RBI kept the interest rate unchanged ! - Seeker's Thoughts

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RBI kept the interest rate unchanged !

Inflation – RBI kept interest rate unchanged at 6.5
The fifth bimonthly monetary policy was released in December 2018 where the RBI kept the rate unchanged. The Monetary Policy Committee decides the monetary policy.
The intention remained to keep the inflation under control.



What is Inflation?
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 a 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 cannot be produced, so another 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 the responsibility to maintain this relationship of Supply and Demand.  Or in easy words, RBI cannot increase the 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 the 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 the interest rate.  Due to which the loans go at a higher rate for industries, buyers and people. So, during that time people don’t borrow money, and that impacts on the market. As a result, inflation comes down.
Oil price decline
The sharp fall in inflation comes on the back of 30% decline in crude oil prices in November compared with October.

Retains GDP growth rate
The RBI decided to retain GDP growth rate for 2018-19 at 7.4% and estimated growth at 7.5% for the first half of the next financial year.

Reduced the statutory liquidity ratio (SLR)
In a move to boost credit flows, the central bank has decided to reduce the statutory liquidity ratio (SLR) requirement for banks to 18% of net demand and time liabilities from 19.5% over the next six quarters, by 25 bps each in every quarter.
However, the RBI kept the rate unchanged. This was to keep the inflation rate around 4% as inflation rate between 2% to 6% is considered healthy for the economy.

The pure reason for keeping the rate unchanged was the ‘Inflation’ however; there can be other financial challenges- to maintain financial stability. Fiscal slippages risk impacting the inflation outlook, heightening market volatility and crowding out private investment. Instead, this may be an opportune time to bolster macroeconomic fundamentals through fiscal prudence.
There are challenges in a 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.