MUMBAI, July 18 Reuters India39;s central bank said on Thursday that the economy39;s natural rate of interest has increased since the pandemic and will rise further, driven by the growth of potential output, which analysts said could limit the scope to ease monetary policy.

The natural rate of interest is associated with an economy operating at full capacity without generating inflationary pressures, and though not observable, it serves as a reference point for monetary policy, the Reserve Bank of India said in its monthly bulletin.

It estimated the natural rate was 1.41.9 in the fourth quarter of 202324, higher than the 0.81.0 in the third quarter of 202122, the last time it made an estimate, the central bank said.

When the policy rate is set below the natural rate, the stance is regarded as accommodative, and the converse signifies a restrictive stance. The policy stance is neutral when the real policy rate is at the level of the natural rate, the RBI said.

Currently, with inflation at 5.1 and the central bank39;s key lending rate set at 6.5, the real rate stands at 1.4. That could increase to 2 based on the RBI39;s estimate of an average inflation rate of 4.5 for this fiscal year.

As such, the RBI39;s wide estimate for the fourth quarter fed into the narrative of both its hawkish and dovish monetary policy committee members, said Gaura Sen Gupta, chief economist at IDFC First Bank.

The lower range of the neutral rate indicates space to cut interest rates by 50…