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Feb 10, 2012

[Economy] How does RBI know about money supply in the market?

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Question from Kritika

How govt assume more money with public which causes inflation?
If am right,persistent rice in price level is inflation which is assumed to happen whenthere is more money with public, as a result demand increases , which causes price rise.
So to curb the flow of money with public ,RBI taking measures to increase repo rates.
But what my doubt is , how can govt come to conclusion that there is more money with the public?

Answer
Government  and RBI are two different entities.
Both are involved in managing the economy in their own capacity.
  1. What Government does (taxation and budget) is called Fiscal policy
  2. What RBI does (repo, reverse repo, CRR, SLR etc) is called Monetary policy.
It is the job of RBI to worry about Money supply in the market.
They've a system called M1,M2,M3,M4 to calculate it and they tweak their repo rates etc accordingly.
For more on M1 to M4, Click Me

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