Dec 8, 2021
By: bhakti.makwana@timesinternet.in
Credit: BCCL
Why do we watch credit policy review by the RBI? Changes to the benchmark interest rates — the rate at which banks borrow from the RBI.
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This affects everything from the cost of your home and auto loans to the rate of inflation in the country to price of government bonds to the overall cash sloshing around in the system.
Credit: Flourish chart
This time the market expects the RBI to not cut interest rates, instead reduce the amount of money in the system and slowly bring it back to pre-covid levels. But it can't be rushed because there has been an over four times increase since March 2020.
Credit: BCCL
Credit: Flourish chart
An interest rate hike is intended to tame inflation. Consumer prices in India have been rising sharply in recent months.
Credit: Flourish chart
A rise in inflation makes the rupee weaker against the dollar, which further makes the things rupee can buy more expensive. Which means more inflation.
Credit: Flourish chart
Since inflation is rising and the rupee is weakening, will the RBI hike interest rates now? Experts say, may be not. here's why
Credit: BCCL
Credit: Flourish chart
Increasing interest rates also affect the cost of borrowing for companies. Which in turns reduces profits for the borrowing companies, and therefore, the economic growth. Therefore, the hikes are done only when the economy can absorb the higher cost.
Credit: Flourish chart
When $ strengthens, it takes more ₹ to pay for the same amount due. The below chart shows that India pays out more forex than it receives except last year when crude oil prices fell sharply
Credit: Flourish chart
If the current account balance i.e. net of forex payments increases then it will also mean that the government will spend more than it planned to i.e a wider fiscal deficit.
Credit: Flourish chart