RBI's Policy To Keep Interest Rates Low Might Result in Higher Inflation

By Aditya Raghunath

Investing.com -- Yesterday, the Reserve Bank of India came out with its Monetary Policy Report that was cheered by investors. The equity markets rose close to 1% on April 7 on the back of RBI’s dovish stance. India’s Central Bank stated that growth is likely to rebound in 2021 as vaccination drives gain pace resulting in a recovery in consumer demand. However, a sluggish macro economy coupled with rising crude oil prices and inflation fears could negatively impact India’s recovery.

There is a lot of uncertainty regarding the second wave of COVID-19 infections that is sweeping across India. In case the new virus variants result in economic shutdowns, RBI’s optimistic projections will take a backseat. Considering the massive risks, RBI has stated it will ensure ample liquidity and kept interest rates low.

The RBI maintained an accommodative stance and kept the Repo rate at 4% as it intends to maintain inflation between 2% and 6% going forward. The retail inflation based on the consumer price index stood at a three-month high of 5.03% in February which can be attributed to rising fuel prices.

An oversupply of money might result in a rise in inflation rates. Alternatively, a higher interest rate might result in high borrowing costs and stall economic recovery while also impacting the manufacturing and export sectors.