The RBI interest rate policies despite evincing lots of interest have become predictable off-late. Given the fact that the last 13 revisions have resulted in rate hikes, there is an understandable gloom associated with it. Our personal loans are getting costlier, buying your dream home isn’t easy, budding entrepreneurs have seen the cost of capital head north etc. Before we discuss further, let’s first try to understand the rationale behind these rate hikes by RBI.
The policy being referred to is “Monetary policy” by which the monetary authority of a country like RBI, controls the supply of money by controlling interest rates; monetary base and reserve requirements. The policies are designed keeping in mind, the rate of economic growth, inflation, unemployment or exchange rate. The current RBI policy also referred to as
contractionary policies, seeks to address the high inflation levels in India by suppressing demand. The rationale is that higher interest rates would lead to less borrowing thereby reduced investments and demand for capital goods. In addition, higher interest rates will also lead to people saving more thereby reducing consumption i.e. demand.
Seems logical and sound, isn’t it? It is, but empirically it has been established that monetary policies are effective in targeting price stability, exchange stability and financial stability in short term or at best medium term. The Reserve Bank has so far, hiked its key policy rates 13 times, totaling 350 basis points since March 2010 i.e. the hike has been continuing for more than 18 months.
