RBI as a Controller of Inflation
Author : Amit Kumar Bose | Published On : 24 Nov 2021
Inflation has been a daunting issue for India since independence. Its harmful effects have been observed for various reasons, as for example, in the year 1974, the inflation rate was 28.6 % and the reason associated with it was the rise in oil prices (world’s oil crisis when OPEC reduced production and increased oil prices). In addition, the ‘70s were the years of war and drought, resulting in stagnation of the growth of the Indian economy and a rise in prices of various commodities. The financial crisis of 1991, due to government fiscal deficits, rupee devaluation resulted in an uptick of inflation of 13.87% - taking a toll on the economy. Even though inflation was much controlled at a later date, but till the end of 19th century average inflation of 9.3% was recorded. In the society, the poor are the most vulnerable to inflation. Inflationary pressures faced by India was severe in 2006-08 and 2009-11, causing an immense burden on the purchasing power of ordinary Indian citizen. To begin with, we shall first understand the concept of Inflation.
What is Inflation?
Inflation is defined as the significant and sustained rise in the general price level of most goods and services of daily or common use, such as food, housing, clothing, transport, consumer staple, etc. Inflation indicates consumers' purchasing power of a unit of a country’s currency, leading to a slowdown in economic growth. The valuation of money is reduced in inflation, meaning, that a certain amount of money now would be able to procure a smaller quantity of a commodity than it did prior to inflation. The general cost of living of ordinary people is impacted with such a loss of purchasing power. In a basket of goods and services, change in average price over time is measured by inflation.
How to Measure Inflation?