✍️ CRR Cash Reserve Ratio is the minimum fraction of total deposits of a bank’s customers that banks have to hold as reserves with the central bank. ✍️ SLR Statutory Liquidity Ratio is the ratio of liquid assets to the net demand and time liabilities. ✍️ LAF Liquid Adjustment Facility is a tool to allow banks to borrow money through repurchase agreements. It consists of repo and reverse repo operations. ✍️ MSF Marginal Standing Facility allows scheduled banks to borrow funds overnight from RBI against approved government securities. ✍️ MSS Market Stabilization Scheme is a monetary policy intervention by RBI to withdraw excess liquidity by selling government securities in the economy. ✍️ OMO Open Market Operations refers to the buying and selling of government securities in the open market so as to expand or contract the amount of money in the banking system. ✍️ REPO Repo...
Inflation
The general rise in the price level of goods and services.
It is estimated as the percentage rate of change in price index over the reference time-period.
Currently in India inflation rate is measured with the help of Consumer Price Index- combined (Base year- 2012).
Till April 2014, Inflation rate was measured with the help of WPI (Wholesale Price Index).
Rate of Inflation= (Current period price index-Reference period price index)/(Reference Period Price Index)×100
Type of Inflation
Based on rate of rising in Inflation
1. Creeping Inflation
Price rise at very small rate (< 3 %)
It is considered safe and essential for the economy.
2. Walking or Trotting Inflation
Price rise at moderate rate (3 % < Inflation < 10 %)
Inflation at this rate is a warning signal for the Economy.
3. Running Inflation
Price rise at high rate (10 % < Inflation < 20 %)
It affects economy adversely.
4. Hyperinflation or Galloping Inflation or Runway Inflation
Price rise at very high rate (20 % < Inflation < 100 %)
This situation brings total collapse of Economy.
Based on causes
Demand Pull Inflation: When Inflation arises due to higher demand for goods and services over the limited supply.
Cost Push Inflation: When Inflation arises due to higher input cost (Example- raw material, wages etc.) for goods and services over the limited supply.
Other definitions-
1. Deflation
It is opposite to Inflation.
Reduction of general level of price in an economy.
In this price index measured is negative.
2. Stagflation: When stagnation and inflation coexist in the economy.
3. Stagnation: low national income growth and high unemployment.
4. Disinflation
When the rate of Inflation is at a slower rate.
Example:
If the Inflation of last month was 4 % and rate of inflation in the current month is 3 %.
5. Reflation:
Deliberate action of government to increase the rate of inflation to redeem economy from a deflationary situation.
6. Core Inflation:
It is a measure of price rise in the economy excluding the price rise of some products (whose price is volatile and temporary in nature.
Effects of Inflation
1. Redistribution of income and wealth
Due to the effect of inflation, some group of people loses and another group of people gains.
Example-
In case of debtors and creditors
Debtor- gainer
Creditor- loser
In case of Producers and Consumers
Producer- gainer
Consumer- loser
2. Effects on Production and Consumption
Due to inflation, the demand decreases which curtails the production.
People try to use fewer services which lead to decrease in consumption.
3. Unfavorable Balance of Payments
Export decreases and import increases from other countries which lead to decrease in forex reserve.
Measures to control Inflation
1. Credit control-
It is used by RBI.
2. Increase in Direct Taxes
Due to increase in direct taxes, people have less money available to them and low demand from them leads to a lower price.
3. Price Control
By fixing maximum price limit by authorities.
4. Trade measures
Maintain proper supply in the economy by export and import of goods and services.
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