The US Fed has indicated that it may increase interest rates in the coming meeting also, along with this, it is now believed that the RBI is also going to increase the repo rate.
Rate hike for the fifth time this year
The US Fed has raised its benchmark short-term interest rates for the fifth time this year. Explain that to control inflation, central banks increase interest rates. After the US central bank, now RBI can also increase interest rates. After this the banks will also increase the interest rates on the loan. Its direct loss will be to the borrowers. Interest rates will go up on all types of loans including home loans, car loans and personal loans. Those who have already taken a home loan, they will have to pay a higher amount in EMI.
RBI may also increase rates
Now RBI can also increase rates. RBI’s Monetary Policy Committee meeting is going to be held from September 28 to September 30. It is believed that in this meeting, RBI can take a decision to increase the repo rate by 0.25 to 0.35 percent. Retail inflation figures for August 2022 are much higher than the RBI’s tolerable level. In such a situation, now the pressure on RBI to increase the repo rate has increased. On August 5, the RBI had increased the repo rate by half a percentage point to 5.40 percent. If the repo rate increases, then the banks will also increase the interest rates on the loan. At the same time, there are indications that the government is not in favor of raising interest rates by the RBI.
Inflation high in both countries
Central banks raise key interest rates to control inflation. According to the latest data, retail inflation in India rose to 7 per cent in August. Earlier it was 6.71 per cent in July 2022. In this way, the inflation rate has been above the RBI’s tolerable level for the eighth consecutive month. On the other hand, if we talk about America, then the inflation rate has been recorded higher than expected. According to US CPI data, the monthly CPI (Consumer Price Index) grew at 8.3 per cent in August. In the US, inflation in June was the highest in 40 years at 9.1 percent.
How inflation is curbed by rising interest rates
It is very important to strike a balance between demand and supply in an economy. When demand is high and supply is low, inflation rises. One of the reasons behind the increase in demand is high liquidity. When people have more money, they will spend more and demand will increase. A good demand is good for GDP growth. But when inflation becomes high enough, central banks try to insulate liquidity from the market. Central banks raise key interest rates. After this, the banks also have to increase the rates on the loan. Due to the increased interest rates, customers stop taking loans. This reduces the liquidity (inflow of money) in the market and keeps inflation under control.