what is meant by higher interest rate?how does it help during inflation?

is it the interest rate on the fixed deposits or on loans or is it the one that companies give to their share holders??what does higher interest rate imply and y shld it be increased at the time of inflation…how does higher repo rate help during inflation ..and y is inflation nt a gud thing?

2 Replies to “what is meant by higher interest rate?how does it help during inflation?”

  1. Higher Interest rate means higher CRR. CRR is the % of deposits of a banking institution which that bank has to keep with RBI without any interest. Because a big sum bank has to keep with RBI without interest, bank may need to revise the lending interest rates too to higher rates. If credit which is being available on higher rates, then less no of people will be interested to spend money by taking loans for purchase of goods etc. therefore there will be low demand and low demand means lower prices. some times after increase in CRR bank may also need to revise their deposit rates to higher to fetch more deposits. because fixed income deposits are giving higher returns, more money may go into lock-up and because money is not available in the market, cosumption will be lower. If consumption will be lower then prices are to be reduced also.

  2. Cash reserve ratio(CRR) refers to the ratio of money which a bank must maintain in it to cater to daily transactions. For eg. if crr is 10% then it means the bank has to keep the 10% of money with it always and the rest 90% can be used for lending to others and other financial investments. Sometimes inflation can be caused due to high liquidity in market which means too much money is flowing in the market. So the rbi hikes crr to absorb excess money which then reduces inflation.

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