How much Inflation Reduced Due to Increase in Interest Rates, RBI told the Whole Truth - Read Now
The Reserve Bank of India (RBI) has reported that a cumulative interest rate hike of 2.5% since May 2022 has successfully reduced inflation by 1.6%. In a recent article penned by senior officials, including Deputy Governor Debabrata Patra, the central bank explained how these monetary policy changes have impacted the economy. The current policy rate stands at 6.5%, and the Monetary Policy Committee (MPC) has kept rates unchanged since February 2023, maintaining a neutral stance during its October 2024 meeting.
How Did Inflation Decrease?
The RBI’s analysis indicates that the increase in policy rates has stabilized inflation and curbed overall demand. This action has contributed to deflationary responses within the economy. The article stresses that while monetary policy adjustments have a profound impact on short-term interest rates, their effects on long-term rates are more muted. Notably, inflation dipped below 4% in July and August, with retail inflation recorded at just 3.54% in July—its lowest level in five years.
However, inflation surged to 5.49% in September, driven by rising food prices. The RBI anticipates an inflation rate of around 4.5% for the current fiscal year.
Will Interest Rates Drop in December?
While the RBI MPC has opted to freeze interest rates for the tenth consecutive time, the recent shift to a neutral stance opens the door for potential rate cuts in the future. Analysts are speculating whether the repo rate will be reduced in December, depending on inflation data for October and November. Some experts suggest that the RBI may not follow the U.S. Federal Reserve or the European Central Bank in cutting rates, emphasizing that India’s unique geographical and demographic context requires tailored monetary policy.