Download Inflation

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)

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


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.
Thank You