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Behind the rate cut

Apex bank is confirming your concern - inflation is on the rise & you better factor it when planning your finances
By Rounak Kumar Gunjan | April 08, 2017

The bi-monthly monetary policy announcement by the Reserve Bank of India (RBI) has come to become a much awaited event in recent years. So, when the first announcement for this financial year came out, the expectations were that there will be revision to push for economic activity. However, the RBI did not tamper much and only changed the reverse repo rate by increasing it. Naturally, the move has had mixed reactions, with the industry players lauding the move to check on inflation.

Even during the press conference, the RBI members cited curbing of inflation through controlling liquidity in the economy as one of the major reasons for bringing down the reverse repo rate (RRR) by 25 basis points from 5.75 per cent. That inflation has been a cause of concern is understood by the measures taken by the RBI in recent years to keep this spoiler under check. In fact, a little over a week before the policy announcement, the RBI had reduced the rates on small saving instruments.

Although, there were murmurs among the small savers community over the displeasure of repeatedly reducing the returns on their savings; there is little for them to rejoice each passing quarter when interest rates are being revised. The truth it seems is that inflation is not coming under check, which is a thing to worry about and something that the apex bank is working hard to check.

The RRR is the rate at which RBI borrows money from commercial banks. Ideally, an increase in the same automatically brings down the amount of money circulating in the economy which affects prices and thus bringing about a reduction in inflation. However, inflation is also affected by other external factors such as monsoons, recession and migration of population among others. With the weather department predicting poor monsoons, inflation is not going to be something that will easily abate. The RBI and the government would need to step in to control inflation, lest it starts impacting adversely. 

The government has set a target of curbing inflation to 4 per cent for the current year, which is ambitious a figure. It is also the rate at which the savings bank passes interest to account holders. Effectively, the money in your savings bank account barely manages to match your purchasing power. The reality is pretty stark—if you wish to maintain your lifestyle, you can no more afford to depend only on putting money into assured returns savings. For any real returns, you will need to deploy your money into instruments that beat inflation in the long run. The choice is limited and is in equities. 




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