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How Interest Rates Effect Economy and Controls Inflation?

Posted By On 1/20/2009 12:02:00 PM Under

1. It is a known fact that inflation is a monster which stares each govt and common man has to face the same every day as it eats into his or her savings. Govts are sensitive to inflation and it has been a cause of govt collapses at the centre. Thus the onus lies on the central bank of each country like India has Reserve Bank of India which sucks out the liquidity from the market by tightening CRR and Repo rate etc and as a net result the inflation is reined.

2. One has to understand this fact that increase in interest rates leads to make borrowing money less attractive and as a net result the economy slows down. Conversely one can state that reverse is done to make the economy leap frog and in that endeavour the interest rates is lowered to make availability of credit at cheap rates which makes money flow more freely into the system which in turn stimulates economic growth.

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