Real Interest Rate

The Real Interest Rate is the interest rate adjusted for the effect of inflation, reflecting the true cost of borrowing or the actual return on savings in terms of purchasing power. It is calculated as: Real Interest Rate ≈ Nominal Interest Rate – Inflation Rate (using the Fisher equation for precise calculation). When the real interest rate is negative—as can occur when CPI inflation exceeds the RBI's repo rate—it effectively penalises savers and can incentivise investment in real assets like gold and real estate.