RBI's Unchanged Rate - Let's Understand Why! - Seeker's Thoughts

Recent Posts

Seeker's Thoughts

A blog for the curious and the creative.

RBI's Unchanged Rate - Let's Understand Why!

Inflation – RBI kept interest rate unchanged at 6.5 

Whenever the prices of things go up, there comes a childlike fantasy in mind that print as many rupees as possible and give money to all. However, The Central Bank of countries as in Indian case- it is the Reserve Bank of India,  go opposite of that. 

Understanding through example- Suppose, there is shortage of milk in the market during summer. The Price of milk goes higher, because everyone has money to get milk. In this case, milk can not be produced, so other way is to control the flow of money.

In the market there are multiple commodities, goods and services available. Their prices go up, that is called as inflation in common man’s language. So Central Bank has responsibility to maintain this relationship of Supply and Demand.  Or in easy words, RBI can not increase production of goods, services or commodities, so it controls the flow of money. Therefore, to curb inflation- the tight money policy is adopted. 
Money restricts the market so when people do not have easy money available they postpone their plans to buy things. This is the strategy to keep prices stable until  things are available and prices go down due to availability of enough supply of product as demanded by the people. So, this is understood that to curb inflation that means rising prices, the  flow of money is controlled.

This is done through various tools and one among them is when RBI increases interest rate.  Due to which the loans go at higher rate for industries, buyers and people. So, during that time people don’t borrow money, and that impacts on market. As a result inflation comes down. 

The Falling rupee

The dollar is rising and that means rupee is falling in its value, so it was expected out of RBI to increase the price. However, the RBI kept rate unchanged. This was to keep inflation rate around 4% as inflation rate between 2% to 6% is considered healthy for economy.

The pure reason for keeping the rate unchanged was the ‘Inflation’ however; there can be other financial challenges- to maintain financial stability.

There are challenges in way like NPA problems are already breaking Indian Banks, Federal Bank of America can also increase the interest rate. So, upcoming months may bring challenges.