Prakriti Deb, Pune
The Reserve Bank of India (RBI) recently had the Monetary Policy Committee (MPC) meet, in which they decided to keep the main interest rate, called the repo rate, at 6.5%. This is the third time in a row that they haven’t changed it.
How does the RBI repo rate affect the common man?
The RBI uses the repo rate as a tool to manage various aspects of the economy, including borrowing costs, consumer spending, business investment, inflation, exchange rates, etc.
For a common man in India, the repo rate directly influences borrowing costs. When the repo rate is lowered, banks reduce interest rates on loans, and borrowing becomes cheaper. Low repo rates may result in reduced returns on fixed deposits and savings accounts. On the other hand, if the repo rate rises, loan interest rates increase which leads to higher borrowing costs.
When the RBI keeps the repo rate unchanged, it maintains the cost at which banks borrow money. For the common man, this means stability in borrowing costs. It doesn’t directly alter interest rates, but it signifies a predictable financial environment. This implies people may continue making purchases and investments without concerns about sudden rate fluctuations.
What does the RBI say?
The RBI believes that the economy is doing okay, even though there are some challenges from other countries.
RBI Governor Shaktikanta Das said, “Domestic economic activity is holding up well, and is likely to retain its momentum, despite weak external demand. Considering this confluence of factors, the MPC decided to remain watchful and evaluate the emerging situation.”
Das mentioned that while the cost of vegetables went up, they’re keeping an eye on other factors like global food prices and weather patterns. “While the vegetable price shock may reverse quickly, possible El Nino weather conditions, along with global food prices need to be watched closely, against the backdrop of skewed Southwest Monsoon.” He added, “These developments warrant a heightened vigil on the evolving inflation trajectory.”
The RBI has also asked banks to set aside a larger part of incremental deposits, which is the additional money that people put into their bank accounts over a specific period of time. It is the extra cash that goes into the bank on top of what was already there before.
Starting from August 12, banks must save 10% of this extra money they got between May 19 and July 28. This is done to ensure stability by helping to control the amount of money banks can lend, making it slightly harder to borrow.