How RBI controls Inflation?

RBI & Inflation

A few days before, the Economic survey anticipated a V-shaped recovery and rapid growth. Subsequently, the Second wave of covid-19 is working as an obstacle in the growth of the economy. Lockdown has been imposed in many states to avoid the rapid surge and vaccination drive has also been sped up.  The forecast which has been done for FY-22 seems not feasible in this case.

The government set an Inflation target every five years. Reserve bank of India has the responsibility to achieve this target. If it couldn’t achieve that it is answerable to the government. RBI controls the inflation by money supply mechanism.

The monetary policy committee maintained the accommodative stance. The REPO rate has How RBI controls Inflation?been stabilized to 4% and reverse repo rate to 3.55%. The repo rate and reverse repo rate indirectly impact you.

REPO RATE- This is the rate at which RBI provides loans to other financial institutions(Banks).

REVERSE REPO RATE-  This is the rate at which banks deposit their money in the Reserve bank of India.

These rates also govern the cash flow(money supply) which helps to keep a control on inflation. Reserve bank of India strives to maintain inflation by this mechanism.

The central bank is striving to gradually normalize the liquidity, which currently stands to 4% of NDTL of banks compared to 2.3% of end march 2020. The central bank also gave comfort to bond vigilant by committing to buy G-secs in the secondary market to the tune of RS. 1 lakh crore in the first quarter of FY22.

The RBI, thus, trying to accommodate this situation.


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