Rural savings, investment, and interest rates in developing countries : evidence from India

by Farrukh Iqbal


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This study estimates interest elasticities of rural savings and investment in a major developing country, India, and examines the apparent effects on those factors of policies of financial repression. Critics claim that such policies inhibit rural savings and investment. The results, however, do not support such criticism. Interest-rate variations are found to exercise a weak (positive) effect on savings but a strong (negative) effect on rural investment, which suggests that low-interest-rate policies have a small "cost" in terms of savings forgone and a large "benefit" in terms of investment achieved. A low-interest-rate policy may be preferred, therefore, in countries where the rate of rural investment is perceived to be considerably below some socially desirable level.

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