This is considerably low compared to 2 per cent-plus real rates India had during 2016-2018, when it adopted inflation targeting, and even lower relative to the expected real rates in the US, which are anywhere between 1.4 per cent and 2.1 per cent, depending upon how one measures the expected inflation. AdvertisementAnd bank and NBFC credit, both to the small and medium sectors and the retail segment, has recovered strongly since Q4-2025, from when the expected real rates started to fall. Lower real lending rates compress banks’ profitability from traditional lending, encouraging a search for higher-yielding borrowers, which are naturally risky. What we are arguing, instead, is that the low real rates may not be the most efficient tool in reducing the cost of credit in India. The real bottleneck in Indian finance is the cost of finding, evaluating and monitoring creditworthy borrowers, and this loads up into the lending rates.