Impact of the Repo Rate on Inflation

Impact of the Repo Rate on Inflation

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At least once every quarter, the Reserve Bank of India (RBI) announces its monetary policy. At the moment, it makes its policy public once every two months. Through its money related arrangement mediation, the national bank controls the "DEMAND" side of the economy to hold expansion under tight restraints. The RBI discusses currency reserves, inflation, and the state of the economy at its MPC meetings. Then, it chooses whether to raise or lower the key benchmark rates. These include, among others, the repo rate, the reverse repo rate, the cash reserve ratio, and the statutory liquidity ratio. The repurchase rate, also known as the repo rate, is the most significant interest rate among these. It is the financing cost at which a country's national bank loans cash to business banks for a present moment. Treasury bills (T-bills) and bonds from the government are exchanged for these loans. When the country is experiencing high inflation, the Repo Rate is typically increased. On the other hand, if the nation is headed toward deflation, it is reduced.

The interest rate that commercial banks must pay on RBI loans goes up when the repo rate goes up. The loans get more expensive. This makes it harder for banks to take loans. There are two ways this reaches customers:

1. First, in order to increase the amount of cash available to the bank, commercial banks raise the interest rates on deposit accounts for their customers. Customers prefer to keep their savings in banks because of the higher returns they receive. It reduces liquidity or the amount of money in circulation. As a result, demand drops. The costs fall when there is a constant supply.

2. Second, banks raise the interest rates on loans like auto loans and home loans. Customers pay more for loans as a result of this. As a result, they prefer to take out fewer loans, which reduces their financial options. Without credits, they can't make large uses like purchasing another home, vehicle or even schooling at times.

The economy's demand decreases as a result of the drop in liquidity, lowering inflation rates. Conversely, a reduction in the repo rate lowers loan rates and lowers deposit returns. As a result, customers would rather not use the banking system and keep their money with them. The economy's demand rises as a result of this increase in available funds. Products cost more when there is a constant supply. When an economy is experiencing a slowdown, this is frequently done.