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Interest rates, saving and investment: Evidence from India

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  • Prema-Chandra Athukorala

Abstract

The role of interest rates in the process of economic development is examined through an empirical inquiry into the interest rate-saving-investment nexus in the Indian economy during the period 1955-95. The results are generally in support of the financial liberalization school of thought. Higher real interest rates seem to promote both financial and total savings, and stimulate private investment. On the investment side, the combined salutary effect of interest rate increases operating through increased debt intermediation and self-financed capital accumulation outweighs the direct cost effect on investment. Overall, the study casts doubt on the robustness of results coming from the vast cross-country literature on the subject and calls for systematic time-series analyses covering a variety of country situations to inform the on-going policy debate.

Suggested Citation

  • Prema-Chandra Athukorala, 1998. "Interest rates, saving and investment: Evidence from India," Oxford Development Studies, Taylor & Francis Journals, vol. 26(2), pages 153-169.
    • Handle: RePEc:taf:oxdevs:v:26:y:1998:i:2:p:153-169
    DOI: 10.1080/13600819808424151
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    Cited by:

    1. Adama Messanh COMBEY, 2016. "The Main Determinants of Private Investments in the WAEMU Zone: The Dynamic Approach," Journal of Economics and Political Economy, KSP Journals, vol. 3(4), pages 731-743, December.
    2. Bank for International Settlements, 2008. "Transmission mechanisms for monetary policy in emerging market economies," BIS Papers, Bank for International Settlements, number 35.
    3. Comlanvi Jude EGGOH, 2009. "Développement financier et croissance : Une synthèse des contributions pionnières," LEO Working Papers / DR LEO 442, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    4. Lateef Adewale Yunusa & Ibrahim A. Adekunle & Tolulope Oyakhilome Williams & Jamiu Adeniyi Akindele, 2021. "Dilemma Between Deposit And Lending Rate: Savings-Investment Perspective," Business & Management Compass, University of Economics Varna, issue 1, pages 65-85.
    5. Pradyumna Dash, 2016. "The Impact of Public Investment on Private Investment: Evidence from India," Vikalpa: The Journal for Decision Makers, , vol. 41(4), pages 288-307, December.
    6. Hillary Chijindu Ezeaku & Imo Godwin Ibe & Uche Boniface Ugwuanyi & N. J. Modebe & Emmanuel Kalu Agbaeze, 2018. "Monetary Policy Transmission and Industrial Sector Growth: Empirical Evidence From Nigeria," SAGE Open, , vol. 8(2), pages 21582440187, April.
    7. Moyo, Clement & Le Roux, Pierre, 2018. "Interest rate reforms and economic growth: the savings and investment channel," MPRA Paper 85297, University Library of Munich, Germany.
    8. Mahraddika, Wishnu, 2019. "Does international reserve accumulation crowd out domestic private investment?," International Economics, Elsevier, vol. 158(C), pages 39-50.
    9. Saba Mushtaq & Danish Ahmed Siddiqui, 2016. "Effect of interest rate on economic performance: evidence from Islamic and non-Islamic economies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-14, December.
    10. Omar A Mendoza Lugo, 2008. "The differential impact of real interest rates and credit availability on private investment: evidence from Venezuela," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 501-537, Bank for International Settlements.
    11. Lidiema, Caspah, 2017. "Effects of government borrowing on private investments in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 22, Kenya Bankers Association (KBA).
    12. Wishnu Mahraddika, 2019. "Does international reserve accumulation crowd out domestic private investment?," Departmental Working Papers 2019-02, The Australian National University, Arndt-Corden Department of Economics.
    13. COMBEY, Adama, 2016. "The Main Determinants of Private Investment in The WAEMU Zone: The Dynamic Approach," MPRA Paper 75382, University Library of Munich, Germany.
    14. Felix Eschenbach, 2004. "Finance and Growth: A Survey of the Theoretical and Empirical Literature," Tinbergen Institute Discussion Papers 04-039/2, Tinbergen Institute.

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