Hi sharing my recent post written with a colleague on the Wall Street Journal India Real Time Blog. 

What is the neutral rate? 
This has dominated monetary policy talk in India, with economists arguing that as the central bank withdraws its monetary stimulus, it needs to move to back to a neutral rate as soon as possible. 
The central bank Tuesday raised rates for both its key repo and reverse repo rates by a modest 25 basis points. 
Gov. Duvvuri Subbarao said Wednesday (when he wasn’t quoting Deng Xiaoping) that he asked his in-house economists what the neutral rate means. 
Theoretical economics says the neutral rate is one consistent with an economy’s potential output and low and stable inflation — a sweet spot for the economy. Gov. Subbarao said it’s not an “observable construct.” It is a textbook concept, he added, more applicable to mature economies and not to one like India, which has big growth potential and room for productivity and efficiency improvements. 
Deputy Gov. Subir Gokarn, who handles monetary policy, had a more spiritual take. “It’s like Nirvana,” he said. “You don’t know what it is, but you’ll know when you get there.” Prior to taking over his current charge, Deputy Gov. Gokarn was the chief economist at Standard & Poor’s for Asia Pacific. His current job has made him more circumspect in making forecasts and projections. 
“Having been in that game for so many years, I can tell you with certainty that being on the outside and being able to visualize things without the pressure of having to make a decision is very different from being in a situation where we have to make a decision,” he said. Thus he has his own take on the criticism of being “behind the curve” in raising interest rates. For him, the curve doesn’t exist. 
“I think is important to recognize that when you say behind the curve, from an outside perspective the curve looks like a nice thin line,” Deputy Gov. Gokarn said. “So there is an exact predictability precision to it. From the inside the curve looks like a wide band.”