Rbi Inflation Control

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Rbi Inflation Control

By | December 2010
Page 1 of 1
The steps generally taken by the RBI to tackle inflation include a rise in repo rates (the rates at which banks borrow from the RBI), a rise in Cash Reserve Ratio and a reduction in rate of interest on cash deposited by banks with RBI. The signals are intended to spur banks to raise lending rates and to reduce the amount of credit disbursed. The RBI's measures are expected to suck out a substantial sum from the banks. In effect, while the economy is booming and the credit needs grow, the central bank is tightening the availability of credit. The RBI also buys dollars from banks and exporters, partly to prevent the dollars from flooding the market and depressing the dollar — indirectly raising the rupee. In other words, the central bank's interactions have a desirable objective — to keep the rupee devalued — which will make India's exports more competitive, but they increase liquidity. To combat this, the RBI does what it calls "sterilisation" — it sucks out the rupees it pays out for dollars through sale of sterilisation bonds. It then sells these bonds to banks. Economists point out that there has not been much success in such sterilisation attempts in India. The central bank's attempt to offload Government bonds on banks has not been too successful inasmuch as the banks sell the bonds and get rupees instead. ( http://www.legalserviceindia.com/article/l177-RBIs-Control-of-Inflation.html) The RBI has raised the rates twice this year to check food inflation from spreading to manufactured goods, but with inflation continuing to rise, economists expect another round of policy action even before the scheduled July 27 review of the monetary policy. The Finance Minister attributed the rising prices to shortage of certain commodities, besides the impact...