What causes inflation
Let us say I have a product which I can produce at a rate 10 per day. However there is demand for 15 units a day. Due to higher demand & lower availability, I can find 10 people who are ready to pay more to get my product on that day by paying higher price. So the price of my product will be proportionately higher compared to the delta in demand and supply. ==>What government does is it makes sure there is less money available with the people; so that there is lesser demand so the prices are in control. Keeping fiscal deficit within x % of GDP. So that inflation is low. ==>What RBI does is it makes sure that credit is available at an higher price. So people are discouraged from buying more There is another aspect that is completely ignored in textbook economics. i. I as a producer / consumer have to say pay money as a bribe. So as a producer I ll have to adjust that price in the cost of product. And as a consumer the product costs shoots up by that amou