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:
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: