RBI with its sole authority over the Indian currency usually exercises its full power efficiently to control the fluctuating economy. India is economically in a much stable state than that of most countries because India's economy does not depend upon any third party and RBI plays a key role in developing and maintaining the stability. RBI has many important responsibilities to keep in check because in an economy like India where inflation and demonetisations are pretty steep it is really crucial to keep the economy on track.
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RBI will tentatively increase its key lending rates or as we call them, repo rates by the ending of this year. Repo rates and reverse repo rates help to keep our economy stable. The repo rates are usually decreased when there is a depression in the economy and is increased when inflation is noticed. There are some features of the economy that lead to determining inflation or depression in the economy and RBI has to assess those key factors to have a clear view of the market situation.
In India, we are currently experiencing inflation where certain parts of the market are enjoying huge profits while other sectors are kept stagnant. Prices of oils like petrol, diesel etc are hiked up along with many other necessary items and these are some clear indications of how the economy is suffering due to inflation. The RBI will increase the rate by 25 basis points and this decision of them was well accepted by The International Monetary Fund.
The common man is still coping with this decision of RBI and with the increased exchange rates the value of Indian currency will decrease making export cheaper and import costlier. Inflation also decreases the purchasing power of the country. RBI has to increase the interest rates so that the condition does not worsen.
With the increase of 0.25% interest rates loans are becoming costlier. Home loans are seen to have a worse than usual effect on it. The interest rates are hiked up to discourage the common mass to take or give loans and it also checks the amount of money that the common man is holding. The slope of inflation is a tricky one and if it an eye is not kept on it, it can yield disastrous results for an economy like India.
Now that RBI has started to increase its repo rates banks have also increased the marginal cost based lending rates (MICR) and an increase of 0.10% of MICR has been recorded. Banks have been increasing their MCLRs citing the hike in the cost of funds before the RBI hiked the policy rates. Banks are increasing their MICR as there was an increase in interest rates.
After a gap of four years, the Reserve Bank of India is increasing its interest rates. The common man is surely affected by this decision of RBI making loans and other basic necessities higher than usual but the inflation has to be kept in check.