Nowadays the Reserve Bank of India (RBI) is often in the news. However, people are largely in the dark about what it does, and why. True, the press tell us that when the RBI hikes the ‘repo’ rate (the interest rate at which the RBI makes short-term loans to commercial banks), the cost of home and automobile loans is expected to go up, since the banks’ cost of funds rises; and, correspondingly, the reverse is expected when the RBI reduces the rate.
Yet we need to understand more about the RBI’s policies, since they have an impact on the lives of the common working people, not merely on the buyers of flats and cars. Indeed, the RBI’s policies seem set to have an even bigger impact in future, as international financial capital tightens its grip on our country’s economic decision-making process itself. The recent appointment of Raghuram Rajan as governor, and the policies he has initiated in his first four months of office, have far-reaching implications. Let us look at some recent developments in order to get an idea of what the RBI is up to, and where it is heading.