Why should India’s central bank acknowledge rising inflation and what it should do?.
The recent studies carried out by relevant agencies have shown that retail inflation is climbing in India. This has necessitated tightening monetary policy through control of policy rates. The RBI is the chief party to modify rate and control inflationary trends.
Role of RBI
- Monetary policy
The RBI formulates the monetary policy of the country through repo, reverse repo, bank rate etc so as to control inflation.
- Promote fiscal discipline
The RBI promotes fiscal discipline in government by keeping lid on the spending by the government and structuring its debts.
Causes of inflation
- Shortage of commodity
Shortage of a particular commodity causes inflation. If the demand outpaces supply, it starts a cycle of inflationary trends.
- Increased spending
Increased spending by consumers creates demand for goods. As demand grows, the prices grow. This is also a cause for inflation.
Tools for tackling inflation
- Repo rate
It is the rate at which the central bank lends funds to commercial banks for a short term. Availability of funds affects the ability of banks to lend further.
- Reverse repo rate
It is the rate at which commercial banks deposit their money with the central bank. By controlling money in the system, inflation can be controlled.
- SDF
Standing Deposit Facility empowers RBI to absorb liquidity from banks without any collateral. This helps in reducing additional liquidity.
- SLR
Statutory Liquidity Ratio is the amount of money that should be present with the banks in highly liquid form. It affects the lending of the banks.
- CRR
Cash Reserve Ratio is the minimum cash that commercial banks have to keep with the central bank. It is also used to control lending.
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