Inflation...

What is inflation?It is in headlines in every newspaper/media and is being considered as the biggest threat for UPA Govt losing elections.
Lets try to understand some things about it.

Definition: Inflation in simple terms is the measure of the Price hike of certain necessary commodities of daily use.
If the inflation is high,we say that the prices of the things we purchase are on high.It is calculated on annual basis as percentage increase or decrease of a particular index(In India we use WPI)

How is it calculated: We have an index WPI(Wholesale Price Index),which is the measure of wholesale prices of a basket of goods/basic items like food items,Fuel etc.

A base value is set(Lets say 100 for year 1978).There would be ups and downs in the prices of goods.WPI would capture that.
And inflation is simply the %age increase/decrease of WPI.

Now is inflation all Bad?
And the Govt should try to have zero or -ve inflation?
The answer is NO!!!

Lets see the reason.Suppose,the Govt needs to set up a capital intensive project.It would require a huge investment on it.
May be moneytization(Printing of currency,borrowings etc).The money comes in the market.People now have more capital at their disposal(Liquidity).They can buy more.(Greater Purchasing Power)Demand increases.Supply is constant.So naturally prices will increase.Result Inflation rises...So inflation is a by Product of any Growth oriented economy.If you want growth,inflation would be there.
We can't have Growth and Inflation mutually exclusive.
Over a period of time,my Project will start giving returns.A break even point and after that Profits only.

So a +ve inflation is necessary for the growth purposes.

Impact: Organised Private sector (Read IT,corporate have good salaries)...Rich class no effect.
Govt employees get DA(Dearness Allowance)...The major affected party is the Poor Indians.People below poverty line.
They won't be able to buy even the basic necessities.
So Govt should try to curb inflation.

Tools to Control inflation: RBI ha smany monetary tools to control inflation.One is to increase the interest rates at which it lends to the Banks.Since getting money is now expensive :) so less capital.People will buy less.Again Supply -Demand Scenario and prices will fall.
SLR-Statutory Liquidity Ratio...%age of total deposits which banks need to deposit with the RBI.If SLR ratio is increased,less capital and hence again prices will fall.
CRR-Cash Reserve Ratio...Amount which the banks have to keep with them.If CRR is increased,again less capital at disposal and Prices will fall.
So we see that the RBI uses its monetary policy,these tools to control the Liquidity in the market and hence inflation.
When and how to do it.And by what value.These are some of the questions which RBI Governor has to mull over before making any decision.