Business News: How RBI Controls the Economy with Bank Rate and Repo Rate?

Business News: Every country has a central bank in charge of determining its economic orientation. In India, the Reserve Bank of India (RBI) is responsible for managing inflation and ensuring financial system liquidity. To achieve this equilibrium, the RBI uses crucial monetary measures such as the bank rate and the repo rate. These are the interest rates at which government and private banks borrow from the RBI; the bank rate applies to long-term loans and the repo rate to short-term loans. Adjusting these rates has a direct impact on banks' borrowing costs, which affects both businesses and consumers.

Bank Rate Vs Repo Rate

When the RBI reduces interest rates, banks offer lower-cost loans, encouraging businesses to grow and expand while allowing consumers to obtain home, automobile, and personal loans. This increased spending boosts economic growth. However, excessive liquidity can cause inflation by increasing demand and raising the cost of critical products. In such instances, the RBI hikes interest rates, increasing lending costs, lowering spending, and delaying economic development. The key challenge for the RBI is to achieve a balance between promoting economic growth and containing inflation, so guaranteeing long-term financial stability.