RBI is the apex body resaponsible for regulating public and private sector banks, framing the monetary policy and other aspects related to the financial sector. The monetary policy is used to control inflation in the economy (This is called inflation-targeting). Here are some insights on the impact of RBI policy on inflation:
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Let us begin by understanding what RBI is and its responsibilities:
RBI stands for Reserve Bank of India which is responsible for regulating money flow and managing banks in the economy. Also known as the Banker’s Bank and Lender of Last Resort, RBI is central to all financial decisions and transactions made in the country.
The central body was established in the year 1935 on 1st of April in Calcutta but later on, moved to Mumbai in the year 1937.
The primary objective of RBI is undertaking and supervising of different initiatives taken in favor of the financial sector which comprises commercial banks, non-banking institutions, and other financial institutions.
The functions of the Reserve Bank of India can be broadly divided into 6 categories:
See Also: RBI Credit Policy
One of the important functions of RBI is to regulate and control inflation in the economy. Let us understand how this is done:
Inflation is the rise in prices of goods and services with time. It is more money chasing fewer goods. It is essentially the rate at which the price for a given basket of commodities (goods and services) rises over a given period of time. In other words, as inflation increases, the purchasing power of a country’s currency reduces.
See Also: How To Invest If RBI Cuts Repo Rate?
There are two observations that come as impact under these policies:
Increasing interest rates imply difficulties for banks vis-a-vis borrowing capital from RBI and hence controls the influx of capital in the market. This way RBI decreases the liquidity and controls inflation.
The increase in reserve ratios implies a decrease in the lending power of banks; hence a reduction in the loan granting power of banks. These ratios help in managing credit levels in the economy.
RBI is a central body that governs inflation control and other financial reforms. With the above-discussed ratios and rates, RBI exercises control over inflation in the economy and makes necessary and required changes.
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