What is the relationship between inflation and interest rate in India ?
In India, the relationship between **inflation** and **interest rates** is a critical dynamic managed by the **Reserve Bank of India (RBI)** to ensure economic stability. Here’s a detailed breakdown of how they interact and impact the economy: --- ### **1. The Core Mechanism: RBI’s Inflation-Targeting Framework** - **RBI’s Mandate**: Maintain inflation within the **4% ± 2% range** (CPI-based) under the **Monetary Policy Committee (MPC)** system. - **Tool Used**: **Repo Rate** (rate at which RBI lends to banks). #### **How It Works**: - **High Inflation (CPI > 6%)** → RBI **raises repo rate** → Banks increase loan rates → Borrowing costs rise → Demand slows → Prices cool. - *Example*: In 2022–23, RBI hiked repo rate from **4% to 6.5%** to combat 7.8% inflation. - **Low Inflation (CPI < 4%)** → RBI **cuts repo rate** → Cheaper loans → Boosts spending/growth. --- ### **2. Key Channels of Impact** #### **A. Borrowing C...