Recently Hon. Finance Minister made another call to drop the Repo rate for Government to speed up growth.
This, in itself, leads to a debate and perhaps divided opinions as so far the RBI has been increasing Repo rates to control inflation.
RBI defines what is known as the “Repo” rate – this is the rate at which RBI lends to other Banks. Quite obviously, the rate at which the Bank in turn would lend to its customers will depend on this and be higher than the defined Repo rate.
Conversely if the Bank were to park money in RBI it would get interest at what is known as the “Reverse Repo” rate.
Current Repo rate is 8% and after Mr.Raghuram Rajan has taken over as Governor RBI, this has undergone 3 increases.
However, there is a counter argument that if it is a demand versus supply issue, then the other alternative could be to actually increase supply. This can be done by
Do recall that the onion price rise about a year ago was more to do with supplies not reaching the market rather than a sudden spurt in demand
Yes, to a large extent it has. WPI Inflation, which is based on whole sale price, has gone down below 3% and the CPI or consumer inflation is also down below 6%. But these levels need to be maintained.
If you follow the cycle post repo rate increase you will realise that decreased disposable incomes=decrease in demand. Over a period of time supply or production would naturally re align itself with demand.
So, if supply decreases, it means production has fallen and therefore growth.
So a rate increase would suppress growth as a fall out, if it is done in isolation.
Conversely, a fall in Repo rate will mean a rise in growth as well as inflation.
We wish to increase growth from 5% levels to 7-8%. At the same time we want to consistently have WPI inflation below 6%. This means Repo rate or RBI’s monetary policy cannot be viewed in isolation as a means of reducing Inflation alone.
Apart from Repo rate the Government will and has taken measures on:
We hope that as a nation our GDP growth will remain higher than Inflation!