Rural interest rates in the Indian economy

In this paper an attempt has been made to analyze some of the major features of the interest‐rates in the Indian rural money market. Such a market is distinguished by its duality, with the unorganised sector largely dominating the supply of funds even today. Rural interest‐rates are largely explained by risk and uncertainty rather than by the monopoly power of the moneylenders, though monopoly profit may have existed in some cases. A theoretical model is then constructed and statistical tests show positive correlation between farmers’ income and repayments and negative correlation between the interest‐rate, on the one hand, and income, repayments and monetization on the other. Thus, a rise in farm incomes may reduce the risk premium and, therefore, rural interest‐rates. Further econometric study revealed that the bank rate is more likely to be the leader than the follower of the bazaar rate.