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Inflation BY AYUSSH SANGHI Measures to Address Inflation Part 4.13 ress 1nflati01Par
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How to Address Inflation? . Usually three ways are adopted to contain inflation: Usually three watcontain inflation: Monetary Policy . Fiscal Policy Administrative Measures
Monetary Policy The Central Bank of a country measures includes: Quantitative and . Qualitative like increase/decrease in cash reserve ratio, repo rate or adopting a specific monetary policy. Let's understand them in detail.
Monetary Policy . The governments may take recourse to tighter monetary policy to cool . Example: RBI may increase the bank rates/repo rates etc. to curb the . Due to such a step the public may want to invest more in the banks and down either the demand-pull or the cost-push inflation. supply of money in the market. lead to a drop in the consumption, thereby driving down the inflation in the economv.
Monetary Policy RBI may also use qualitative control methods such as: raise margins on loans for commodities for which traders have a tendency to speculate and hoard, increasing the number of in increasing the down payment of instalments. stalments,
Monetary Policy Reserve Bank may also resort to other operations such as the Open Market Operations to mop out the liquidity from the market by selling government securities and bonds.
Be Careful After understanding monetary steps, please take NOTE they these measures can only be successful if inflation is due to demand pull factors and not structural in nature. Some of the limitations of raising interest rates to curb inflation have been discussed next: . Some of the limitations of raising interest rates to curb inflation
Be Careful Many a time it has been observed in the past that the increase in bank rate by the RBI may not translate into a commensurate increase in interest rates by the banks. Banks necessarily do not raise their own interest rates at times even if the correct signals have been given by the RBI thereby defeating the entire purpose of the move. . Presence of unorganized banking on a large scale. Due to this RBI is not able to control a large part of the banking sector in the economy.