Interest rates, saving and investment: evidence from India

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.