Overnight Rate or Overnight Policy Rate (OPR)
Base Lending Rate (BLR)
The Base Lending Rate is adjusted in correlation to Overnight Rate. The cause and effect of Overnight Rate adjustment is vast in terms of micro and macro economics, but suffice for this post here to illustrate the direct factors and effects.
Hike in the cost of borrowing has the intention of slowing down consumer demand & spending in a overheated economy, usually characterized by a steadily increasing inflation rate, uptrending share market and business activity. Example, the recent 25 bps in Overnight Rate translates into 35 bps in Base Lending Rate at 6.60%.
Think of it this way in layman terms – when it cost more to borrow money, consumer spending power will reduce. Demand-pull inflation is partly driven up by up-spiralling consumer demand, so when money supply drops, price will remain steady (or drops) in theory. Bear in mind that increase in money supply is usually the primary factor for demand-pull inflation, so hiking the Overnight Rate is probably the most effective way.
Read this illustration on the Cause & Effect of Business Cycle to understand more on how all these are correlated.
**bps = basis points. One basis point is equivalent to 0.01 percent.