Finance, Forex and Investments

Why reserve bank of india increases repo and reverse repo rates to control inflation?

Public Comments

1. It does so because it is easy to control money supply in the market. loans will become expensive so that the lending will reduce. increase in rates also offers increase in interest rates for savings so people will deposit money into the bank thereby controlling money supply. this is one of the effective methods of controlling money supply.
2. for decresing money supply so less money-------->>>bank have less deposits---->>banks will increase interest rates----->>people will take less loans because interest rates are high------>> Now people have less money ----->>people will buy less---->>it leads to less demand of commodities around ------->>less demands results in less prices because sellers have to sell the products otherwise high interest of carrying onventory will hit them--------------->>>>ITS ALL LEADS TO LESS PRICES AND LOWER INFLATION CHEKOUT MY BLOG www.Jasia.in
3. because that's what all post-war economist jokers have been writing in their books and articles.Actually WB paid these clowns to make this a theory so that wealthies would be able to gamble even on govt. security rates and fool many ( even govts.) to become rich.
4. As you are aware, price of an item is controlled by both supply and demand for an item. The government is very ineffective in managing the supply of goods. This means increasing production of goods. It finds it easy to control demand for items. Demand for items is reduced when money supply is reduced. When repo rates are increased, banks interest rates are increased, loans becomes costlier and less loans are taken. So this indirectly reduces demand for the item. However, this works only to the extent of items which are bought through loan financing. This is ineffective in the case of food items, gas, electricity and transportation of common man. The repo rates have no effect on them. Government calculates inflation taking into account prices of refrigerators, air conditioners, cars and many such items which are not essentials but which are affected by interest rates. So, increase in repo rates reduces demand for these items and therefore their prices sometimes come down. So inflation might come down on an overall basis. But, the common man will still suffer since his items are still costlier. Unless government works on improving production of agricultural goods, common man's condition will not improve. For instance, India had double digit inflation earlier. Now we talk of single digit inflation. Sometime, we have low inflation rates also. But the price of rice and dhal keeps increasing. Increasing repo rates is a weak reaction - it is a short term reaction - it is to show something has been done - it has no effect on common man - it is the only thing RBI could do - RBI cannot make agricultural policy.