On what basis does the RBI increase the lending interest rates?

Answer 1

So many economic and international factors guide RBI to increase or decrease lending interest rates. These include inflation, economic growth, money supply, forex position, international lending rates, economy's priorities, macro channelising of funds in a desired manner......etc.

Answer 2

The RBI would raise guide banks to raise interest rates if the inflation rate is high due to excessive demand (not if its because of a supply crisis), to reduce consumer spending by borrowing and encourage saving. If the savings level is low and borrowing is too high to sustain or if there is too much money in the hands of the consumer and thus prices are rising, the RBI usually uses the repo rate, CRR as tools to suck in money from the system - which will decrease the availability of funds for the banks to lend out and hence increase the interest rates.

Answer 3

whenever the indian economy faces inflationery situation .. its time to show yellow card - the RBI thinks so and it encourages increase in lending rates. But the indian money market is driven by a parallel market which deals with cash only and its size is enormous and uncontrollable.

Hence the RBI's action has no direct bearing in the economy except the fact that its action drives shivers down the share market and manufacturers market etc.,

The best way to control the inflation is to hold the bull by its horn not by its tail. Crores of money (black included) are changing hands everyday in the real estate market and the exponential price rise is not checkd so far...

the logic is quite simple my dear watson.. politicians are playing the real estate market too..

Answer 4

RBI does not increase interest rates. Bank Boards have been vested with the powers to independently evaluate and prescribe interest rates .
Each Bank has an "Asset Liability Committee"(ALCO) which is empowered by the Board to monitor structural liquidity and interest rate sensitivity on the residual maturities of assets and liabilities in their balance-sheet, arrive at their "net interest margins"(NIMs).
ALCOs look at the "repo" rate of the RBI as the benchmark "call money floor rate". Typically, there is a 3 to 4% difference between average interest rate on deposits and on loans and advances.

RBI prescribes the repo rate after monitoring inflation, money supply (M3), Trade balances, FDI, stock market indices, LIBOR and US inflation, monsoon forecasts and the "yield curve".
RBI reviews its "monetary stance" every quarter and comes up with an annual stance and a mid-term review.

Therefore, the RBI is a watchdog and the Banks are independently working on their NIMs and their ALCOs prescribe interest rates.

The only area where RBI prescribes interest rates is on "priority secotor advances" at the micro level in tune with the "poverty alleviation programmes"

Answer 5

RBI increase the lending interest rates based on the inflation rate. This is to contain money supply. According to the economic theory increased supply of money to the market induce inflationary tendencies and therefore to reduce money supply the lending interest rate is increased so that demand for money is thereby reduced.

Answer 6

Simple logic - Demand and Supply - they increase it when the demand by public for money in form of loan is raising.

When public wants more money from banks in the form of loan, the RBi observes this and increases the interest rate slowly.

Same way, when the money circulation falls or slows down, or when it wants the money circulation to increase, it simply drops down the interest rate. Naturally that attracts more customers for loans.

Answer 7

RBI mean reserve bank of india that can possible to increase
the lending interate rates

Answer 8

When money supply in circulation is more, price of same commoditie increases. We say inflation is up. Here sufferers are poor people, as their income does not increase, as that of rich people. Now if Government wants elections to win, it has to contain inflation.So to curb money supply, RBI increases lending rate to Banks. Banks in turn increases lending rate to its customers.

Answer 9

The main reason is to control inflation.
RBIs presumption is, since the rate of interest is increased, the demand for credit will decrease. And buying of many things which are not of immediate requirement will be postponed. In fact, the cost of land and the houses in urban places have shot up to a very high level due to the availability of credit at cheaper rates.

Answer 10

Interest is nothing but cost of money. Like any other commodity cost of money also varies with its supply and demand. When money in circulation or liquidity increases it tends to feed inflation by increasing demand for goods and services. That's why RBI steps in to keep inflationary pressures under check so as not to affect economic growth but also ensure adequate money supply.