Q.(a) What are the causes of Inflation in India ?

(a) Inflation in India arises from demand-side factors (more money supply, deficit financing, higher incomes, population) and supply-side factors (higher costs, shortages, hoarding, black money). (b) Monetary policy aims at price stability, growth, exchange stability, employment and orderly credit control.

(a) Causes of Inflation in India

Demand-pull (increase in aggregate demand):

1. Increase in money supply — excessive expansion of currency and credit.
2. Deficit financing — the government printing money to meet its deficits.
3. Rising incomes and population — higher disposable income and a growing population raise demand for goods.
4. Increase in public expenditure — large government spending raises demand.

Cost-push / supply-side factors:

5. Rising cost of inputs — higher wages, fuel and raw-material prices push up costs.

6. Shortage of goods — inadequate agricultural and industrial supply, natural calamities.

7. Hoarding and black-marketing — artificial scarcity raises prices.

8. Black money — unaccounted income increases spending and prices.

9. Higher indirect taxes — raise the prices of goods.

(b) Objectives of Monetary Policy

Monetary policy is the policy of the central bank (RBI) to regulate the money supply and credit to achieve economic goals:

1. Price stability — controlling inflation and deflation to keep prices reasonably stable.
2. Economic growth — ensuring adequate credit for productive investment and development.
3. Exchange-rate stability — maintaining a stable external value of the currency. …