Monetary Policy – Inflation (Part 1)

Hello Readers !! Today we will discuss Monetary Policy which will cover the meaning and explanation of various other banking terms such as Monetary Policy Inflation, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo and Reverse Repo Rate etc. Before discussing all these terms in details and their impacts, let’s start discussing the meaning of monetary policy and why there is need of this policy.

 

Meaning of Monetary Policy –

 

Monetary Policy means the actions which are mainly taken by Central Bank (RBI) to regulate the availability, cost and use of money and credit in the economy. In simple words, RBI takes measures to control the flow of the money supply by changing interest rates and reserves amount for customers as well as bank and financial institutions.

Now the question arises, why there is need to control the money flow in the economy?

The answer is – to control the inflation i.e. to maintain price stability in the economy. To control inflation, central bank use different types of instruments or tools, which are CRR, SLR, Repo Rate, Reverse Repo Rate, Bank Rate, Open Market Operations etc. We will discuss these terms later in this topic.

First we will understand, What is Inflation?

 

Meaning of Inflation –

Inflation means rise in the prices of goods and services which consequently results in the fall of purchasing power of the money.

Monetary Policy Inflation Meaning clickncrack

 

To make it clearer, let’s take one example.

Suppose you went to Burger Shop where you often go and ordered your favourite meal which includes One Burger, One Pack of Fries and One Cold Drink. As you go there often, you know the billing amount and without asking you was about to pay ₹200. But the bill was amounted to ₹250. This rise of ₹50 in your bill is known as Inflation.

The story do not ends here. Being a regular customer, you bought only ₹200 as you was aware of the billing amount. Now, you want to consume more commodities but do not have that much money. So, you cancelled the order of cold drink and had rest of the meal. What happened now is Fall in Purchasing Power. Earlier you were getting more commodities from the same amount and now you have to pay more to consume the same commodities.

 

Now, the question is how to control the inflation. But before that we must know, what causes inflation?

 

Causes of inflation –

There are basic two causes of inflation – Excess money supply and Excess purchasing power in the hands of the public.

 

cause of inflation

 

As we come to know the causes of inflation. Now, we will understand the measures to control this inflation.

There are several ways through which inflation could be controlled. These measures can be divided into –

  • Monetary Measures or Quantitative Techniques
  • Fiscal Measures

 

Monetary Measures or Quantitative Techniques

These measures are taken by Central Bank – Reserve Bank of India to control the money supply in the economy. It includes changes in the bank rates and reserves and sale of government securities in open market.

 

 

Inflation - Monetary Measures taken by RBI

 

 

 

Fiscal Measures

These measures are adopted by the government to effect the changes in the purchasing power with the public which includes –

 

fiscal measures inflation

 

 

With this we will finish this topic here.

We will discuss Monetary and Fiscal measures and Factors of causes of Inflation explaining the purchasing power, demand and supply of goods and services in detail in next article.

Hope you have enjoyed learning. Please give your feedback in the comments section, as we are ready serve better.

 

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