three-month) interest rates? The answer is that there never is a single interest rate in the real world, quite unlike that in the textbook. We have a myriad rates across different maturities and also across different credit (or rating) classes. Typically, there exist certain benchmark rates, and it is most commonly the 10-year G-Sec rate, one of the most actively traded securities in most markets. Then yields at the short-end directly reflect monetary policy. So if the US Federal Reserve cuts the fed rate, yields on commercial paper (CP) (typically three-month maturity) realigns to the new fed rate. As we move up the maturity profile, the yields increasingly tend to reflect market expectations about the future. Which is the reason that between June 2000 and today, while the US fed fund (and CP) rates have fallen 550 basis points (bps) from 6.5 to 1.0 per cent, the Ytm on 10-year US G-sec has dropped by only 230 bps, from 6.1 to 3.8 per cent.

?Real? interest rates in economic policy play an expectational role ? the subject is the investor who seeks the true cost of servicing debt by netting the expected rate of inflation from his cost of debt. No investor uses the three-month cost of money for evaluating a long-term investment. Moving from 10-year G-Sec to corporate yields, the credit spread in the US for Aaa corporate bonds has come down from 220 bps in January 2003 to about 150 bps now. Quite comparable to credit spreads in India, where for Aaa paper it ranges from 100 to 200 bps, depending on how frequently the issuer visits the market.

Too many incorrect statements have been made to the effect that the real interest rates in India are too high. The limited objective of this column is to set the record right.

The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)