RBI To Not Tinker With The Repo Rates at This Stage

August 8, 2015

The third bi-monthly monetary policy review for 2015 was held recently by RBI on 4th August, 2015, and as was widely expected, there was no drop in the repo rate and it stayed firm at the previous rate of 7.25%. The repo rate is the rate at which the commercial banks borrow money from the RBI, which directly affects the rate at which us, the customers, borrow money from banks. Thus, what is the direct implication is that the loans you take from banks will carry about the same interest rate, and not drop. So is this a good move or a bad one?

It’s hard to pick one. A higher repo rate would encourage people to deposit money, while a lower repo rate means that people will prefer to borrow more, which they would spend into the economy, and consequently increase the inflation rate. And keeping this in mind, RBI has lowered its inflation forecast for the Jan-Mar quarter by 0.2%. While there might be many other motives behind maintaining the same repo rate, controlling or reducing inflation is very likely one of them, especially considering the poor monsoons this year (which would cause inflation).

It is a prudent move by the RBI to not tinker with the repo rates at this stage, and whether this move makes sense or not will take time to ascertain. However, there is definitely lots of speculation that the RBI will reduce repo rates in future, which will surely boost investment and growth in the economy.

 

-Shrey Mehta, Imarticus Learning

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