Monetary and Fiscal Measures to Address Inflation

Inflation refers to the rate at which prices rise in the economy. According to the monetary policy framework, the tolerable range is 4% ± 2% (2% to 6%).

Inflation decreases the purchasing power of a currency, as more money is needed to buy the same thing. As inflation rises, the worth of money holding falls. However, in a developing economy, some inflation is desirable, and a minimum level of inflation must be maintained to ensure economic growth.

Therefore various monetary and fiscal measures are taken to control inflation.

Fiscal methods:

  • It refers to the measures taken by the government to manage inflation.
  • It includes measures such as
    • Managing the rate of tax
    • Government expenditure
    • Intervention in the market for price stabilization

Monetary methods:

  • It refers to the measures taken by RBI to manage inflation.
  • It includes measures such as
    • Conducting open market operations
    • Changing Repo rate
    • Changing CRR and SLR

Limitations:

  • Lack of interest rate transmission means commercial banks may not respond to changing repo rates in the market.
  • Market sentiments may be down, so the efforts of the government to increase activities may not work.
  • A slowdown in the global economy.
  • Liquidity trap.

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