Presented By: Siddharth Iyer Ashish Kumar Jain Pankaj Jain Satish Kachhawa Jharna Tinani

Macroeconomic Fundamentals
India
GDP Growth Inflation Saving Rate Current Account Deficit Exchange Regime Trade Moderate Low High Under 6 % of GDP Floating Less Important

Circle of Inflation
Inflation ↑ Rate of Interest ↓

Price ↑

Investment ↑

Consumption ↑ Income ↑

Aggregate Demand ↑ Production ↑

Monetary Policy
Objectives
•Price stability •Ensuring adequacy of credit to support growth •Financial Stability

Instruments
•Move from direct to indirect instruments •LAF (Repo & Reverse Repo) •OMO •MSS

Fiscal Policy
• Potential to increase tax • Reprioritize expenditures • Increase borrowing, domestic or external

Inflation as measured by WPI (Base Year 1993-94)
250.00 15.00 13.00 200.00
Rising Oil Prices

11.00 9.00 7.00 5.00

150.00 Index Value

100.00

Gulf War

IMD Redemption

3.00 1.00 (1.00) (3.00) (5.00) (7.00) (9.00) (11.00) (13.00) (15.00)

100

Asian Crisis

50.00

Balance of Payments Crisis

1990-91 1996-97 1999-00 2000-01 2002-03 2003-04 2006-07 1991-92 1992-93 1993-94 1994-95 1995-96 1997-98 1998-99 2001-02 2004-05 2005-06

Inflation Rate (%age terms)

Comparison of Interest rates and Inflation
16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 1992-93 1994-95 1996-97 1998-99 2000-01 2004-05 1990-91 2002-03 2006-07 CRR Bank Rate WPI

Rate (%age terms)

1991-Balance of Payment Crisis
Causes • • • • • Excess Demand was more important cause. Increase in oil prices. (Gulf War) Gross savings of Govt was (-ve) The Monetized deficit rose from 1.6% to 3.1% of GDP Increase in budget deficit would generalized inflationary pressure in the economy. • • • • • Actions Excess demand of Govt was met from 3 sources PDS System further expanded 1.5 million tonnes of foodgrains off-loaded by FCI Imports of edible oils Reducing subsidiary and external support to production so as to make them more responsive to price and demand change.

1992-93, 1993-94
Causes • Decline was due to prices of Agri product fell (with a good Kharif Harvest) WPI for all commodities reached 250.7 in Jan 1994 WPI Base Changed • • • • • • Actions Continued with the disinflationary policies. Reduction in the fiscal deficit played important role. Financial sector reformed (relaxation in SLR, CRR) Agricultural Price Policy Min Support Price/ Procurement Prices PDS System improved.

• •

1994-95
Causes • • • Growth in fiscal deficit Monetized deficit recorded a high rate of growth of 15.6% Central issue were Rise (23%), Wheat (21.8%), Sugar (9%), production shortfall. High growth of monetary variables, due to strong forex reserves. Cumulative impact of large increase in MSP in the last 3 years. • Actions Containment of fiscal deficit, operational frame work. ceiling on net RBI credit to Govt. RBI intervened Money supply growth M3 contained within 16% CRR increased from 14% to 15%, May 1994, imposed on FCNR(B), NRNR A/c Max IR on NRE A/c ↓ Stability in Wheat prices by open market sales Monthly sugar supply for PDS maintained.

• • • 7. 8. 9.

• •

1997-98, 1998-99, 1999-00
Causes • Low inflation because of success achieved in moderating money supply growth & keeping fiscal deficit within prudent limits. Inflation increased due to shortfall in essential agri commodities (onions & potatoes) in 1998-99 • Actions Monetary & Credit Policy 1998 reduced Bank Rate to 9% CRR increased from 10% to 11%. Interest rate deregulation in banks. inflation record 18 years low of 2% at the end of July 99.

• • •

Outcomes – Monetary Policy Inflation
Significant reduction in inflation since mid-1990s Inflation contained despite supply shocks and large capital flows Inflation expectations stable

Why is inflation better behaved?
More credible monetary policy • Central banks learned from the errors of the 1970’s and stabilized their policies. • Central banks have increased their focus on inflation • Control as a result of institutional reforms like central Bank independence and preventative measures. Lower inflation environment • Consistent and predictable low inflation has made Inflation more stable because the anticipation of low Inflation makes firms re-price their goods less often.

Any Questions?