Published on: February 15, 2022

INFLATION IN INDIA

INFLATION IN INDIA

Honnāli NEWS

India’s retail inflation accelerated past the 6% mark in January to hit 6.01%, breaching the central bank’s tolerance threshold for consumer price inflation for the first time since June 2021.

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WHAT IS INFLATION – Situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of money

WHAT CAUSES INFLATION – (1) Increase in demand (2) Reduced supply

HOW IS IT DETERMINED – There are different indices in India like Wholesale Price Index(WPI), Consumer Price Index(CPI) etc which measure inflation rates in India.

WHO DETERMINES INFLATION IN INDIA – Reserve Bank of India through Monetary Policy Committee ( MPC )

HOW IS INFLATION TACKLED –

IN GENERAL

  • Both government and central bank (Reserve Bank) try to tackle inflation with their policies which are known as Fiscal and Monetary Policies respectively.
  • Fiscal policies correspond to tax related measures taken by government to control inflation (money supply).
  • RBI through its various monetary policies limit the money supply by altering rates like CRR, Repo, Reverse Repo etc
  • Administrative measures taken by government like strengthening of Public Distribution System also plays a crucial role in curbing inflation.

INFLATION TARGETING BY MPC

  • WHAT IS INFLATION TARGETING – Monetary policy framework wherein the Central Bank of a country focuses only on maintaining the rate of Inflation within a targeted range.
  • Inflation targeting was first adopted by New Zeeland
  • In case of India
    • Inflation targeting was introduced through the Monetary Policy Framework Agreement signed between the RBI and Government in 2015.
    • As per terms of the agreement, RBI’s primary objective would be to maintain price stability, while keeping in mind the objective of growth.
    • The RBI is required to maintain rate of inflation of 4% with a deviation of 2% i.e. inflation has to be maintained between 2% to 6%