IMPACT OF FISCAL DEFICITS ON REAL INTEREST RATES

The study tries to uncover the relationship between fiscal deficits and real interest rates using the Vector Auto Regressive Model. The relationship is estimated using three variants of nominal interest rates. It results suggest that the direction of causality runs from real interest rates to fiscal deficit. Further, there is no financial crowding out effect in case of India .Hence, the argument of public expenditure crowding out private investment by making borrowing more expensive cannot be used as argument for cutting down on the much needed investments in various public infrastructure. The findings also indicate that it is difficult to isolate the effect of fiscal deficit from other influences in the economy.