RBI raises rates to tame inflation
- The RBI’s Monetary Policy Committee (MPC) voted unanimously to raise the repo rate by 50 basis points to 4.90% in a bid to slow inflation which it estimates will average 7.5% in the current April-June quarter.
- focused on the withdrawal of accommodation which had been provided to support the COVID-19 hit economy, to ensure that inflation remains within the target going forward, while supporting growth.
- The MPC retained its forecast for real GDP growth for 2022-23 at 7.2%.
- would continue to be proactive and decisive in mitigating the fallout of the ongoing geopolitical crisis in the economy.
Causes of increase in interest rates:
- Inflation has steeply increased much beyond the upper tolerance level.
- A large part of the rise in inflation is primarily attributed to a series of supply shocks linked to the war [in Ukraine].
How does increasing Interest rates help:
- Hikes set to raise the lending rates in the banking system
- Impact the demand in the economy.
- The rate hike will force banks and non-banking finance companies to increase lending rates.
- result in higher equated monthly installments (EMIs) of existing borrowers.
- Target Inflation of 4 per cent (plus or minus 2 percent).
- Impact of increased Interest Rate
- Repo Rate
- Inflation Targetting