The Reserve Bank of India is the highest authority that regulates the entire banking system. Every two months, the central bank adjusts the repo rate depending on the inflation in India. On October 8, the RBI remained accommodative, meaning it kept the repo rate unchanged at 4%. This remains a good thing for us. How? Read to know!
Back to Basics
Repo rate is a technical term that not many of us know. In simple terms, it is the rate of interest charged to commercial banks who borrow money from the RBI. Like, our banks charge an interest rate on home loans. RBI also charges a sum from the commercial banks. The repo rate is adjusted and monitored every two months. RBI only increases the repo rate in cases of inflation and vice-versa. To maintain inflation, RBI charges a higher interest rate from the commercial banks so that the excess money supply is removed out of the market.
This time, the RBI maintained the repo rate at 4% and hasn’t changed it for eight months. This is done to bring the economy back to its feet from a two-year lull. India is steadily reopening, and it’s important to encourage liquidity in the system right now. Hence, the repo rate hasn't changed in so long.
Well, when you hear the word ‘accommodative stance’, just know that the RBI wants to expand the money supply to support the slowing economic growth. At this moment, the Indian economy has just begun to reopen, and it’s important to get it back on-track. At the moment, the RBI wants the cost of borrowing to be on the lower side so that people borrow more money from the banks. Once we borrow more, we buy assets or spend it. This kickstarts the manufacturing activity and demand.
How Does Repo Rate Affect Us?
If RBI decreases or maintains the repo rate, it means commercial banks will have to pay less interest to the central bank. This further means we can borrow more, which encourages businesses. This keeps the cash flowing through the systems. Meanwhile, when the prices of goods become higher and the inflation rises, RBI increases the repo rate. This makes banks charge a higher interest rate, which discourages spending and people are forced to deposit the money in the bank. This way the RBI tightens the liquidity in the market and gets inflation in-control.
What Would Be RBI’s Next Move?
We all are suffering from the rising fuel prices. Never in dream could one have thought that we would be paying Rs 100/litre for petrol. This automatically impacts all sectors, making the prices of goods higher. It’s mostly expected that in the next monetary policy committee meeting, the RBI will increase the repo rate, thus tightening liquidity.
The demand in the market for goods is rising, the employment sector is getting back in shape, the supply side has reopened, and it seems only fair to believe that RBI should do something to control the inflation. However, RBI continues to see growth as the biggest challenge. The COVID-19 situation is not off the table, and that’s why RBI’s next move remains a mystery. It’s only hopeful that the RBI would save us from the burning fire of inflation.