Before we start with our topic RBI Policy on Inflation we want
everyone should be familiar with the word RBI .
What is history of RBI ?
What is its Structure ?
What are its objectives and functions ?
What is Inflation and how it is measured?
Reserve Bank of India (RBI) is India's Central Banking
Institution, which controls the monetary policy of the Indian
rupee, established on 1 April 1935 in accordance with the
provisions of the Reserve Bank of India Act,1934 under guidelines
laid down by Dr. B.R Ambedhkar. The Seal of RBI have sketch of
the Tiger and Palm Tree.
The Central Office of the RBI initially Headquartered at Kolkata
now permanently at Mumbai.
RBI is fully owned by Government of India.
The General superintendence and direction of the RBI is entrusted
with the 20-members Central Board of Directors which includes :
The Governor (currently Duvvuri Subbarao),
Four Deputy Governors,
One Finance Ministry Representative,
Ten Government-nominated Directors to represent important
elements from India's economy,
And Four Directors to represent Local Boards headquartered at
Mumbai, Kolkata, Chennai and New Delhi.
Main Objective of RBI is to assist development strategy of the
Government of India.
Various Functions includes:
Bank of Issue
Manergial of Exchange Control
Issuer of Currency
Banker of Banks
Detection of Fake Currency
Inflation is a rise in the general level of prices of goods and
services in an economy over a period of time . When the general
price level rises, each unit of currency buys fewer goods and
Consequently, Inflation also reflects an erosion in the purchasing
power of money .
A Chief measure of Price Inflation is the Inflation Rate, the
annualized percentage change in a general price index (normally
the Consumer Price Index) over time. High rates of inflation and
Hyperinflation are caused by an excessive growth of the
Inflation's effects on an economy may be Positive and Negative.
Positive effects include ensuring that central banks can
adjust nominal interest rates (intended to mitigate
recessions), and encouraging investment in non-monetary
Negative effects of inflation include a decrease in the real
value of money and other monetary items over
time, uncertainty over future inflation which may discourage
investment and savings, and if inflation is rapid
enough, shortages of goods as consumers begin hoarding out
of concern that prices will increase in the future.
RBI is the main monetary authority of the country , It
formulates, implements and monitors the Monetary policy.
Objectives are maintaining price stability and ensuring adequate
flow of credit to productive sectors.
RBI is Regulator and Supervisor of the financial system and
prescribes broad parameters of banking operations within which
the country's banking and financial system functions.
Main objectives is to maintain public confidence in the
system, protect depositors‘ interest and provide cost-effective
banking services to the public.
The RBI controls the monetary supply, monitors economic
indicators like the gross domestic product.
RBI lends to the commercial banks through its discount window to
help the banks meet depositor’s demands and reserve
requirements. The interest rate the RBI charges the banks called
If the RBI wants to increase the liquidity and money supply in the
market, it will decrease the bank rate and ,
If it wants to reduce the liquidity and money supply in the
system, it will increase the bank rate.
Presently, the bank rate is 9.0%.
Cash Reserve Ratio (CRR) :
Every commercial bank has to keep certain minimum cash
reserves with RBI.
RBI uses this tool for securing the monetary stability in the
country, it increase or decrease the reserve requirement depending
on whether it wants to effect a decrease or an increase in the
An increase in Cash Reserve Ratio (CRR) will make it mandatory
on the part of the banks to hold a large proportion of their deposits
in the form of deposits with the RBI. This will reduce the size of
their deposits and they will lend less. This will in turn decrease the
The current rate is 4.75%.
Statutory Liquidity Ratio (SLR):
Banks maintain liquid assets in the form of gold, cash and
approved securities. Higher liquidity ratio forces commercial
banks to maintain a larger proportion of their resources in liquid
form and thus reduces their capacity to grant loans and
advances, thus it is an anti-inflationary impact.
Higher liquidity ratio diverts the bank funds from loans and
advances to investment in government and approved securities.
Presently, SLR rate is 23%.
RBI uses three kinds of selective credit controls:
Minimum margins for lending against specific securities.
Ceiling on the amounts of credit for certain purposes.
Discriminatory rate of interest charged on certain types of
Direct credit controls in India are of three types:
Part of the interest rate structure i.e. on small savings and
provident funds, are administratively set.
Banks are mandatory required to keep 24% of their deposits in
the form of government securities.
Banks are required to lend to the priority sectors to the extent
of 40% of their advances.
RBI left Interest rates unchanged citing inflationary pressures, but
cut the Statutory Liquidity Ratio to 23% to increase the flow of
credit to industry with Repo Rate at 8 per cent and Cash Reserve
Ratio for banks at 4.75 per cent.
SLR cut will maintain liquidity to facilitate smooth flow of credit
to productive sectors to support growth lowering policy rates will
only aggravate inflationary impulses without necessarily
stimulating growth , RBI Review.
RBI lowered the economic growth projection to 6.5 percent.
Inflation forecast also raised to 7 percent.