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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>
(A Project Report by Pawan Pant)
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.
(A Project Report by Pawan Pant)
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.
(A Project Report by Pawan Pant)
Deflation .Reflation 1. 2.2 Effects of Inflation on Income Distribution INFLATION (A Project Report by Pawan Pant) .TABLE OF CONTENTS 1.1.1 Economic Effects of Inflation 2.Inflationary spikes .Cost-Push Inflation .Running Inflation .Stealth Inflation . Introduction of Inflation 1.1 Effects on production 2.Walking Inflation .Built-in Inflation .6 Causes of Inflation A) Monetary Factors B) Non-monetary Factors C) Structural Factors.3 Features of Inflation 1.Disinflation . Trace the Effects of Inflation 2.1.1 Inflation: Definition 1.Chronic Inflation .4 Types of Inflation .2 How to measure Inflation? 1.Demand-pull Inflation .Core Inflation .Assets inflation 1.5 Others Terms related to Inflation .Headline inflation .Galloping or Hyper-Inflation .Creeping Inflation .
Control Measures of RBI . Issues in Measuring Inflation 10.Introduction . Indian Scenario . Reserve Bank of India . Effects of Inflation on Foreign Trade 2. Effect Of Inflation on Consumption And Welfare 2. Conclusion 13.6. Price Rise still pinching Common Man's Pocker 5.5.3. Annexure INFLATION (A Project Report by Pawan Pant) . Measures to Control Inflation 1) Monetary Measures 2) Fiscal Measures 3) Other Non-monetary Measures 4. Tackling Inflation 6. Social and Political Effects 2.1. Effects On Manufacturers 3. Inflation & India (WPI) 8.Inflation in India and other Developed Countries .1.Inflation Pressure over the Last Few Months .1.Reasons for inflation in India .1.4. Measures of Inflation 7.Global Inflation A Comparison With India 9.Monetary Policy .Functions of Reserve Bank of India .Inflation during 1980's and 1990's .Role of RBI .2.Monetary & Credit Policy 12. An Example Of How Inflation Can Be Dangerous (Case) 11.
Introduction of ‘Inflation’ INFLATION (A Project Report by Pawan Pant) .
then inflation for the current year is INFLATION (A Project Report by Pawan Pant) .1 DEFINITION According to Crowther. “Inflation is a state in which the value of money is falling i.” 1.e.2 HOW TO MEASURE INFLATION? If the price level in the current year is ‘P1’ & in the previous year is ‘Po’. prices are rising.1.
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.
(A Project Report by Pawan Pant)
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
(A Project Report by Pawan Pant)
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
(A Project Report by Pawan Pant)
let’s take a look into how and why production costs can change. Another factor that can cause increases in production costs is a rise in the price 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). Whenever in some country the government indulges recklessly in unproductive expenditures. As a result. causing a rise in the general price level (inflation). With higher production costs and productivity maximized. companies cannot maintain profit margins by producing the same amounts of goods and services. a process of inflation begins which often culminates in hyper-inflation. Costpush inflation basically means that prices have been “pushed up” by increases in costs of any of the four factors of production (labour. It is always a result of wrong policies of the government. If the cost of labour. a factor of production. Management Practice under Cost-Push Inflation: To understand better their effect on inflation. making retail prices higher. 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.leads to a monetary collapse and national catastrophe. increases. the company has to allocate more resources to pay for the creation of its goods or services. land or entrepreneurship) when companies are already running at full production capacity. Cost-Push Inflation Aggregate supply is the total volume of goods and services produced by an economy at a given price level. To continue to maintain (or increase) profit margins. capital. which are largely financed by borrowing from the Central Bank of the Country. the increased costs are passed on to consumers. which is caused by a depreciation in INFLATION (A Project Report by Pawan Pant) . Along with increasing sales. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production. However. 5. the company passes the increased costs of production on to the consumer. we have cost-push inflation. increasing prices is a way for companies to constantly increase their bottom lines and essentially grow. This could occur because of scarcity of raw materials. it is important to recognise the fact that hyper-inflation does not arise abruptly.
The government may also increase taxes to cover higher fuel and energy costs. 6. businesses. governments and foreign buyers. causing an increase in the price level from P1 to P2. The rationale behind this increase is that. they will need to raise the retail price paid by consumers. To visualize how cost-push inflation works. also referred to as “too much money chasing too few goods”. again. INFLATION (A Project Report by Pawan Pant) . The term demand-pull inflation is mostly associated with Keynesian economics. we can use a simple price-quantity graph showing what happens to shifts in aggregate supply. forcing companies to allocate more resources to paying taxes. categorized by the four sections of the macro economy households. This excessive demand. they compete to purchase limited amounts of goods and services. thereby causing inflation. for companies to maintain (or increase) profit margins. As production costs increase. Buyers in essence “bid prices up”. are causing inflation.their home currency. usually occurs in an expanding economy. Demand-Pull Inflation Demand-pull inflation occurs when there is an increase in aggregate demand. The graph below shows the level of output that can be achieved at each price level. When these four sectors concurrently want to purchase more output than the economy can produce. aggregate supply decreases from AS1 to AS2 (given production is at full capacity).
Management Practice under Demand-Pull Inflation: The increase in aggregate demand that causes demand-pull inflation can be the result of various economic dynamics. If aggregate demand increases from AD1 to AD2. The results of reduced taxes can lead also to growing consumer confidence in the local economy. the ‘quantity supplied’ will increase (given production is not at full capacity). As a result. This in turn leads to increased consumer spending. Another factor can be the depreciation of local exchange rates. As companies increase production due to increased demand. households are left with more disposable income in their pockets. thus pulling up prices. but cause a change in the quantity supplied as represented by a movement along the AS curve. the cost to produce each additional output increases. for foreigners. Finally. INFLATION (A Project Report by Pawan Pant) . Looking again at the price-quantity graph. reduces the price of exports. The rationale behind this change is that companies would need to pay workers more money (e. if government reduces taxes. which further increases aggregate demand. thus increasing aggregate demand and eventually causing demand-pull inflation. Demand-pull inflation is a product of an increase in aggregate demand that is faster than the corresponding increase in aggregate supply. as represented by the change from P1 to P2. Rapid overseas growth can also ignite an increase in demand as more exports are consumed by foreigners. the purchasing of imports decreases while the buying of exports by foreigners increases. we can see the relationship between aggregate supply and demand. For example. 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). an increase in government purchases can increase aggregate demand. When aggregate demand increases without a change in aggregate supply. in the short run. which raises the price of imports and. 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.g. this will not change (shift) aggregate supply.
while the other two factors lead to shifts in the Phillips curve. the current inflation rate equals the sum of demand-pull inflation. supply shock inflation. It thus might be called hangover inflation. to maintain profit levels. demand-pull inflation can occur as companies. At any one time. Gordon's triangle model of inflation. pass on the higher cost of production to consumer’s prices. Just like cost-push inflation. In Robert J.overtime)and/or invest in additional equipment to keep up with demand. built-in inflation represents one of three major determinants of the current inflation rate. thereby increasing the cost of production. INFLATION (A Project Report by Pawan Pant) . The built-in inflation we see now started with either persistent demand-pull or large costpush (supply-shock) inflation in the past. 7. "Demand-pull inflation" refers to the effects of falling unemployment rates (rising real gross domestic product) in the Phillips curve model. and built-in inflation. It then became a "normal" aspect of the workings of the economy due to the roles of inflationary expectations and the price/wage spiral. 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.
8. It means that the standard methods of fighting inflation using either monetary policy or fiscal policy to induce a recession are extremely expensive.Inflationary expectations play a role because if workers and employers expect inflation to persist in the future. If they are successful. following the generally accepted theory of adaptive expectations. (It is part of the conflict theory of inflation. Instead.e. Thus. nominal in economics. built-in inflation involves a vicious circle of both subjective and objective elements. In the end. 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.) Workers and employers usually do not get together to agree on the value of real wages. if they expect price inflation -.) This means that inflation happens now simply because of subjective views about what may happen in the future. so that inflation encourages inflation to persist.or have experienced price inflation in the past -. Chronic inflation tends to become permanent and INFLATION (A Project Report by Pawan Pant) . (see real vs. Chronic Inflation Chronic inflation is characterized by much higher price increases than ordinary inflation. To protect the real value of their profits (or to attain a target profit rate or rate of return on investment). This encourages workers to push for higher money wages. The price/wage spiral refers to the conflictual nature of the wage bargain in modern capitalism. meaning large rises in unemployment and large falls in real gross domestic product.they push for higher money wages.. at annual rates of 10% to 30% in some industrialized nations and even 100% or more in a few developing countries. Of course. referring to the objective side of the inflationary process. they will increase their (nominal) wages and prices now. this raises the costs faced by their employers. employers then pass the higher costs onto consumers in the form of higher prices. i. workers attempt to protect their real wages (or to attain a target real wage) by pushing for higher money (or nominal) wages. such inflationary expectations arise because of persistent past experience with inflation.
In addition. insurance policies. Finally. Prior to that. To accommodate chronic inflation. the inflation outlook was presented in terms of the CPI. the Board stated the chain-type price index for PCE draws extensively on data from the consumer price index but. 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. the result is a more consistent series over time. 9. Since February 2000.g. including those that affect source data from the CPI. historical data used in the PCE price index can be revised to account for newly available information and for improvements in measurement techniques. This is based on chained dollars. pensions. property speculation increases. In explaining its preference for the PCE. incentives to acquire savings. and long-term bonds are reduced because inflation erodes their future purchasing power.ratchets upwards to even higher levels as economic distortions and negative expectations accumulate. normal economic activities are disrupted Consumers buy goods and services to avoid even higher prices. The PCE chaintype 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. —Monetary Policy Report to the Congress. Federal INFLATION (A Project Report by Pawan Pant) . the weights are based on a more comprehensive measure of expenditures. The preferred measure by the Federal Reserve of core inflation in the United States is the core Personal consumption expenditures price index. businesses concentrate on short-term investments. Core Inflation Core inflation is a measure of inflation which excludes certain items that face volatile price movements e. has several advantages relative to the CPI. 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. food. while not entirely free of measurement problems.
10. This is trimmed at 19. 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. 17. attributing to a more accurate measurement on core inflation. As a result. There also is a median PCE. There are also other types of measuring inflation rates. headline inflation may not present an accurate picture of the current state of the economy. 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. In relation to this. Trimmed means that the highest rises and declines in prices are trimmed by a certain percentage. INFLATION (A Project Report by Pawan Pant) . which separates "noise" and "signal". 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. This differs from core inflation which excludes factors.e.4% at the upper tail. The concept of core inflation as aggregate price growth excluding food and energy was introduced in a 1975 paper by Robert J. The Cleveland Federal Reserve computes a Median CPI and a 16% trimmed mean CPI. This is the definition of "core inflation" most used for political purposes. This is still used as the indicator for most other countries. Gordon.4% at the lower tail end and 25. 2000 The older preferred measure of inflation in the United States was the Consumer Price Index. energy. such as food and energy costs. the Median CPI is usually higher than the trimmed figures for both PCE and CPI. Core inflation is thus intended to be an indicator and predictor of underlying long-term inflation. but is not used for any purpose in determining inflation. In the United States the Dallas Federal Reserve computes a trimmed mean PCE price index. food products).Reserve Board of Governors. and is presented monthly in the US by the Bureau of Labor Statistics. Feb.
Since most companies charge a fee to accept payment a portion gets built into profit and revenue. slow economic growth and rising unemployment). and their derivatives. A big example of stealth inflation can be overdraft fees from banks surcharges from Telco providers. agricultural prices are not generally factored into core inflation figures. Stagflation Stagflation is a macroeconomics term used to describe a period of inflation combined with stagnation (that is. 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. 12. Typical assets are financial instruments such as bonds. 14.11. INFLATION (A Project Report by Pawan Pant) . The term describes a situation in which "external" (ie Agricultural) price rises drive up core inflation rates. 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. It has been claimed that the term was invented by analysts at Merrill Lynch in early 2007. a term coined in the late 2000s. Assets Inflation Assets inflation is an economic phenomenon denoting a rise in price of assets. Agflation Agflation. shares. as opposed to ordinary goods and services. describes generalised inflation led by rises in Agricultural commodity prices. as well as real estate and other capital goods. generally including recession. 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. In the United States. 13. The inflation part of the term relates to the up charging of the service without actually providing anything additional. processing fees and installation fees.
since a decrease in the money supply is likely to cause a decrease in the price level. although not all episodes of deflation correspond to periods of poor economic growth historically. 'deflation' means a decrease in the general price level. It should not be confused with deflation. Core inflation seeks to INFLATION (A Project Report by Pawan Pant) . under the usual contemporary definition of inflation. For example if a large amount of crop is destroyed.1. including many Austrian school economists. it is increasing at a slower rate.4% and the next month the rate of inflation was 4. For example one month the rate of inflation was 4. which is an overall decrease in prices. Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression. than a month before.4% less. however. Therefore. still use the word in this sense. 0. Inflationary spikes Inflationary spikes occur when a particular section of the economy experiences a sudden price rise possibly due to external factors. Being how much prices are increasing per unit of time. the term was used by the classical economists to refer to a decrease in the money supply. The two meanings are closely related. the value of the remaining crop will rise sharply. This will distort the overall measure of inflation within the economy (Headline inflation). some economists. it can be expressed using the word disinflation The slowing of the rate of inflation per unit of time. Disinflation Disinflation is a decrease in the rate of inflation. Alternatively.0%.5 OTHER TERMS RELATED TO INFLATION Deflation Deflation is the opposite of inflation. In this instance the price of goods and services is still increasing.
Just as disinflation is an acceptable antidote to high inflation. 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. is considered bad regardless how high it is). or even adjusting interest rates. INFLATION (A Project Report by Pawan Pant) . reflation is considered to be an antidote to deflation (which. This can possibly be achieved by methods that include reducing tax. Reflation Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes. It can refer to an economic policy whereby a government uses fiscal or monetary stimulus in order to expand a country's output. which may be susceptible to such shocks. changing the money supply. unlike inflation.avoid the influence of these spikes by excluding areas of the economy such as food and energy. It is the opposite of disinflation.
e. Indirect Taxes INFLATION (A Project Report by Pawan Pant) . Expansion of Money Supply This is the basic factor. which raises the aggregate demand causing inflation. causing a rise in price leading inflation. demand for real goods and services increases.6 CAUSES OF INFLATION For controlling the rates of commodity. inflating which means what are the reasons or causes behind inflation. Credit facilities allotted by bank are also the result of inflation. they spend more due to expenditure consumption or demonstration effect. There are various factors which causes inflation in the economy which is as followsA) Monetary Factors B) Non-monetary Factors C) Structural Factors. the expenditure for the non-development like defense expenditure will create shortages of consumption goods resulting inflation. A) MONETARY FACTORS 1. Increase in Consumer Spending As the income of the consumers rises.1. there is increase in demand of luxurious commodities. we must know why these rates are rising i. which causes inflation. 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. Deficit financing also contribute to the growth of inflation. On the other way. 4. Increase in Disposable Income When the disposable income of people increases. Due to increase in expansion of money supply. 3. 2. 5.
Rising Population As population of the economy increases. 2. which causes inflation. INFLATION (A Project Report by Pawan Pant) . bad weather. Speculation and Black Money Speculation.e. Bottlenecks and Shortages Bottlenecks i. creating unnecessary demand for goods and services. 3. as such unearned money is spend lavishly by people. B) NON-MONETARY FACTORS 1. Demand for Foreign Commodities When the demand for the foreign commodities increases. famines. the supply for the home commodities decreases which leads to increasing the price. etc results in crop failure. So. sellers increase the price of their products to recover the tax from the consumers. blockages and shortages of various kinds destruct the process of the economic development. price rise. As a result of shortages. rising population is the foremost non-monetary factor resulting inflation. 4. which leads to rising price. 6. Natural Calamities Due to the occurrence of natural calamities like floods. which indirectly leads to inflation. hoarding and black money also causes inflation. 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. demand for better goods increases. 5.Due to high indirect taxes.
Hence when supply of money is increased. 5. INFLATION (A Project Report by Pawan Pant) . 4. output of real goods and services does not increase which leads to inflation. Lack of Foreign Capital The unfavourable terms of trade and deficit in balance of payments have further increased the problem of rising prices. Limited Efficient Entrepreneurs Entrepreneurs do not possess spirit to undertake risky projects. 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. 3. Investments are generally made in trade and unproductive assets like land.C) STRUCTURAL FACTORS 1. inefficient transport. Capital Shortage This is due to a very low rate of capital formation in a poor country where vicious circle of poverty exists. gold etc. rigid prices. which leads to the price rise and finally inflation. Infrastructural Bottlenecks Power shortages. 2. etc are obstruction to the economic growth of the country. underutilization of capacities and resources. Imperfections of the Market Immobility of factors.
TRACE THE EFFECTS OF INFLATION INFLATION (A Project Report by Pawan Pant) .
1 Economic Effects of Inflation Inflation is a very unpopular happening in an economy. [b] Energies of business community are diverted to speculation and making quick profits rather than genuine production i. [c] Inflation encourages the hoarding and black marketing [d] Inflation also affects Misallocation of Resources INFLATION (A Project Report by Pawan Pant) . Some America presidential candidates called ‘Inflation As Enemy Number One’ High rate inflation makes the file of the poor very miserable. it would lead to a galloping or hyperinflation and results in disastrous effects on the economy.e. (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.1. encourages speculation. [a] Uncontrolled inflation leads to discouragement in savings due to falling value of money. 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. The effects/consequences of inflation are as followers 2.2.1. It is therefore described as anti-poor. Inflation is the most important concern of the people as it badly affects their standard of living. Inflation not only disrupts the economy but also prepares ground for social and political upheavals. 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. investment increases that generates income and creates employment as a results output expands. When price rise profits increases.
1. 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.4. [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. [g] Distortions and Maladjustments in the production dispute the working of the price systems in the system in the economy. The people whose real incomes erode during inflation are the victims of inflation.[e] Flight of capital is encouraged due to fall in money the investors prefer to invest abroad. [b] Fixed income groups like salaried class and pensioners are hit hard during inflation. [e] Farmers gain in inflation by prices of agriculture prices commodities rise and costs paid them lag behind prices. 2. 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 (A Project Report by Pawan Pant) .1.2. Hence galloping inflation is the ‘Cruelest tax of all’. 2. [f] Consumers suffers as seller’s market will be developed if price of all type of goods rise of any quality. 2. As a result their consumption would fall and the standard of living. [c] Business community welcomes inflation as they earn super normal profits. It redistributes wealth in favour of the rich at the cost of poor it makes the rich richer and poor poorer. EFFECTS OF INFLATION ON INCOME DISTRIBUTION Inflation is socially undesirable. small investors and class lose during inflation.1. [d] Investors in shares benefit during inflation small savers.3.
INFLATION (A Project Report by Pawan Pant) . [c] The standard of business morality go down during inflation.5. 2. [b] Inflation disrupts social life by favouring rich and black market. They therefore become reluctant to trade. When they seek repayment they find that the money they receive is less than they expected. EFFECTS ON MANUFACTURERS Inflation is harmful to trade.domestic consumers buy foreign goods and imports rise hence unfavourable balance of payments. SOCIAL AND POLITICAL EFFECTS [a] The antisocial elements get rewarded and the masses suffer during inflation. [d] People lose faith in democratic government due to inflation.6. Manufacturers generally sell goods on credit.1. 2.1.
MEASURES TO CONTROL INFLATION INFLATION (A Project Report by Pawan Pant) .
These cash reserves of commercial banks will decrease as they pay central bank for purchasing these securities. During inflation. the central bank increases this cash reserve ratio this will reduce the lending capacity of the banks. 2.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. Regulation of Consumer Credit INFLATION (A Project Report by Pawan Pant) . Thus the loan able funds with commercial banks decrease which leads to credit contraction. Fixation of Margin Requirements Commercial banks have to maintain certain fixed margins while granting loans. 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. Open Market Operations During inflation. the central bank sells the bills and securities. This discourages borrowings and thereby helps to reduce the money in circulation. (B) The Qualitative Methods 1. Raising the Bank Rate To control inflation the central bank increases the bank rate. 3. 2. Variable Reserve Ratio The commercial banks have to keep certain percentage of their deposits with the central bank in the form of cash reserve. In inflation central bank raises the margin to contract credits and reduces the price level.
By undertaking these measures the central bank can control the money supply and help to curb inflation.For purchase of durable consumer goods on installment basis rules regarding payments are fixed. 3. These results in credit contraction and fall in prices. Direct Action Direct action is taken by central bank against commercial banks if they do not follow the monetary policy laid by it. Moral Suasion This refers to request made by central bank to commercial banks to follow its general monetary policy. Publicity The central bank undertakes publicity to educate commercial bank and public about the trends in money market. 6. Control through Directives Certain directives are issued by central bank to commercial banks and they are asked to follow them while lending. 7. Rationing of Credit The central bank regulates the amount and purpose for which credit is granted by commercial banks. During inflation and initial payment is increased and the number of installments are reduced. 4. This keeps in check the volume of money. INFLATION (A Project Report by Pawan Pant) . 5.
Hence the effective demand would decrease. Public Borrowing The government may resort to voluntary and compulsory borrowing. 5. 6. This would reduce the income in the hands of some people. Taxation The rates of direct and indirect taxes may be raised and new taxes may be imposed. 3. 4. Inducement to Save The government should induce savings through incentives. Public Expenditure During inflation. Over Valuation of Domestic Currency Over valuation of domestic currency makes exports costlier and there is a fall in the volume of exports. This policy will reduce the disposable income in the hands of the people and their expenditure.(2) FISCAL MEASURES 1. 2. the government should reduce its expenditure. Public debt management The public debt should be handled in such a way that there is no increase in the supply of money. Imports also become cheaper and there is an increase in money supply causing a fall in prices. Hence the surplus in the budget should be used to repay the public debts. This will reduce the supply of money and purchasing power of the people causing a fall in prices. INFLATION (A Project Report by Pawan Pant) . Hence the effective demand would decrease. This policy reduces the income in the hands of some people.
Imports Imports of food grains and other essential goods which are in short supply should be allowed. 2. Check on population growth It is essential to check the growth of population by adopting effective family planning devices. The production of essential goods at the cost of luxury goods can also serve as an anti-inflationary measure. 5. This will help to control inflation. INFLATION (A Project Report by Pawan Pant) . the rise in wage rate should be linked to rise in labour productivity. Legal action Legal action should be taken against hoarders and black marketers. 4. Also rationing should be introduced for equitable distribution of essential commodities. Price control and rationing Price control must be introduced in respect of essential commodities. Wage-rate During inflation. The supply of essential goods can be undertaken through public distribution system to keep the prices in check.(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. 6. 3.
Above all. INFLATION (A Project Report by Pawan Pant) . The various measures stated above have to be combined in a proper manner depending on the situation of the country. an efficient and honest administration and good discipline among people are essential.
PRICE RISE STILL PINCHING COMMON MAN’S POCKET INFLATION (A Project Report by Pawan Pant) .
8 per cent in 2006-07 in its national income from Rs 28.4 per cent GDP growth notwithstanding. meat & meat products. While the prices of wheat. the common man is still reeling under the massive burden of rising prices. 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. 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. pulses. spices and condiments. The price rises come at a time when India has witnessed a growth of 15.639 crore in 2006-07. edible oil. INFLATION (A Project Report by Pawan Pant) .46. milk products and fruits & vegetables – on an average – increased by over 25 per cent in this period. excepting for just sugar.96.762 crore in 2005-06 to Rs 32. In fact.The 15 per cent rise in national and per capita income and a buoyant 9. forcing the aam aadmi to question the authenticity of the much promised inclusive growth.
TACKLING INFLATION INFLATION (A Project Report by Pawan Pant) .
where above 7% growth was sustained over a 25-year period. countries with high inflation have tended to have low growth. achieving high sustained GDP growth is about fundamental issues of economic reform. it is possible to sustain higher growth rates. This is one area where politicians have been ahead of the intellectuals. were not associated with high inflation. Conversely. If inflation now stands still at 7%. the link between inflation and growth is complex. and this is giving heightened GDP growth. Episodes where inflation went up are associated with a brief acceleration of GDP growth. expected inflation has gone up from roughly 3% in 2004 to roughly 7% today--a rise of 4 percentage points. INFLATION (A Project Report by Pawan Pant) . However. Parliament is right in demanding low inflation and high GDP growth. Inflation of 3% is politically acceptable. Since there is no trade-off between inflation and GDP growth. This heightened growth is not sustained. this boost to GDP growth will fade away. One of the great strengths of India is that the political system just does not accept high inflation. In fact. In the business cycle. we have a credit boom. in return. High inflation does not give high growth.Many people think it is ok to tolerate some inflation if. to get back to 3%. and does not concomitantly require high inflation. prosperity and poverty alleviation as high GDP growth. and inflation above 5% sets off alarm bells. A government can jolt an economy by raising the inflation rate. real interest rates have actually gone down. The growth miracles of Asia. In India. 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. an acceleration of inflation can support a temporary acceleration of growth. Borrowing has become cheaper. Interest rates have risen by less than 4 percentage points. As a consequence. Nothing matters as much for peace.
A meddlesome government will go through the whiplash of doing an MSP one INFLATION (A Project Report by Pawan Pant) . India has the potential to be the world's biggest exporter of milk. What India does not have is an institutional capacity for delivering predictable.bust cycle of GDP growth. sending the police to unearth "hoarding". factories. then more labour and capital would shift from unproductive cereals to high-value milk production. Low inflation volatility induces low volatility of GDP growth. exporters. the way to deal with an outbreak of inflation was to do government interference in commodity markets. 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. is one involving low inflation. giving out import licences. Milk exports were banned. non-volatile inflation of 3%. In socialist India. which is also predictable and nonvolatile. This is deeply distortionary. we go through boom-and-bust cycles. supply chain.Currently. banning futures trading. The ideal combination. sometimes GDP growth rates are very high and sometimes GDP growth rates drop sharply. If milk prices had been allowed to rise. This sophisticated ecosystem will not flourish when the government meddles in the milk industry. There is a powerful international consensus that stabilizing inflation reduces this boomand. A few commodities that "cause" inflation are identified. which has been achieved in all mature market economies. This boom-and-bust cycle is unpleasant for every household. in India. and milk prices fell. and the government swings into action banning exports. etc. etc. But this requires a sophisticated web of producers. Low and predictable inflation also reduces the number of mistakes made by entrepreneurs in formulating investment plans.
a modern central bank is able to infer expected inflation. In a mature market economy. Using these prices. when Tony Blair and Gordon Brown won the election. 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. the RBI has a complex mandate spanning over many contradictory roles. they refashioned the Bank of England as a focused central bank which has three core values INFLATION (A Project Report by Pawan Pant) . In India. in order to respond to changes in expected inflation. Active trading takes place on the spot and derivatives markets. fundamental reforms have been undertaken in order to refashion monetary institutions in the light of modern knowledge. This has led to failures on inflation control. A modern central bank has the economic knowledge required to watch out for expected inflation deep in the future. so as to deliver inflation that is on target. and respond to it ahead of time. there is a slow impact on the economy. India is evolving from a socialist past into a mature market economy. for both ordinary bonds and inflation-indexed bonds. When the short-term interest rate is raised or lowered. In India's case.day because milk prices are low and banning exports another day because milk prices are high. in the late 1990s. If the export of ball bearings were sometimes banned by the government. There is something profoundly wrong about a government that interferes in what can be imported and what can be exported. In other countries. the RBI Act of 1934 predates modern monetary economics. a modern central bank watches expected inflation with great interest. How can predictable. possibly spread over two to three years. As an example. you can be sure there would be fewer factories to build ball bearings.
but they are very real.The bad drafting of the RBI Act of 1934 is the ultimate cause of the distress of milk producers today. 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 (A Project Report by Pawan Pant) . These linkages are not immediately visible.
MEASURES OF INFLATION
(A Project Report by Pawan Pant)
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.
(A Project Report by Pawan Pant)
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.  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.
(A Project Report by Pawan Pant)
INFLATION & INDIA (WPI) INFLATION (A Project Report by Pawan Pant) .
which is available on a weekly basis with the shortest possible time lag of two weeks.It is an indicator of movement in prices of commodities in all trade and transactions. 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. Fuel Group contributes 1 and Manufactured Products have 122 new commodities. The current series of Index Number of Wholesale Prices in India with 1981. “Fuel. It is also the price index in India. The new series with 1993-94 as the base has as many as 435 items in the Commodity basket. a large number of commodities have been added and a few with diminished importance have been dropped. To reflect the structural changes in the economy that have taken place over a decade. WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. 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. and “Manufactured Products” provide 318 items. Primary Articles account for 13. In all.The Wholesale Price Index (WPI) is the most widely used price index in India. Power. “Primary Articles” contribute 98 items. Light & Lubricants Manufactured Products INFLATION (A Project Report by Pawan Pant) . The number of price quotations in the revised series is spread out to as many as 1918 quotations. It is the only general index capturing price movements in a comprehensive way. • • • Primary Articles Fuel. Figures in the parentheses are the weights of the respective groups in the 1981-82 series. weighting diagram and other related issues. WPI was first published in 1902.82 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 revised weights of the three major groups are given below. there are 136 new items in the revised series. Power. selection of the base year. the Government appointed a Working Group to revise the existing WPI series and to examine the commodity coverage. In the revised series. Out of that. Light and Lubricants” 19 items.
Permanency of the outlet 4. Cement Criteria for Selection of Wholesale Price Outlets The following criteria were used to determine the wholesale price outlets 1. Food products 7. Location Measures of inflation in India Three different price indices are available in India 1. power 3. Fuel. Primary articles 2. 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. Consumer price index [calculated for 3 different types of workers] INFLATION (A Project Report by Pawan Pant) . Manufactured products 4. Vegetables 6. Popularity of an establishment along the line of goods to be priced 2. Wholesale price index 2. Main constituents of WPI 1.India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. Cooperativeness of the price informant 5. Annual rates of change in the WPI calculated using both the existing and the new series are given below. but thereafter the two series virtually move in cycle. Most developed countries use the Consumer Price Index (CPI) to calculate inflation. Consistency of the stock 3. Food articles 5. Edible oils 8.
However. GDP deflator Availability 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. INFLATION (A Project Report by Pawan Pant) .3. The GDP deflator is available annually In many countries. The WPI is available weekly [for a lag of 2 weeks] 2. the main focus is placed on CPI for assessing inflationary trends. because 1. The CPI is available monthly [for a log of 1 month] 3. the CPI remains important because it is used for indexation purposes for many wage and salary earners.
INDIAN SCENARIO INFLATION (A Project Report by Pawan Pant) .
as the Indian economy undergoes structural changes. resulting in the classical definition of inflation of too much money chasing too few goods). since the mid-nineties controlling inflation has become a priority for policy framers. the causes of domestic inflation too have undergone tectonic changes. However. have become virtually intolerant to inflation. Inflation today is caused more by global rather than by domestic factors. The natural fallout of this has been that we. causes of today's inflation are complicated. 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 (A Project Report by Pawan Pant) .Inflation is no stranger to the Indian economy. In fact. Needless to emphasise. Naturally. today the situation has changed significantly. as a nation. But. Reasons for inflation in India 1) Increase in Demand and fall in supply causes rise in prices. till the early nineties Indians were used to double-digit inflation and its attendant consequences. 2) A Growing Economy has to pass through Inflation. While inflation till the early nineties was primarily caused by domestic factors (supply usually was unable to meet demand. 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.
INFLATION PRESSURE OVER THE LAST FEW MONTHS INFLATION (A Project Report by Pawan Pant) .
INFLATION IN INDIA AND OTHER DEVELOPED COUNTRIES INFLATION (A Project Report by Pawan Pant) .
reaching a low of 3 ¾ percent in mid 1997. recording a low of 3 percent in early 1986. reaching a peak of a little over 16 percent in late 1991. and considerably more variable. inflation has. 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. However. been higher at 8 ¾ percent. In response. inflation has again fallen sharply. the RBI moved to tighten monetary policy. In the 1990s. as the agricultural sector rebounded. industrial activity slowed. on average. inflation again accelerated in the second half of 1998as adverse supply conditions in key commodity markets put upward pressure on food price. 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. Inflation rose sharply in the early 1990s. averaging 6 ¾ percent. and a high of a little over 10 percent in 1988. and financial stability was restored. more recently.INFLATION DURING 1980’s AND 1990’s WPI inflation was relatively stable between 1983 and 1990. and inflation was brought down gradually. As these conditions have eased.However. INFLATION (A Project Report by Pawan Pant) .
Both indices have also volatile. prices in the manufacturing sector have been lowered and more stable. Inflation in both primary products and fuel and energy categories has been considerably high in1990s than in the 1980s. although given the administered nature of these prices such adjustment have tended to occur at irregular intervals leading to sharp movements in the index. the sharp rise in prices in the recent year is partly due to government moving more towards market based prices.Within the three sub-component of WPI. ranging from 2-13 percent. INFLATION (A Project Report by Pawan Pant) . Within the fuel and energy category.
INFLATION (A Project Report by Pawan Pant) .
GLOBAL INFLATION A COMPARISON WITH INDIA Inflation rates in some developed and developing economies based on the Consumer Price Indices. it was in a much higher range for the developing economies including India . while inflation rate in the developed economies ranged between 1-2 percent. Up to the mid 1990s. 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. it is imperative that inflation rate in India be close to our major trading partners. INFLATION (A Project Report by Pawan Pant) .with some years even recording double digit inflation. For exchange rate stability and smoother trade. The declining trend in inflation is also visible in many of the developing economies in Asia. Over the last three to four years.
ISSUES IN MEASURING INFLATION INFLATION (A Project Report by Pawan Pant) .
Inflation measures are often modified over time. we want to know how the price of a large 'basket' of goods and services changes. Finally. inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost increases. with no change in quality. for example. INFLATION (A Project Report by Pawan Pant) . and therefore instead of looking at the change in price of one good. if the price of a 10 kgs of corn changes from 90 to 100 over the course of a year. economic institutions sometimes only look at subsets or special indices. This includes hedonic adjustments and “reweighing” as well as using chained measures of inflation. As with many economic numbers. One common set is inflation excluding food and energy. Inflation numbers are averaged or otherwise subjected to statistical techniques in order to remove statistical noise and volatility of individual prices. when looking at inflation. represent the fraction of spending that typical consumers spend on each type of goods (using data collected by surveying households). versus changes in the economy. But we are usually more interested in knowing how the overall cost of living changes. which is a weighted average of many prices. then this price change represents inflation. either for the relative weight of goods in the basket. The weights in the Consumer Price Index. This is the purpose of looking at a price index. In the simplest possible case. or in the way in which goods from the present are compared with goods from the past.Measuring inflation requires finding objective ways of separating out changes in nominal prices from other influences related to real activity. which is often called “core inflation”.
and its shortfall in wheat is 255. That shows that there is food on the shelves. India’s wheat. This year. INFLATION (A Project Report by Pawan Pant) . Experts say it all started with Mugabe’s regime. pulses and edible oil production is not enough to keep pace with the growth the country is witnessing. but all of it highly priced. Massive department stores. running at more than 100. Zimbabwe’s skyrocketing inflation – now the world’s highest. However. are full of clothes. That is why Indian government is worrying about the rising inflation rates. more than a decade of mismanagement and neglect has dropped agricultural production to pre-colonial levels. Zimbabwe’s shortfall in maize is 360. if you don’t have enough agriculture commodities the prices are bound to go up. and changed the name of the country to Zimbabwe.000 tones. This is one lesson India can learn from Zimbabwe. the basic flaw in Zimbabwe’s economy is that Zimbabwe lost its ability to feed itself. Whatever may be the reason. thousands of commercial farms managed to grow enough food to export throughout the region. Streets of Zimbabwe are dotted with shopping mall. but without customers. So. when Mugabe’s nationalist rebels overthrew the white dominated government of Rhodesia. the land of Mugabe. built for a time when farmers from miles around would come to do their weekend shopping. it is not anywhere near Zimbabwe.000 per cent a year – keeps the cost of living rising. Zimbabwe is a classic case of how inflation can make life hell for people. rice.000 tones. but no customers? It is Zimbabwe.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. At present. In 1979.
With cash almost a worthless possession. Many of the Indian businessmen in Zimbabwe. INFLATION (A Project Report by Pawan Pant) . A 30-pound bag of potatoes cost 90 million in the first week of March. So. especially Gujaratis. Zimbabwe is an example for the world how inflation can ruin a country. a sausage sandwich sells for 30 million Zimbabwe dollars. or about US $1. The situation in Zimbabwe has hit several Indians badly. people have started investing in something different. which does not produce enough food for itself. are finding it tough to do trade there. They stack bags of maize meal in their homes.25. Because. Now that same bag costs 160 million.
RESERVE BANK OF INDIA INFLATION (A Project Report by Pawan Pant) .
1935. The Government held shares of nominal value of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. 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.The central bank of the country is the Reserve Bank of India (RBI). the Governor and four Deputy Governors. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members. 2.20. The Reserve Bank of India Act. Chennai and New Delhi. 1934 was commenced on April 1. 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. Kolkata. 100 each fully paid which was entirely owned by private shareholders in the beginning. one Government official from the Ministry of Finance. The Act. The share capital was divided into shares of Rs.000. It was established in April 1935 with a share capital of Rs. ten nominated Directors by the Government to give representation to important elements in the economic life of the country. INFLATION (A Project Report by Pawan Pant) . Reserve Bank of India was nationalized in the year 1949. and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai. 1934 (II of 1934) provides the statutory basis of the functioning of the bank.
to play a leading role in developing a sound financial system so that it can discharge its regulatory function efficiently.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. INFLATION (A Project Report by Pawan Pant) . • • To maintain stable payments system so that financial transactions can be safely and efficiently executed. and to enable it to operate efficiently i. • To ensure that credit allocation by the financial system broadly reflects the national economic priorities and societal concerns. To promote the development of financial infrastructure of markets and systems.e.. 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.
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. Banker to Government The second important function of the Reserve Bank of India is to act as Government banker. 40 crores in value. Originally. 200 crores. The Reserve Bank has the obligation to transact Government business. 1. to keep the cash balances as deposits free of interest. the assets of the Issue Department were to consist of not less than two-fifths of gold coin. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. The Bank makes ways and means advances to the Governments for 90 days. via. of which at least Rs. eligible bills of exchange and promissory notes payable in India. 115 crores should be in gold. Government of India rupee securities. 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 Bank has the sole right to issue bank notes of all denominations. The Reserve Bank of India helps the Government . The system as it exists today is known as the minimum reserve system. to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. gold bullion or sterling securities provided the amount of gold was not less than Rs. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. It acts as adviser to the Government on all monetary and banking matters. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Since 1957. Due to the exigencies of the Second World War and the post-war period.both the Union and the States to float new loans and to manage public debt. Bank of Issue Under Section 22 of the Reserve Bank of India Act. INFLATION (A Project Report by Pawan Pant) . It makes loans and advances to the States and local authorities. 2. agent and adviser. these provisions were considerably modified. The remaining three-fifths of the assets might be held in rupee coins.
INFLATION (A Project Report by Pawan Pant) . Since 1956. 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. the licence can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. This power of the Bank to call for information is also intended to give it effective control of the credit system. 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. 4. it has the power to influence the volume of credit created by banks in India.e.3. in detail. 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. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Every bank has to get a licence from the Reserve Bank of India to do banking business within India. selective controls of credit are increasingly being used by the Reserve Bank. Controller of Credit The Reserve Bank of India is the controller of credit i. 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. its assets and liabilities. By an amendment of 1962. According to the Banking Regulation Act of 1949. 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 Reserve Bank of India is armed with many more powers to control the Indian money market. It can do so through changing the Bank rate or through open market operations. Each scheduled bank must send a weekly return to the Reserve Bank showing. 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.
F. 5. As supreme banking authority in the country. (b) It controls the credit operations of banks through quantitative and qualitative controls. has the following powers (a) It holds the cash reserves of all the scheduled banks. therefore. Custodian of Foreign Reserves The Reserve Bank of India has the responsibility to maintain the official rate of exchange. Supervisory functions In addition to its traditional central banking functions. 10.M. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. the Reserve Bank has to act as the custodian of India's reserve of international currencies. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh. According to the Reserve Bank of India Act of 1934. 1 = sh. (c) It controls the banking system through the system of licensing. the Reserve Bank of India. 1934. The rate of exchange fixed was Re. the Reserve bank has certain nonmonetary functions of the nature of supervision of banks and promotion of sound banking in India. After India became a member of the International Monetary Fund in 1946. though there were periods of extreme pressure in favour of or against the rupee. and the Banking Regulation Act. The vast sterling balances were acquired and managed by the Bank. the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I. Further. the RBI has the responsibility of administering the exchange controls of the country.The Reserve Bank has also the power to inspect the accounts of any commercial bank. The Reserve Bank Act.000. inspection and calling for information. Besides maintaining the rate of exchange of the rupee. 6d.6d. 1949 have given the RBI wide powers of supervision and control over commercial and co-operative INFLATION (A Project Report by Pawan Pant) . 6. the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs.
the Reserve Bank has helped in the setting up of the IFCI and the SFC. which. The Bank now performs a variety of developmental and promotional functions. But only since 1951 the Bank's role in this field has become extremely important.banks. liquidity of their assets. relating to licensing and establishments. and liquidation. 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. Accordingly. the Unit Trust of India in 1964. it set up the Deposit Insurance Corporation in 1962. branch expansion. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers. INFLATION (A Project Report by Pawan Pant) . Promotional functions With economic growth assuming a new urgency since Independence. the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. As far back as 1935. and to provide industrial finance as well as agricultural finance. at one time. amalgamation. extend banking facilities to rural and semi-urban areas. 7. The Reserve Bank was asked to promote banking habit. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. and establish and promote new specialized financing agencies. reconstruction. 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. the Industrial Development Bank of India also in 1964. the range of the Reserve Bank's functions has steadily widened. the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. to eliminate moneylenders from the villages and to route its short term credit to agriculture. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings. The Bank has developed the co-operative credit movement to encourage saving. were regarded as outside the normal scope of central banking. management and methods of working.
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. and INFLATION (A Project Report by Pawan Pant) . 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. This serves two purposes firstly. Open Market Operations (OMO) 2. capacity expansion gets boost. OMO is also used in curbing the artificial liquidity created to avoid strengthening of rupee against dollar in order to remain competitive in exports. CRR is the portion of deposits (as cash) which banks have to keep/maintain with the RBI. They are 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.CONTROL MEASURES OF RBI RBI actually has four chief weapons in its arsenal to control the inflation. Bank Rate or Discount rate 4. Reserve Requirements This mainly constitute of Cash to Reserve Ratio (CRR) and Statutory Liquidity ratio (SLR). Repo rate 1. Reserve Requirements (CRR and SLR) 3. 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. Exactly opposite happens when RBI buys securities from open market. 2. So when RBI sells government securities in secondary market it sucks out the liquidity (stock of money) in the economy. it ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system.
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. Open market operations have limitations due to amount of government securities with RBI is limited and close to Rs 60. Indian bank rate is at 6 per cent down from 10 per cent in 1981 and 12 per cent in 1991 4. So interest rates will move in upward direction and opposite happens when CRR is reduced. Bank Rate or Discount rate This is the rate at which the RBI makes very short term loans to banks. large amount of capital is not available for circulation. 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. Recently RBI raised CRR from 4. So higher is the CRR less is the money available in the economy.5% to 5% in two stages which enabled to transfer about 8000 Crore rupees from money in supply to RBI’s coffers.000 Crore is in form of marketable securities. 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. Considering Bank Rate which is untouched in current INFLATION (A Project Report by Pawan Pant) . A cut means that the RBI wants the economy to grow and take up new ventures. With increase in repo rate banks tend to invest more in repo transactions.000 Crore and out of that only Rs 45. inflation. An increase in the discount rate means the RBI wants to slow the pace of growth to reduce inflation. Thus. 3. Banks borrow from the RBI to meet any shortfall in their reserves. Repo rate It is the rate at which the RBI borrows short term money from the market. CRR has actually been reduced to this level of 5% from 15% in 1981.000 crore everyday.thereby.
CRR and Repo Rate in its armory to guard against the onslaught of inflation.scenario RBI is left with only 2 major measures viz. 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 (A Project Report by Pawan Pant) . Since large part of inflation is attributed to large increase in international oil and metal prices.
interest rate and inflation so as to ensure price stability. Two set of objective have been pursued for long. being primarily concerned with money matters. Second is sect oral deployment of the funds depending upon the priorities lay down in the plant. also described as money and credit policy. and at the same time moderating the growth of money supply to contain the inflationary pressure in the economy. The policy statement gives an overview of the working of the economy. so organize currency and credit that it subs serves the broad economic objectives of the country.) governed by the RBI. It also lays down norms for financial institutions (like banks. in short. In the light it specifies the measures that the RBI intends to take an influence such key factors of money supply. One is controlled expansion of money. In the performance of this task. Meaning and objectives Monetary policy. The sector which have received special attention are. it formulates and executes a monetary policy with clear cut goals and tools to be used for this. This is a statement. itself with the supply of money as also credit to the economy. and a rise in that of a industrial credit. capital adequacy etc. It sought to achieve the twin objectives of meeting in the full needs of production and trade. announced twice in a year. the RBI as determined the allocation of funds also the interest rate among the different sector.MONETARY POLICY The Reserve bank of India. With decline in the share of agricultural credit. core industries INFLATION (A Project Report by Pawan Pant) . finance companies etc. it is a sort of blue-print containing a description of aims and means. 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. There pertain to such matters as cash reserves ratio.
and weaker section of population.The growth of money supply at 16 % the growth rate of economy is 6. steel and engineering etc). iron. priority sector (agriculture. It is important remember that there are some limitations on its successful application. These limitations on its successful application. The monetary policy. is to supplement the process of macro-stabilization and structural adjustment intimated in the middle of 1991. wheat). The stipulated growth in money supply was put at an average of 11% to 12% per annum. 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. small scale industries etc). And the projected growth the rate of the economy was set at 5% to 6%. priority sectors and export. INFLATION (A Project Report by Pawan Pant) .5% other important concern of the policy as been deployment of funds as among sectors such as procurement of food grains by the government. The aim as been to bring down the high double-digit inflation aimed at achieving the trend rate of inflation at about 5%.(coal. and since then. as also from certain shortcomings of the economic situation obtaining in the country. The ninth plan as envisaged an average inflation rate in the region of 7% per annum . with its various aims. food grains (rice. while the growth of the economy remains the primary aim. These limitation mostly arise from the under developed character of the economy. During the 1990s. 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.
resulting from the INFLATION (A Project Report by Pawan Pant) . With currency forming a large proportion of money supply. The fact inhibits the credit-creating capacity of the banking system.G. And since the reserve bank operates on money supply via credit to the public. The effectiveness of the monetary policy is on its increase. For an effective use of the policy to flight inflation much larger policy profile is necessary. 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. By habit and custom associated with the paucity and backwardness of appropriate institution people prefer to make use of cash rather than cheques. Every economic problem has diagnosed and tackled from all the angles including the monetary side if the situation so demands. However it needs also to be noted that in recent years. Correctly I. Predominance of currency In the context of Indian conditioned a limitation on the effective use of currency in the total money supply.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. This reduces the capacity of the banking system to create fresh credits on the basis of an increase in its reserves.1. not even every monetary problem. banks have to face the problem of large outgo of currency every time they create credit. This is largely because of the larger use of credit and the consequent relative decline of currency in the total money supply. For example the price situation prevailing in the country is not solely or the case of inflationary rise in price. its capacity to do so is accordingly limited. where money seems to be a major factor it needs to be stressed that monetary policy can at best influence the demand for goods. 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.
The transactions i. In this regard. As such these are not reported the result is that supply and demand of money does not remain as desired RBI. known as “indigenous bank” these and other nonbanking institutions provide a considerable proportion of total credit and worse. borrowers and lenders keep their transaction secret.the creation of new money INFLATION (A Project Report by Pawan Pant) . which is unorganized and less amenable to the operation of reserve bank consist of heterogeneous agencies. is in fact cut into two with not much communication between them and therefore with divergence in the structure of interest rates. Underdeveloped money market Another inhibiting factor in the Indian situation is the weak money market. One part where the monetary policy is more effective is the organized one consisting of Reserve bank. too. Existence of black money A serious obstacle in the efficient working of monetary policy circulation of large amount in the bank market. 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. the state bank foreign banks.increase in the diversification of the economy and growth investment and organized money markets. 5. 3. 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 . 4. the Indian joint-stock banks etc the other part. 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. The last being aided by the reserve bank. This market essentially dealing in short-term funds.e. the linkage between the two sectors are not so well developed.
The enumeration of the main limitation on the monetary policy in India should be enough for us to realize that this policy. So is to case of interest rates which have been influenced more by the government policy rather than the RBI’s wishes. 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. INFLATION (A Project Report by Pawan Pant) . which can be the basis for an effective monetary policy. With in development and diversification of the economy as also with the furtherance of banking habits things are bound to improve. However. The rate of interest in respect of specified loans.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. even within its restricted sphere. is not the effective remedy for problems essentially monetary in character. in the meantime and alongside there is a need to modernize the money market.
After the economic reforms started in early nineties. The RBI has lowered its growth forecast to 8. non-banking financial institutions. It also contains an economic overview and presents future forecasts.5-9 per cent as it expects global GDP to decline in 2007.MONETARY & CREDIT POLICY Monetary and Credit policy has direct impact on prices of commodities. Apart from this it also contains norms for the banking and financial sector and the institutions which are governed by RBI like Banks. the Reserve Bank of India has kept all the interest rates unchanged to sustain the investment boom. USD 50. although the interest rate determination is market based. inflation and prevailing interest rates. INFLATION (A Project Report by Pawan Pant) . credit policy of RBI determines the direction of movement of interest rates.000 v/s.5 per cent and RBI's medium term inflationary target is now 4-4. The objective of the policy is to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy. primary dealers (money markets) and dealers in the foreign exchange (forex) market. Stability for the national currency and growth in employment and income are also considered.5 per cent. hedging for individuals and remittances up to $100. The RBI has also announced important operational tools for moving towards capital account convertibility. Credit policy of RBI Annual Credit Policy RBI keeps all rates intact. Inflation targets have also been revised downward to 5 per cent from last year's targets of 5-5. In its credit policy for 2007-08.5 per cent from 8. the growth of overall Indian economy. financial institutions.000 earlier. Among them Indian companies can invest in foreign companies’ upto 300 per cent of their net worth. hence. Thus help RBI control the inflation.
aluminium. M3 expansion to be moderated in the range of 16. Bank Rates unchanged. • • • • • • • • • High priority to price stability.50. Deposits projected to increase by around 17.0 per cent during 2008-09. Inflation to be brought down to around 5.0 per cent as soon as possible.5 per cent in 2008-09 with a preference for bringing it close to 5. RBI projects economy to grow by 8-8.0-4. Reverse Repo.5-17. Scheduled banks required to maintain CRR of 8. Going forward.5 per cent in 2008-09. A clearing and settlement arrangement for OTC rupee derivatives proposed. 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 0.0 per cent or Rs 5.Domestic producers and users will also be allowed to hedge their price risk on international commodity exchanges for copper. well-anchored inflation expectations and orderly conditions in financial markets while sustaining the growth momentum.000 crore (Rs 5.0 per cent during 200809. Swift response on a continuous basis to evolving adverse international and domestic developments through both conventional and unconventional measures. Repo. Indian companies will also be allowed to rebook and cancel their forward contracts.09. INFLATION (A Project Report by Pawan Pant) .5 per cent so that an inflation rate of around 3.500 billion) during 2008-09. Introduction of STRIPS in Government securities by the end of 2008.25 per cent from May 24. 2008.0 per cent becomes a medium-term objective. zinc. and even aviation turbine fuel. the resolve is to condition policy and perceptions for inflation in the range of 4.25 per cent with effect from the fortnight beginning May 24. Adjusted non-food credit projected to increase by around 20. Emphasis on credit quality and credit delivery while pursuing financial inclusion.
one crore and above made mandatory to be routed through the electronic payment mechanism. RRBs allowed selling loan assets to other banks in excess of their prescribed priority sector exposure. 30 lakh. Working Group to be set up for a supervisory framework for SPVs/Trusts. The shortfall in lending to weaker sections would be taken into account for contribution to RIDF with effect from April 2009. • • • • • • • • • • • • • • • Currency futures to be introduced in eligible exchanges in consultation with the SEBI. All transactions of Rs. Consolidated supervision of financial conglomerates proposed. INFLATION (A Project Report by Pawan Pant) . 20 lakh to Rs. The Reserve Bank to disseminate details of various charges levied by banks. The prudential guidelines for specific off-balance sheet exposures of banks to be reviewed. 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. Reserve Bank to carry out supervisory review of banks' exposure to the commodity sector.• 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. broad framework to be finalized by May 2008. Loans granted to RRBs for on lending to agriculture and allied activities to be classified as indirect finance to agriculture. Asset classification norms for credit to infrastructure projects relaxed. Inter-departmental Group to review the existing regulatory and supervisory framework for overseas operations of Indian banks. The limit of bank loans to individuals for housing having lower risk weight of 50 per cent enhanced from Rs.
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. has traditionally given more importance to growth. The RBI. 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. the central bank seems to have decided to focus more on inflation rather than growth. Hence. Regulations in respect of capital adequacy. considered a temporary phenomenon in early reports. The US Fed is famous (or notorious. the RBI clearly differs with the government on both inflation and the impact of oil price. 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. depending which side you are on). Going by the language of the mid-term review announced. 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. even at the cost of economic growth. it has decided to act ahead INFLATION (A Project Report by Pawan Pant) . Hence. The finance ministry was of the opinion that the effect of high oil prices had more or less been absorbed. The central bank believes that higher oil prices. The RBI clearly admits that it would be difficult to keep year end inflation at the targeted 5 to 5. as befitting the central bank of a developing country starved of economic growth.• • Dispense with the extant eligibility norms for opening on-site ATMs for wellmanaged and financially sound UCBs. Does this mean that the era of benign interest rates are over? Central banks all over the world are generally fixated on controlling inflation. The finance minister was less convinced about the need for a rate hike as he stated publicly that inflation was within manageable limits.5 per cent without necessary policy responses.
inflation is like toothpaste – once you let it ooze out. However. the rate at which it borrows money from the system.25 per cent. is a token or signaling rate which does not have any operational significance. currently at 6 per cent.25 per cent. As expected. By keeping the bank rate stable. the RBI raised the reverse repo rate. the RBI is allowing itself the flexibility to roll back if economic growth is affected in future. by 25 basis points taking it to 5. the RBI has left both the bank rate and cash reserve ratio (CRR) unchanged. As a deputy governor of the bank put it. The repo rate. it is very difficult to push back. the rate at which the RBI lends money to the system. The second move was not as widely expected as the first and is being seen as a sign of this new found aggressiveness. it has some psychological significance as it is used as a reference rate indicating the medium term interest outlook of the central bank.of the problem. The bank rate. To prevent the market from reading too much into the hikes in repo and reverse repo rates. INFLATION (A Project Report by Pawan Pant) . has also been raised by a matching margin to 6.
Cost-push inflation is a result of decreased aggregate supply as well as increased costs of production. similarly Inflation can also be said to have Positive and Negative faces on Indian Economy. The increase in aggregate supply causing demand-pull inflation can be the result of many factors. itself a result of different factors. INFLATION (A Project Report by Pawan Pant) . There are endemic and perhaps diverse reasons at the root of inflation. If an economy identifies what type of inflation is occurring (cost-push or demand pull). including increases in government spending and depreciation of the local exchange rate. Inflation is just like a man whose behaviour cannot be predicted and one can say that as man has two faces.CONCLUSION Inflation is not simply a matter of rising prices. then the economy may be better able to rectify (if necessary) rising prices and the loss of purchasing power.
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