Lower population growth decreases the number of people in the labour force, meaning less investment is needed to provide the necessary capital stock to employ the average labour force. As investment falls, a lower neutral interest rate – the one that equalises the supply of and demand for funds – will be required.
India has witnessed significant disinflation since 2012–13 – with headline CPI inflation moderating from an annual average of 10.0 per cent in 2012–13 to 3.6 per cent in 2017–18 and 3.7 per cent in 2018–19 so far (April-December). As per the latest reading, headline inflation stood at a low of 2.2 per cent in December 2018.