Examining the Role of Repo Rate in Controlling Inflation: Analyzing the Dynamics of the Proportional Relationship

Abstract

A research study has assessed how effective repo rate adjustments as an instrument of monetary policy control across most economies could result in inflation. Based on raw data and reports collated from Bangladesh and India as well as global experiences between 2020 and 2022, the paper has shown that repo-linked measures were found to be deficient in containing structurally inefficient supply chains responsible for causing inflation. It also found that during the period 2020 to 2022, global supply chain issues, notably shortages in semiconductors and crises in energy, made up for about 50 to 60 percent of inflationary pressures. Repo rates increased during the period but, as the forgoing displays, economic recovery was hampered and inflation by those factors was not addressed. Studies across India and Bangladesh show repo measures, as well, were ineffective in dealing with inflation brought on by structure. Of interest, though, is Sri Lanka, where the highlight was on the need to have both monetary and fiscal interventions. The study proposes a multi-pronged approach aimed at controlling inflation with particular effects and focusing on investment in supply chains as well as fiscal measures and structural reforms.