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| India'a Current Repo Interest Rate stands at 6.25% |
Repo rate is the most important monetary policy tool in the
hands of the central banks.
An increase in Repo Rate reduces inflation.
How?
An increase in Repo Rate will make borrowing for commercial
banks costly and therefore in turn they are forced to increase their lending
rates. This will increase the borrowing costs of business and industry and they
tend to curtail fresh investments. This in turn reduces the incomes of people
who would have executed those expansion plans. This reduced income lowers the
demand for consumption goods and consequently brings down the prices of these
commodities. Lower commodity prices result in lower inflation.
This is how macro economics work or at least supposed to work.
The opposite happens if the Repo Rate is reduced - it spurs
growth and inflation tends to go up.
In conclusion central banks increase Repo Rate if they want to
tame inflation and reduce it if they want to spur growth.
The Reserve Bank of India (RBI) in its latest review meeting,
contrary to wide expectations that the Repo rate will be reduced by 25 basis
points, maintained the Repo rate at 6.25% indicating that it believes that any
reduction would stoke inflation.
Suggested Further Study:
- What Is Basis Points?
- Yield Definition
- Yield Slide
- What is the Relationship Between a Bond's Market Price
and Its Yield to Maturity?
- What Is Internal Rate of Return or IRR In Simple Terms?
- Value
Investing
