Different measures of

RBI to control
inflation in India 
-Jay Mutha
 What is Inflation?
✘ Inflation refers to a general
progressive increase in prices of
goods and services in an
economy. When the general
price level rises, each unit of
currency buys fewer goods and
services; consequently, inflation
corresponds to a reduction in
the purchasing power of
money.
 Causes of Inflation?
✘ Demand Pull Inflation:
 Excess aggregate demand in overall economy.
 Business respond to high demand by raising prices to increase profit margin.

✘ Cost Push Inflation:

 Cost of production or operation are increasing due to:
 Increase in wages.
 Increase in cost of production inputs.
 Increased cost of imported components.
 Methods of RBI to control
inflation in India
✘ Monetary policies:
 Increasing bank rates.
 Repo rates.
 Cash reserve ratio.
 Buying dollars.
 Open market operations.
 Increasing bank rates
✘ Bank rate-Interest rate at which RBI lends money to the
domestic banks.
✘ Increase in bank rates leads to:
 Increase in deposit rate.
 Increase in lending rate.
✘  Discourages businessmen and consumers to take loans.
✘ Hence the controlled supply of money reduces the inflationary
pressure on the economy.
 Repo rates
✘ Repo rate is the rate at which the RBI (in case of India) lends
money to commercial banks in the event of any shortfall of funds.
Repo rate is used by monetary authorities to control inflation.
✘ In the event of inflation, central banks increase repo rate as this acts
as a disincentive for banks to borrow from the central bank. This
ultimately reduces the money supply in the economy and thus helps
in arresting inflation.
 Cash reserve ratio
✘ Banks are required to hold a certain proportion of the deposit in the
form of cash.
✘ Higher the Cash Reserve Ratio=> Lower the amount for lending
and investments with the banks. 
✘ Tool for the RBI to control the amount that banks lent. i.e. to control
the liquidity in the banking system and the country.
 Buying dollars
✘ RBI buys dollars to prevent the rupee from appreciating, it will lead
to an injection of money into the domestic economy. This will cause
interest rates to fall. To prevent this, after buying dollars, RBI can
sell government securities and suck money out of the economy.
✘ This act will push up interest rates in the economy, and business
will cut back on capital expenditure financed by loans, reducing the
demand for money.
 Open market operations
✘ This refers to buying and selling of government securities by RBI to
regulate short-term money supply. If RBI wants to induce liquidity
or more funds into the system, it will buy government securities and
inject funds, and if it wants to curb the amount of money out there,
it will sell these to banks, thereby reducing the amount of cash that
banks have. RBI uses this tool actively even outside of its monetary
policy review to manage liquidity on a regular basis.
Thank You!!