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बेसिक इंग्लिश का दूसरा सत्र (कक्षा प्रारंभ : 22 अक्तूबर, शाम 3:30 से 5:30)
Q. Demonetisation and Deflation: Discuss the impact of demonetisation on retail inflation.
Dec 15, 2016 Related to : GS Paper-3

Ans :


Demonetisation of high value currency notes of Rs.500 and Rs.1000 has been done almost a month ago and its effects are now visible. At the time of announcement everyone agreed that withdraw high-denomination banknotes was going to impact economic activity in the short term. But the specific outlines of the effects were probably a lot less understood at the time of that announcement. The deflationary shock has manifested itself in a deceleration in retail inflation, as demand for a range of goods and services have been damped.

Impact and analysis-

  • Rise and fall in prices are closely linked to the money supply in the market. If the supply of money increases, its value decreases and results into inflation. The reverse case is deflation, if money supply goes down, the value of money increases results into deflation.
  • The headline Consumer Price Index hit a two-year low of 3.63% for November 2016, it was 5.41% in November 2015. 
  • The major contributor to the slowdown in price gains was the food and beverages group, where inflation eased to 2.56% largely on the back of a slump in the prices of vegetables, a highly perishable commodity.
  • In the backdrop of demonetisation, due to restricted access to cash, the discretionary spending on goods and services in the CPI excluding food and fuel have been affected.


Recently released CPI data have revealed the impact of demonetisation in retail inflation. Due to restricted access to cash the prices of many commodities have fallen and resulted into deflation. Now government needs to ensure the sufficient availability of cash in market, else prolonged deflation may create dangerous impact on economy.    

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