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The article published in the editorial section of The Hindu Newspaper talks about how the monetary policy committee has decided to keep the interest rate the same as before.
Background Information
What is an Interest Rate?
An interest rate is the cost of borrowing money or the earnings from saving money. It is usually expressed as a percentage of the amount you borrow or save over a year. For borrowers, if you take out a loan, like a mortgage, the interest rate represents the extra amount you need to pay back on top of what you borrowed. For instance, if you borrow $1,000 at a 5% interest rate, you will end up paying back $1,050 after one year.
On the other hand, for savers, when you deposit money in a savings account, the bank pays you interest as a reward for keeping your money there. For example, if you save $1,000 in a bank account with a 2% interest rate, you will earn $20 after a year.
How Interest Rates Affect Inflation
Interest rates and inflation are closely related, and changes in interest rates can influence inflation in several ways. First, when interest rates are low, borrowing money becomes cheaper. This encourages people and businesses to take out loans to spend and invest. Increased spending can lead to higher demand for goods and services, which can cause prices to rise, contributing to inflation.
Second, when interest rates are high, saving money becomes more attractive because you earn more on your deposits. Higher saving means that people spend less, which can reduce the demand for goods and services and help keep inflation in check.
Central banks, like the Reserve Bank of India (RBI) or the U.S. Federal Reserve, use interest rates as a tool to manage inflation. If inflation is rising too quickly, they may raise interest rates to cool down the economy by discouraging borrowing and spending. Conversely, if inflation is low and the economy needs a boost, they might lower interest rates to encourage borrowing and spending.
Finally, changes in interest rates can also affect people’s expectations about future inflation. For example, if a central bank raises interest rates, people may expect inflation to decrease, which could lead them to adjust their spending and saving behaviours.
In summary, interest rates play a crucial role in shaping the economy and controlling inflation. By adjusting interest rates, central banks can influence how much money people borrow and spend, which ultimately affects the overall level of prices in the economy.
Article Explanation
RBI Decides to Maintain Interest Rates
Recently, the Reserve Bank of India (RBI) announced that it will keep the benchmark interest rate at 6.50%. This rate has not changed since April 2023. The decision was made by the Monetary Policy Committee (MPC), a group of experts who meet to set interest rates and manage the country’s monetary policy. Out of the six members in the MPC, five members voted to keep the rate the same.
One of the new members of the committee suggested lowering the interest rate by 0.25%. This suggestion was based on recent data showing that inflation—the rate at which prices for goods and services increase—had fallen below the RBI’s target of 4% in both July and August. However, the MPC decided against this move. They felt that the decline in inflation was not steady or consistent enough. They predicted that inflation would rise again starting in September, which it did, reaching 5.5%—the highest inflation rate seen in the past nine months.
Inflation and Economic Growth Forecasts
The MPC has kept its inflation forecast at 4.5% for the upcoming months. They also project that the economy (measured by Gross Domestic Product or GDP) will grow at a rate of 7.2% over the next two years, through 2024-25. However, they revised some of their earlier inflation estimates. For the second quarter of this year (Q2), they expect inflation to average 4.1%, which is lower than their previous prediction of 4.4%. In the third quarter (Q3), the average inflation estimate has increased to 4.8%, up from an earlier estimate of 4.7%. Looking ahead, they anticipate inflation will decrease to 4.2% between January and March 2025.
Shift in Policy Stance
The MPC has agreed to change its approach from a strict stance (known as “hawkish”) to a more balanced or neutral stance. This indicates they are no longer solely focused on increasing interest rates to combat inflation. Instead, they are also considering how to support economic growth while managing inflation. Despite these adjustments, the MPC has made it clear that it remains focused on bringing inflation down to the 4% target and that the likelihood of a rate cut in the next meeting in December is slim.
Concerns About Rising Food Prices
A significant worry for the RBI is the rising cost of food, particularly vegetables. Governor Shaktikanta Das pointed out that core inflation (which excludes food and energy prices) has reached a low point and may not fall further. This suggests that inflation pressures might still exist, which could complicate the RBI’s efforts to manage the economy.
Global Economic Factors
The article also mentions that global economic conditions are affecting India’s economic outlook. For example, rising prices for oil and metals are putting additional pressure on inflation. Climate-related issues are also ongoing challenges for the economy. While the U.S. Federal Reserve recently cut its interest rates, the RBI is focusing more on domestic economic trends rather than simply following global developments.
Future Challenges for the Economy
Lastly, the article highlights that there are signs of a slowdown in India’s economic activity. Car sales have decreased, which indicates that consumers may be spending less money. Additionally, industrial production showed a decline in August. If these trends of slowing economic activity continue, the MPC may face difficult decisions ahead. They will need to find a balance between supporting growth and controlling inflation, which could present challenges in the months to come.
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The Hindu Epaper Editorial Explanation given by Hello Student is only a supplementary reading to the original article to make things easier for the students.
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The Editorial Page of The Hindu is an essential reading for all the students aspiring for UPSC, SSC, PCS, Judiciary etc or any other competitive government exams.
This may also be useful for exams like CUET UG and CUET PG, GATE, GMAT, GRE AND CAT
To read this article in Hindi –https://bhaarat.hellostudent.co.in/