RBI’s decision to hike REPO rate: An analysis

RBI’s decision to hike REPO rate: An analysis

Recently, in a major shift to its monetary policy, RBI increased the REPO Rate by .25 basis points making it 8 %. It is important to know that repo rate is the rate at which banks borrow short-term loans or funds from RBI. RBI uses repo and reverse repo techniques to increase or decrease the liquidity in the market.

To increase liquidity, RBI buys government securities from banks under REPO; to decrease liquidity, RBI sells the government securities to banks. Governor of RBI has said that this move is aimed to curb inflation. Lets have a check:-

From RBI’s point of view

1. This move is aimed at decreasing inflation which erodes the complete economic growth.

2. This move further restraints the flow of liquidity in the market to some extent which could help in bringing down the CPI inflation rather than WPI inflation.(because retail prices are high)

3. This decision lays emphasis on consumer price index which has been seen as the more accurate measure of inflation.

4. This decision will not be welcomed by the big investors and industries as they were expecting a lowering of prime rates as they believe that with this step export may be further impacted especially in the MSME sector.

From consumer’s point of view

1. The interest on car loan, home loan and personal loan may rise in the near future.

2. The retail prices of vegetables, fruits and other articles excluding fuel rates may come down.

3. This move will ultimately benefit the very poor and poor sections of the society by reducing inflation at retail price.

4. The deposit rates may decrease in the long term as they are high because inflation is high.

5. This step will not create immediate reduction in cost of funds or immediate demand.

Conclusion

This step by the RBI is more leaned towards ending the inflation at retail prices rather than attracting customers. It is no hidden fact that the biggest impediment in the way of economic growth is the soaring inflation rate.

So, this step is a short term measure which might not be welcomed by the industries but is a big relief for the common man. RBI has sid that this might be the last step in tightening the monetary policy and in future we can expect a rate cut by the apex bank.