Inflation

INFLATION
A Project Report
Submitted by
Pawan Pant
Enrollment No.072460957
Address : 19/1288, Sector-19, Indira Nagar, Lucknow-226016
in partial fulfillment of the requirement

for the award of the degree
Of
Master in Business Administration (MBA B & f)
IN
[BANKING & Finance]
Indira Gandhi Open University (IGNOU)
<April 2010>
INFLATION
(A Project Report by Pawan Pant)
Acknowledgement
At the out set, I am thankful to My University (Indira Gandhi National Open

University, Delhi), my Regional center at Lucknow and the Study Center at KKC ,
Lucknow, The respective authorities for providing me an opportunity to undertake
my MBA Post Graduate Diploma in Business Administration (PGDBA).
I am thankful to the management of my organization (HDFC Bank), my Project
supervisor Mrs Asha Baijal (Designation ) for Guiding me in completion
of this project..
I am also thankful to My Zonal Head ( Mr Arun Mendiratta) and Cluster Head (Mr
Rishi Raj),
AND
My other colleagues, Mrs Sumeet Bhatia and Mr Dhiraj Kumar Rai for providing
me valuable suggestions and guidance during the project.
INFLATION
Executive Summary:
The one Thing, which is rising Week after Week, Mouth after Mouth and which has given
the Sleepless Nights to to Congress Government in the last few months, which affects
from Prime Minister to Common Man. YES, IT IS INFLATION.
Inflation is commonly understood as a situation of substantial and rapid general

increase in the level of prices and consequent deterioration in the value of money over a
period of time. In other words inflation usually refers to a persistent and rapid rise in the
general price level, which reduces the value of money or its purchasing power over a
period of time.
INFLATION
TABLE OF CONTENTS
1. Introduction of Inflation
1.1 Inflation: Definition
1.2 How to measure Inflation?
1.3 Features of Inflation
1.4 Types of Inflation
- Creeping Inflation
- Walking Inflation
- Running Inflation
- Galloping or Hyper-Inflation
- Cost-Push Inflation
- Demand-pull Inflation
- Built-in Inflation
- Chronic Inflation
- Core Inflation
- Headline inflation
- Stealth Inflation
- Assets inflation
1.5 Others Terms related to Inflation
- Deflation
- Disinflation
- Inflationary spikes
- Reflation
1.6 Causes of Inflation
A) Monetary Factors
B) Non-monetary Factors
C) Structural Factors.
2. Trace the Effects of Inflation
2.1 Economic Effects of Inflation
2.1.1 Effects on production
2.1.2 Effects of Inflation on Income Distribution
INFLATION
2.1.3. Effect Of Inflation on Consumption And Welfare
2.1.4. Effects of Inflation on Foreign Trade
2.1.5. Social and Political Effects
2.1.6. Effects On Manufacturers
3. Measures to Control Inflation
1) Monetary Measures
2) Fiscal Measures
3) Other Non-monetary Measures
4. Price Rise still pinching Common Man's Pocker
5. Tackling Inflation
6. Measures of Inflation
7. Inflation & India (WPI)
8. Indian Scenario
- Reasons for inflation in India
- Inflation Pressure over the Last Few Months
- Inflation in India and other Developed Countries
- Inflation during 1980's and 1990's
- Global Inflation A Comparison With India
9. Issues in Measuring Inflation
10. An Example Of How Inflation Can Be Dangerous (Case)
11. Reserve Bank of India
- Introduction
- Functions of Reserve Bank of India
- Role of RBI
- Control Measures of RBI
- Monetary Policy
- Monetary & Credit Policy
12. Conclusion
13. Annexure
INFLATION
Introduction
of
‘Inflation’
INFLATION
1.1 DEFINITION
According to Crowther, “Inflation is a state in which the value of money is falling i.e.
prices are rising.”
1.2 HOW TO MEASURE INFLATION?

If the price level in the current year is ‘P1’ & in the previous year is ‘Po’, then inflation
for the current year is
INFLATION
1.3 FEATURES OF INFLATION:
1. Inflation leads to persistent remarkable and continuous rise in general price level.
2. Inflation is a scarcity oriented.
3. Inflation is a dynamic phenomenon. It is not a state of high prices, but a process of
rising prices.
4. Inflation is a state of disequilibria. It involves an imbalance between aggregate
demand and aggregate supply.
5. Inflation is a pure monetary phenomenon.
6. Real inflation takes place only after full employment.
7. Inflation is a longer period phenomenon.
INFLATION
1.4 TYPES OF INFLATION:
Inflation is often classified on three different criteria. Firstly, one might distinguish
between various types of inflation on the basis of speed at which the general price level
rises. Secondly, one way distinguishes between open and suppressed inflation. Finally, as
we find in the modern macroeconomic theory, inflation is classified on the basis of the
factors, which induce it.
On the criterion of the rate at which the general price level rises, we have the following
types of inflation:
1. Creeping Inflation
2. Walking Inflation
3. Running Inflation
4. Galloping or Hyper-Inflation
5. Cost-Push Inflation
6. Demand-pull Inflation
7. Built-in Inflation
8. Chronic Inflation
9. Core Inflation
10. Headline inflation
11. Stealth Inflation
12. Assets inflation
1. Creeping Inflation
An extremely mild form of inflation is often characterized as creeping inflation. In this
case prices rise at a rate of around 2 percent per annum. In case the rate of inflation
does not register further increase, those a mild does of inflation may not have any
adverse effects on the economy.
Creeping inflation sometimes provides necessary inducement to investors. The debatable
question about the creeping inflation however, is whether it would not eventually gather
momentum and thereby creates distortions in the economy. The world has witnessed both
types of situations. Certain countries have lived with mild inflation’s over long periods
INFLATION
and their economies in these periods have registered rapid economic growth. In other
countries, creeping inflation eventually accelerated and caused the collapse of the
economy.
2. Walking Inflation
The walking inflation in terms of degree of prices rise is an intermediate situation
between the creeping and running inflation’s. The rate of inflation in this case is
distinctly higher than that in the case of the creeping inflation. Since the walking
inflation does not invite widespread protests, the monetary authorities do often not take it
seriously and they don’t undertake timely corrective measures. It also sometimes leads to
balance of payments problems because on the one hand it induces imports and, on the
other discourages exports.
3. Running Inflation
The running inflation is considered to be a stage between walking inflation and
hyperinflation. Since the hyperinflation is often defined as a situation in which prices rise
at a rate of at least 40 percent per month.
When prices rise at a rate exceeding 4-5 percent per month the situation becomes
alarming. This inflation redistributes income to the disadvantages of the fixed income
groups such as workers, pensioners and salary earners, it is considered to be highly
unjust. Further a running inflation also creates conditions of uncertainty. If prices rises
from 10-12 percent than the economy will be collapsed and there will be no monetary
measures to prove effective.
4. Hyper Inflation
The hyper-inflation refers to a situation in which prices rise at an alarming rate of 40
percent per month or even more. The most notable examples of hyper-inflation are to be
found in the economic histories of Germany, Austria, Russia, Poland, Greece, Hungary
and China. In hyperinflation money loses its importance as a store of value as no one
holds it for precautionary and speculative purposes. In fact, a hyper-inflation invariably
INFLATION
leads to a monetary collapse and national catastrophe. However, it is important to
recognise the fact that hyper-inflation does not arise abruptly. It is always a result of
wrong policies of the government. Whenever in some country the government indulges
recklessly in unproductive expenditures, which are largely financed by borrowing from
the Central Bank of the Country, a process of inflation begins which often culminates in
hyper-inflation.
5. Cost-Push Inflation
Aggregate supply is the total volume of goods and services produced by an economy at a
given price level. When there is a decrease in the aggregate supply of goods and services
stemming from an increase in the cost of production, we have cost-push inflation. Cost-
push inflation basically means that prices have been “pushed up” by increases in costs
of any of the four factors of production (labour, capital, land or entrepreneurship) when
companies are already running at full production capacity. With higher production costs
and productivity maximized, companies cannot maintain profit margins by producing the
same amounts of goods and services. As a result, the increased costs are passed on to
consumers, causing a rise in the general price level (inflation).
Management Practice under Cost-Push Inflation:

To understand better their effect on inflation, let’s take a look into how and why
production costs can change. A company may need to increases wages if labourers
demand higher salaries (due to increasing prices and thus cost of living) or if labour
becomes more specialized. If the cost of labour, a factor of production, increases, the
company has to allocate more resources to pay for the creation of its goods or services.
To continue to maintain (or increase) profit margins, the company passes the increased
costs of production on to the consumer, making retail prices higher. Along with
increasing sales, increasing prices is a way for companies to constantly increase their
bottom lines and essentially grow. Another factor that can cause increases in production
costs is a rise in the price of raw materials. This could occur because of scarcity of raw
materials, an increase in the cost of labour and/or an increase in the cost of importing
raw materials and labour (if the they are overseas), which is caused by a depreciation in
INFLATION
their home currency. The government may also increase taxes to cover higher fuel and
energy costs, forcing companies to allocate more resources to paying taxes.
To visualize how cost-push inflation works, we can use a simple price-quantity graph
showing what happens to shifts in aggregate supply. The graph below shows the level of
output that can be achieved at each price level. As production costs increase, aggregate
supply decreases from AS1 to AS2 (given production is at full capacity), causing an
increase in the price level from P1 to P2. The rationale behind this increase is that, for
companies to maintain (or increase) profit margins, they will need to raise the retail
price paid by consumers, thereby causing inflation.
6. Demand-Pull Inflation
Demand-pull inflation occurs when there is an increase in aggregate demand,
categorized by the four sections of the macro economy households, businesses,
governments and foreign buyers. When these four sectors concurrently want to purchase
more output than the economy can produce, they compete to purchase limited amounts of
goods and services. Buyers in essence “bid prices up”, again, are causing inflation. This
excessive demand, also referred to as “too much money chasing too few goods”, usually
occurs in
an expanding economy.
The term demand-pull inflation is mostly associated with Keynesian economics.
INFLATION
Management Practice under Demand-Pull Inflation:
The increase in aggregate demand that causes demand-pull inflation can be the result of
various economic dynamics. For example, an increase in government purchases can
increase aggregate demand, thus pulling up prices.
Another factor can be the depreciation of local exchange rates, which raises the price of
imports and, for foreigners, reduces the price of exports. As a result, the purchasing of
imports decreases while the buying of exports by foreigners increases, thereby raising
the overall level of aggregate demand (we are assuming aggregate supply cannot keep
up with aggregate demand as a result of full employment in the economy). Rapid
overseas growth can also ignite an increase in demand as more exports are consumed by
foreigners. Finally, if government reduces taxes, households are left with more
disposable income in their pockets. This in turn leads to increased consumer spending,
thus increasing aggregate demand and eventually causing demand-pull inflation. The
results of reduced taxes can lead also to growing consumer confidence in the local
economy, which further increases aggregate demand.
Demand-pull inflation is a product of an increase in aggregate demand that is faster than

the corresponding increase in aggregate supply. When aggregate demand increases
without a change in aggregate supply, the ‘quantity supplied’ will increase (given
production is not at full capacity). Looking again at the price-quantity graph, we can see
the relationship between aggregate supply and demand. If aggregate demand increases
from AD1 to AD2, in the short run, this will not change (shift) aggregate supply, but
cause a change in the quantity supplied as represented by a movement along the AS
curve. The rationale behind this lack of shift in aggregate supply is that aggregate
demand tends to react faster to changes in economic conditions than aggregate supply.
As companies increase production due to increased demand, the cost to produce each
additional output increases, as represented by the change from P1 to P2. The rationale
behind this change is that companies would need to pay workers more money (e.g.
INFLATION
overtime)and/or invest in additional equipment to keep up with demand, thereby
increasing the cost of production. Just like cost-push inflation, demand-pull inflation can
occur as companies, to maintain profit levels, pass on the higher cost of production to
consumer’s prices.
7. Built-in Inflation
Built-in inflation is an economic concept referring to a type of inflation that resulted
from past events and persists in the present. It thus might be called hangover inflation.
At any one time, built-in inflation represents one of three major determinants of the
current inflation rate. In Robert J. Gordon's triangle model of inflation, the current
inflation rate equals the sum of demand-pull inflation, supply shock inflation, and built-in
inflation. "Demand-pull inflation" refers to the effects of falling unemployment rates
(rising real gross domestic product) in the Phillips curve model, while the other two
factors lead to shifts in the Phillips curve.
The built-in inflation we see now started with either persistent demand-pull or large cost-
push (supply-shock) inflation in the past. It then became a "normal" aspect of the
workings of the economy due to the roles of inflationary expectations and the price/wage
spiral.
INFLATION
Inflationary expectations play a role because if workers and employers expect inflation
to persist in the future, they will increase their (nominal) wages and prices now. (see real
vs. nominal in economics.) This means that inflation happens now simply because of
subjective views about what may happen in the future. Of course, following the generally
accepted theory of adaptive expectations, such inflationary expectations arise because of
persistent past experience with inflation.
The price/wage spiral refers to the conflictual nature of the wage bargain in modern
capitalism. (It is part of the conflict theory of inflation, referring to the objective side of
the inflationary process.) Workers and employers usually do not get together to agree on
the value of real wages. Instead, workers attempt to protect their real wages (or to attain
a target real wage) by pushing for higher money (or nominal) wages. Thus, if they expect
price inflation -- or have experienced price inflation in the past -- they push for higher
money wages. If they are successful, this raises the costs faced by their employers. To
protect the real value of their profits (or to attain a target profit rate or rate of return on
investment), employers then pass the higher costs onto consumers in the form of higher
prices. This encourages workers to push for higher money wages.
In the end, built-in inflation involves a vicious circle of both subjective and objective
elements, so that inflation encourages inflation to persist. It means that the standard
methods of fighting inflation using either monetary policy or fiscal policy to induce a
recession are extremely expensive, i.e., meaning large rises in unemployment and large
falls in real gross domestic product. This suggests that alternative methods such as wage
and price controls (incomes policies) may be needed as complementary to recessions in
the fight against inflation.
8. Chronic Inflation
Chronic inflation is characterized by much higher price increases than ordinary
inflation, at annual rates of 10% to 30% in some industrialized nations and even 100%
or more in a few developing countries. Chronic inflation tends to become permanent and
INFLATION
ratchets upwards to even higher levels as economic distortions and negative expectations
accumulate.
To accommodate chronic inflation, normal economic activities are disrupted Consumers
buy goods and services to avoid even higher prices; property speculation increases;
businesses concentrate on short-term investments; incentives to acquire savings,
insurance policies, pensions, and long-term bonds are reduced because inflation erodes
their future purchasing power; governments rapidly expand spending in anticipation of
inflated revenues; exporting nations suffer competitive trade disadvantages forcing them
to turn to protectionism and arbitrary currency controls.
9. Core Inflation
Core inflation is a measure of inflation which excludes certain items that face volatile
price movements e.g. food.
The preferred measure by the Federal Reserve of core inflation in the United States is the
core Personal consumption expenditures price index. This is based on chained dollars.
Since February 2000, the Federal Reserve Board’s semi-annual monetary policy reports
to Congress have described the Board’s outlook for inflation in terms of the PCE. Prior
to that, the inflation outlook was presented in terms of the CPI.
In explaining its preference for the PCE, the Board stated the chain-type price index for
PCE draws extensively on data from the consumer price index but, while not entirely free
of measurement problems, has several advantages relative to the CPI. The PCE chain-
type index is constructed from a formula that reflects the changing composition of
spending and thereby avoids some of the upward bias associated with the fixed-weight
nature of the CPI. In addition, the weights are based on a more comprehensive measure
of expenditures. Finally, historical data used in the PCE price index can be revised to
account for newly available information and for improvements in measurement
techniques, including those that affect source data from the CPI; the result is a more
consistent series over time. —Monetary Policy Report to the Congress, Federal
INFLATION
Reserve Board of Governors, Feb. 17, 2000
The older preferred measure of inflation in the United States was the Consumer Price
Index. This is still used as the indicator for most other countries, and is presented
monthly in the US by the Bureau of Labor Statistics.
This index tends to change more on a month to month basis than does "core inflation".
This is because core inflation eliminates products that can have temporary price shocks
(i.e. energy, food products). Core inflation is thus intended to be an indicator and
predictor of underlying long-term inflation.
The concept of core inflation as aggregate price growth excluding food and energy was
introduced in a 1975 paper by Robert J. Gordon. This is the definition of "core inflation"
most used for political purposes. Analysis by the Federal Reserve Bank of New York
indicates that this measure is no better than a moving average of the Consumer Price
Index as a predictor of inflation.
There are also other types of measuring inflation rates. In the United States the Dallas
Federal Reserve computes a trimmed mean PCE price index, which separates "noise"
and "signal". This is trimmed at 19.4% at the lower tail end and 25.4% at the upper tail.
The Cleveland Federal Reserve computes a Median CPI and a 16% trimmed mean CPI.
Trimmed means that the highest rises and declines in prices are trimmed by a certain
percentage, attributing to a more accurate measurement on core inflation. In relation to
this, the Median CPI is usually higher than the trimmed figures for both PCE and CPI.
There also is a median PCE, but is not used for any purpose in determining inflation.
10. Headline Inflation

Headline inflation is a measure of the total inflation within an economy and is affected
by areas of the market which may experience sudden inflationary spikes such as food or
energy. As a result, headline inflation may not present an accurate picture of the current
state of the economy. This differs from core inflation which excludes factors, such as food
and energy costs.
INFLATION
11. Stealth Inflation
Stealth Inflation is the term used to describe charges and fees created by business to gain
extra profit and revenue from its customers. The stealth part of the term is that business
will often use miscellaneous fees to charge customers without the customers consciously
knowing the fees existed, even though they may have agreed then signed a contract for
the goods and services the fee is hidden in a mirage of words and policies. The inflation
part of the term relates to the up charging of the service without actually providing
anything additional. Since most companies charge a fee to accept payment a portion gets
built into profit and revenue. A big example of stealth inflation can be overdraft fees from
banks surcharges from Telco providers, processing fees and installation fees.
12. Assets Inflation

Assets inflation is an economic phenomenon denoting a rise in price of assets, as
opposed to ordinary goods and services. Typical assets are financial instruments such as
bonds, shares, and their derivatives, as well as real estate and other capital goods.
13. Agflation
Agflation, a term coined in the late 2000s, describes generalised inflation led by rises in
Agricultural commodity prices. In the United States, agricultural prices are not generally
factored into core inflation figures. The term describes a situation in which "external" (ie
Agricultural) price rises drive up core inflation rates.
It has been claimed that the term was invented by analysts at Merrill Lynch in early
2007.
14. Stagflation
Stagflation is a macroeconomics term used to describe a period of inflation combined
with stagnation (that is, slow economic growth and rising unemployment), generally
including recession.
INFLATION
1.5 OTHER TERMS RELATED TO INFLATION
Deflation
Deflation is the opposite of inflation. Therefore, under the usual contemporary definition
of inflation, 'deflation' means a decrease in the general price level. Alternatively, the
term was used by the classical economists to refer to a decrease in the money supply;
some economists, including many Austrian school economists, still use the word in this
sense.
The two meanings are closely related, since a decrease in the money supply is likely to
cause a decrease in the price level.
Deflation is considered a problem in a modern economy because of the potential of a

deflationary spiral and its association with the Great Depression, although not all
episodes of deflation correspond to periods of poor economic growth historically.
Disinflation
Disinflation is a decrease in the rate of inflation. Being how much prices are increasing
per unit of time, it can be expressed using the word disinflation The slowing of the rate of
inflation per unit of time.
For example one month the rate of inflation was 4.4% and the next month the rate of
inflation was 4.0%. In this instance the price of goods and services is still increasing;
however, it is increasing at a slower rate, 0.4% less, than a month before. It should not
be confused with deflation, which is an overall decrease in prices.
Inflationary spikes
Inflationary spikes occur when a particular section of the economy experiences a sudden
price rise possibly due to external factors. For example if a large amount of crop is
destroyed, the value of the remaining crop will rise sharply. This will distort the overall
measure of inflation within the economy (Headline inflation). Core inflation seeks to
INFLATION
avoid the influence of these spikes by excluding areas of the economy such as food and
energy, which may be susceptible to such shocks.
Reflation
Reflation is the act of stimulating the economy by increasing the money supply or by
reducing taxes. It is the opposite of disinflation. It can refer to an economic policy
whereby a government uses fiscal or monetary stimulus in order to expand a country's
output. This can possibly be achieved by methods that include reducing tax, changing the
money supply, or even adjusting interest rates. Just as disinflation is an acceptable
antidote to high inflation, reflation is considered to be an antidote to deflation (which,
unlike inflation, is considered bad regardless how high it is).
Originally it was used to describe a recovery of price to a previous desirable level after a
fall caused by a recession. Today it also (in addition to the above) describes the first
phase in the recovery of an economy with increasing demand from a slump.
INFLATION
1.6 CAUSES OF INFLATION
For controlling the rates of commodity, we must know why these rates are rising i.e.
inflating which means what are the reasons or causes behind inflation.
There are various factors which causes inflation in the economy which is as follows-
A) Monetary Factors
B) Non-monetary Factors
C) Structural Factors.
A) MONETARY FACTORS
1. Expansion of Money Supply
This is the basic factor, which causes inflation. Due to increase in expansion of money
supply, there is increase in demand of luxurious commodities. Credit facilities allotted by
bank are also the result of inflation. Deficit financing also contribute to the growth of
inflation.
2. Increase in Disposable Income

When the disposable income of people increases, demand for real goods and services
increases, causing a rise in price leading inflation.
3. Increase in Consumer Spending

As the income of the consumers rises, they spend more due to expenditure consumption
or demonstration effect, which raises the aggregate demand causing inflation.
4. Development and Non-Development Expenditure

The expenditure for the development of huge plants and projects will increase the
demand for factors of production resulting in inflation. On the other way, the expenditure
for the non-development like defense expenditure will create shortages of consumption
goods resulting inflation.
5. Indirect Taxes
INFLATION
Due to high indirect taxes, sellers increase the price of their products to recover the tax
from the consumers, which indirectly leads to inflation.
6. Demand for Foreign Commodities

When the demand for the foreign commodities increases, the supply for the home
commodities decreases which leads to increasing the price.
B) NON-MONETARY FACTORS
1. Rising Population
As population of the economy increases, demand for better goods increases, which
causes inflation. So, rising population is the foremost non-monetary factor resulting
inflation.
2. Natural Calamities
Due to the occurrence of natural calamities like floods, famines, bad weather, etc results
in crop failure, which leads to rising price.
3. Speculation and Black Money

Speculation, hoarding and black money also causes inflation, as such unearned money is
spend lavishly by people, creating unnecessary demand for goods and
services.
4. Unfair Practices by Monopoly Houses

The monopoly houses prefer to restrict outputs of their products and raise their prices to
enjoy excess profits leading to inflation.
5. Bottlenecks and Shortages

Bottlenecks i.e. blockages and shortages of various kinds destruct the process of the
economic development. As a result of shortages, price rise.
INFLATION
C) STRUCTURAL FACTORS
1. Capital Shortage
This is due to a very low rate of capital formation in a poor country where vicious circle
of poverty exists.
2. Infrastructural Bottlenecks
Power shortages, inefficient transport, underutilization of capacities and resources, etc
are obstruction to the economic growth of the country, which leads to the price rise and
finally inflation.
3. Limited Efficient Entrepreneurs

Entrepreneurs do not possess spirit to undertake risky projects. Investments are
generally made in trade and unproductive assets like land, gold etc. Hence when supply
of money is increased, output of real goods and services does not increase which leads to
inflation.
4. Lack of Foreign Capital

The unfavourable terms of trade and deficit in balance of payments have further
increased the problem of rising prices.
5. Imperfections of the Market

Immobility of factors, rigid prices, ignorance of market conditions etc all these does not
allow the resources to utilize properly so rising prices due to increase in supply and
without increase in real output.
INFLATION
TRACE THE EFFECTS
OF
INFLATION
INFLATION
2.1 Economic Effects of Inflation
Inflation is a very unpopular happening in an economy. Inflation is the most important
concern of the people as it badly affects their standard of living. Some America
presidential candidates called ‘Inflation As Enemy Number One’
High rate inflation makes the file of the poor very miserable. It is therefore described as
anti-poor. Inflation not only disrupts the economy but also prepares ground for social
and political upheavals.
The effects/consequences of inflation are as followers -

2.1.1. EFFECTS ON PRODUCTION
The condition or fact of being operative or in force on production can be divided into two
categories the stimulating or effect and the disastrous effect.
(A) Stimulating or Favourable Effect

Because of the effects on production it has been observed that mild inflation or gently
rising prices have a stimulating or a tonic effect on the economy. When price rise profits
increases, investment increases that generates income and creates employment as a
results output expands. This process continues up to the point of full employment
(B) Disastrous or Unfavourable Effects

If money supply increases beyond the point of full employment, it would lead to a
galloping or hyperinflation and results in disastrous effects on the economy.
[a] Uncontrolled inflation leads to discouragement in savings due to falling value of
money.
[b] Energies of business community are diverted to speculation and making quick profits
rather than genuine production i.e. encourages speculation.
[c] Inflation encourages the hoarding and black marketing
[d] Inflation also affects Misallocation of Resources
INFLATION
[e] Flight of capital is encouraged due to fall in money the investors prefer to invest
abroad.
[f] Consumers suffers as seller’s market will be developed if price of all type of goods
rise of any quality.
[g] Distortions and Maladjustments in the production dispute the working of the price
systems in the system in the economy.
2.1.2. EFFECTS OF INFLATION ON INCOME DISTRIBUTION

Inflation is socially undesirable. It redistributes wealth in favour of the rich at the cost of
poor it makes the rich richer and poor poorer. The people whose real incomes erode
during inflation are the victims of inflation.
[a] As the value of money falls the burdens of debt is reduced and debtors gain creditor
suffer because in real sense they receive less during inflation.
[b] Fixed income groups like salaried class and pensioners are hit hard during inflation.
[c] Business community welcomes inflation as they earn super normal profits.
[d] Investors in shares benefit during inflation small savers, small investors and class
lose during inflation.
[e] Farmers gain in inflation by prices of agriculture prices commodities rise and costs
paid them lag behind prices.
2.1.3. EFFECT OF INFLATION ON CONSUMPTION AND WELFARE

Inflation reduces the economic welfare of the fixed income groups as the price raises the
purchasing power of money falls hence the people get a smaller amount of goods
services or low quality for the same amount of money. As a result their consumption
would fall and the standard of living. Hence galloping inflation is the ‘Cruelest tax of
all’.
2.1.4. EFFECTS OF INFLATION ON FOREIGN TRADE

Inflation affects adversely the Country’s balance of payments situation when prices are
raising foreign demand for our goods will fall and exports declined due to high prices
INFLATION
domestic consumers buy foreign goods and imports rise hence unfavourable balance of
payments.
2.1.5. SOCIAL AND POLITICAL EFFECTS

[a] The antisocial elements get rewarded and the masses suffer during inflation.
[b] Inflation disrupts social life by favouring rich and black market.
[c] The standard of business morality go down during inflation.
[d] People lose faith in democratic government due to inflation.
2.1.6. EFFECTS ON MANUFACTURERS

Inflation is harmful to trade. Manufacturers generally sell goods on credit. When they
seek repayment they find that the money they receive is less than they expected. They
therefore become reluctant to trade.
INFLATION
MEASURES
TO
CONTROL
INFLATION
INFLATION
These are the following actions taken to control inflation
1) Monetary Measures
2) Fiscal Measures
3) Other Non-monetary Measures
(1) MONETARY MEASURES

(A) Quantitative Methods
1. Raising the Bank Rate
To control inflation the central bank increases the bank rate. With this the cost of
borrowing of commercial banks from central bank will increase so the commercial banks
will charge higher rate of interest on loans. This discourages borrowings and thereby
helps to reduce the money in circulation.
2. Open Market Operations

During inflation, the central bank sells the bills and securities. These cash reserves of
commercial banks will decrease as they pay central bank for purchasing these securities.
Thus the loan able funds with commercial banks decrease which leads to credit
contraction.
3. Variable Reserve Ratio

The commercial banks have to keep certain percentage of their deposits with the central
bank in the form of cash reserve. During inflation, the central bank increases this cash
reserve ratio this will reduce the lending capacity of the banks.
(B) The Qualitative Methods

1. Fixation of Margin Requirements
Commercial banks have to maintain certain fixed margins while granting loans. In
inflation central bank raises the margin to contract credits and reduces the price level.
2. Regulation of Consumer Credit
INFLATION
For purchase of durable consumer goods on installment basis rules regarding payments
are fixed. During inflation and initial payment is increased and the number of
installments are reduced. These results in credit contraction and fall in prices.
3. Control through Directives

Certain directives are issued by central bank to commercial banks and they are asked to
follow them while lending. This keeps in check the volume of money.
4. Rationing of Credit
The central bank regulates the amount and purpose for which credit is granted by
commercial banks.
5. Moral Suasion
This refers to request made by central bank to commercial banks to follow its general
monetary policy.
6. Direct Action
Direct action is taken by central bank against commercial banks if they do not follow the
monetary policy laid by it.
7. Publicity
The central bank undertakes publicity to educate commercial bank and public about the
trends in money market. By undertaking these measures the central bank can control the
money supply and help to curb inflation.
INFLATION
(2) FISCAL MEASURES
1. Taxation
The rates of direct and indirect taxes may be raised and new taxes may be imposed. This
policy will reduce the disposable income in the hands of the people and their
expenditure.
2. Public Expenditure
During inflation, the government should reduce its expenditure. This would reduce the
income in the hands of some people. Hence the effective demand would decrease.
3. Public Borrowing
The government may resort to voluntary and compulsory borrowing. This policy reduces
the income in the hands of some people. Hence the effective demand would decrease.
4. Over Valuation of Domestic Currency

Over valuation of domestic currency makes exports costlier and there is a fall in the
volume of exports. Imports also become cheaper and there is an increase in money
supply causing a fall in prices.
5. Inducement to Save
The government should induce savings through incentives. This will reduce the supply of
money and purchasing power of the people causing a fall in prices.
6. Public debt management

The public debt should be handled in such a way that there is no increase in the supply of
money. Hence the surplus in the budget should be used to repay the public debts.
INFLATION
(3) NON –MONETARY MEASURES/OTHER MEASURES
1. Increase in output
Every country suffering from inflation should take steps to increase the output of scarce
goods and services. The production of essential goods at the cost of luxury goods can
also serve as an anti-inflationary measure.
2. Price control and rationing

Price control must be introduced in respect of essential commodities. Also rationing
should be introduced for equitable distribution of essential commodities. The supply of
essential goods can be undertaken through public distribution system to keep the prices
in check.
3. Imports
Imports of food grains and other essential goods which are in short supply should be
allowed.
4. Legal action
Legal action should be taken against hoarders and black marketers.
5. Wage-rate
During inflation, the rise in wage rate should be linked to rise in labour productivity.
This will help to control inflation.
6. Check on population growth

It is essential to check the growth of population by adopting effective family planning
devices.
INFLATION
Above all, an efficient and honest administration and good discipline among people are
essential. The various measures stated above have to be combined in a proper manner
depending on the situation of the country.
INFLATION
PRICE RISE
STILL
PINCHING
COMMON MAN’S
POCKET
INFLATION
The 15 per cent rise in national and per capita income and a buoyant 9.4 per cent GDP
growth notwithstanding, the common man is still reeling under the massive burden of
rising prices.
In fact, excepting for just sugar, the rates of as many as 7-8 essential commodities have
shot up by over 25 per cent between January and May as against the same period last
year.
While the prices of wheat, pulses, spices and condiments, edible oil, meat & meat
products, milk products and fruits & vegetables – on an average – increased by over 25
per cent in this period, forcing the aam aadmi to question the authenticity of the much
promised inclusive growth.
The price rises come at a time when India has witnessed a growth of 15.8 per cent in
2006-07 in its national income from Rs 28,46,762 crore in 2005-06 to Rs 32,96,639 crore
in 2006-07.
The primary reason for their vegetables price rise is the entry of retailers in organised
market which has been sourcing supplies directly from the farmers to retail warehouses.
INFLATION
TACKLING
INFLATION
INFLATION
Many people think it is ok to tolerate some inflation if, in return, it is possible to sustain
higher growth rates. Nothing matters as much for peace, prosperity and poverty
alleviation as high GDP growth. However, the link between inflation and growth is
complex. High inflation does not give high growth. The growth miracles of Asia, where
above 7% growth was sustained over a 25-year period, were not associated with high
inflation. In fact, countries with high inflation have tended to have low growth.
In the business cycle, an acceleration of inflation can support a temporary acceleration

of growth. In India, expected inflation has gone up from roughly 3% in 2004 to roughly
7% today--a rise of 4 percentage points.
Interest rates have risen by less than 4 percentage points. As a consequence, real interest
rates have actually gone down. Borrowing has become cheaper; we have a credit boom;
and this is giving heightened GDP growth.
If inflation now stands still at 7%, this boost to GDP growth will fade away. Episodes
where inflation went up are associated with a brief acceleration of GDP growth. A
government can jolt an economy by raising the inflation rate. This heightened growth is
not sustained. Conversely, achieving high sustained GDP growth is about fundamental
issues of economic reform, and does not concomitantly require high inflation.
One of the great strengths of India is that the political system just does not accept high
inflation. This is one area where politicians have been ahead of the intellectuals.
Inflation of 3% is politically acceptable, and inflation above 5% sets off alarm bells.
The government that can jolt an economy by raising the inflation rate then has to go
through the costly process of wringing out the inflation, to get back to 3%. Since there is
no trade-off between inflation and GDP growth, Parliament is right in demanding low
inflation and high GDP growth.
INFLATION
Currently, in India, we go through boom-and-bust cycles; sometimes GDP growth rates
are very high and sometimes GDP growth rates drop sharply. This boom-and-bust cycle
is unpleasant for every household. There is a powerful international consensus that
stabilizing inflation reduces this boomand- bust cycle of GDP growth.
The ideal combination, which has been achieved in all mature market economies, is one
involving low inflation, which is also predictable and nonvolatile. Low inflation volatility
induces low volatility of GDP growth.
Low and predictable inflation also reduces the number of mistakes made by
entrepreneurs in formulating investment plans. What India does not have is an
institutional capacity for delivering predictable, non-volatile inflation of 3%. In socialist
India, the way to deal with an outbreak of inflation was to do government interference in
commodity markets.
A few commodities that "cause" inflation are identified, and the government swings into
action banning exports, giving out import licences, banning futures trading, sending the
police to unearth "hoarding", etc.
This is deeply distortionary. Milk exports were banned, and milk prices fell. But why
should milk farmers pay for a macroeconomic problem of inflation? The cost of bringing
down inflation needs to be dispersed all across the economy.
If milk prices had been allowed to rise, then more labour and capital would shift from
unproductive cereals to high-value milk production. India has the potential to be the
world's biggest exporter of milk. But this requires a sophisticated web of producers,
supply chain, exporters, factories, etc.
This sophisticated ecosystem will not flourish when the government meddles in the milk
industry. A meddlesome government will go through the whiplash of doing an MSP one
INFLATION
day because milk prices are low and banning exports another day because milk prices
are high.
There is something profoundly wrong about a government that interferes in what can be
imported and what can be exported. If the export of ball bearings were sometimes
banned by the government, you can be sure there would be fewer factories to build ball
bearings.
India is evolving from a socialist past into a mature market economy. How can
predictable, non-volatile inflation of 3% be achieved? The recipe that has been
developed worldwide is to devote the entire power of monetary policy to this one task. In
India, the RBI has a complex mandate spanning over many contradictory roles. This has
led to failures on inflation control.
In a mature market economy, a modern central bank watches expected inflation with
great interest. Active trading takes place on the spot and derivatives markets, for both
ordinary bonds and inflation-indexed bonds.
Using these prices, a modern central bank is able to infer expected inflation. When the
short-term interest rate is raised or lowered, in order to respond to changes in expected
inflation, there is a slow impact on the economy, possibly spread over two to three years.
A modern central bank has the economic knowledge required to watch out for expected
inflation deep in the future, and respond to it ahead of time, so as to deliver inflation that
is on target.
In India's case, the RBI Act of 1934 predates modern monetary economics. In other
countries, fundamental reforms have been undertaken in order to refashion monetary
institutions in the light of modern knowledge. As an example, in the late 1990s, when
Tony Blair and Gordon Brown won the election, they refashioned the Bank of England as
a focused central bank which has three core values
INFLATION
The bad drafting of the RBI Act of 1934 is the ultimate cause of the distress of milk
producers today. These linkages are not immediately visible, but they are very real. It is
because India does not have a proper institutional foundation for monetary policy that
we are reduced to distortionary mechanisms for inflation control.
INFLATION
MEASURES
OF
INFLATION
INFLATION
Inflation is measured by calculating the percentage rate of change of a price index,
which is called the inflation rate. This rate can be calculated for many different price
indices, including Consumer price indices (CPIs) which measure the price of a selection
of goods purchased by a "typical consumer." In the UK, an alternative index called the
Retail Price Index (RPI) uses a slightly different market basket.
Cost-of-living indices (COLI) are indices similar to the CPI which are often used to
adjust fixed incomes and contractual incomes to maintain the real value of those
incomes.
Wholesale price index The Wholesale Price Index (WPI) is the most widely used price
index in India. It is the only general index capturing price movements in a comprehensive
way. WPI was first published in 1902, and was one of the more economic indicators
available to policy makers until it was replaced by most developed countries by the
Consumer Price Index in the 1970s.It is an indicator of movement in prices of
commodities in all trade and transactions.
Producer price indices (PPIs) which measure the prices received by producers. This
differs from the CPI in that price subsidization, profits, and taxes may cause the amount
received by the producer to differ from what the consumer paid. There is also typically a
delay between an increase in the PPI and any resulting increase in the CPI. Producer
price inflation measures the pressure being put on producers by the costs of their raw
materials. This could be" passed on" as consumer inflation, or it could be absorbed by
profits, or offset by increasing productivity. In India and the United States, an earlier
version of the PPI was called the Wholesale Price Index.
Commodity price indices, which measure the price of a selection of commodities. In the
present commodity price indices are weighted by the relative importance of the
components to the "all in" cost of an employee.
INFLATION
The GDP Deflator is a measure of the price of all the goods and services included in
Gross Domestic Product (GDP). The US Commerce Department publishes a deflator
series for US GDP, defined as its nominal GDP measure divided by its real GDP
measure.
Capital goods price Index, although so far no attempt at building such an index has been
made, several economists have recently pointed out the necessity of measuring capital
goods inflation (inflation in the price of stocks, real estate, and other assets) separately.
[citation needed] Indeed a given increase in the supply of money can lead to a rise in
inflation (consumption goods inflation) and or to a rise in capital goods price inflation.
The growth in money supply has remained fairly constant through since the 1970's
however consumption goods price inflation has been reduced because most of the
inflation has happened in the capital goods prices.
Regional Inflation
The Bureau of Labor Statistics breaks down CPI-U calculations down to different
regions of the US.
Historical Inflation
Before collecting consistent econometric data became standard for governments, and for
the purpose of comparing absolute, rather than relative standards of living, various
economists have calculated imputed inflation figures. Most inflation data before the early
20th century is imputed based on the known costs of goods, rather than compiled at the
time. It is also used to adjust for the differences in real standard of living for the
presence of technology. This is equivalent to not adjusting the composition of baskets
over time.
INFLATION
INFLATION
&
INDIA (WPI)
INFLATION
The Wholesale Price Index (WPI) is the most widely used price index in India. It is the
only general index capturing price movements in a comprehensive way. WPI was first
published in 1902, and was one of the more economic indicators available to policy
makers until it was replaced by most developed countries by the Consumer Price Index in
the 1970s.It is an indicator of movement in prices of commodities in all trade and
transactions. It is also the price index in India, which is available on a weekly basis with
the shortest possible time lag of two weeks. It is due to these attributes that it is widely
used in business and industry circles and in Government and is generally taken as an
indicator of the rate of inflation in the economy.
The current series of Index Number of Wholesale Prices in India with 1981- 82 as base
year came into existence from July 1989. With a view to reflecting adequately the
changes that have taken place in the economy since 1981-82, the Government appointed
a Working Group to revise the existing WPI series and to examine the commodity
coverage, selection of the base year, weighting diagram and other related issues. WPI is
the index that is used to measure the change in the average price level of goods traded in
wholesale market. The new series with 1993-94 as the base has as many as 435 items in
the Commodity basket. To reflect the structural changes in the economy that have taken
place over a decade, a large number of commodities have been added and a few with
diminished importance have been dropped. In the revised series, “Primary Articles”
contribute 98 items, “Fuel, Power, Light and Lubricants” 19 items, and “Manufactured
Products” provide 318 items. The number of price quotations in the revised series is
spread out to as many as 1918 quotations. In all, there are 136 new items in the revised
series. Out of that, Primary Articles account for 13, Fuel Group contributes 1 and
Manufactured Products have 122 new commodities. The revised weights of the three
major groups are given below. Figures in the parentheses are the weights of the
respective groups in the 1981-82 series.
• Primary Articles
• Fuel, Power, Light & Lubricants
• Manufactured Products
INFLATION
India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation
rate in the economy. Most developed countries use the Consumer Price Index (CPI) to
calculate inflation.
Annual rates of change in the WPI calculated using both the existing and the new series
are given below. It is seen that the new series starts at a higher level than the old series
accounting for a relatively higher annual rate of change, but thereafter the two series
virtually move in cycle.
Main constituents of WPI

1. Primary articles
2. Fuel, power
3. Manufactured products
4. Food articles
5. Vegetables
6. Food products
7. Edible oils
8. Cement
Criteria for Selection of Wholesale Price Outlets

The following criteria were used to determine the wholesale price outlets
1. Popularity of an establishment along the line of goods to be priced
2. Consistency of the stock
3. Permanency of the outlet
4. Cooperativeness of the price informant
5. Location
Measures of inflation in India

Three different price indices are available in India
1. Wholesale price index
2. Consumer price index [calculated for 3 different types of workers]
INFLATION
3. GDP deflator
Availability
1. The WPI is available weekly [for a lag of 2 weeks]
2. The CPI is available monthly [for a log of 1 month]
3. The GDP deflator is available annually
In many countries, the main focus is placed on CPI for assessing inflationary trends,
because
1. It is the index most statistical resources are placed

2. It is most closely related to the cost of living
In India however the main focus is placed on WPI because it has a broader coverage and
is published on a more frequent and timely basis than the CPI.
However, the CPI remains important because it is used for indexation purposes for many
wage and salary earners.
INFLATION
INDIAN
SCENARIO
INFLATION
Inflation is no stranger to the Indian economy. In fact, till the early nineties Indians were
used to double-digit inflation and its attendant consequences. But, since the mid-nineties
controlling inflation has become a priority for policy framers.
The natural fallout of this has been that we, as a nation, have become virtually intolerant
to inflation. While inflation till the early nineties was primarily caused by domestic
factors (supply usually was unable to meet demand, resulting in the classical definition of
inflation of too much money chasing too few goods), today the situation has changed
significantly.
Inflation today is caused more by global rather than by domestic factors. Naturally, as
the Indian economy undergoes structural changes, the causes of domestic inflation too
have undergone tectonic changes.
Needless to emphasise, causes of today's inflation are complicated. However, it is indeed

intriguing that the policy response even to this day unfortunately has been fixated on the
traditional anti-inflation instruments of the pre-liberalisation era.
Reasons for inflation in India

1) Increase in Demand and fall in supply causes rise in prices.
2) A Growing Economy has to pass through Inflation.
3) Lack of Competition and Advanced Technology (increases cost of production and rise
in price)
4) Defective Monetary and Fiscal Policy (In India its fine)
5) Hoarding (when traders hoard goods with intention to sell later at high prices)
6) Weak Public Distribution System
INFLATION
INFLATION PRESSURE OVER THE LAST FEW MONTHS
INFLATION
INFLATION IN INDIA AND OTHER DEVELOPED COUNTRIES
INFLATION
INFLATION DURING 1980’s AND 1990’s
WPI inflation was relatively stable between 1983 and 1990, averaging 6 ¾ percent,
recording a low of 3 percent in early 1986, and a high of a little over 10 percent in 1988.
In the 1990s, inflation has, on average, been higher at 8 ¾ percent, and considerably
more variable. Inflation rose sharply in the early 1990s, reaching a peak of a little over
16 percent in late 1991, as primary product prices rose sharply and the balance of
payment crisis resulted in a sharp depreciation of the rupee and upward pressure on the
price of industrial inputs. However, as the agricultural sector rebounded, industrial
activity slowed, and financial stability was restored, inflation declined to 7 percent by
mid 1993 but then again accelerated to over 10 percent during 1994 and 1995 as
economic activity recovered strongly. In response, the RBI moved to tighten monetary
policy, and inflation was brought down gradually, reaching a low of 3 ¾ percent in mid
1997.However, more recently, inflation again accelerated in the second half of 1998as
adverse supply conditions in key commodity markets put upward pressure on food price.
As these conditions have eased, inflation has again fallen sharply.
INFLATION
Within the three sub-component of WPI, prices in the manufacturing sector have been
lowered and more stable, ranging from 2-13 percent. Inflation in both primary products
and fuel and energy categories has been considerably high in1990s than in the 1980s.
Both indices have also volatile. Within the fuel and energy category, the sharp rise in
prices in the recent year is partly due to government moving more towards market based
prices, although given the administered nature of these prices such adjustment have
tended to occur at irregular intervals leading to sharp movements in the index.
INFLATION
INFLATION
GLOBAL INFLATION A COMPARISON WITH INDIA
Inflation rates in some developed and developing economies based on the Consumer
Price Indices. Up to the mid 1990s, while inflation rate in the developed economies
ranged between 1-2 percent, it was in a much higher range for the developing economies
including India - with some years even recording double digit inflation. For exchange
rate stability and smoother trade, it is imperative that inflation rate in India be close to
our major trading partners. Over the last three to four years, we have moved closer to
this objective with inflation rate being in the range 3-5 percent as against 2-3 percent in
the developed economies. The declining trend in inflation is also visible in many of the
developing economies in Asia.
INFLATION
ISSUES
IN
MEASURING
INFLATION
INFLATION
Measuring inflation requires finding objective ways of separating out changes in
nominal prices from other influences related to real activity. In the simplest possible
case, if the price of a 10 kgs of corn changes from 90 to 100 over the course of a year,
with no change in quality, then this price change represents inflation. But we are usually
more interested in knowing how the overall cost of living changes, and therefore instead
of looking at the change in price of one good, we want to know how the price of a large
'basket' of goods and services changes. This is the purpose of looking at a price index,
which is a weighted average of many prices. The weights in the Consumer Price Index,
for example, represent the fraction of spending that typical consumers spend on each
type of goods (using data collected by surveying households).
Inflation measures are often modified over time, either for the relative weight of goods in
the basket, or in the way in which goods from the present are compared with goods from
the past. This includes hedonic adjustments and “reweighing” as well as using chained
measures of inflation. As with many economic numbers, inflation numbers are often
seasonally adjusted in order to differentiate expected cyclical cost increases, versus
changes in the economy.
Inflation numbers are averaged or otherwise subjected to statistical techniques in order

to remove statistical noise and volatility of individual prices. Finally, when looking at
inflation, economic institutions sometimes only look at subsets or special indices. One
common set is inflation excluding food and energy, which is often called “core
inflation”.
INFLATION
AN EXAMPLE OF HOW INFLATION CAN BE DANGEROUS
Hazards of inflation [How Zimbabwe was affected by inflation] Have you heard of a
country which is dotted with malls filled with goods, but no customers? It is Zimbabwe,
the land of Mugabe.
Zimbabwe is a classic case of how inflation can make life hell for people. Experts say it
all started with Mugabe’s regime. Whatever may be the reason, the basic flaw in
Zimbabwe’s economy is that Zimbabwe lost its ability to feed itself.
So, if you don’t have enough agriculture commodities the prices are bound to go up. This
is one lesson India can learn from Zimbabwe. India’s wheat, rice, pulses and edible oil
production is not enough to keep pace with the growth the country is witnessing. That is
why Indian government is worrying about the rising inflation rates.
However, it is not anywhere near Zimbabwe. Zimbabwe’s skyrocketing inflation – now

the world’s highest, running at more than 100,000 per cent a year – keeps the cost of
living rising.
In 1979, when Mugabe’s nationalist rebels overthrew the white dominated government of
Rhodesia, and changed the name of the country to Zimbabwe, thousands of commercial
farms managed to grow enough food to export throughout the region.
At present, more than a decade of mismanagement and neglect has dropped agricultural
production to pre-colonial levels. This year, Zimbabwe’s shortfall in maize is 360,000
tones, and its shortfall in wheat is 255,000 tones.
Streets of Zimbabwe are dotted with shopping mall. That shows that there is food on the
shelves, but all of it highly priced. Massive department stores, built for a time when
farmers from miles around would come to do their weekend shopping, are full of clothes,
but without customers.
INFLATION
With cash almost a worthless possession, people have started investing in something
different. They stack bags of maize meal in their homes.
The situation in Zimbabwe has hit several Indians badly. Many of the Indian
businessmen in Zimbabwe, especially Gujaratis, are finding it tough to do trade there.
Because, a sausage sandwich sells for 30 million Zimbabwe dollars, or about US $1.25.
A 30-pound bag of potatoes cost 90 million in the first week of March. Now that same
bag costs 160 million.
So, Zimbabwe is an example for the world how inflation can ruin a country, which does
not produce enough food for itself.
INFLATION
RESERVE BANK
OF
INDIA
INFLATION
The central bank of the country is the Reserve Bank of India (RBI). It was established in
April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of
the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each
fully paid which was entirely owned by private shareholders in the beginning. The
Government held shares of nominal value of Rs. 2,20,000.
Reserve Bank of India was nationalized in the year 1949. The general superintendence
and direction of the Bank is entrusted to Central Board of Directors of 20 members, the
Governor and four Deputy Governors, one Government official from the Ministry of
Finance, ten nominated Directors by the Government to give representation to important
elements in the economic life of the country, and four nominated Directors by the Central
Government to represent the four local Boards with the headquarters at Mumbai,
Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial and economic
interests and the interests of co-operative and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II
of 1934) provides the statutory basis of the functioning of the bank.
The Bank was constituted for the need of following
• To regulate the issue of bank notes
• To maintain reserves with a view to securing monetary stability and
• To operate the credit and currency system of the country to its advantage.
INFLATION
Functions of Reserve Bank of India:
• To maintain monetary stability so that the business and economic life can deliver
welfare gains of a properly functioning mixed economy.
• To maintain financial stability and ensure sound financial institution so that
monetary stability can be safely pursued and economic units can conduct their
business with confidence.
• To maintain stable payments system so that financial transactions can be safely and
efficiently executed.
• To promote the development of financial infrastructure of markets and systems, and
to enable it to operate efficiently i.e., to play a leading role in developing a sound
financial system so that it can discharge its regulatory function efficiently.
• To ensure that credit allocation by the financial system broadly reflects the national
economic priorities and societal concerns.
INFLATION
ROLE OF RBI
The Reserve Bank of India Act of 1934 entrust all the important functions of a central
bank the Reserve Bank of India.
1. Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue
bank notes of all denominations. The distribution of one rupee notes and coins and small
coins all over the country is undertaken by the Reserve Bank as agent of the Government.
The Reserve Bank has a separate Issue Department which is entrusted with the issue of
currency notes. The assets and liabilities of the Issue Department are kept separate from
those of the Banking Department. Originally, the assets of the Issue Department were to
consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided
the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of
the assets might be held in rupee coins, Government of India rupee securities, eligible
bills of exchange and promissory notes payable in India. Due to the exigencies of the
Second World War and the post-war period, these provisions were considerably
modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign
exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold.
The system as it exists today is known as the minimum reserve system.
2. Banker to Government
The second important function of the Reserve Bank of India is to act as Government
banker, agent and adviser. The Reserve Bank is agent of Central Government and of all
State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has
the obligation to transact Government business, via. to keep the cash balances as
deposits free of interest, to receive and to make payments on behalf of the Government
and to carry out their exchange remittances and other banking operations. The Reserve
Bank of India helps the Government - both the Union and the States to float new loans
and to manage public debt. The Bank makes ways and means advances to the
Governments for 90 days. It makes loans and advances to the States and local
authorities. It acts as adviser to the Government on all monetary and banking matters.
INFLATION
3. Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the
Banking Companies Act of 1949, every scheduled bank was required to maintain with the
Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of
its time liabilities in India. By an amendment of 1962, the distinction between demand
and time liabilities was abolished and banks have been asked to keep cash reserves equal
to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can
be changed by the Reserve Bank of India.
The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible
securities or get financial accommodation in times of need or stringency by
rediscounting bills of exchange. Since commercial banks can always expect the Reserve
Bank of India to come to their help in times of banking crisis the Reserve Bank becomes
not only the banker's bank but also the lender of the last resort.
4. Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the
volume of credit created by banks in India. It can do so through changing the Bank rate
or through open market operations. According to the Banking Regulation Act of 1949,
the Reserve Bank of India can ask any particular bank or the whole banking system not
to lend to particular groups or persons on the basis of certain types of securities. Since
1956, selective controls of credit are increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the Indian money
market. Every bank has to get a licence from the Reserve Bank of India to do banking
business within India, the licence can be cancelled by the Reserve Bank of certain
stipulated conditions are not fulfilled. Every bank will have to get the permission of the
Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly
return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the
Bank to call for information is also intended to give it effective control of the credit
system.
INFLATION
The Reserve Bank has also the power to inspect the accounts of any commercial bank.
As supreme banking authority in the country, the Reserve Bank of India, therefore, has
the following powers
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and qualitative
controls.
(c) It controls the banking system through the system of licensing, inspection and calling
for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled
banks.
5. Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of
exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to
buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The
rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the
exchange rate fixed at lsh.6d. though there were periods of extreme pressure in favour of
or against the rupee. After India became a member of the International Monetary Fund
in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with
all other member countries of the I.M.F.
Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the
custodian of India's reserve of international currencies. The vast sterling balances were
acquired and managed by the Bank. Further, the RBI has the responsibility of
administering the exchange controls of the country.
6. Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has certain non-
monetary functions of the nature of supervision of banks and promotion of sound banking
in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given
the RBI wide powers of supervision and control over commercial and co-operative
INFLATION
banks, relating to licensing and establishments, branch expansion, liquidity of their
assets, management and methods of working, amalgamation, reconstruction, and
liquidation.
The RBI is authorized to carry out periodical inspections of the banks and to call for
returns and necessary information from them. The nationalization of 14 major Indian
scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing
the growth of banking and credit policies towards more rapid development of the
economy and realization of certain desired social objectives. The supervisory functions
of the RBI have helped a great deal in improving the standard of banking in India to
develop on sound lines and to improve the methods of their operation.
7. Promotional functions
With economic growth assuming a new urgency since Independence, the range of the
Reserve Bank's functions has steadily widened. The Bank now performs a variety of
developmental and promotional functions, which, at one time, were regarded as outside
the normal scope of central banking. The Reserve Bank was asked to promote banking
habit, extend banking facilities to rural and semi-urban areas, and establish and promote
new specialized financing agencies. Accordingly, the Reserve Bank has helped in the
setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962,
the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964,
the Agricultural Refinance Corporation of India in 1963 and the Industrial
Reconstruction Corporation of India in 1972. These institutions were set up directly or
indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to
provide industrial finance as well as agricultural finance. As far back as 1935, the
Reserve Bank of India set up the Agricultural Credit Department to provide agricultural
credit. But only since 1951 the Bank's role in this field has become extremely important.
The Bank has developed the co-operative credit movement to encourage saving, to
eliminate moneylenders from the villages and to route its short term credit to agriculture.
The RBI has set up the Agricultural Refinance and Development Corporation to provide
long-term finance to farmers.
INFLATION
CONTROL MEASURES OF RBI
RBI actually has four chief weapons in its arsenal to control the inflation. They
are
1. Open Market Operations (OMO)
2. Reserve Requirements (CRR and SLR)
3. Bank Rate or Discount rate
4. Repo rate
1. Open Market Operations (OMO)

In this case RBI sells or buys government securities in open market transaction
depending upon whether it wants to increase the liquidity or reduce it. So when RBI sells
government securities in secondary market it sucks out the liquidity (stock of money) in
the economy. So overall it reduces the money supply available with banks in effect the
capital available with banks for lending purpose becomes scarce hence interest rates
move in upward direction. Exactly opposite happens when RBI buys securities from open
market. The transaction increases the money supply available with banks so the cost of
money (interest rate) moves in downward direction and business activities like new
investments, capacity expansion gets boost. In a nutshell RBI buys securities when the
economy is sluggish and demand is not picking up and sells securities when the economy
is overheated and needs to cool down.
OMO is also used in curbing the artificial liquidity created to avoid strengthening of
rupee against dollar in order to remain competitive in exports.
2. Reserve Requirements
This mainly constitute of Cash to Reserve Ratio (CRR) and Statutory Liquidity ratio
(SLR). CRR is the portion of deposits (as cash) which banks have to keep/maintain with
the RBI. This serves two purposes firstly, it ensures that a portion of bank deposits is
totally risk-free and secondly it enables that RBI control liquidity in the system, and
INFLATION
thereby, inflation. Whereas SLR is the portion of their deposits banks are required to
invest in government securities. So due to CRR and SLR obligation towards RBI financial
institutions will be able to lend only the part of money available with them although this
effect is small when transaction is between just two entities and constitute one layer.
But when money flows through series of players and layers very less money will be left
with the institutions present at the bottom of pyramid. So higher is the CRR less is the
money available in the economy. So interest rates will move in upward direction and
opposite happens when CRR is reduced. Recently RBI raised CRR from 4.5% to 5% in
two stages which enabled to transfer about 8000 Crore rupees from money in supply to
RBI’s coffers. CRR has actually been reduced to this level of 5% from 15% in 1981.
3. Bank Rate or Discount rate

This is the rate at which the RBI makes very short term loans to banks. Banks borrow
from the RBI to meet any shortfall in their reserves. An increase in the discount rate
means the RBI wants to slow the pace of growth to reduce inflation. A cut means that the
RBI wants the economy to grow and take up new ventures. Indian bank rate is at 6 per
cent down from 10 per cent in 1981 and 12 per cent in 1991
4. Repo rate
It is the rate at which the RBI borrows short term money from the market. After economic
reforms RBI started borrowing at market prevailing rates. So it makes more sense to
banks to lend money to RBI at competitive rate with no risk at all. Although the repo rate
transactions are for very short duration the everyday quantum of operations is
approximately Rs 40,000 crore everyday. Thus, large amount of capital is not available
for circulation. With increase in repo rate banks tend to invest more in repo transactions.
Open market operations have limitations due to amount of government securities with
RBI is limited and close to Rs 60,000 Crore and out of that only Rs 45,000 Crore is in
form of marketable securities. Considering Bank Rate which is untouched in current
INFLATION
scenario RBI is left with only 2 major measures viz. CRR and Repo Rate in its armory to
guard against the onslaught of inflation.
Since large part of inflation is attributed to large increase in international oil and metal
prices, the cooling price trend in them comes as a great relief to RBI and Indian
economy as a whole and along with RBI measures has helped stabilize inflation
INFLATION
MONETARY POLICY
The Reserve bank of India, being primarily concerned with money matters, so organize
currency and credit that it subs serves the broad economic objectives of the country. In
the performance of this task, it formulates and executes a monetary policy with clear cut
goals and tools to be used for this.
Meaning and objectives

Monetary policy, also described as money and credit policy, itself with the supply of
money as also credit to the economy. This is a statement, announced twice in a year.
With decline in the share of agricultural credit, and a rise in that of a industrial credit,
the RBI has started making an annual policy statement in April with a review of the same
in October Beginning with 1999-2000 The RBI has decided that the policy announcement
will be an annual affair.
The policy statement gives an overview of the working of the economy. In the light it
specifies the measures that the RBI intends to take an influence such key factors of money
supply, interest rate and inflation so as to ensure price stability. It also lays down norms
for financial institutions (like banks, finance companies etc.) governed by the RBI. There
pertain to such matters as cash reserves ratio, capital adequacy etc. in short, it is a sort
of blue-print containing a description of aims and means.
Two set of objective have been pursued for long. One is controlled expansion of money.
It sought to achieve the twin objectives of meeting in the full needs of production and
trade, and at the same time moderating the growth of money supply to contain the
inflationary pressure in the economy.
Second is sect oral deployment of the funds depending upon the priorities lay down in the
plant, the RBI as determined the allocation of funds also the interest rate among the
different sector. The sector which have received special attention are; core industries
INFLATION
(coal, iron, steel and engineering etc); food grains (rice, wheat); priority sector
(agriculture, small scale industries etc); and weaker section of population.
During the 1990s, and since then, while the growth of the economy remains the primary
aim, the control of inflation as become more urgent concern of the policy the thrust of the
policy as been restrictive in nature so as to reduce the fast growing money supply. The
aim as been to bring down the high double-digit inflation aimed at achieving the trend
rate of inflation at about 5%. The stipulated growth in money supply was put at an
average of 11% to 12% per annum. And the projected growth the rate of the economy
was set at 5% to 6%. The ninth plan as envisaged an average inflation rate in the region
of 7% per annum .The growth of money supply at 16 % the growth rate of economy is
6.5% other important concern of the policy as been deployment of funds as among
sectors such as procurement of food grains by the government, priority sectors and
export. The monetary policy, with its various aims, is to supplement the process of
macro-stabilization and structural adjustment intimated in the middle of 1991.
Monetary Policy of RBI

Reserve Bank of India focuses on the following main six basic goals of monetary policy
• High employment
• Economic growth
• Price stability
• Interest-rate stability
• Stability of financial markets
• Stability in foreign exchange markets
Limitation of Monetary Policy

While examining the working of the monetary policy. It is important remember that there
are some limitations on its successful application. These limitations on its successful
application. These limitation mostly arise from the under developed character of the
economy, as also from certain shortcomings of the economic situation obtaining in the
country.
INFLATION
1. Restricted scope of policy
The first thing to be aware of is that the policy relating to money is not all that is needed
to combat every evil, not even every monetary problem.
Every economic problem has diagnosed and tackled from all the angles including the
monetary side if the situation so demands. For example the price situation prevailing in
the country is not solely or the case of inflationary rise in price, where money seems to
be a major factor it needs to be stressed that monetary policy can at best influence the
demand for goods. For an effective use of the policy to flight inflation much larger policy
profile is necessary.
Correctly I.G.Patel states “… the role of monetary policy in combating inflation in any
country is strictly limited and that monetary policy can be effective only if it is a part of
an overall frame work of policy which includes not only fiscal and foreign exchange
policy but also what is described as income policy”
2. Predominance of currency
In the context of Indian conditioned a limitation on the effective use of currency in the
total money supply. The fact inhibits the credit-creating capacity of the banking system.
And since the reserve bank operates on money supply via credit to the public, its capacity
to do so is accordingly limited. With currency forming a large proportion of money
supply, banks have to face the problem of large outgo of currency every time they create
credit. By habit and custom associated with the paucity and backwardness of appropriate
institution people prefer to make use of cash rather than cheques. This means that a
major portion of the cash generally percolates in the economy without returning to the
banking system in the form of deposits. This reduces the capacity of the banking system
to create fresh credits on the basis of an increase in its reserves.
However it needs also to be noted that in recent years. The effectiveness of the monetary
policy is on its increase. This is largely because of the larger use of credit and the
consequent relative decline of currency in the total money supply, resulting from the
INFLATION
increase in the diversification of the economy and growth investment and organized
money markets. The last being aided by the reserve bank.
3. Underdeveloped money market

Another inhibiting factor in the Indian situation is the weak money market. This market
essentially dealing in short-term funds, is in fact cut into two with not much
communication between them and therefore with divergence in the structure of interest
rates. One part where the monetary policy is more effective is the organized one
consisting of Reserve bank, the state bank foreign banks, the Indian joint-stock banks etc
the other part, which is unorganized and less amenable to the operation of reserve bank
consist of heterogeneous agencies, known as “indigenous bank” these and other non-
banking institutions provide a considerable proportion of total credit and worse, the
linkage between the two sectors are not so well developed.
In this regard, too, things are improving with the further expansion of organized market
and a large number of indigenous bankers associating with modern institutions including
reserve bank uniform ally over a large part is being witnessed.
4. Existence of black money

A serious obstacle in the efficient working of monetary policy circulation of large amount
in the bank market. The transactions i.e. borrowers and lenders keep their transaction
secret. As such these are not reported the result is that supply and demand of money does
not remain as desired RBI. This means that a significant part of money economy remains
outside the orbit of RBI’s monetary policy it is rightly regarded “as a threat to the ability
of the official monetary-credit policy mechanism to manage demand and price in several
sectors of the economy.
5. Government policies
The scope of monetary policy is further restricted because the RBI could not pursue
independent line in money affairs the expansion of money supply has for example not
always need in the response of genuine needs of the economy .the creation of new money
INFLATION
to meet the government deficits is one such case it has been one powerful factor causing
inflationary pressures in the economy again in the development of credit among different
use for example purchase of government securities through the instrument of Statutory
Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) further a considerable proportion
of as much as 40 percent of bank credit is required to be extended to the activities
specified under the scheme of priority sectors. So is to case of interest rates which have
been influenced more by the government policy rather than the RBI’s wishes. The rate of
interest in respect of specified loans. In fact it leads to a distortion of interest –structure
as the banks tried to make up for this by charging higher rates from the borrowers.
The enumeration of the main limitation on the monetary policy in India should be enough
for us to realize that this policy, even within its restricted sphere, is not the effective
remedy for problems essentially monetary in character. With in development and
diversification of the economy as also with the furtherance of banking habits things are
bound to improve.
However, in the meantime and alongside there is a need to modernize the money market,
which can be the basis for an effective monetary policy.
INFLATION
MONETARY & CREDIT POLICY
Monetary and Credit policy has direct impact on prices of commodities, inflation and
prevailing interest rates, hence, the growth of overall Indian economy. After the
economic reforms started in early nineties, although the interest rate determination is
market based, credit policy of RBI determines the direction of movement of interest rates.
Thus help RBI control the inflation.
Apart from this it also contains norms for the banking and financial sector and the
institutions which are governed by RBI like Banks, financial institutions, non-banking
financial institutions, primary dealers (money markets) and dealers in the foreign
exchange (forex) market. It also contains an economic overview and presents future
forecasts. The objective of the policy is to maintain price stability and ensure adequate
flow of credit to the productive sectors of the economy. Stability for the national currency
and growth in employment and income are also considered.
Credit policy of RBI

Annual Credit Policy RBI keeps all rates intact. In its credit policy for 2007-08, the
Reserve Bank of India has kept all the interest rates unchanged to sustain the investment
boom.
The RBI has lowered its growth forecast to 8.5 per cent from 8.5-9 per cent as it expects
global GDP to decline in 2007. Inflation targets have also been revised downward to 5
per cent from last year's targets of 5-5.5 per cent and RBI's medium term inflationary
target is now 4-4.5 per cent.
The RBI has also announced important operational tools for moving towards capital
account convertibility. Among them Indian companies can invest in foreign companies’
upto 300 per cent of their net worth, hedging for individuals and remittances up to
$100,000 v/s. USD 50,000 earlier.
INFLATION
Domestic producers and users will also be allowed to hedge their price risk on
international commodity exchanges for copper, aluminium, zinc, and even aviation
turbine fuel. Indian companies will also be allowed to rebook and cancel their forward
contracts.
Highlights RBI Monetary and Credit Policy

Following are the highlights of the Monetary and Credit Policy that the
Reserve Bank of India
• RBI hikes CRR by 0.25 per cent from May 24;
• Repo, Reverse Repo, Bank Rates unchanged.
• RBI projects economy to grow by 8-8.5 per cent in 2008-09;
• Inflation to be brought down to around 5.5 per cent in 2008-09 with a preference for
bringing it close to 5.0 per cent as soon as possible. Going forward, the resolve is to
condition policy and perceptions for inflation in the range of 4.0-4.5 per cent so that
an inflation rate of around 3.0 per cent becomes a medium-term objective.
• High priority to price stability, well-anchored inflation expectations and orderly
conditions in financial markets while sustaining the growth momentum.
• Swift response on a continuous basis to evolving adverse international and domestic
developments through both conventional and unconventional measures.
• Emphasis on credit quality and credit delivery while pursuing financial inclusion.
• Scheduled banks required to maintain CRR of 8.25 per cent with effect from the
fortnight beginning May 24, 2008.
• M3 expansion to be moderated in the range of 16.5-17.0 per cent during 2008-09.
• Deposits projected to increase by around 17.0 per cent or Rs 5,50,000 crore (Rs
5,500 billion) during 2008-09.
• Adjusted non-food credit projected to increase by around 20.0 per cent during 2008-
09.
• Introduction of STRIPS in Government securities by the end of 2008- 09.
• A clearing and settlement arrangement for OTC rupee derivatives proposed.
INFLATION
• Domestic crude oil refining companies would be permitted to hedge their commodity
price risk on overseas exchanges/markets on domestic purchase of crude oil and sale
of petroleum products based on underlying contract.
• Currency futures to be introduced in eligible exchanges in consultation with the
SEBI; broad framework to be finalized by May 2008.
• Indian companies to be allowed to invest overseas in energy and natural resources
sectors.
• Reserve Bank can be approached for capitalization of export proceeds beyond the
prescribed period of realization.
• Loans granted to RRBs for on lending to agriculture and allied activities to be
classified as indirect finance to agriculture.
• The shortfall in lending to weaker sections would be taken into account for
contribution to RIDF with effect from April 2009.
• RRBs allowed selling loan assets to other banks in excess of their prescribed priority
sector exposure.
• The Reserve Bank to disseminate details of various charges levied by banks.
• Asset classification norms for credit to infrastructure projects relaxed.
• The prudential guidelines for specific off-balance sheet exposures of banks to be
reviewed.
• Reserve Bank to carry out supervisory review of banks' exposure to the commodity
sector.
• The limit of bank loans to individuals for housing having lower risk weight of 50 per
cent enhanced from Rs. 20 lakh to Rs. 30 lakh.
• Consolidated supervision of financial conglomerates proposed.
• Working Group to be set up for a supervisory framework for SPVs/Trusts.
• Inter-departmental Group to review the existing regulatory and supervisory
framework for overseas operations of Indian banks.
• All transactions of Rs. one crore and above made mandatory to be routed through the
electronic payment mechanism.
INFLATION
• Dispense with the extant eligibility norms for opening on-site ATMs for well-
managed and financially sound UCBs.
• Regulations in respect of capital adequacy, liquidity and disclosure norms for
systemically important NBFCs to be reviewed
RBI Credit Policy Refocusing on Inflation

The RBI has raised both the repo and the reverse repo rates by 25 basis points and most
analysts expect further hikes over the next year. Does this mean that the era of benign
interest rates are over? Central banks all over the world are generally fixated on
controlling inflation, even at the cost of economic growth. The US Fed is famous (or
notorious, depending which side you are on), for its obsession with inflation control and
has often been accused of pushing the economy to phases of lower growth through its
hawkish interest rate policies. The RBI, as befitting the central bank of a developing
country starved of economic growth, has traditionally given more importance to growth.
The latest credit policy review came after some optimistic statements from the finance
ministry on inflation and the need to keep interest rates low for sustaining the growth
momentum. The finance minister was less convinced about the need for a rate hike as he
stated publicly that inflation was within manageable limits. The finance ministry was of
the opinion that the effect of high oil prices had more or less been absorbed.
Going by the language of the mid-term review announced, the RBI clearly differs with
the government on both inflation and the impact of oil price. The central bank believes
that higher oil prices, considered a temporary phenomenon in early reports, have
become a more permanent component in inflation management. The RBI is also of
opinion that the pass-through effect of higher oil prices are not fully reflected in the
prices of intermediate and final goods. Hence, the central bank seems to have decided to
focus more on inflation rather than growth.
The RBI clearly admits that it would be difficult to keep year end inflation at the targeted
5 to 5.5 per cent without necessary policy responses. Hence, it has decided to act ahead
INFLATION
of the problem. As a deputy governor of the bank put it, inflation is like toothpaste – once
you let it ooze out, it is very difficult to push back.
As expected, the RBI raised the reverse repo rate, the rate at which it borrows money
from the system, by 25 basis points taking it to 5.25 per cent. The repo rate, the rate at
which the RBI lends money to the system, has also been raised by a matching margin to
6.25 per cent. The second move was not as widely expected as the first and is being seen
as a sign of this new found aggressiveness.
To prevent the market from reading too much into the hikes in repo and reverse repo
rates, the RBI has left both the bank rate and cash reserve ratio (CRR) unchanged. The
bank rate, currently at 6 per cent, is a token or signaling rate which does not have any
operational significance. However, it has some psychological significance as it is used as
a reference rate indicating the medium term interest outlook of the central bank. By
keeping the bank rate stable, the RBI is allowing itself the flexibility to roll back if
economic growth is affected in future.
INFLATION
CONCLUSION
Inflation is not simply a matter of rising prices. There are endemic and perhaps diverse
reasons at the root of inflation. Cost-push inflation is a result of decreased aggregate
supply as well as increased costs of production, itself a result of different factors. The
increase in aggregate supply causing demand-pull inflation can be the result of many
factors, including increases in government spending and depreciation of the local
exchange rate. If an economy identifies what type of inflation is occurring (cost-push or
demand pull), then the economy may be better able to rectify (if necessary) rising prices
and the loss of purchasing power.
Inflation is just like a man whose behaviour cannot be predicted and one can say that as
man has two faces, similarly Inflation can also be said to have Positive and Negative
faces on Indian Economy.
INFLATION
ANNEXURE
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION
INFLATION

Inflation

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Inflation

Uploaded by

Copyright:

Available Formats

INFLATION

Address : 19/1288, Sector-19, Indira Nagar, Lucknow-226016

in partial fulfillment of the requirement

At the out set, I am thankful to My University (Indira Gandhi National Open

Inflation is commonly understood as a situation of substantial and rapid general

1.2 HOW TO MEASURE INFLATION?

Management Practice under Cost-Push Inflation:

Demand-pull inflation is a product of an increase in aggregate demand that is faster than

10. Headline Inflation

12. Assets Inflation

Deflation is considered a problem in a modern economy because of the potential of a

2. Increase in Disposable Income

3. Increase in Consumer Spending

4. Development and Non-Development Expenditure

6. Demand for Foreign Commodities

3. Speculation and Black Money

4. Unfair Practices by Monopoly Houses

5. Bottlenecks and Shortages

3. Limited Efficient Entrepreneurs

4. Lack of Foreign Capital

5. Imperfections of the Market

The effects/consequences of inflation are as followers -

(A) Stimulating or Favourable Effect

(B) Disastrous or Unfavourable Effects

2.1.2. EFFECTS OF INFLATION ON INCOME DISTRIBUTION

2.1.3. EFFECT OF INFLATION ON CONSUMPTION AND WELFARE

2.1.4. EFFECTS OF INFLATION ON FOREIGN TRADE

2.1.5. SOCIAL AND POLITICAL EFFECTS

2.1.6. EFFECTS ON MANUFACTURERS

(1) MONETARY MEASURES

2. Open Market Operations

3. Variable Reserve Ratio

(B) The Qualitative Methods

2. Regulation of Consumer Credit

3. Control through Directives

4. Over Valuation of Domestic Currency

6. Public debt management

2. Price control and rationing

6. Check on population growth

In the business cycle, an acceleration of inflation can support a temporary acceleration

Main constituents of WPI

Criteria for Selection of Wholesale Price Outlets

Measures of inflation in India

1. It is the index most statistical resources are placed

Needless to emphasise, causes of today's inflation are complicated. However, it is indeed

Reasons for inflation in India

Inflation numbers are averaged or otherwise subjected to statistical techniques in order

However, it is not anywhere near Zimbabwe. Zimbabwe’s skyrocketing inflation – now

5. Custodian of Foreign Reserves

1. Open Market Operations (OMO)

3. Bank Rate or Discount rate

Meaning and objectives

Monetary Policy of RBI

Limitation of Monetary Policy

3. Underdeveloped money market

4. Existence of black money

Credit policy of RBI

Highlights RBI Monetary and Credit Policy

RBI Credit Policy Refocusing on Inflation

You might also like