TODAY WE ARE GOING TO DISCUSS ABOUT LAF. IN INDIA 70% PEOPLE ARE POOR SO RBI AND GOVT OF INDIA ALWAYS FOCUS ON INFLATION.RBI ALWAYS REVIEW INFLATION DATA.IN INDIA RBI DECIDE TO MAINTAIN INFLATIN BETWEEN 2 % TO 6%.IF RBI FIND INFLATION IS MORE THEN NORMAL THEN THEY CHANGE POLICY RATE.HERE RBI USE 2 INSTRUMENT THAT IS REPO RATE AND REVERSE REPO RATE.
**THE RATE AT WHICH ANY BANK BORROW MONEY FROM RBI THEN IT IS CALLED REPO RATE.(6.25%)
** RBI IS A NON PROFIT MAKING ORG.SO WHEN BANK HAVE EXCESS MONEY WITH THEM, THEN THEY PARK MONEY WITH RBI FOR GETING INTEREST RATE LESS THEN 1% OF REPO RATE.(5.25%)
WHEN RBI FIND THAT INFLATION IS MORE THEN NORMAL THEN RBI INCREASE REPO RATE.BY INCREASING REPO RATE RBI INDIRECTLY MAKE LOAN COSTLY.WHEN BANK GET COSTLY LOAN THEN BANK DEMAND LESS MONEY AND PEOPLE ALSO REDUCE THEIR DEMAND OF LOAN.WHEN PEOPLE REDUCE DEMAND AND SUPPLY NOT CHANGE WITHIN SHORT DURATION THEN PRICE OF GOODS AND SERVICES COMES DOWN.
REVERSE POSITION TAKEN BY RBI IF INFLATION COME BELOW NORMAL POSITION OR RBI WANTS TO GENERATE EMPLOYMENT OR BOOST GDP.
