To reduce the inflation, RBI has to increase repo rates. The meeting of Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is starting from 3rd April 2023, i.e., on Monday. This meeting will continue from April 3rd, 2023 to April 6th, 2023. In this meeting, RBI can increase the repo rates by 25 basis points (0.25%). If repo rates will increased, then this is the 7th time in a row.
RBI is increasing the repo rates continuously from May 2022. To reduce inflation, the RBI has increased the total repo rates by 250 basis points, i.e., 2.50%, since May 2022. It is believed that this increase will be the last in the Monetary Policy Committee meeting. The RBI will hold a press conference on Thursday, April 6, to discuss the meeting’s decisions.
Recently, many developed countries central banks like US Federal Reserve, the European Central Bank, and the Bank of England, have also increased the interest rates to reduce inflation in the market.
How much difference will a 0.25% repo rates hike make?
Suppose a person named Rohit has taken a Education loan of Rs 30 lakh at a fixed rate of 7.90% for 20 years. Its EMI is Rs 24,907. In 20 years, he will have to pay an interest of Rs 29.77 lakh at this rate. That means he will have to pay a total of Rs 59.77 lakh instead of Rs 30 lakh.
Now, if Rohit has taken the loan, the RBI will increase the repo rate by 0.25%. For this reason, banks also increase the interest rate by 0.25 percent. Now, when a friend of Rohit goes to the same bank to take a loan, the bank tells him an interest rate of 8.15% instead of 7.90%.
Rohit’s friend also takes a loan of Rs 30 lakh for 20 years, but his EMI becomes Rs 25,374. That means Rs 467 more than Rohit’s EMI. Because of this, Rohit’s friend will have to pay a total of Rs 60.90 lakh in 20 years. This is 1.13 lakh more than Rohit.
Why does RBI increase or decrease the repo rates?
The RBI has a powerful tool to fight inflation in the form of the repo rate. When inflation is very high, the RBI tries to reduce the money flow in the economy by increasing the repo rate. If the repo rate is high, the loan that banks get from the RBI will be expensive. In return, banks will make loans more expensive for their customers. This will reduce money flow in the economy. If the money flow is less, then demand will decrease and inflation will decrease.
Similarly, when the economy goes through a bad phase, there is a need to increase money flow for recovery. In such a situation, the RBI reduces the repo rate. Due to this, the loan from the RBI becomes cheaper for the banks, and the customers also get the loan at a cheaper rate. Let’s learn from this example. When economic activity came to a standstill during the Corona period, there was a decrease in demand. In such a situation, the RBI increased the money flow in the economy by reducing the interest rates.
