In News: RBI raised key policy rates to fight inflation

What is inflation?

Types of Inflation

1) Demand-Pull Inflation

Causes of Demand-Pull Inflation:

2) Cost-Push Inflation

Monetary Policy Measures

Tools Features
Cash Reserve Ratio (CRR) The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time.
Statutory Liquidity Ratio (SLR) The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, government securities, cash and gold.
Repo Rate The interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
Reverse Repo Rate The interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
Marginal Standing facility (MSF) It is the rate at which Banks can borrow short term funds from RBI. Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits of the SLR.
Open Market Operations (OMOs) These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
Market Stabilisation Scheme (MSS)  It is a monetary policy intervention by the RBI to withdraw excess liquidity (or money supply) by selling government securities in the economy, the mobilised cash is held in a separate government account with the Reserve Bank.

Note: The Policy Corridor in monetary policy of the RBI refers to the area between the reverse repo rate and the MSF rate

Previous Year Questions (PYQs)

Q.1) With reference to the Indian economy, demand-pull inflation can be caused/increased by which of the following? (2021)

  1. Expansionary policies
  2. Fiscal stimulus
  3. Inflation-indexing wages
  4. Higher purchasing power
  5. Rising interest rates

Select the correct answer using the code given below.

  1. 1, 2 and 4 only
  2. 3, 4 and 5 only
  3. 1, 2, 3 and 5 only
  4. 1, 2, 3, 4 and 5

Q.2) Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? (2017)

  1. It decides the RBI’s benchmark interest rates.
  2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
  3. It functions under the chairmanship of the Union Finance Minister.

Select the correct answer using the code given below :

  1. 1 only
  2. 1 and 2 only
  3. 3 only
  4. 2 and 3 only

Source: Indian Express

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