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Analyze the impact of inflation on common citizens and the Indian economy. What are the key policy measures taken by the Reserve Bank of India (RBI) to control inflation?
Inflation significantly affects both common citizens and the broader Indian economy. For the average person, rising prices reduce purchasing power, making essential goods like food, fuel, and healthcare more expensive and disproportionately impacting low- and middle-income households. For the economRead more
Inflation significantly affects both common citizens and the broader Indian economy. For the average person, rising prices reduce purchasing power, making essential goods like food, fuel, and healthcare more expensive and disproportionately impacting low- and middle-income households. For the economy, high inflation disrupts savings, investment, and business planning, while also increasing input costs and reducing export competitiveness. Persistent inflation can erode consumer confidence and lead to slower economic growth. To manage inflation, the Reserve Bank of India (RBI) adopts a monetary policy framework with an inflation target of 4% (±2%) under the flexible inflation targeting regime. Key policy tools include adjusting the repo rate (currently the primary instrument), open market operations, cash reserve ratio (CRR), and statutory liquidity ratio (SLR). By raising interest rates, the RBI aims to curb excess money supply and reduce demand-driven inflation. Additionally, the RBI closely monitors global commodity prices, currency fluctuations, and domestic supply-side constraints to formulate appropriate responses and ensure price stability while supporting growth.
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See lessIf RBI continuously increases the repo rate, what is the likely impact on the economy?
If the Reserve Bank of India (RBI) continuously increases the repo rate, the overall cost of borrowing for banks also rises, leading them to pass on this higher cost to consumers and businesses in the form of increased interest rates on loans. As a result, loans for homes, vehicles, education, and bRead more
If the Reserve Bank of India (RBI) continuously increases the repo rate, the overall cost of borrowing for banks also rises, leading them to pass on this higher cost to consumers and businesses in the form of increased interest rates on loans. As a result, loans for homes, vehicles, education, and businesses become more expensive, which reduces borrowing and dampens consumer spending and corporate investment. This slowdown in demand helps to control inflation, which is often the primary objective of such rate hikes. However, while inflation may be brought under control, the economy may also experience slower growth due to reduced consumption and investment. In the long run, continuous repo rate hikes can lead to lower economic activity, reduced job creation, and slower industrial and services sector growth, although they may encourage savings due to higher returns on deposits.
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See lessWhich of the following best explains the concept of “Stagflation”?
Stagflation is an economic condition characterized by the unusual combination of stagnant economic growth, high unemployment, and rising inflation. Typically, inflation occurs in a growing economy, but during stagflation, the economy experiences slow or no growth while prices continue to rise, creatRead more
Stagflation is an economic condition characterized by the unusual combination of stagnant economic growth, high unemployment, and rising inflation. Typically, inflation occurs in a growing economy, but during stagflation, the economy experiences slow or no growth while prices continue to rise, creating a challenging situation for policymakers. This phenomenon defies traditional economic theories, which suggest that inflation and unemployment usually move in opposite directions. Stagflation makes it difficult for central banks to implement corrective measures, as efforts to control inflation (like raising interest rates) may worsen unemployment, while steps to boost growth (like lowering interest rates) could fuel inflation further. The term gained prominence during the 1970s oil crisis when many economies, including the United States, faced this difficult economic scenario.
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See lessWhat is fiscal deficit? How does it impact the Indian economy?
Fiscal deficit refers to the shortfall between the government's total expenditure and its total revenue (excluding borrowings) in a given financial year. It indicates how much the government needs to borrow to meet its expenses when revenues fall short. In the Indian context, a high fiscal deficit cRead more
What Is the Importance of Environmental Economics?
Environmental economics is important because it helps us understand the relationship between the economy and the environment, guiding how we use natural resources sustainably. It studies the costs and benefits of environmental policies, helping governments and businesses make informed decisions thatRead more
Environmental economics is important because it helps us understand the relationship between the economy and the environment, guiding how we use natural resources sustainably. It studies the costs and benefits of environmental policies, helping governments and businesses make informed decisions that balance economic growth with environmental protection. By assigning economic value to clean air, water, and biodiversity, environmental economics highlights the true cost of pollution and resource depletion, encouraging practices that reduce harm and promote conservation. This field plays a crucial role in addressing challenges like climate change, resource scarcity, and environmental degradation, ensuring that economic development today does not compromise the well-being of future generations.
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