IMPACT OF REAL INTEREST RATES ON REAL OUTPUT GROWTH IN INDIA: A LONG-RUN ANALYSIS IN A LIBERALIZED FINANCIAL REGIME

Hrushikesh Mallick () and Shashi Agarwal
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Shashi Agarwal: Development Planning Centre of the Institute of Economic Growth (IEG), Delhi 110007, India

The Singapore Economic Review (SER), 2007, vol. 52, issue 02, 215-231

Abstract: The study attempts to evaluate the impact of short-term real interest rate on growth rate in India in a liberalized financial and trade regime (March 1993 to March 2005). Using ARDL approach to cointegration of Pesaran and Shin (1999), the study finds that interest rate does not have a direct impact; rather, it may have an indirect and adverse impact on growth rate through the transmission channel of bank credit, thereby neither supporting the arguments advocated by Keynesians nor the explanations offered by the proponents of Financial Liberalization School. This incredible result may be attributed to the poor quality of credit disbursal of the banking system in India or low credit offtake for productive investment purposes as investment, an important determinant of economic growth, is governed by several other factors.

Keywords: Interest rate; financial liberalization; monetary transmission mechanism; credit and growth rate (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1142/S021759080700266X

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