In India, inflation is rising day-by-day, it is the matter of concern for the government. Explain how RBI helps in controlling inflation?
Central Bank, i.e. RBI acts as the agent and the financial advisor of the government. At the time of inflation, RBI controls the supply of credit in the economy. It implies increase or decrease in the supply of money by regulating the credit creation by the commercial banks. RBI uses quantitative and qualitative instruments to control the supply of credit in an economy.
Quantitative instruments are:
(i) Bank rate
(ii) Open market operations
(iii) Cash Reserve Ratio (CRR)
(iv) Statutory Liquidity Ratio (SLR)
Qualitative instruments are:
(i) Margin requirements
(ii) Rationing of credit
(iii) Direct action
(iv) Moral suasion