To understand RBI monetary policy we have to understand why RBI has to do all this mehnat, RBI has a biggest villain standing against him called as INFLATION.
Inflation is the biggest parasite in the Indian economy. In the condition of inflation there is flow of extra money in the economy creating excess of demand in the market for the products as compared to supply in midst of all this maara maari the producers grab this opportunity with both arms and if possible with legs too (too greedy these fellows), they mark higher prices for the goods that are excess in demand and this creates a rise in price of the products resulting in inflation.
Inflation has the following adverse effects on the economy:
Here is story of Mr. Bechara (common man)
Inflation and Purchasing Products-
Purchasing Power-The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you’d be able to purchase. Mr.Bechara is fetching a salary of Rs.20K monthly, he was doing his best to keep up to the expectations his over sized wife and extra demanding kids, Now in inflation his salary is the same but his 20K will now cannot complete the demands of his family, because that 20K has become equivalent to say, 18K and now they can have less resources in the same prices, This will result in the debt conditions , lesser purchase of goods and services(due to higher prices) and will directly hurt the economy.
Inflation and Debt-
Price inflation is a debtor’s best friend and a creditor’s worst enemy. Let’s see how, our Mr. Bechara gave Rs. 10K to a debtor in 2006 for a period of three years, after two years inflation occurred, now the value of that 10k becomes equivalent to 8k (loss in the value of Rs), The effect of inflation on debtors is positive because debtors can pay their debts with money that is less valuable.
Other negative impacts-
Black-marketing– Expecting inflation many mafias start to collect the onions and kerosene in their backyards for releasing these when the inflation strikes, hence they will make big bucks in no time and our Mr. Bechara has to pay more than hefty amount for the daily ka aaloo ,pyazz..
Unemployment– Inflation comes along with a gift package of unemployment, companies with limited resources will start to fire people on the name of cost cutting and also the new recruitments will not happen resulting in not so aache din for aspirants.
Different stages of Inflation-
Creeping or mild inflation is when prices rise 3% a year or less.
This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to the economy because it heats up economic growth too fast.
When inflation rises to ten percent or greater, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can’t keep up with costs and prices. Foreign investors avoid the country.
Hyperinflation is when the prices skyrocket, the currency becomes a piece of trash, Zimbabwe experienced a similar conditions in previous years.
Calculation of Inflation-
In India inflation is calculated by the help of CPI(Consumer Price Index),previously it was calculated by WPI(Wholesale Price Index), CPI as a scale was adopted by RBI ,due the recommendations of Urijit Patel committee.