Measures to control inflation ➨ Monetary Policy: Monetary | UPSC Notes EPFO Labour Law

Measures to control inflation

➨ Monetary Policy: Monetary policy can control the growth of demand through an increase in interest rates and a contraction in the real money supply. For example, in the late 1980s, interest rates went up to 15% because of the excessive growth in the economy and contributed to the recession of the early 1990s.

➨ Monetary measures of controlling the inflation can be either quantitative or qualitative. Bank rate policy, open market operations and variable reserve ratio are the quantitative measures of credit control, by which inflation can be brought down. Qualitative control measures involve selective credit control measures.

➨ Bank rate policy is used as the main instrument of monetary control during theperiod of inflation. When the central bank raises the bank rate, it is said to haveadopted a dear money policy. The increase in bank rate increases the cost ofborrowing which reduces commercial banks borrowing from the central bank.Consequently, the flow of money from the commercial banks to the public getsreduced. Therefore, inflation is controlled to the extent it is caused by the bankcredit.

➨ Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the CRR which reduces the lending capacity of the commercial banks. Consequently,flow of money from commercial banks to public decreases. In the process, ithalts the rise in prices to the extent it is caused by banks credits to the public.

➨ Open Market Operations: Open market operations refer to sale and purchaseof government securities and bonds by the central bank. To control inflation,central bank sells the government securities to the public through the banks.This results in transfer of a part of bank deposits to central bank account andreduces credit creation capacity of the commercial banks.