MONETARY POLICY TOOLS

MONETARY POLICY TOOLS

INFLATION WORD MEANING
 Planning

INFLATION
 Causes for inflation:
Inflation is caused by a combination of factors that can be observed on both Demand side
& Supply side.

 DEMAND PULL INFLATION

 COST PUSH INFLATION
Plannin Inflation
Demand side Factors
 population Growth

 More Money Supply

 Increased Disposable Incomes

 More public expenditure

 Deficit Financing

 Black Money
More money supply
Population growth
subsidy
Types of subsidy
 SUPPLY SIDE FACTORS
a. Higher incomes of the Factors of Production like Land, Labour, Capital
& Entrepreneur

b. Industrial Disputes

c. Natural Calamities

d. Illegal Hoarding of Goods & Black Market

e. Excessive Exports

f. Disruptions in International supplies

HOARDINGS AND BLACK MARKET
 Planning
Inflation
There are 3 broad types of CPIs - (for different type of consumers; new CPI system of 2012)

(a) CPI for Urban population, known as CPI (Urban)

(b) CPI for Rural population, known as CPI (Rural)

(c) Consolidated CPI for Urban and Rural, which is based on CPI (Urban) and CPI
(Rural)- key measure for CPI
 Planning
Inflation
CPI components Rural Urban Combined

Food, beverages, tobacco 59.31 37.15 49.71

Miscellaneous Items like Health,

24.91 28 26.31
Education etc..

Housing NA 22.53 9.77

Fuel, light 10.42 8.4 9.49

Clothing , bedding ,footwear 5.36 3.91 4.73

Total 100 100 100

 Planning
Inflation
 CPI is measured by Central Statistics Office (CSO) with 2011-2012 as Base year. It
is measured on monthly basis.
 INFLATION CALCULATION
CONTENT 2012 PRICES 2020 PRICES

CHICKEN BIRYANI RS.120 RS.180

SAMOSA RS.8 RS.12

MILK 20 PER LITRE 30 PER LITRE

TOTAL RS.148 RS.222

Plan
I. Based upon the levels of price variations, Inflation can be categorised as

1. Creeping Inflation: When prices are gently rising when prices rise by not more
than 3%, it is referred as Creeping Inflation.

2. Chronic Inflation: If creeping inflation persists (continues to increase) for a

longer period, then it is often called as Chronic or Secular Inflation.
 Planning
Inflation

3. Walking Inflation: When prices rise by more than 3%, but less than 10% per
annum, it is called as Walking Inflation.
.

4. Moderate Inflation: It happens when prices rise by less than 10% per annum

5. Running Inflation: It occurs when prices rise by more than 10% in a year.
 Galloping Inflation
According to Prof. Samuelson, if prices rise by dual or triple digit inflation rates like
30% or 400% or 999% yearly, then the situation can be termed as Galloping Inflation.
When prices rise by more than 20%, but less than 1000% per annum (i.e. Between
20% to 1000% per annum),
.
 Hyper Inflation

7. Hyperinflation refers to a situation where the prices rise at an alarming high

rate. The prices rise so fast that it becomes very difficult to measure its magnitude.
However, in quantitative terms, when prices rise above 1000% per annum
stagflation
 Planning
Inflation
y
X-axis  Time in Years
%

Hyperinflation
E
infinite% Y-axis  Price rise in %

Creeping Inflation (0 to 3 %) = 0A
1000%
Walking Inflation (3 to 10 %) = AB
D

Galloping Running Inflation (10 to 20 %) = BC

Price Rise (in%)
Galloping Inflation
(20 to 1000 %) = CD
20%

Running C Hyperinflation
(1000 % & above) = DE
10%
walking Moderate Inflation
B (0 to 10%) = 0A + AB = 0B
creeping
3%
A
Note: Graph not drawn to scale. Just for conception
understanding
0 x
Time in years or Annul

Fig. Creeping, Walking, Running, Galloping and Hyperinflation

 Planning
Inflation

Phillips Curve

Unemployment

Stagflation

Inflation
Phillips curve
  Cash Reserve Ratio (CRR):

The Minimum percentage of NDTL that every Schedule Commercial Bank (SCB) is
required to deposit with RBI without any interest rate. There are no limits on CRR.
 Statutory Liquidity Ratio (SLR):
• The share of net demand and time liabilities (deposits) that banks
must maintain in safe and liquid assets, such as, government
securities, cash and gold
 Planning
REPO RATE
This is the rate at which commercial banks borrow money from the central bank for a short
period of time by selling their securities or financial assets to the central bank with an
agreement to repurchase it at a future date at predetermined price
 REVERSE REPO RATE
The reverse repo rate is the rate of interest at which the central
bank borrows funds from other banks for a short duration.
The banks deposit their short term excess funds with the central
bank and earn interest on it.
 Planning
BANK RATE
The only way the bank rate is different from the repo rate is that the bank rate is the rate
at which banks borrow money from the central bank without any sale of securities.
It is generally for a longer period of time
Pl MARGINAL STANDING FACILITY
The Reserve Bank of India in its monetary policy for 2011-12 introduced the marginal
standing facility under which banks could borrow funds from RBI when there is a
considerable shortfall of liquidity.
This measure has been introduced by RBI to regulate short-term asset liability mismatches
more effectively.
Under this facility, banks can borrow up to 3% of their net demand and time liability.
Plang OPEN MARKET OPERATIONS

These include both, outright purchase/sale of government securities for

injection/absorption of liquidity
 MONETARY POLICY COMMITTEE
• STRUCTURE: CHAIRMEN IS RBI GOVERNOR

• TOTAL SIX MEMBERS INCLUDING CHAIRMEN

• THREE MEMBERS FROM RBI

• THREE MEMBERS FROM GOVT OF INDIA FOR THE

PERIOD OF FOUR YEARS
MPC OLD MEMBERS