Control of Inflation
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Chapter 3 – 3.3 Control of Inflation (Page 22)
We are witnessing a surge in inflation in India and this time the
soaring numbers are reflecting the CPI (Consumer Price Index).
The inflation figures are soaring due to rise in prices of food items,
primarily potato (136%), pulses (40%), onion (15.4%) and wheat (14%).
Supply side constraint has been sighted as the primary reason behind
this recent surge. It’s true keeping in mind the draughts and floods
that we have faced this year.
It would be interesting to see how the government tackles the
situation. We have studied in our textbook (Page 22) the following
steps required to control the inflation.
Increase in bank rates
Increase in cash reserve ratio
The recent news item confirms these.
New Delhi, Dec 21 (PTI) The Prime Minister's Economic Advisory Council
chairman, C Rangarajan, today suggested that the Reserve Bank of India
could reduce money supply and raise interest rate to tame the rising
prices of food articles.
"If price decline does not happen in December, than early steps could
be taken. RBI could increase interest rates...preferably could reduce
liquidity by acting on CRR", he said.
Rangarajan was responding to a question, what measures the RBI should
take to moderate food inflation that climbed to a 10-year high of 20
per cent during the first week of December, driven mainly by higher
prices of potato, other vegetables and pulses.
Making a case for reduction in money supply, Rangarajan, also a former
Reserve Bank Governor, said the apex bank could raise the Cash Reserve
Ratio (CRR), the portion of amount that banks are required to keep
with the central bank
Source – PTI News of 21st Dec 2009.