Can You Identify Him ?

Dr. D. Subbarao took over as the 22nd Governor of

the Reserve Bank of India. Dr. Subbarao has been
appointed for a three-year term. Prior to this
appointment, Dr. Subbarao was the Finance Secretary
in the Ministry of Finance, Government of India.
Dr. Subbarao has earlier been Secretary to the Prime
Minister's Economic Advisory Council (2005-2007),
lead economist in the World Bank (1999-2004),
Finance Secretary to the Government of Andhra
Pradesh (1993-98) and Joint Secretary in the
Department of Economic Affairs, Ministry of
Finance, Government of India (1988-1993).
Dr. Subbarao has wide experience in public finance
RBI TRYST WITH PRICE
CONTROL OVER LAST 10
YEARS – ‘POLICIES AND
IMPLICATIONS’
INTRODUCTION

The Reserve Bank of India is the central bank of the

country entrusted with monetary stability, the
management of currency and the supervision of the
financial as well as the payments system.

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 has been in

Mumbai since inception.
FUNCTIONS OF RBI
•Bank of issue

Sole right to issue bank notes of all denominations. The

distribution of one rupee notes and coins and small coins all over
the country is undertaken by the Reserve Bank as agent of the
Government.

•Banker to Government

Act as Government banker, agent and adviser. The Reserve Bank

of India helps the Government - both the Union and the States to
float new loans and to manage public debt.
It acts as adviser to the Government on all monetary and banking
matters.
•Bankers' Bank

Every scheduled bank was required to maintain with the Reserve Bank
a cash balance equivalent to 5% of its demand liabilites and 2 per cent
of its time liabilities in India. The scheduled banks can borrow from
the Reserve Bank of India on the basis of eligible securities.

•Controller of Credit

It has the power to influence the volume of credit created by banks in

India.

•Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the

official rate of exchange. Besides maintaining the rate of exchange of
the rupee, the Reserve Bank has to act as the custodian of India's
reserve of international currencies
•Supervisory function

Powers of supervision and control over commercial and

co-operative banks, relating to licensing and
establishments, branch expansion, liquidity of their
assets, management and methods of working,
amalgamation, reconstruction, and liquidation.
RBI - PRICE CONTROL
AND SOME MEASURES .
 MONETARY POLICIES
 It is concerned with changing the supply of money
stock and rate of interest for the purpose of stabilizing
the economy at full employment or potential output
level by influencing the level of aggregate demand.

 At times of recession monetary policy involves the

adoption of some monetary tools which tends to
increase the money supply and lower interest rate so
as to stimulate aggregate demand in the economy.

 At the time of inflation monetary policy seeks to

contract aggregate spending by tightening the money
supply or raising the rate of return.
 Objectives :-
 To ensure the economic stability at full employment
or potential level of output.

 To achieve price stability by controlling inflation and

deflation.

 To promote and encourage economic growth in the

economy
WEAPONS :-
 BANK RATE: Bank Rate is the rate at which
central bank of the country  (in India it is RBI) 
allows finance to commercial banks

 REPO RATE: Repo (Repurchase) rate is the

rate at which the RBI lends shot-term money to the
banks

 REVERSE REPO-RATE: Reverse Repo rate is

the rate at which banks park their short-term excess
liquidity with the RBI.
VARIABLE RESERVE RATIO :
Commercial banks in every country maintain, either by the
requirement of law by or custom , a certain percentage of their
deposits in the form of balances with the central bank .
The central bank has the power to vary this reserve requirement
and the variation in the reserve requirements affect the credit
creating capacity of commercial banks

 CRR : CRR means Cash Reserve Ratio.  Banks in India are

required to hold a certain proportion of their deposits in the form
of  cash. 

 SLR : Every bank is required to maintain at the close of

business every day, a minimum proportion of their Net Demand
and Time Liabilities as liquid assets in the form of cash, gold and
un-encumbered approved securities
OPEN MARKET OPERATIONS

 Its refer broadly to the purchase and sale

by the Central Bank of a variety of assets,
such as foreign exchange, gold,
government securities and even company
shares. In India, they are confined to the
purchase and sale of Government
securities.

 To increase the money supply, the central

bank buys securities from commercial
banks and public.
FISCAL POLICY
•Fiscal policy is another type of budgetary policy in relation
to taxation, public borrowing, and public expenditure.

•Once the fiscal situation was decided and determined by

the government, it was the central bank’s responsibility to
ensure that monetary stability was maintained and the
government’s borrowing programme was managed with
minimum disruptions, in terms of stability

•Involves an increase in taxation and decrease in

government spending.
•Increase in taxes leads to reduce in private expenditure.
OBJECTIVE OF FISCAL
POLICY
1. To achieve desirable price level:
The stability of general prices is necessary for
economic stability. The maintenance of a desirable
price level has good effects on production, employment
and national income. Fiscal policy should be used to
remove; fluctuations in price level so that ideal level is
maintained.

2. To Achieve desirable employment level:

The efficient employment level is most important in
determining the living standardof the people. It is
necessary for political stability and for maximization
Weapons of Fiscal Policy
1. Taxation Policy:
Increase in taxes would effectively reduce private
expenditure, in an effect to minimise inflationary pressures. It
is known that when more taxes are imposed, the size of the
disposable income diminishes, also the magnitude of the
inflationary gap in regards to the availability of the supply of
goods and services.

2. Deficit financing policy:

RBI has to issue new currency notes. But this decision should
be taken very carefully because increasing trend of deficit
financing will decrease the value of currency in world market
and it will increase the prices of commodities in commodity
market.
3. Government loan:
The government should avoid paying back any of its past
loans during inflationary periods, in order to prevent an
increase in the circulation of money

4. Public debt:
The effects of a large deficit budget, which is mainly
responsible for inflation, can be partially offset by
covering the deficit through public borrowings.
POINT TO REMEMBER

•Keynes, however, suggested a programme of compulsory savings,

such as deferred pay as an anti-inflationary measure. Deferred pay
indicates that the consumer defers a part of his or her wages by
buying savings bonds (which, of course, is a sort of public
borrowing), which are redeemable after a particular period of time,
this is sometimes called forced savings. Additionally, private
savings have a strong disinflationary effect on the economy and an
increase in these is an important measure for controlling inflation.
 Other Direct Measures
Direct controls refer to the regulatory measures undertaken to
convert an open inflation into a repressed one. Such regulatory
measures involve the use of direct control on prices and rationing of
scarce goods.

The function of price control is a fix a legal ceiling, beyond which

prices of particular goods may not increase.

1.)Increasing Production:
(a) One of the foremost measures to control inflation is to
increase the production of essential consumer goods like food,
clothing, kerosene oil, sugar, vegetable oils, etc
(b) Rationing:
Rationing aims at controlled distribution of scarce goods so as to make
them available to a large number of consumers. It is applied to essential
consumer goods such as wheat, rice, sugar, kerosene oil, etc. It is meant
to stabilise the prices of necessaries and assure distributive justice. But
it is very inconvenient for consumers because it leads to artificial
shortages, corruption and black marketing.

(c) Direct Control:
Direct Price control is another measure of direct control to check
inflation. It means fixing an upper limit for the prices of essential
consumer goods. They are the maximum prices fixed by law and
anybody charging more than these prices is punished by law. But it is
difficult to administer in this case.
Some Latest Updates :
Price rise has become a problem for the Indian
economy and to control the price rise, the Indian
government is taking certain measures.
 It may be noted, that inflation has declined but to an
extent.
Measures include, withdrawing of the export incentives on steel
and cement, banning exports of non basmati rice etc. Now the
effect of the recent measures by the RBI can only be assessed in
the coming future.

Inflation Rate decreased from 8.62%

to 8.58 % in October 2010
Finance Minister Pranab Mukherjee has said inflation is a
price to pay for rapid growth. There are suggestions in the
government of a "new normal" of inflation running at 6 to
8 percent, from the roughly 5 percent considered
acceptable by policymakers in recent years.
Under attack for rising prices, prime minister Manmohan Singh said the
government was making every possible effort to control "high inflation"
and insulate poor from its adverse impact.

He said "I know that in the last few months high inflation has caused you
difficulties. It is the poor who are the worst affected by rising prices,
especially when the prices of commodities of every day use like
foodgrains, pulses, vegetables increase.

He said that to achieve goals, the government did not need any new
scheme or programme to be launched. "However, we do need to
implement the schemes we have already started more effectively,
minimising the chances of corruption and misuse of public money."
 Latest Rates :
1. CRR – 6 %

2. SLR – 25 %

3. REPO RATE – 6.25 %

4. REVERSE REPO RATE- 5.25 %

5. BANK RATE – 6.0 %

Conclusion :
•From various monetary, fiscal and other
measures it becomes clear that to control
inflation government should adopt all measures
simultaneously.
•That the success of the fiscal measures to control inflation
needs a matching demand-supply equation is vindicated by
India’s failure to check price rise in 2010. RBI has hiked
“policy rates” repeatedly during the last two years, but prices,
especially food prices, have gone on increasing unchecked as
demand has continued to outpace supply.
Bibliography:
1. www.google.com

2. www.allbankingsolutions.com

3. www.rbi.org.in

4. www.businesseconomics.in

5. www.financialexpress.com

6. www.wikipedia.com
 Thank You

Prepared By :
Medha Gupta
Mohd. Tahir Ali
Neha Singhania
Shradha Jain
Mohit Mehta