1. Name the policy implemented by RBI to control and regulate money supply. 2. Define creeping inflation. What is its impact on the economy?

Question

Read the extract given below and answer the questions that follow: 

Aug 17,2015 Mumbai Bankers today said, the sharp fall in inflation to 3.38% for July has raised hopes of another rate cut by RBI at September review of the policy. “Obviously, if more find’more and more positive news on inflating front comes. It’s a reasonable expectation to expect that rules will be out at the September policy”, reported Mr. Aditya Puri the Mangaing Director of HDFC Bank. He said the Governor of RBI, Mr. Raghuram Rajan had earlier said that RBI is actively looking at rate cut.

1. Name the policy implemented by RBI to control and regulate money supply. 

2. Define creeping inflation. What is its impact on the economy? 

3. Explain how the following measures are adopted by RBI to control inflation: 1. Change in Reserve Ratio 2. Credit Rationing.

Answer 1

1. Monetary Policy.

2. Creeping inflation: It occurs when there is a sustained rise in prices over time at a mild rate, say around 2 to 3 percent per year. It is also known as mild inflation. Creeping inflation keeps the economy away from stagnation. But some economists regard it as dangerous for the economy. They say creeping inflation may look simple in the begining but with the passage of time it may acquire alarming proportions.

1. Cash Reserve Ratio: By regulating CRR, the RBI tries to control inflation. In the time of inflation, the Central Bank raises the CRR. An increase in the CRR leads to reduction in cash reserves with the commercial banks. Therefore, commercial banks will not be in position to create only a smaller amount of credit. 

2. Credit Rationing: Credit rationing aims at fixing the maximum or ceiling of total amount of bank loans and/or fixing the maximum limit of loans for a specific purpose. The central bank may fix the maximum amount of loans for every commercial bank. For instance, during the period of inflation, RBI reduces the maximum amount of loan which the commercial banks can give to the traders so as to prevent hoarding of goods by traders.