Role of Reserve Bank in inflation

To understand the bank role it is necessary to know about inflation

Inflation : inflation is situation of economy  under which prices of goods and services fall down and purchasing power of consumer fall down due to fall down value of money.

Inflation has having both effects on our economy. It has positive effect as well negative effect. To recover the economy from recession inflation is require but a certain level. But when inflation increase it effect growth of  economy.

Negative effect is that it inc price of goods which reduce the saving as well as investment of consumer. In our economy flow of capital is effected . value of money fall down. People start hoarding of goods. demand and supply are not equal. There is situation of disequilibrium in our economy.

Positive effect  is that it wipe out debts.

How  Reserve bank  play important  role  in inflation and  move  economy towards growth?

In inflation RBI raising interest rates, the RBI order to commercial banks to raise rates . As a result ,firms do not borrow as much to invest when rates are higher and individuals stop buying durable goods against credit and started  to save. Lower demand growth leads to a better match between demand and supply.

RBI ensure that price don’t move and encourage people to save money and create price stability.

Finance stability: RBI also play an important role in finance stability. It create balance between   borrowing  and deposit of money. For this purpose, it keep a specific ratio of cash   which we known as cash reserve ratio. It ensure liquidity in the economy and proper flow of capital in economy and move economy towards growth .

Click here for government certification in Accounting, Banking & Finance