Playlist Description - How RBI Control Inflation - Repo , Reverse Repo rates ( Practical Perspective )
Playlist Url - https://www.youtube.com/playlist?list=PL_16BSQMjAHNsvilYt1zRFRRrwsye41kw
When you read the economic times , this is one topic that will always appear irrespective of the season ...so mastering it and knowing a bit of it can help you be in good ground
Case Finance 3 - How the RBI uses the interest rates to control inflation ?
Solution - By Amlan Dutta
The central bank (country's bank )is RBI...the other bansk which do business with common audiences is called commercial banks ...we can hold accounts and do operations with the commerciall banks but we cannot have accounts or do operations with the RBI
RBI only does operations with the commercial banks of the country and therein lies the gist of the note
Now when RBI lends money to the commercial banks i.e SBI , ICICI etc , the rate at which it offers such funds is called repo rates .
The rate at which it borrow's money from the commercial banks is called the reverse repo rate
Increasing the repo rate as also the reverse repo rates helps arrest inflation .How ?
(1) Increasing the Repo rates
If The central bank increases the rate of interest for lending , any commercial bank will exercise constraint in taking loans ...so available capital in the market will be reduced
Obviously , then money made available to the public for spending wil reduce thereby reducing spending ....so obviouisly demand for all products will fall down and so inflation wil get arrested
(2) Increasing the Reverse Repo rate
Here the central bank borrows money from the commercial banks
if it offers a healthy rate of interest, then it but natural that the commercial banks will flock to the central bank to park their capital because of 2 reasons
(1) More security because RBI is the govt's bank and so there is no chance of default
(2) Good rate of return
Even in same rate of return , it is always preferable for commercial banks to park money with RBI for security , because common borrower can always default but RBI cant ( govt can mint money )
Now when the commercial banks give money to the central bank , again money from the system reduces ....i,e money available with the commercial banks for giving to public
Now , so public will not be freely available to raise capital and even if , raises it , it does it at very high cost!
So obviously public think's before making such investment and so gradually such loans gets less sold ....finally affecting spending and thereby the demand and so consequently the prices come down and therefore th inflation
Voila , we have seen how the RBI can use powers it has as far as increasing /decreasing interest rates are concerned to reduce inflation ,
Hopefully when you read next the role of the RBI governor to reduce inflation , this is something that may come to his mind !
Humble regards ,
Amlan Dutta
I am set out to make make knowledge free to the best of my capacity and i will do everything i can to that effect !
Playlist Url - https://www.youtube.com/playlist?list=PL_16BSQMjAHNsvilYt1zRFRRrwsye41kw
When you read the economic times , this is one topic that will always appear irrespective of the season ...so mastering it and knowing a bit of it can help you be in good ground
Case Finance 3 - How the RBI uses the interest rates to control inflation ?
Solution - By Amlan Dutta
The central bank (country's bank )is RBI...the other bansk which do business with common audiences is called commercial banks ...we can hold accounts and do operations with the commerciall banks but we cannot have accounts or do operations with the RBI
RBI only does operations with the commercial banks of the country and therein lies the gist of the note
Now when RBI lends money to the commercial banks i.e SBI , ICICI etc , the rate at which it offers such funds is called repo rates .
The rate at which it borrow's money from the commercial banks is called the reverse repo rate
Increasing the repo rate as also the reverse repo rates helps arrest inflation .How ?
(1) Increasing the Repo rates
If The central bank increases the rate of interest for lending , any commercial bank will exercise constraint in taking loans ...so available capital in the market will be reduced
Obviously , then money made available to the public for spending wil reduce thereby reducing spending ....so obviouisly demand for all products will fall down and so inflation wil get arrested
(2) Increasing the Reverse Repo rate
Here the central bank borrows money from the commercial banks
if it offers a healthy rate of interest, then it but natural that the commercial banks will flock to the central bank to park their capital because of 2 reasons
(1) More security because RBI is the govt's bank and so there is no chance of default
(2) Good rate of return
Even in same rate of return , it is always preferable for commercial banks to park money with RBI for security , because common borrower can always default but RBI cant ( govt can mint money )
Now when the commercial banks give money to the central bank , again money from the system reduces ....i,e money available with the commercial banks for giving to public
Now , so public will not be freely available to raise capital and even if , raises it , it does it at very high cost!
So obviously public think's before making such investment and so gradually such loans gets less sold ....finally affecting spending and thereby the demand and so consequently the prices come down and therefore th inflation
Voila , we have seen how the RBI can use powers it has as far as increasing /decreasing interest rates are concerned to reduce inflation ,
Hopefully when you read next the role of the RBI governor to reduce inflation , this is something that may come to his mind !
Humble regards ,
Amlan Dutta
I am set out to make make knowledge free to the best of my capacity and i will do everything i can to that effect !
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