Role of RBI in Controlling Inflation Dr. Deepakshi Gupta

What is Price Instability Fluctuations in Prices

Inflation Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. March-end, 2012-13 inflation was 6.5 percent.

STAGES OF INFLATION 1. CREEPING INFLATION (3%-4%) 2. WALKING INFLATION (30% -40%) 3. RUNNING INFLATION (40% - 80 %) 4. HYPER INFLATION (100% and abv)

Money supply growth 15% in 2012-13. Major Cause of Inflation Money Supply refers to the total volume of money circulating in the economy at a point in time. Money supply is basically determined by the central bank of a country. Money supply growth 15% in 2012-13.

Factors affecting Money Supply Cheap Monetary Policy Deficit financing Government Expenditure FDI and FII inflows

Monetary Policy Milton Friedman states, “Inflation is always and everywhere a monetary phenomenon.”

TYPES OF MONETARY POLICY Cheap money policy : Followed in periods of slums & depression Dear money policy: Followed in periods of boom & inflation.

Monetary Policy - Weapons Open Market Operations Bank rate Cash Reserve Ratio Liquidity Ratio Repo rate Reverse Repo rate Deficit Financing Issue of New Currency Margin Requirements

Open Market Operations OMOs are the means of implementing monetary policy by which a central bank controls the nation’s money supply by buying and selling government securities, or other financial instruments

Bank rate Rate at which Central Bank lends money to commercial Banks. Current rate - 8.50%

Cash Reserve Ratio It refers to the cash which banks have to maintain with RBI as certain percentage of their demand and time liabilities. Current Rate - 4.00%

Liquidity Ratio Current rate - 23% It is the percentage of total deposits commercial banks have to invest in government bonds and other approved securities. Current rate - 23%

Repo Rate The term Repo is used as an abbreviation for Repurchase Agreement. Repo rate is the interest rate at which the central bank lends funds to banks. Current Rate - 7.50%

Reverse Repo The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. Current rate - 6.50%

Issue of New Currency During Inflation the RBI will issue new currency notes replacing many old notes. This will reduce the supply of money in the economy.

Marginal Requirement Ratio Marginal Requirement of Loan = Current value of security offered for loan - Value of loans granted.

Deficit Financing It means printing of new currency notes by Reserve Bank of India .If more new notes are printed it will increase the supply of money thereby increasing demand and prices. Thus during Inflation, RBI will stop printing new currency notes thereby controlling inflation.

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