FALL IN REPO RATE: It’s Economic Implication

GMD

All those who are updated with the financial news they would have heard that there is a decrease in the Repo Rate by 25 basis points. Hence, I will share my thoughts on this decision from an economic view point.

Let me first explain you the Repo Rate in short. The repo or repurchase rate is the interest charged by the RBI to banks when they approach it for short term loans. The repo rate is linked to the interest rate borrowers pay when they take loans from banks because the latter always charges inters which is higher than the existing repo rate.

Our repo rate has seen many ups and downs. Here I present my work of research on fluctuations of Repo rate since Oct’05 to present.

 

 

With 25 basis points down, the banks can get the short term loans at a low price hence this will lead to reduction in  interest on further loan provided by the banks to its customer. Hence, this will boost the economy also. Now with the lower interest rate more manufacturers will be willing to take loans and expand their business. This is a step towards ‘MADE IN INDIA’ campaign and to again encourage the industries to grow.  But this is possible only in short run.

In the long-run, reducing Repo and Reverse Repo rates is harmful for the economy as it is just a means to lend reserves to banks, enabling them to engage in far bigger inflation to undertake much more credit expansion through FRB. While this lending will have some short-term positive effects, in the long-run, it creates and worsens the inflationary boom of the familiar boom-bust cycle. It also sets the conditions for the inevitable raising of interest rates thus pricking the inflationary bubble and triggering the depression.

Hence, I feel Repo Rate should be kept under examination always so that it never turns harmful our economy.

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