Measures to Contain Inflation

RBI takes monetary measures while the Government takes fiscal measures to contain inflation.

Monetary Measures

As part of the monetary policy review, the RBI takes suitable measures to moderate demand to levels consistent with the capacity of the economy to maintain its growth without provoking price rise. It is generally agreed that high rates of inflation is caused by an excessive growth of the money supply.

The RBI controls the money supply by its monetary policy via which it alters the interest rates and alters the banking reserve requirements to bring the inflation in its comfort zone {which is around 5%}.

The key policy rates are:

• Repo Rate;
• Reverse Repo Rate;
• Marginal Standing Facility; and
• Key banking reserve requirements are SLR and CRR.

When these rates are altered, the movements are passed on other prevailing interest rates in the economy which ultimately influences the borrowing costs for firms and households. For example, when the interest rates go down, it becomes cheaper to borrow, so households are more willing to buy goods and services and firms are in a better position to purchase items to expand their businesses, such as property and equipment.

Fiscal Measures

The government can take the following Fiscal Measures to contain inflation:

• Reducing Import Duties
• Allowing imports of the commodities which are scarce in market.
• Removing levy obligations in case of sugar
• Banning exports of commodities such rice and oils.
• Imposing minimum export prices.
• Suspending or banning the futures trading is come commodities.
• Raising the stock limit of some commodities.
• Making available the commodities via various organizations such as NAFED and NCCF.