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INFLATION

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 Introduction

• Inflation is expansion or an act of inflating.

• Inflation means persistent rise in General Price-level.

• In words of Samuelson, “ By Inflation we mean a time of generally rising

prices.”.

• In words of Shapiro, “ Inflation is simply a constant and persistent rise in

general price-level.

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Government Control
Restricted
Open Inflation
Inflation

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 Time wise

War Time Post War Peace Time

Inflation Time Inflation Inflation

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 Rate Wise
Gallopin
Creeping Walking Running Hyper
g

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 Coverage/
Scope Wise

Sectoral Comprehensive
Inflation Inflation

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• What is the trade-off between inflation and
growth?

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• Let us suppose that the government reduces
the lending rate to the banks( currently at
around 8%) to 4–4.5%. People who earlier
couldnt afford to buy a house or a car or take
personal loan can now take the loans easily
since the interest to be paid would be
minimum

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• So, the demand for the houses. goods,
services increases in the country and to fulfill
the demands companies try to build new
plants to accommodate excess demands
which in turn leads to increase in the
employment in the country. Also, the loans
available to the companies is very cheap so
they dont mind building new and new plants.

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• As far as the supply is meeting the demand,
the inflation rate is low.
• But if the demand goes on increasing( since
people have money to buy new things) and if
the supply couldn’t keep up the pace with the
demand( since companies also have
constraints like building new plants which
might take months),  the prices of the goods
tends to increase
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• This is because people who have credit
available with them would try to bid against
each other for the same good. This leads to an
increase in price of the goods which leads to
inflation.

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• So, in order to control inflation, you would have
to reduce the money supply in the system. This is
possible through the fiscal policies(like increase
in taxes) and monetary policies( through increase
in the interest rate). Therefore, the interest rate
which was earlier around 4–4.5% would keep on
rising. This would force the people to postpone
their buying behavior since the easy money is
now gone, thanks to the interest rates.

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• Once the prices starts to go down( because
supply would start exceeding demand), the
interest rate would again be lowered to pump
money into the system.
• The scenario of keeping interest rate very low
in the presence of high inflation would be
disastrous which would lead to Hyper-inflation(
recent example is Zimbabwe, just search
Zimbabwe hyper-inflation).
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 Fiscal Policy

PIET 15
Fiscal Policy

• The term ‘Fisc’ in English means ‘Treasury’.

• Hence, policy concerning treasury or Government
exchequer is known as ‘Fiscal Policy’.
• Fiscal Policy refers to the Revenue and Expenditure
policy of the Govt. which is generally used to cure
recession and maintain economic stability in the
country.
• The Collective form of policies of imposing taxation,
taking loans or deficit financing are known as ‘fiscal
policy’.

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Objectives of Fiscal Policy

• Economic Stabilization
• Economic Growth
• Optimum Allocation of Economic Resources
• Equitable Distribution of Income and Wealth
• Break the Vicious Circle of Poverty
• Provide Full Employment
• Acceleration of Rate of Capital Formation

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Instruments of Fiscal Policy

1. Budget
2. Taxation
3. Public Expenditure
4. Public Debt

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 Monetary Policy

PIET 19
Monetary Policy

Monetary policy is the process by which monetary authority of a

country, generally a central bank controls the supply of money in
the economy by its control over interest rates in order to maintain
price stability and achieve high economic growth. In India, the
central monetary authority is the Reserve Bank of India (RBI). It is
so designed as to maintain the price stability in the economy.

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Monetary Policy

• The Monetary and Credit Policy is the policy statement,

traditionally announced twice a year, through which the Reserve
Bank of India seeks to ensure price stability for the economy.
• These factors include - money supply, interest rates and the
inflation.
• Besides, the RBI also announces norms for the banking and
financial sector and the institutions which are governed by it.

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Objectives of Monetary Policy

• Price Stability
• Controlled Expansion Of Bank Credit
• Promotion of Fixed Investment
• Restriction of Inventories and stocks
• To Promote Efficiency
• Reducing the Rigidity

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Instruments of Monetary Policy

1. Bank Rate of Interest

2. Cash Reserve Ratio
3. Statutory Liquidity Ratio
4. Open market Operations
5. Margin Requirements
6. Deficit Financing
7. Issue of New Currency
8. Credit Control

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Cash Reserve Ratio
CRR, or cash reserve ratio, refers to a portion of deposits (as cash)
which banks have to keep/maintain with the RBI. During Inflation
RBI increases the CRR due to which commercial banks have to
keep a greater portion of their deposits with the RBI . This serves
two purposes. It ensures that a portion of bank deposits is totally
risk-free and secondly it enables that RBI control liquidity in the
system, and thereby, inflation.

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Statutory Liquidity Ratio

Banks are required to invest a portion of their deposits in

government securities as a part of their statutory liquidity
ratio (SLR) requirements . If SLR increases the lending capacity
of commercial banks decreases thereby regulating the supply
of money in the economy.

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Bank Rate of Interest

Bank rate in India is determined by Reserve Bank of India (RBI).

It is the rate at which RBI gives loan to
commercial banks without keeping any collateral. The RBI also
provides short term loans to its clients (keeping collateral) which
is called the repo rate.
Any upward revision in Bank Rate by central bank is an indication
that banks should also increase deposit rates as well as Base
Rate / Benchmark Prime Lending Rate.  Thus any revision in the
Bank rate indicates that it is likely that interest rates on your
deposits are likely to either go up or go down,  and it can also
indicate  an increase or decrease in your EMI.

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Open Market Operations

It refers to the buying and selling of Govt. securities in the open

market . During inflation RBI sells securities in the open market
which leads to transfer of money to RBI. Thus money supply is
controlled in the economy.

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Margin Requirements

• During Inflation RBI fixes a high rate of margin on the

securities kept by the public for loans. If the margin increases
the commercial banks will give less amount of credit on the
securities kept by the public thereby controlling inflation.

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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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Issue of New Currency

• During Inflation the RBI will issue new currency notes

replacing many old notes.

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How is the Monetary Policy different from the Fiscal Policy?

• The Monetary Policy regulates the supply of money and the cost and
availability of credit in the economy. It deals with both the lending
and borrowing rates of interest for commercial banks.
• The Monetary Policy aims to maintain price stability, full employment
and economic growth.
• The Monetary Policy is different from Fiscal Policy as the former
brings about a change in the economy by changing money supply and
interest rate, whereas fiscal policy is a broader tool with the
government.
• The Fiscal Policy can be used to overcome recession and control
inflation. It may be defined as a deliberate change in government
revenue and expenditure to influence the level of national output and
prices.

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As of 10 September 2018, the key indicators are

Indicator Current rate

Inflation 4.8%

Bank rate 7% 

CRR 4.00%

SLR 19.5%

Repo rate 6.50% 

Reverse repo rate 6.25%

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Reserve Bank of Indian
The Reserve Bank of India is India's central
banking institution, which controls the monetary
policy of the Indian rupee.
It commenced its operations on 1 April 1935 during the
British Rule in accordance with the provisions of the
Reserve Bank of India Act, 1934.

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 Ministry of Finance

Arun Jaitley
Minister of Finance

Pon Radhakrishnan Shiv Pratap Shukla

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Minister of State for Finance Minister of State for Finance
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