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NEP Final (PowerPoint)


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									Inflation is on account of flawed Monetary Policy
Ambarish, Kusuma, Karthik, George

 Rise in prices.  Ex. Inflation=10%.  Demand > Supply.  CPI  WPI

 Due to Monetary Policy.

 Excess Money.  Aggregate demand >

 Demand-pull Inflation.  Cost push Inflation.

Aggregate supply.  Increase in cost of production.

Variations of inflation
 Deflation

 Hyperinflation  Stagflation

Monetary Policy
 open market operation

 bank rate and

discretionary control of refinance  cash reserve ratio  statutory liquidity ratio

Monetary Policy
 direct credit allocation

and credit rationing  credit authorization scheme  credit planning  moral suasion

Monetary Policy
Contractionary Monetary Policy Expansionary Monetary Policy

Causes of inflation
Demand side
 Increase in nominal money supply  Increase in disposable income
 Expansion of Credit  Black money spending

 Repayment of Public Debts  Expansion of the Private Sector  Increasing Public Expenditures

Causes of inflation
Supply side
       

Shortage of factors of production or inputs Industrial Disputes Natural Calamities Artificial Scarcities Increase in exports Global factors Neglecting the production of consumer goods Application of law of diminishing returns

History of inflation
First five yr plan (1951-56).
Successful in combating inflation.

The Seventies
Controlled at first, gained momentum later on. Large influx of refugees from Bangladesh. Failure of kharif crops (1972-73).
Aggravated by rise in crude oil prices-OPEC.

Successful second five year plan(1956-61). Base year.
Deterioration during third plan(1961-66).

World – wide Inflation. Effective Monetary policy. Change of government.

Bumper harvest in 1967-68.

History of inflation
The Eighties
Return of congress to power. A vigorous anti-inflationary policy. Rise of prices from January 1983. Tightening of selective credit controls.

The Nineties
Rise in administered prices.

Gulf – Surcharge
Better performance of agricultural sector & Macro economic corrections

Heavy fiscal deficit
Sobering effect of agriculture on inflation.

Supply management.

Present Situation of Inflation

 a dearth of skilled workforce resulting in attrition and cost-push

inflation  demand –supply mismatch in food grains resulting in rise in inflation  measure to develop the bond, currency and derivatives markets that will include launching exchange-traded currency and interest rate futures and developing a transparent credit derivatives market with appropriate safeguards."

 The Reserve Bank of India has kept interest rates at a peak of

7.41% to try to quash inflation by slowing down GDP growth rate of 8.7% in 2007-08 to 8% now  The prices of certain essential commodities like vegetables, cereals, pulses and edible oils, however, softened during the 4th week.

 The annual rate of inflation has touched 42-month high of 7.57

per cent for the reason that there is a high surge in food items prices and unbearable crude oil prices

 RBI measures : Raised CRR further to suck excess liquidity

 GOVERNMENT measures : Banned exports of food grains and

related commodities, decrease of weight of primary articles and reduced customs duties

June - July
 Banned export of skimmed milk

 
 

powder Inflation climbed to 8.24% but essential food items turned cheaper Suspended futures trading of staple food items Surge in price of oil Besides hiking CRR twice by 25 and 50 basis points, respectively, the apex bank also increased the rates for short-term lending to banks by 0.25 per cent

August - September
 Inflation reached to a record high of 12.9%  Govt infused Rs 4000 Cr market intervention  As a result of all measures taken by Govt and RBI, inflation

slipped down to 12.10%

 Inflation dropped down to 10.68% by the end of October

from 11.99%  RBI kept its Monetary Policies intact  Union Govt decided to infuse 1,25,000 Cr into the system  RBI cuts the REPO rate REASONS : The injection of money into the system does not have negative impact on inflation due to reduction in crude oil and other commodity prices

November- December
 Fall in prices of crude oil, metals and other manufactured

items helped cool inflation(8.90%).  RBI got the opportunity to cut the policy rates.  Fuel and metal prices came down triggering an increase in the prices of primary food articles( fruits and vegetables).  Finally the yr ended with a minimal inflation rate of 6.61

Asian crisis 1998

Sudden currency depreciation due to large outflows of funds took place in East Asia in 1998 due to tight monetary policy suggested by IMF… the consequences are:  The much heavier debt serving burden due to high interest rates and tight monetary policy  Financial difficulties for the borrowers due to fall in the value of money  Increasing non-performing loans  High inflation caused by raising import prices resulting in from currency depreciation

 Refloating the economies through lower interest rates  Increasing government spending  Breaking down Rupee – Dollar peg  Rupee appreciation

RBI’s effective policies in bringing down inflation
RBI cuts CRR to a low of 5.5% in November RESULT : Rs 40,000 C were infused into the economy  RBI cuts REPO rate to 7.5% RESULT : Banks are able to get funds at cheaper rates  SLR is cut to 24% in November RESULT : Banks made it easy to cut lending rates and get money at cheaper rates THE MOST ANTICIPATED RESULT INFLATION SLIDES DOWN FROM A HIGH OF 12.9% TO 6.21%

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