Inflation and interest rates relationship in india

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inflation and interest rates relationship in india

What is the relationship between inflation and nominal interest rate? In India interest rate is quite high as compared to other developed countries, but industry . The relationship between economic growth and interest rates remains another (i) Is the influence of inflation rate on India's economic growth significant?. The December 2 Fifth Bi-Monthly Monetary Policy Statement, , from the Reserve Bank of India (RBI) declared, “On the basis of an.

How Inflation and Interest Rates Are Related to Economic Growth? A Case of India

Hence borrowing will decline and as such the money supply i. A fall in the money supply will lead to people having lesser money to spend on goods and services. Hence, they will buy a lesser amount of goods and services. This, in turn, will lead to a fall in the demand for goods and services. With the supply remaining constant and the demand for goods and services declining; the price of goods and services will fall.

As inflation is a continuous increase in the general price level of goods and services so a fall in the general price level of goods and services will lead to a decline in inflation levels.

Inflation and interest rates: What is the Reserve Bank's policy? - vifleem.info Business

In low inflationary situations; the interest rate is reduced. A fall in interest rates will make borrowing cheaper. Hence, borrowing will increase and the money supply will also increase. With a rise in money supply, people will have more money to spend on goods and services.

inflation and interest rates relationship in india

So; the demand for goods and services will increase and with supply remaining constant this leads to a rise in the price level i. To know more about the impact of interest rate on inflation you can watch the video below: On 2 August, RBI reduced the Repo Rate from 6.

inflation and interest rates relationship in india

Repo rate is the rate at which commercial banks borrow from RBI. This reduction in MCLR will lead to an increase in loan growth in both retail and corporate segment.

inflation and interest rates relationship in india

What further consternation is needed to move the RBI into action? It is surprising that the ministry of finance made inaudible noises at this unfortunate development obviating wide-ranging anticipation.

Unless the finance ministry initiates serious independent evaluation, the economic plot of the new government may soon be lost. The RBI blamed the need to adhere to its conservative interest rate policy on weak tax revenue growth and slow pace of divestment.

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It does not take a trained economist to see that the economic morass the RBI itself described provides ample explanation for why there are no takers on the horizon for divested units and why tax revenue should be low in this ebb cycle unless the same extortion from taxpayers continues under the new government through stopping or delaying refunds and input tax credit, demanding unwarranted pre-deposits, and preponing tax payments through diktat in the last quarter, in other words, through pervading taxpayer harassment carried out through policy imposition on the tax administration.

This gives rise to curiosity to examine recent data.

inflation and interest rates relationship in india

This enables observation of real interest rate trends in figure 2. The polynomials reveal that the real median base rate of scheduled commercial banks — which has immediate relevance — has been positive and rising from about Q3-Q4 of with respect to CPI and CPI IW and from Q1 itself with respect to WPI.

Fitting polynomials to other interest rate trends — given their fickle movements — was not found to be so revealing.

inflation and interest rates relationship in india

Reflecting the continuing decline in WPI see figure 1it is not surprising that the real base rate has been throughout positive and rising with respect to the WPI since Q1with further sharp rises from Q3while, with respect to CPI and CPI IWthe real base rate has been positive and sharply rising from Q4 Separating the rate into rural and urban yields similar trends not shown.

Further, the lower range of the real base rate follows the same trend just below the higher range rate figure 4in fact, almost coinciding since Q4

Rethinking the Relationship Between Interest Rates and Inflation