Why RBI and Modi govt are failing to control inflation? : Indian Economics Case study
Think School・2 minutes read
The RBI raised the key repo rate to address inflation caused by global economic shocks, particularly stemming from the war in Ukraine, impacting interest rates and home loan EMIs. Despite efforts to curb inflation, global supply chain disruptions and increased raw material costs continue to affect product prices, leading to a stagnant market with no money circulation globally.
Insights
- The RBI raised the repo rate due to global economic shocks and geopolitical uncertainty, impacting inflation in India as a result of the Russia-Ukraine war, leading to increased financial burdens for borrowers.
- Understanding inflation calculation involves the Consumer Price Index (CPI) and a basket of goods and services, with the Russia-Ukraine war spiking commodity prices globally. Despite RBI's efforts to curb inflation through repo rate hikes, global supply chain disruptions and increased raw material costs persist, impacting product prices and hindering economic growth.
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Recent questions
What caused the recent inflation surge in India?
The inflation surge in India was primarily caused by the war in Ukraine, which led to increased food and fuel prices globally. This rise in prices directly impacted the economy, leading to a projection of Consumer Price inflation exceeding 18% in January 2023. The geopolitical uncertainty and global economic shocks prompted India's Central Bank, RBI, to raise the key repo rate by 35 basis points in an effort to curb inflation.
How does RBI's repo rate hike affect borrowers?
RBI's repo rate hike directly affects borrowers, especially those with home loans, by increasing their Equated Monthly Installments (EMIs). As the repo rate influences commercial bank lending rates, borrowers face higher interest rates on their loans, resulting in increased financial burdens. This can lead to challenges in managing finances and meeting loan repayment obligations, impacting individuals and households.
What is the role of Consumer Price Index (CPI) in inflation calculation?
The Consumer Price Index (CPI) plays a crucial role in inflation calculation by measuring the average change over time in prices paid by consumers for a basket of goods and services. CPI data is collected from various markets and sectors to assess the cost of living, purchasing power, and currency value. Understanding CPI helps in analyzing inflation trends, determining the impact on consumer spending, and formulating monetary policies to address economic challenges.
How does the Russia-Ukraine war impact global inflation rates?
The Russia-Ukraine war has a significant impact on global inflation rates by spiking commodity prices worldwide. The conflict led to disruptions in the global supply chain, causing increased raw material costs and affecting product prices. This escalation in commodity prices contributes to inflationary pressures in various economies, leading to challenges in managing inflation levels and stabilizing economic conditions.
What are the consequences of high interest rates on construction businesses?
High interest rates, resulting from the RBI's repo rate hikes, have adverse consequences on interest-sensitive businesses like construction companies. These businesses face challenges in completing projects due to deterred buyers and financial strains caused by increased borrowing costs. Project delays, vendor payment issues, and hindered growth are common outcomes of high interest rates, impacting the construction sector's operations and overall economic performance.
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Summary
00:00
"RBI Raises Repo Rate to Curb Inflation"
- India's Central Bank, RBI, raised the key repo rate by 35 basis points due to global economic shocks and geopolitical uncertainty.
- The war in Ukraine led to increased food and fuel prices, causing inflation to rise.
- The Consumer Price inflation was projected to exceed 18% in January 2023.
- Inflation in India surged due to the Russia-Ukraine war, impacting the economy and interest rates.
- RBI's repo rate hikes directly affect home loan EMIs, increasing financial burdens for borrowers.
- Understanding inflation calculation involves the Consumer Price Index (CPI) and a basket of goods and services.
- CPI data is collected from various markets and sectors to assess cost of living, purchasing power, and currency value.
- The Russia-Ukraine war spiked commodity prices globally, affecting inflation rates worldwide.
- RBI's repo rate hike aims to curb inflation by influencing commercial bank lending rates and consumer spending.
- Despite RBI's efforts, inflation persists due to global supply chain disruptions and increased raw material costs, impacting product prices.
13:54
Global Market Stagnation Due to Interest Rates
- Buyers lacking funds lead sellers to reduce prices, but sellers face constraints due to past losses and rising input costs, limiting price reductions. This results in a stagnant market with no money circulation affecting all goods and services globally.
- An increase in the RBI's repo rate impacts interest-sensitive businesses like construction, hindering growth and project completion. High interest rates deter buyers, causing financial strain on construction companies, leading to project delays and vendor payment issues.
- The RBI's crucial role in the economy is highlighted, with slight miscalculations in repo rate adjustments potentially causing significant economic slowdowns. Understanding these concepts aids in safeguarding wealth from inflation, with partners like IDFC First Bank offering higher interest rates and zero fee banking services to enhance savings.
