Amid the coronavirus, there's sharp fall in deposit rates due to aggressive rate cuts by banks in response to the RBI's reduction in the benchmark rates. In addition to this, the Consumer Price Index (CPI) has slid real interest rate in the negative territory.
The CPI-based inflation was declared after two months gap in June which has risen to 6.09%, higher than the one expected (4%). It is expected that the CPI may ease to 4% by the end of this year. This is because CPI eased to 5.91% in March from 7.52% in January. However, it spiked again in the month of June due to the coronavirus pandemic. It is also speculated that RBI may further cut interest rates which may force the banks to reduce the deposit rates further.
What is Negative Real Interest Rate?
When Nominal Interest Rate drops below zero per cent for a specific economic zone, it is called Negative Real Interest Rate.
For Example: If the inflation is 5% per annum, and the bank provides an interest of 3%, then it is a negative real interest rate.
What is the Nominal Interest Rate?
Nominal Interest Rate is the rate of return which an investor or borrower will get or have to pay in the market.
For example: If you have deposited Rs. 500 in your bank account and the bank is offering 5% interest per annum, the by the end of the year you will have Rs. 525.
What is Real Interest Rate?
When the Nominal Interest Rate is adjusted for inflation, it is called Real Interest Rate.
For example: If the inflation is 8% per annum, it means that now we have to pay Rs. 108 for goods and services for which we earlier paid Rs. 100. But your nominal interest rate is 5%, which means that you have only earned Rs. 3.
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