Interplay Between CPI and Repo Rates ( BY RBI )

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 Hello friends lets understand about CPI & Repo rates


friends  CPI is an essential tool for RBI as it looks after the monetary policies of the country.

The framework by RBI requires it to keep the inflation rate around 4% however it can fluctuate anywhere between 2% and 6%.

The primary motive of RBI is inflation control, while it may change from time to time depending on the decision of the monetary policy committee. Knowing what is CPI and how much is the impact becomes important for the central bank.

The MPC holds its meeting to decide the repo rate in the economy. Repo rate  are decided in tandem with the inflation rate of the economy.

Say the inflation in the economy is rising. This means that the general price level prevailing in the market is rising. In such a situation, to arrest inflation, the central bank would want to reduce the money supply in the economy. For this RBI may increase repo rates, which will make it difficult for the banks to borrow money from the RBI, ultimately reducing liquidity in the economy.

Therefore, often inflation is the deciding factor for RBI’s monetary policy.

Interplay Between Inflation and Investment

Calculating inflation-adjusted returns is extremely important because it tells the real value of an investment and if the money has grown in real terms or not.

Say your investment gave you 3% returns per annum over a period of time and the value of money, which is inflation, also rose 3.5%; net-net your investment’s returns get nullified. The reason being, the value of money also rose.

Hence, it is important to spot inflation-beating investment instruments.

If inflation is going up and it can be seen in CPI climbing up, it means that the same Rs 100 will be able to buy a lesser number of goods tomorrow than it could today.

The value of money has risen over the years, and it is a general function of the economy. The same 10 paise that could afford a big basket of goods in the 1940s-50s is not even a valid denomination in India in today’s times. While this is a broader idea of inflation, an increase in the general level of prices is experienced by people on a day-to-day basis. Whether one is going to buy vegetables, availing the services of an IT firm, or even making an investment  into  stocks , mutual funds  and likewise.

CPI is a metric that can be used by anyone from any walk of life: investor, trader, consumer, businessman, farmer, and the list is endless. Since CPI decides the value of money, it sets the base for any transaction.


Wise investing

knowledge is growth 

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