06th July 2025, Gaurav Kumar Singh
Inflation—it’s one of those economic terms that affects everything from your grocery bill to your loan EMI, yet it often goes unnoticed. At the center of this economic tug-of-war is the Reserve Bank of India (RBI), the nation’s central bank. But how does RBI manage to keep inflation in check?
The answer lies in its clever use of interest rates.
Let’s break it down in the simplest terms so you understand not just what happens, but also how it impacts your daily life.
What is Inflation, and Why Should You Care?
Inflation is the rate at which the general level of prices for goods and services rises. When inflation is too high, your purchasing power decreases—you pay more for the same things.
Imagine buying milk for ₹50 per liter today, but ₹60 next month. That’s inflation at play. A little inflation is normal (and even healthy for growth), but too much can hurt savings, increase costs, and create economic instability.
Who is the RBI and What Does It Do?
The RBI is the central bank of India, responsible for regulating the currency, controlling monetary policy, and maintaining the stability of the financial system.
One of its core roles? Managing inflation. And the primary tool it uses for that? Interest rates.
What Are Interest Rates, and How Do They Affect the Economy?
Interest rates refer to the cost of borrowing money. The RBI sets a benchmark interest rate known as the repo rate, which is the rate at which it lends money to commercial banks.
Here’s how it works:
Higher interest rates → Loans become expensive → People and businesses borrow less → Spending and demand go down → Inflation slows.
Lower interest rates → Loans become cheaper → Borrowing increases → Spending and demand go up → Economy grows, but inflation may rise.
How RBI Controls Inflation Using the Repo Rate?
The repo rate is the RBI’s magic wand.
1. When Inflation is High: RBI Increases the Repo Rate
This makes loans costlier for banks.
Banks pass on this cost to customers → Higher EMIs on home, car, and personal loans.
People borrow and spend less → Demand falls.
With reduced demand, prices stabilize or fall → Inflation comes under control.
2. When Inflation is Low: RBI Decreases the Repo Rate
Loans become cheaper → Borrowing and investments rise.
Consumer demand picks up → Businesses thrive.
It stimulates growth, especially in slow economic periods.
Real-Life Example
In 2020, during the COVID-19 pandemic, RBI cut interest rates to stimulate economic activity. But when inflation started rising sharply in 2022–23, RBI began raising rates again to keep price levels in check.
Other Tools RBI Uses (Besides Repo Rate)
While interest rates are the main tool, RBI has a few others:
Reverse Repo Rate: Rate at which banks park their money with RBI. A higher reverse repo can encourage banks to save rather than lend.
Cash Reserve Ratio (CRR): The percentage of deposits banks must hold as reserves. A higher CRR means less money to lend.
Open Market Operations (OMO): Buying/selling government bonds to influence money supply.
These tools support interest rate adjustments and help RBI fine-tune the money flow.
Does Raising Rates Always Work?
Not always. While interest rate hikes are effective in curbing inflation driven by excess demand, they may not work well when inflation is due to supply shocks—like a sudden rise in oil or food prices.
Also, frequent or sharp hikes can slow down the economy, reduce job creation, and affect businesses.
How Does It Affect You as a Consumer?
Every time RBI tweaks the repo rate:
Loan EMIs may increase or decrease
Fixed deposit returns can go up or down
Property prices, car sales, and consumer spending shift
Stock market reacts instantly
So yes, RBI’s decision directly influences your wallet.
Summary: A Balancing Act
RBI walks a fine line—too low inflation can mean stagnation; too high can mean chaos. Through interest rate control, it tries to:
Maintain price stability
Ensure economic growth
Support employment and financial stability
It’s a dynamic process, based on global trends, domestic data, and long-term vision.
Final Thoughts
Next time you hear “RBI hikes repo rate by 25 basis points,” don’t just scroll past. Know that it’s an effort to balance our economy, control inflation, and ensure that your money retains its value over time.
Inflation control isn’t just a government problem—it’s your money, your loans, and your future that’s at stake. And the RBI is working behind the scenes to protect it.
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