The Reserve bank of India (RBI) is the authority to release its decisions on where to set the benchmark interest rate. Most investors and traders are familiar with interest rate decisions and considered it as one of the major economic events. These investors and traders use the economic calendar to get the latest news on interest rates decisions among others. No doubt! The interest rates decided by RBI is in the interest of consumers, businesses, investors, and country’s economy. It is because economy thrives when investors, businesses, and consumers take risks. Borrowing money is one of the big risks which directly relate to the level of interest rates, risk-taking, and availability of credit. All these things tell a lot about a country’s current and future economy stats.
This is why the Indian Reserve Bank of India (RBI) take necessary measures in deciding –
- The interest rates to control the inflation
- Money flow in the market
To understand the interest rate decisions clearly, let’s take an example: When RBI reduce the interest rates, consumers, investors, and business sectors get the opportunity to borrow money on low-interest rates. When that happens, citizens buy more goods, investors invest big, and business sectors get credit to investment to expand their businesses, which is healthy for country’s economy to grow but sometimes, it also becomes the cause of increasing inflation.
Which is why controlling interest rates in order to maximize the economic growth while keeping inflation at reasonable levels is a very crucial financial matter. When there is a chance, the RBI lower interest rates to prompt borrowing and risk-taking but it the economy overheats, leading to high inflation rates, they raise short-term interest rates. Only the recognized authority like RBI has control over short-term interest rates, however, the long-term interest rates are driven by the market through supply and demand for long-term financial securities.
The central bank of the country like RBI (in case of India) set a rate at which they lend money to commercial banks to control inflation.
The relationship between short-term and long-term interest rates is known as yield curve which is a very important and considered as a barometer of consumers’, investors’, and businesses’, in context of risk. In a nutshell, the decisions taken by RBI regarding interest rates impact investing decisions, individual borrowing, purchasing, and business decisions which all count in the economic activities.
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Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.