Role of RBI in Controlling Inflation & Deflation. : Role of RBI in Controlling Inflation & Deflation. Institution: Vidya Vikas.
Faculty: Vikas Sir.
By Ashok S Rana. RBI. : RBI. Establishment:
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
To regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." WHO Controls RBI? : WHO Controls RBI? The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.
Appointed/nominated for a period of four years
Full-time : Governor and not more than four Deputy Governors
Nominated by Government: ten Directors from various fields and one government Official
Others: four Directors - one each from four local boards Objective of RBI.. : Objective of RBI.. The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.
The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board. Current Focus of RBI. : Current Focus of RBI. Some of the initiatives taken by RBI include:
Restructuring of the system of bank inspections.
Introduction of off-site surveillance.
Strengthening of the role of statutory auditors.
Strengthening of the internal defences of supervised institutions.
Supervision of financial institutions.
Legal issues in bank frauds.
Divergence in assessments of non-performing assets and
Supervisory rating model for banks. Main Features of RBI. : Main Features of RBI. Monetary Authority:
1)Formulates, implements and monitors the monetary policy.
Regulator and supervisor of the financial system:
2) Maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.
Manager of Foreign Exchange:
3) To facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency:
4) To give the public adequate quantity of supplies of currency notes and coins and in good quality. Subsidiaries of RBI. : Subsidiaries of RBI. Fully owned: National Housing Bank(NHB), Deposit Insurance and Credit Guarantee Corporation of India(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL).
Majority stake: National Bank for Agriculture and Rural Development (NABARD)The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India. INFLATION. : INFLATION. Inflation can be defined as a sustained upward movement in the aggregate price level that is shared by most products.
It can also be viewed as a fall in the purchasing power of money.
The opposite of inflation is deflation. Types of Inflation. : Types of Inflation. The expected rate of inflation is the level of inflation people expect to occur in future.
There are 3 main types of inflation.
Demand-pull inflation-due to high GDP & low unemployment.
Supply shock inflation-due to adverse changes in price of raw materials(e.g oil)
Built in inflation-induced by expectations based on previous inflation levels. Consequences of Inflation. : Consequences of Inflation. Tax Distortions:
Personal income tax increases with the consumer price index. When inflation increases, the actual value of the tax deductions is much less than it should be due to the declining purchase power.
Unfair gains & loses:
Effects on production, that is, changes in the tempo of economic activity.
Effects on income distribution, that is, re- distribution of income and wealth.
Effects on consumption and welfare. Disinflating Inflation. : Disinflating Inflation. The Reserve Bank of India has proclaimed a sudden 50-basis-point raise in the banks' reserve requirements, in order to bring the inflationary conditions prevailing in the country under control from near three-year peaks.
The Reserve Bank of India (RBI) may go in for further tightening of money supply as there is no likelihood of inflation coming to single digit in the next six months, according to indications given by the central bank governor to a parliamentary panel.
To give a fillip to investment in textile industry, the RBI has proposed to allow banks to issue guarantees or standby letters of credit (LCs) for companies undertaking expansion and technological upgradation. Deflation. : Deflation. A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Causes of deflation. : Causes of deflation. Decreasing Money Supply.
Increasing Supply of Goods.
Decreasing Demand of Goods.
Increasing Demand for Money. Measures to control Deflation. : Measures to control Deflation. Deflation can be checked by making attempts to raise the level of aggregate effective demand. Effective demand can be uplifted partly by inducing the people to spend more on consumption and partly by stimulating investment expenditure in the economy.
Marginal propensity to consume in an economy can be raised by a redistribution of income from the rich to the poor classes.
Similarly, measures should be taken to induce investment.
As an antideflationary measure, a programme of public investment should be financed by borrowing rather than taxation. RBI Websites. : RBI Websites. Weekly Statistical Supplement--------------------------- www.wss.rbi.org.in
RBI Bulletin-------------------------------- www.bulletin.rbi.org.in
Monetary and Credit Policy-------------- www.cpolicy.rbi.org.in
RBI Notifications----------------------------- www.notifics.rbi.org.in
RBI Press Release------------------------------www.pr.rbi.org.in
RBI Speeches---------------------------------- www.speeches.rbi.org.in
RBI Annual Report------------------------------------ www.annualreport.rbi.org.in
Monetary and Credit Information Review-----------------www.mcir.rbi.org.in
Report on Trend & Progress of Banking In India-------www.bankreport.rbi.org Conclusion. : Conclusion. There is no excuse for persistent unwanted deflation. Deflation can be avoided. If it has taken hold, deflation can be eradicated.
Ending unwanted inflation is technically trivial & politically attractive : tax cuts or spending increase.