Why RBI and Modi govt are failing to control inflation? : Indian Economics Case study

Summary

This video explains the surge in inflation in India, largely driven by global events like the Russia-Ukraine war, and how the Reserve Bank of India (RBI) is responding with repo rate hikes. It illustrates how these hikes impact home loan EMIs, business costs, and consumer spending. The script delves into how inflation is calculated through the Consumer Price Index (CPI) and explores the supply-side causes, such as rising raw material costs, that continue to drive inflation despite RBI's efforts. The video emphasizes the importance of understanding these economic dynamics for personal and business financial planning.

Takeaways

• 😀 The Reserve Bank of India (RBI) has raised the key repo rate by 35 basis points to control inflation, which is heavily impacted by geopolitical events like the Russia-Ukraine war.
• 😀 The Russia-Ukraine war has caused a spike in global commodity prices, especially wheat, fuel, and sunflower oil, pushing inflation levels to unprecedented highs.
• 😀 Inflation is calculated using the Consumer Price Index (CPI), which tracks changes in the prices of a basket of goods and services, including food, housing, and healthcare.
• 😀 A higher repo rate directly affects home loan EMIs, as banks pass on the increased interest rate to consumers, making loans more expensive for home buyers and businesses.
• 😀 For example, a 2% increase in the repo rate can lead to a significant rise in monthly loan payments, reducing consumer purchasing power and overall demand in the economy.
• 😀 As the RBI increases the repo rate to curb inflation, it can lead to lower demand for goods and services, which may slow down price increases, but it is not always effective when input costs rise due to supply chain issues.
• 😀 A key issue is that inflation may not be caused by high demand but by rising input costs, such as the increase in the price of raw materials like cotton, oil, and fertilizers, which drives up the cost of production for many goods.
• 😀 The RBI's interest rate hikes may inadvertently slow down economic growth, especially in interest-sensitive sectors like real estate and construction, where projects can be delayed or canceled due to high financing costs.
• 😀 Despite RBI's efforts to control inflation through repo rate hikes, global supply chain disruptions and rising input costs remain major factors driving inflation, particularly in sectors like FMCG and construction.
• 😀 The video emphasizes the critical role of the RBI in managing the economy, explaining how its decisions on repo rates impact everything from consumer spending to corporate profitability and inflation control.
• 😀 The video suggests a need for better understanding of inflation and its broader economic effects through study materials, which are provided for viewers to learn more about Indian economics and its implications for personal finances.

Q & A

What is the repo rate and how does it affect consumers?

The repo rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. When the repo rate increases, banks pass on the higher borrowing costs to consumers in the form of higher interest rates on loans, such as home loans, which directly increases the EMIs that consumers must pay.

How does inflation impact political stability?

Inflation has significant political consequences. Historically, when inflation exceeds a certain level, it can lead to a change in the ruling party, as it affects people's purchasing power and creates dissatisfaction, forcing political changes.

Why is inflation in India rising despite RBI's rate hikes?

Inflation is rising not just due to demand but because of supply-side factors. The Russia-Ukraine war disrupted global supply chains, leading to higher costs for essential commodities like oil, wheat, and fertilizers, which in turn pushed up prices in India.

How is the Consumer Price Index (CPI) used to measure inflation?

The CPI measures inflation by tracking the prices of a fixed basket of goods and services over time. It compares the current cost of the basket to a base year, providing a percentage increase that reflects inflation. The CPI helps assess the cost of living, purchasing power, and currency value.

What role does the RBI play in controlling inflation?

The RBI controls inflation by adjusting the repo rate. By raising the repo rate, it discourages borrowing and spending, which helps reduce demand-driven inflation. However, it is less effective against supply-side inflation, where rising costs of raw materials drive up prices.

How does an increase in the repo rate affect home loan EMIs?

When the RBI raises the repo rate, commercial banks also raise the interest rates on loans, including home loans. This results in an increase in monthly EMIs, making it more expensive for borrowers to repay their loans.

Why is the RBI's repo rate hike not enough to curb inflation caused by global disruptions?

The RBI's rate hikes target demand-driven inflation by reducing borrowing and spending. However, the ongoing global supply-side disruptions, such as the war in Ukraine, are driving up the cost of essential goods and services, which cannot be controlled by interest rate adjustments alone.

How does inflation affect the purchasing power of an average consumer?

As inflation rises, the cost of goods and services increases, reducing the purchasing power of consumers. They are able to buy fewer items with the same amount of money, leading to a decrease in their standard of living.

How does inflation influence corporate decision-making?

Inflation impacts corporations by increasing their operating costs, such as raw material prices and loan interest rates. To cope with higher expenses, companies may cut back on employee benefits, reduce hiring, or limit investments in new projects.

What factors contributed to the rise in inflation in India post the Russia-Ukraine war?

The Russia-Ukraine war caused disruptions in global supply chains, particularly in oil, wheat, and fertilizer production. Russia and Ukraine are key suppliers of these commodities, and their reduced availability led to price hikes, contributing to higher inflation globally, including in India.