Measures to Control Inflation

Since inflation can originate on the demand side or the supply (cost) side, controlling it typically calls for a combination of monetary, fiscal and supply-side measures, chosen to match the underlying cause.

Monetary measures (administered by the RBI, aimed at reducing money supply and credit — a 'dear money' policy):

• Raising the repo rate (the rate at which the RBI lends to commercial banks), making bank borrowing costlier and discouraging further credit expansion.
• Raising the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which forces banks to hold a larger share of deposits with the RBI/in approved securities, reducing the funds available for further lending.
• Open Market Operations (OMO) — the RBI sells government securities to banks and the public, absorbing money out of circulation.
• Raising the bank rate, the long-standing benchmark rate at which the RBI is willing to lend, signalling a broader tightening of credit conditions.

Fiscal measures (administered by the government, aimed at reducing aggregate demand):

• Reducing public expenditure, especially on non-essential or non-productive spending.
• Increasing direct and indirect taxes, which reduces households' disposable income and hence their spending capacity.
• Reducing deficit financing — borrowing less from the RBI (i.e. creating less new money) to fund the budget.
• Aiming for a budget surplus or a smaller deficit, which withdraws demand pressure from the economy overall.

Other (supply-side) measures, aimed directly at raising the supply of goods rather than restraining demand:

• Increasing production and productivity, including through better technology and removing supply bottlenecks.
• Encouraging imports of goods that are in short domestic supply, to relieve immediate price pressure.
• Maintaining buffer stocks (as with foodgrains) and releasing them into the market when prices rise.
• Strengthening the Public Distribution System (PDS) to ensure essential goods reach consumers at controlled prices.
• Checking hoarding and black-marketing through strict enforcement, since these artificially restrict supply. …