The interest rates play a crucial role in any economy, more so in emerging economies. In this backdrop, the author tries to chronicle the movement of interest rates in India from last financial year till date. Besides, he enumerates the steps initiated by Reserve Bank of India in maintaining interest rates in the economy, and their impact on the financial markets (banking sector and capital markets).

Interest is a price of money, which is considered as a function of inflation, where nominal interest includes real interest plus rate of inflation. It also takes into consideration the factors like opportunity cost, risk of default and tenor of borrowing.

Expectations concerning inflation and economic stability are of crucial importance for any market. It is difficult to prepare a formula as to how interest rate expectations are generated. Confidence in the inflation target may provide an anchor. Past inflation rates will influence the inflation in future.

Confidence in monetary policy makes interest rates move with the expected inflation target. This contributes to stabilizing inflation around the target. The expectations channel thus amplifies the effects of monetary policy.

When interest rates are low, demand of credit for consumption and business will be higher. Higher demand leads to higher output and employment. Wage growth also picks up. The wage growth combined with higher profit margins will lead to higher demand for goods and services. High growth of money causes rise in inflation. Inflation can also change due to fluctuations in real demand for goods and services or sometimes due to the changes in the supply or demand for money. The current rise in interest rates is due to expectation of higher inflation movement.

Interest Rate Moves: Impact on Markets, Mumbai Inter Bank of Rate, Collateralized Borrowing and Lending Obligation, CBLO, Indian Oil Corporation, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited , HPCL, Net Demand and Time Liabilities.