A student called Sankalp asked us this question and as apprehended by him, this is not that stupid a question. Simply, why does the RBI not choose to simply print more money instead of thte country taking more loans from the IMF and world bank.
Well, its a good idea in a perfect world but unfortunately, the world and especially the economy does not work that way.
If the RBI simply prints more money, that will mean that the people, with extra money will demand more goods and service,s which in turn, will increase the prices of those goods and services which will increase the amount of inflation in the country.
July 18, 2009 at 1:05 am
Dear sir,
The issue on inflatory pressure of forign money is not resolved. Why rbi chose not to increase money supply unless they get forign money. Both have inflatory pressure.
July 1, 2009 at 1:20 pm
Sir,
I want to know the way to control inflation other than controlling repo rate and crr?
February 14, 2009 at 3:00 am
wouldn’t a loan from any external bank like world bank or im also have similar inflationary efects since any money coming to india from outside lead to an increase in money supply and thus prices???
January 26, 2009 at 6:01 pm
Sir,
I want to know that when the key rates are slashed, how does banks earn more? specially from treasury? When key rates are reduced the banks can lend out more and get more interest but how do they earn more from treasury?
January 25, 2009 at 8:14 pm
thanks for nice and easy explanation.
January 25, 2009 at 12:35 am
Regarding RBI printing more money:
Why printing of more money by RBI increases inflation? Because if it prints more money, then why not RBI increases repo rate so that credit is available at higher interest so it will not raise inflation. Also if RBI borrows money from World Bank, then it has to pay it back over a period of time that too with some interest. To cover the extra burden, RBI ought to increase the repo rate in any case or it has to arrange funds through other means to meet additional burden. So why not print money more than to borrow it from World bank as in former case atleast it doesn’t has to bear extra burden
August 29, 2008 at 1:40 am
Regarding Repo and Bank Rate:
Repo is short term whereas Bank rate is long term. Thus Repo rates are also called short term lending rate and Bank rates are called long term lending rates. Now if the Repo rate > Bank rate, it signifies that short term borrowing of funds is more expensive for commercial banks. Incedentally, this short term borrowing through Repo is required by the banks to maintain its CRR. Thus if Repo rate is increased, bank will reduce its lending to public because to maintain the CRR bank will have to now borrow from RBI at a higher Repo rate. Thus increase of Repo is done to suck liquidity from the economy.
June 24, 2008 at 12:57 am
Thanks for your help, really appreciable the way you answers in lay man language.