RBI will increase repo rate if inflation won’t get controlled

New Delhi : If the retail inflation rates remain above the Reserve Bank’s limit in the third quarter, then the repo rate will have to be increased. Efforts from both monetary and fiscal front are necessary to stop the rising prices of products.

Retail inflation above 6% in the last two quarters
An official associated with the case said that retail inflation remained above 6 percent in the last two quarters of the current financial year. If even in the January-March quarter, it remains above the RBI’s 2-6 percent range, then it will have to give the reason in writing to the government.

Interest rates did not change in the fourth consecutive meeting of the Monetary Committee. To solve this, raising interest rates will be the only option left. However, any increase in interest rates may have the opposite effect on an economy already under pressure from Covid-19.

The law-bound Reserve Bank will also have to provide an approximate period after raising the interest rates, when the interest rates will be brought back under its purview. In the fourth consecutive meeting of the Monetary Policy Committee (MPC) last week, RBI did not make any change in the repo rate.

Although the hands of the Reserve Bank are tied on the inflation front, the government has made every effort to bring it down. Food products are most affected by retail inflation. In view of this, the Modi government has cut import duty on pulses, edible oil and oil seeds.

This step will bring down the prices of products coming from abroad in the domestic market and will help in controlling retail inflation to some extent. Meanwhile, RBI has tried to increase capital liquidity in the financial system, so as to strengthen the banking sector.