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Inflation
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate.When Prices rise the Value of Money falls.
STAGES OF INFLATION
1. CREEPING INFLATION 2. WALKING INFLATION 3. RUNNING INFLATION 4. HYPER INFLATION (0%-3%) ( 3% - 7%) (10% - 20 %) ( 20% and abv)
Causes of Inflation
1. Demand pull Inflation Causes for Increase in Demand :a) b) c) d) e) f) Increase in Money Supply Increase in Black Marketing Increase in Hoarding Repayment of Past Internal Debt Increase in Exports Deficit Financing
Cont.
g)Increase in Income h)Demonstration Effect i)Increase in Black money j) Increase in Credit facilities
Cont.
2) Cost Push Inflation Causes for Increase in Cost :a) Increase in cost of raw materials b) Shortage of Supplies c) Natural calamities d) Industrial Disputes e) Increase in Exports f) Increase in Wages g) Increase in Transportation Cost h) Huge Expenditure on Advertisement
Effects of Inflation
Inflation can have positive and negative effects on an economy. Negative effects of inflation include loss in stability in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include a mitigation of economic recessions, and debt relief by reducing the real level of debt.
Cont..
1. 2. 3. 4. 5. 6. 7. 8. Effect on Producers Effect on Debtors Effect on Creditors Effect on Fixed Income Group Effect on Wage Earners Effect on Equity Holders Effect on farmers Effect on Prodution
9.Effect on Hoarding 10.Effect on value of Money 11.Effect on Investment 12. Effect on savings
RBI
The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.
Governing Body
Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks. RBI has four subsidiariesNHB ( National Housing Bank) NABARD( National bank for Agriculture and development) DICGC( Deposit Insurance and Credit guarantee corporation of India) BRBNMPL( Bhartiya Reserve bank Note Mudra private limited)
Functions of RBI
Bank of Issue Banker to Government Bankers' Bank and Lender of the Last Resort Controller of Credit Custodian of Foreign Reserves Supervisory functions Promotional functions
Margin Requirements
During Inflation RBI fixes a high rate of margin on the securities kept by the public for loans .If the margin increases the commercial banks will give less amount of credit on the securities kept by the public thereby controlling inflation.
Deficit Financing
It means printing of new currency notes by Reserve Bank of India .If more new notes are printed it will increase the supply of money thereby increasing demand and prices. Thus during Inflation, RBI will stop printing new currency notes thereby controlling inflation.
Fiscal Policy
It refers to the Revenue and Expenditure policy of the Govt. which is generally used to cure recession and maintain economic stability in the country.
Other Measures
1. Increase in Imports of Raw materials 2. Decrease in Exports 3. Increase in Productivity 4. Provision of Subsidies 5. Use of Latest Technology 6. Rational Industrial Policy