Answer Outline: Inflation Control Measures by the Reserve Bank of India (RBI) and Their Effectiveness
I. Introduction
- Definition of Inflation: Inflation refers to the general increase in prices of goods and services over time, leading to a decrease in purchasing power.
- RBI’s Mandate: The Reserve Bank of India (RBI) is tasked with maintaining price stability while supporting economic growth.ijcrt.org
- Monetary Policy Framework: The RBI employs various monetary policy tools to control inflation, primarily through the Monetary Policy Committee (MPC), which sets the policy interest rates.
II. Monetary Policy Tools Used by RBI to Control Inflation
A. Repo Rate
- Definition: The rate at which the RBI lends money to commercial banks.en.wikipedia.org+2ijcrt.org+2en.wikipedia.org+2
- Mechanism: Increasing the repo rate makes borrowing costlier for banks, leading them to increase lending rates for consumers and businesses, thereby reducing money supply and curbing inflation.indianexpress.com
- Recent Action: On June 6, 2025, the RBI reduced the repo rate by 50 basis points to 5.5% to stimulate economic growth amid controlled inflation .reuters.com+5reuters.com+5economictimes.indiatimes.com+5
B. Reverse Repo Rate
- Definition: The rate at which the RBI borrows money from commercial banks.ijcrt.org+1en.wikipedia.org+1
- Mechanism: An increase in the reverse repo rate encourages banks to park more funds with the RBI, reducing the money available for lending and thus controlling inflation.
C. Cash Reserve Ratio (CRR)
- Definition: The percentage of a bank’s total deposits that must be maintained with the RBI in the form of liquid cash.ijcrt.org+2en.wikipedia.org+2en.wikipedia.org+2
- Mechanism: Raising the CRR reduces the funds available with banks for lending, thereby decreasing money supply and controlling inflation.paytm.com
- Recent Action: The RBI reduced the CRR by 100 basis points to 3% to enhance liquidity in the banking system .reuters.com+3reuters.com+3ft.com+3
D. Statutory Liquidity Ratio (SLR)
- Definition: The minimum percentage of a bank’s net demand and time liabilities that must be maintained in the form of liquid assets like cash, gold, or approved securities.en.wikipedia.org+1en.wikipedia.org+1
- Mechanism: Increasing the SLR restricts the bank’s ability to lend, thereby reducing money supply and controlling inflation.
E. Open Market Operations (OMO)
- Definition: The buying and selling of government securities in the open market by the RBI.bondsindia.com+2ijcrt.org+2en.wikipedia.org+2
- Mechanism: Selling securities absorbs liquidity from the market, reducing money supply and controlling inflation; buying securities injects liquidity to stimulate growth.
F. Liquidity Adjustment Facility (LAF)
- Definition: A tool that allows banks to borrow money through repurchase agreements (repos) and reverse repos.en.wikipedia.org+1frankbanker.com+1
- Mechanism: Helps manage day-to-day liquidity mismatches and control short-term interest rates, influencing inflation.en.wikipedia.org+3en.wikipedia.org+3en.wikipedia.org+3
G. Marginal Standing Facility (MSF)
- Definition: A facility that allows banks to borrow overnight funds from the RBI against approved government securities.paytm.com+6en.wikipedia.org+6en.wikipedia.org+6
- Mechanism: Acts as a safety valve against unanticipated liquidity shocks, influencing short-term interest rates and inflation.
III. Effectiveness of RBI’s Tools in Controlling Inflation
A. Empirical Evidence
- Studies indicate that monetary policy tools like the repo rate and CRR have a significant impact on controlling inflation in India .indianexpress.com+2ijcrt.org+2paytm.com+2
B. Recent Trends
- The RBI’s proactive measures have led to a decline in inflation rates, with the consumer inflation forecast for FY26 revised downwards to 3.7% .economictimes.indiatimes.com+2economictimes.indiatimes.com+2economictimes.indiatimes.com+2
C. Challenges
- Transmission Lag: Monetary policy actions take time to permeate through the economy and affect inflation.
- Supply-Side Constraints: Monetary tools are less effective against inflation caused by supply-side factors like food shortages or global commodity price hikes.ijcrt.org
- External Factors: Global economic conditions, such as oil prices and geopolitical tensions, can influence domestic inflation beyond the RBI’s control.reuters.com
IV. Conclusion
- The RBI employs a combination of monetary policy tools to control inflation, adjusting them based on economic conditions.
- While these tools have been effective in maintaining inflation within target ranges, their success depends on timely implementation and coordination with fiscal policies.
- Continuous monitoring and flexibility are essential to address emerging inflationary pressures and ensure economic stability.