Question

Read the extract given below and answer the questions that follow:
Aug 17, 2015
Mumbai Bankers today said, the sharp fall in inflation to 3.38% for July has raised hopes of another rate cut by RBI at September review of the policy. "Obviously, if more and more and more positive news on inflating front comes. It's a reasonable expectation to expect that rules will be out at the September policy", reported Mr. Aditya Puri the Managing Director of HDFC bank. He said the Governor of RBI, Mr. Raghuram Rajan had earlier said that RBI is actively looking at rate cut.
i. Name the policy implemented by RBI to control and regulate money supply.
ii. Define creeping inflation. What is its impact on the economy?
iii. Explain how the following measures are adopted by RBI to control inflation:
1. Change in Reserve Ratio
2. Credit Rationing.

Answer 1

The policy implemented by RBI to control and regulate money supply is called monetary policy.

• Creeping inflation: this is also called as mild inflation. Rice in price is mild which is up to 2 to 3% per annum. This type is not of a much problem and is good for healthy functioning of economy.
  
• Cash Reserve Ratio (CRR): every bank has to keep certain percentage of its total deposits within RBI as cash reserves and by regulating CRR, the RBI tries to control inflation.
  
• Credit rationing: it is one of the method to control credits. It controls the flow of credit to particular sector of economy. The central bank may fix the maximum amount of loans for every commercial bank. For instance, during the period of inflation, RBI reduces the maximum amount of loan which the commercial banks can give to the traders so as to prevent hoarding of goods by traders.