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.

Other steps:

• 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).

Prelims Takeaway:

• MPC
• Impact of increased Interest Rate
• Repo Rate
• Inflation Targetting