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Role of RBI in Controlling

Inflation & Deflation.

Institution: Vidya Vikas.

Faculty: Vikas Sir.

By Ashok S Rana.

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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 CentralOffice is where the Governor sits and where policies are formulated.

Though originally privately owned, since nationalisation in 1949, theReserve Bank is fully owned by the Government of India.

Preamble:The Preamble of the Reserve Bank of India describes the basicfunctions of the Reserve Bank as:

To regulate the issue of Bank Notes and keeping of reserves with aview to securing monetary stability in India and generally to operatethe currency and credit system of the country to its advantage."

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WHO Controls RBI?

The Reserve Bank's affairs are governed by a centralboard of directors. The board is appointed by theGovernment of India in keeping with the Reserve

Bank of India Act. Appointed/nominated for a period of four years Constitution:

Official Directors Full-time : Governor and not more than four Deputy Governors

Non-Official Directors Nominated by Government: ten Directors from various fields

and one government Official Others: four Directors - one each from four local boards

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Objective of RBI..

The Reserve Bank of India performs this function under theguidance of the Board for Financial Supervision (BFS). TheBoard was constituted in November 1994 as a committee of theCentral Board of Directors of the Reserve Bank of India.

Objective: Primary objective of BFS is to undertake consolidatedsupervision of the financial sector comprising commercial banks,

financial institutions and non-banking finance companies.

Constitution 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 ReserveBank are ex-officio members. One Deputy Governor, usually, theDeputy Governor in charge of banking regulation and supervision,is nominated as the Vice-Chairman of the Board.

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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 supervisedinstitutions.

Supervision of financial institutions.

Consolidated accounting. Legal issues in bank frauds.

Divergence in assessments of non-performing assets and

Supervisory rating model for banks.

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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, protectdepositors' interest and provide cost-effective banking services to the public. Manager of Foreign Exchange:

3)To facilitate external trade and payment andpromote orderly development and maintenance of foreign exchange market inIndia.

Issuer of currency:4) To give the public adequate quantity of supplies of

currency notes and coins and in good quality.

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Subsidiaries of RBI. Fully owned: National Housing Bank(NHB),

Deposit Insurance and Credit GuaranteeCorporation of India(DICGC), Bharatiya

Reserve Bank Note Mudran PrivateLimited(BRBNMPL).

Majority stake: National Bank for Agricultureand Rural Development (NABARD)The Reserve Bank of India has recentlydivested its stake in State Bank of India tothe Government of India.

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INFLATION.

Inflation can be defined as a sustainedupward 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.

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Types of Inflation.

The expected rate of inflation is thelevel 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.

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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 lessthan it should be due to the declining purchase power.

Unfair gains & loses:

Effects on production, that is, changes in the tempo ofeconomic activity. Effects on income distribution, that is, re- distribution of

income and wealth. Effects on consumption and welfare.

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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 inflationaryconditions prevailing in the country under control from near three-yearpeaks.

The Reserve Bank of India (RBI) may go in for further tightening ofmoney supply as there is no likelihood of inflation coming to single digitin the next six months, according to indications given by the centralbank governor to a parliamentary panel.

To give a fillip to investment in textile industry, the RBI has proposedto allow banks to issue guarantees or standby letters of credit (LCs)for companies undertaking expansion and technological upgradation.

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Deflation. A general decline in prices, often caused

by a reduction in the supply of money orcredit. Deflation can be caused also by a

decrease in government, personal orinvestment spending. The opposite ofinflation, deflation has the side effectof increased unemployment since thereis a lower level of demand in theeconomy, which can lead to an economicdepression.

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Causes of deflation. Decreasing Money Supply.

Increasing Supply of Goods.

Decreasing Demand of Goods.

Increasing Demand for Money.

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Measures to control

Deflation. Deflation can be checked by making attempts to raise the level ofaggregate effective demand. Effective demand can be uplifted partlyby inducing the people to spend more on consumption and partly bystimulating investment expenditure in the economy.

Marginal propensity to consume in an economy can be raised by aredistribution 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 investmentshould be financed by borrowing rather than taxation.

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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

http://images.google.co.in/imgres?imgurl=http://www.ala.org/img/alonline/computer%2520guy.jpg&imgrefurl=http://www.colomalibrary.org/blog/2&h=320&w=314&sz=40&hl=en&start=6&um=1&usg=__z2OL5Q4k6ADGp6mu1_IenrIdgik=&tbnid=g9YJHouLKNwonM:&tbnh=118&tbnw=116&prev=/images%3Fq%3Dcomputer%26gbv%3D2%26um%3D1%26hl%3Denhttp://in.wrs.yahoo.com/_ylt=A0WTf2leNvJIDT4B8Be9HAx.;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1on5cm87e/EXP=1223919582/**http%3A//in.images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fin.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Da%252Bcartoon%252Bthinking%2526fr%253Dyfp-t-in%2526ei%253Dutf-8%2526js%253D1%2526x%253Dwrt%26w=433%26h=500%26imgurl=static.flickr.com%252F1062%252F1064169366_f68e747187.jpg%26rurl=http%253A%252F%252Fwww.flickr.com%252Fphotos%252Ffuturegirl%252F1064169366%252F%26size=139.5kB%26name=Unfinished%2BPainting%2B-%2BAstronaut%2B%2528thinking%2529%26p=a%2Bcartoon%2Bthinking%26type=JPG%26oid=d95ed5765ec246ac%26fusr=Futuregirl%26tit=Unfinished%2BPainting%2B-%2BAstronaut%2B%2528thinking%2529%26hurl=http%253A%252F%252Fwww.flickr.com%252Fphotos%252Ffuturegirl%252F%26no=1%26tt=764%26sigr=11ja4t0ss%26sigi=11g1kf29t%26sigb=134tml61l%26sigh=118n09rvlhttp://in.wrs.yahoo.com/_ylt=A0WTf2leNvJIDT4BCxi9HAx.;_ylu=X3oDMTBqaTFoaGxvBHBvcwMxNwRzZWMDc3IEdnRpZAM-/SIG=1lqhtnofp/EXP=1223919582/**http%3A//in.images.search.yahoo.com/images/view%3Fback=http%253A%252F%252Fin.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Da%252Bcartoon%252Bthinking%2526fr%253Dyfp-t-in%2526ei%253Dutf-8%2526js%253D1%2526x%253Dwrt%26w=476%26h=500%26imgurl=static.flickr.com%252F138%252F331720080_e51a5ad8b6.jpg%26rurl=http%253A%252F%252Fwww.flickr.com%252Fphotos%252Fhaywardart%252F331720080%252F%26size=59.6kB%26name=me%2Bthinking%26p=a%2Bcartoon%2Bthinking%26type=JPG%26oid=0d0f7224be753394%26fusr=haywardART%26tit=me%2Bthinking%26hurl=http%253A%252F%252Fwww.flickr.com%252Fphotos%252Fhaywardart%252F%26no=17%26tt=764%26sigr=11iikll7d%26sigi=11elbgssf%26sigb=134tml61l%26sigh=118uakvch

8/3/2019 95219_633595781902500000

17/17

Conclusion. There is no excuse for persistent

unwanted deflation. Deflation can beavoided. If it has taken hold, deflation

can be eradicated.

Ending unwanted inflation is technicallytrivial & politically attractive : tax cutsor spending increase.

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