The understanding of the real rate of interest in the economy is an extension of the inflation concept. For example, if the 10-year G-Sec has a yield of 7.7% and if the inflation is at an average of 2% then the real interest rate is 5.5%. Normally, there is a positive relationship between the real interest rates and the INR value. That is why it is seen that whenever the RBI hikes rates, the INR actually sees an appreciation in value because the higher rates of interest would have increased the real rates of interest proportionately. Of course, here we are assuming that the inflation does not increase faster than the increase in rates. There is also another portfolio angle to this. When real interest rates are high, we see more flows into debt from Foreign Portfolio Investors (FPIs). As more dollars flow in, the additional supply of dollars in the market tends to make the INR stronger. This is something we have seen quite often in the first few months of any fiscal year.

prachi Patwardhananswered.The understanding of the real rate of interest in the economy is an extension of the inflation concept. For example, if the 10-year G-Sec has a yield of 7.7% and if the inflation is at an average of 2% then the real interest rate is 5.5%. Normally, there is a positive relationship between the real interest rates and the INR value. That is why it is seen that whenever the RBI hikes rates, the INR actually sees an appreciation in value because the higher rates of interest would have increased the real rates of interest proportionately. Of course, here we are assuming that the inflation does not increase faster than the increase in rates. There is also another portfolio angle to this. When real interest rates are high, we see more flows into debt from Foreign Portfolio Investors (FPIs). As more dollars flow in, the additional supply of dollars in the market tends to make the INR stronger. This is something we have seen quite often in the first few months of any fiscal year.