Inflation:

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Inflation's effects on an economy are either positive or negative. Negative effects of inflation y A decrease in the real value of money and other monetary items over time, y Uncertainty over future inflation may discourage investment and savings, y High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects Ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), y Encouraging investment in non-monetary capital projects. y high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Measures to calculated Inflation: Inflation is estimated by calculating the inflation rate of a price index. The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer . The inflation rate is the percentage rate of change of a price index over time.
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The Consumer Price Index (CPI) which measures inflation at the retail level, The Producers Price Index (PPI) which measures inflation at the wholesale level and therefore may also predict future retail prices. The Gross Domestic Product Deflator, the broadest indicator, which measures prices for all finished goods produced domestically.

Inflation projection for the year ending March 2012 revised upwards to 7% GDP growth projection for FY12 retained at 8% Monetary policy Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping the federal funds lending rate at a low level, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. A low positive inflation is usually targeted, as deflationary conditions are seen as dangerous for the health of the economy. There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. CRR- Cash Reserve Ratio: Amount of funds that the banks have to keep with the RBI I stays as a reserve. CRR is basically a measure to ensure safety and liquidity of bank deposits, however over the years it has become an important and effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy. When the RBI feels that the money supply is increasing and causing an upward pressure on inflation, the RBI has the option of increasing the CRR thereby reducing the deposits available with banks to make loans and hence reducing the money supply and inflation. SLR: Statutory Liquidity Ratio It is the amount of liquid assets, such as cash, precious metals or other approved securities, that a financial institution must maintain as reserves other than the Cash with the Central Bank.

In other words depositing in all securities and Maintaining Govt. Securties with RBI.

Bank Rate: Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply. Bank rate and CRR retained at 6% Repo rate: Also known as the repurchase agreement is the Collateralized lending i.e the banks which borrow money from RBI to meet short term needs have to sell securities usually bonds to RBI with an agreement to repurchase at the same at a predetermined rate and date. The reserve bank charges some interest rate on the cash borrowed by banks this interest rate is called the REPO RATE Whenever the banks have any shortage of funds they can borrow it from the central bank. Repo rate is the rate at which our banks borrow currency from the central bank. A reduction in the repo rate will help banks to get Money at a cheaper rate. When the repo rate increases borrowing from the central bank becomes more expensive. It is more applicable when there is a liquidity crunch in the market. The central bank does it in order to increase the liquidity in the market. Current REPO RATE 50 bps to 8% Reverse repo rate: is the rate at which the banks park surplus funds with reserve bank, while the Repo rate is the rate at which the banks borrow from the central bank. It is mostly done then, when there is surplus liquidity in the market by the central bank. It is opposite of Repo rate i.e to say when the banks have excess cash with them they lend it to RBI and the interest they earn is lesser then the interest charged by RBI which is the repo rate Reverse repo and Marginal Standing Facility 100 bps lower and higher at 7% and 9% respectively

The difference between Repo Rate and Bank Rate: The only difference between the two are, in REPO RATE, there is sale of security to RBI on an agreement to" repurchase" it at a future date at predetermined price, that is why the term REPO means "REPURCHASE AGREEMENT", whereas in BANK RATE, there is no such sale or repurchase agreement. It takes place as mere lending of money to commercial banks at fixed rate, i.e the bank rate. MSF: Marginal Standing Facility Scheme As announced in the Monetary Policy for the year 2011-12, a new Marginal Standing Facility (MSF) is being introduced with effect from May 9, 2011. The Scheme will be operational zed on the lines of the existing Liquidity Adjustment Facility Repo Scheme (LAF Repo). MSF is applicable when the banks in case of repo rate are not able to meet up the security and collateral necessities they use the marginal standing facility where in they get charged with a higher rate of interest than the repo rate. Supposing that the repo rate is 8% then the MSF would be 9%.

Example: By taking an example of a common man going for a home loan option would be the one who be effected with these monetary policies as the interest rates on the bank loans taken would either result in higher inflation rate or moderate. Like in if the person has taken loan on floating interest rates instead of fixed then as per the market interest rate he would pay higher interest as there has been an increase in repo rate by 50 bps. If he was paying interest of say 10.50% then he would now pay 11% interest for his bank loan. RBI to curbs the inflations rates through the interest rates.