Know the Indian Rupee: What is Inflation?

So India is in economic slowdown. The Indian rupee is in free-fall. Inflation is at an all time high. Recession is the word these days, and no one is happy about it. But what does all this mean, who made the dollar king, why is the rupee falling, and can we do something about it?

They say knowing the problem is half the problem solved. In this series, we try to solve half of that problem, by looking at it not as a economist, a politician, or a TV presenter (dropping heavy terms) but as a normal educated young man, who wants to know what is going wrong with the Indian rupee.

What is Inflation?

Pound for pound inflation means too much money. That however is perhaps a contradictory definition. I mean how can too much money be bad. On a more correct note, this will mean money which is not accounted for. Money which exist somewhere but there is not trace of how it got there.

What is Inflation
Reading this article, helps in curbing inflation, its been scientifically proven

Now the government (in India’s case the RBI, that’s the Reserve Bank Of India) has a certain amount of gold/silver (this is the actual worth of the country financially) against which they mint a certain amount of notes/coins. After a year, when they add up all that money, it should be equal to the amount they created earlier. If its not, they would balance that amount by creating even more money.

Example:

So if India’s gold was worth Rs. 100 in the beginning, and at the end Rs.20 was UN-accounted (whatever the reason) for; RBI would end up adding Rs. 20 into the economy, because they still have gold worth Rs.100. However those lost 20 notes are still in the system, and for all intent and purposes all those notes are still worth the same amount of gold. Hence the actual value of gold has gone up from Rs.100 to Rs.120. This is how the actual value of a currency drops due to inflation.

Where does this money disappear to?

A valid question. We would love to think, that’s it probably going to politician’s Swiss account. Or maybe to a corporate bank’s stockpile. While both those scenarios are completely feasible, and probably exist anyways, there is something even more subtle to it than just big secret scams and corruption.

Another Example:

When we buy vegetables from a street vendor, and pay him in cash without a receipt, leaves the vendor with money which does not have a trail (he doesn’t have to pay taxes on that income, but that’s probably the only good thing about this), you just created a little nugget of UN-traceable money.

While for an individual this might look harmless, extrapolate this to people across the country buying stuff everyday on cash, and you have Lakhs of rupee entering someone Else’s pocket completely untraceable. So every time you spend money without any paper trail, you have just added to your company’s inflation.

So now that we have a basic idea, what is inflation, we can do something about it instead of just sulking in the corner and blaming the times. While I know its not possible to keep track of each and every paisa that we spend, the ones we do keep a track of is actually strengthening our economy. Prefer options like Debit Cards, net-banking. Avoid the grey market area. Sell property at its actual price and not ask for kickbacks. Get a bill every time you spend money; that way at least you know you are doing your part.

[NOTE: The writer is a software engineer and has never studied economics or commerce ever. Please forgive him if he makes any technical mistakes, but feel free to correct him in the comments.]

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16 thoughts on “Know the Indian Rupee: What is Inflation?

  1. You mentioned you are not an economics person but have attempted to make a layman understand inflation and the falling rupee in simple terms without using the high-end jargons. I am a Commerce grad and I liked your writing.

    Like

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