Page 51 - Banking Finance September 2022

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CPI for Agricultural Labourers (CPI-AL)-and Rural policy. The increase in bank rate increases the cost of
borrowing which reduces commercial banks borrowing from
Labourers (CPI-RL)
the central bank. Consequently, the flow of money from the
These indices were prepared taking 1986-87 year as the base
commercial banks to the public gets reduced. Therefore,
year. The labour bureau has now started work taking 2018-
inflation is controlled to the extent it is caused by the bank
19 as the new base year. It may also include the new
credit.
consumption patterns of the workers. These indices may
be used to fix the national minimum wage.
Cash Reserve Ratio (CRR): To control inflation, the central
bank raises the CRR which reduces the lending capacity of
7. Growth-inflation trade-off the commercial banks. Consequently, flow of money from
Inflation control calls for curbing excess aggregate demand, commercial banks to public decreases. In the process, it halts
and need not necessarily rein in the real growth rate. the rise in prices to the extent it is caused by banks credits
Tightening of monetary policy will be generally aimed at to the public.
containing speculation and enhancing the productive
Open Market Operations: Open market operations refer to
capacity of the economy and thus the potential growth rate.
Also, domestic inflation hurts the price competitiveness of sale and purchase of government securities and bonds by
Indian exports, particularly in the presence of the upward the central bank. To control inflation, central bank sells the
pressure exerted by buoyant capital inflows on the nominal government securities to the public through the banks. This
exchange rate. The RBI is buying foreign exchange to results in transfer of a part of bank deposits to central bank
account and reduces credit creation capacity of the
prevent the rupee from rising, and it had no option but to
sterilise the liquidity so introduced into the system through commercial banks.
an offsetting rise in the reserve rations. But always, growth
II) Fiscal Measures
inflation trade-off is a challenge for the policy makers.
Fiscal measures to control inflation include taxation,
8. Measures to control inflation: government expenditure and public borrowings. The
government can also take some protectionist measures
There are broadly two ways of controlling inflation in an
(such as banning the export of essential items such as pulses,
economy:
cereals and oils to support the domestic consumption,
1). Monetary measures and
encourage imports by lowering duties on import items etc.).
2). Fiscal measures
I) Monetary Measures 9. The bottom line
The most important and commonly used method to control Inflation exists when prices rise but purchasing power falls
inflation is monetary policy of the Central Bank. Most over a certain period. There are two main causes that
central banks use high interest rates as the traditional way determine the type: cost-pull and demand-pull. Some
to fight or prevent inflation. consider built-in inflation as a third cause.Wholesale Price
Index (WPI) and Consumer Price Index (CPI) are indices used
to measure inflation rates. Using monetary policies, the
Monetary measures used to control inflation
Reserve Bank of India tries to keep the annual core inflation
include:
rate at 4% within the tolerable limit of 6% and a lower limit
(i) Bank rate policy
of 2%.
(ii) Cash reserve ratio and
The most powerful way to protect ourselves from inflation
(iii) Open market operations.
is to increase the earning ability and income. One more way
Bank rate policy is used as the main instrument of monetary of seeking protection is to invest in securities and other assets
control during the period of inflation. When the central bank that give returns which are at least equivalent to the rate
raises the bank rate, it is said to have adopted a dear money of inflation.

BANKING FINANCE | SEPTEMBER | 2022 | 51