New Delhi ∙ The Reserve Bank of India is taking a serious view of the inflation rate continuing at a high level. The repo rate has increased 5 times in the last 218 days to 2.25 percent. On May 4, interest rates were hiked for the first time since August 2018. The rates were hiked in all the subsequent 4 MPC meetings. Interest rates are raised to reduce money supply in the market and cause inflation.
Inflation has remained above the RBI’s tolerance limit of 6 percent for the past 10 months. The inflation forecast for this financial year has been maintained at 6.7 percent.
The Reserve Bank has cut its GDP growth estimate for this year. In the October meeting, the estimate was 7 percent, but this time it was cut to 6.8 percent. The World Bank had raised the GDP growth estimate to 6.9 percent the other day. Explaining yesterday’s decision, Deputy Governor Michael Patra said that if things go according to the RBI’s calculations, the time for a consecutive 0.5% increase in interest rates is over, but as inflation is high, it is not time to take a break. The next MPC meeting is from February 6 to 8.
Why the interest rate hike?
Repo is the interest rate on money given by the Reserve Bank to banks. Repo is raised when inflation is high. When repo is raised, banks have to pay more interest to borrow money from RBI. This will increase the cost to the banks and will reduce their borrowing from the RBI. This will reduce the loan given by the banks. This will reduce the money supply in the hands of the people. As consumption and demand decrease, inflation will also decrease.
When the repo rate is high, there will be an increase in the interest rate on the loans given by the banks to the people, commensurate with the higher cost incurred by the banks.
Content Highlight: RBI hikes Interest rate