Why RBI Hike Repo Rate During High Inflation: At present, the rate of inflation is increasing very fast all over the world. India is also no exception to this. In the era of rising inflation, the prices of many essential commodities like petrol, diesel, CNG, oil and so on are skyrocketing. In such a situation, it is having a bad effect on the pockets of the people. Inflation rates are crossing double digits in many countries around the world.
At the same time, inflation rates in America have broken the record of the last 40 years. If reports are to be believed, inflation rates in America have crossed 8.6 percent. The main reason for the rise in inflation is the Corona epidemic and the Russia-Ukraine war. Both major events have had a negative impact on the global supply chain. Thus disrupted supply chains have played a major role in driving the pace of inflation across the world.
At present, the demand for essential commodities is very high all over the world. There the supply is less. For this reason, inflation rates are increasing day by day in many countries. In view of this, recently the Federal Reserve, the Central Bank of America, increased the rates by 0.75 percent.
At the same time, in India too, the Reserve Bank has increased the repo rate by 0.50 percent to control inflation. In such a situation, the question arises that what are repo rates, and what is their role in controlling inflation?
what is repo rate
Repo rate refers to the rates at which the Reserve Bank of India lends to banks. Banks get this amount in the form of loan. With this he offers loans to his customers. Whenever RBI increases the repo rate. During that time the rates of loan to the customers become expensive.
Why does RBI increase repo rate to control inflation?
After RBI increases the repo rate, banks offer loans to customers at more expensive rates. In such a situation, the liquidity in the market becomes very less. This is how inflation is controlled. Think of it this way, during the Corona epidemic, the demand in India, including all over the world, had reduced significantly. Due to this, the RBI had artificially increased the demand by increasing the liquidity in the market by reducing the repo rate during that time.
Now the circumstances are completely different. The demand for essential commodities is increasing very fast across the world. Due to this, there is a sharp increase in the rate of inflation. In such a situation, to reduce the liquidity from the market, RBI has increased the repo rate. Loans from banks become very expensive due to the increase in the repo rate. Due to the cost of loans, the liquidity in the market decreases.