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RBI rate controls for inflation

Last week the RBI Governor announced his return to academics and not continue another term. So we decided to look at Mr Raghuram Rajan's work in numbers. The role of RBI is to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The RBI governor bears the responsibility of executing this mandate. However, Raghuram Rajan is probably the first governor who hasn't been as 'distant' as a classical description of a Governor here.

Through this week and the next we will look at two of the most important and constant battles of RBI - inflation and Rupee value (or Exchange Rate). The RBI has a bunch of tools at its disposal to control inflation (or atleast attempt to) like Repo Rate, Reverse Repo Rate and Cash Reserve Ratio. A Repo Rate is the rate at which RBI lends money to commercial banks. Increasing Repo Rate, reduces banks' incentive to borrow from RBI and ultimately reduce money supply resulting in reducing inflation. Reverse Repo Rate is the rate at which RBI borrows from banks. The Reserve bank uses this tool when it feels there is too much money floating in the banking system. Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. Its like a disaster day fund in case banks fall short of money to meet payment demands of depositors. Statuatory Liquidity Ratio is the amount that the commercial banks require to maintain in the form of cash, or gold or govt. approved securities before providing credit to the customers. This chart looks at how these knobs which have been tweaked and tuned since Raghuram Rajan took office. There are other ratio's at RBI's disposal like Marginal Standing Facility, Call Money Rate etc as well.

Inflation in itself is complicated to calculate in Indian context and has been a widely debated subject among economists and policy makers. In 2014 the RBI decided to use Consumer Price Index where the Government decided to stick with Wholesale Price Index for calculation on inflation. We got our inflation data from the World Bank which in turn calculated it based based on CPI. The rest of the data is courtesy RBI website.

Next week we will take a look at Forex and Gold reserves, and notes issued by RBI and its effect on value of Indian Rupee.