Controlling Inflation in India

Inflation Rate in India

YearInflation, average consumer prices

Percent Change

2000 4.009 -14.15%2001 3.779 -5.74%2002 4.297 13.71%2003 3.806 -11.43%2004 3.767 -1.02%2005 4.246 12.72%2006 6.177 45.48%2007 6.372 3.16%2008 8.349 31.03%2009 10.882 30.34%2010 13.187 21.18%

http://www.indexmundi.com/india/inflation_rate_(consumer_prices).html

Inflation is the rate at which the general level of prices for finished goods and services rises over a given period of time.

Current Inflation Rate is 8.62% as on July 2011

Inflation record since 2000

http://www.indexmundi.com/india/inflation_rate_(consumer_prices).html

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

2

4

6

8

10

12

14

Inflation, average consumer prices

Inflation, average consumer prices

Inflation Rate since 2008

•Rise in prices of Food items & cereals

•(Due to monsoon effects, Supply declined; Prices Shot up)

Agriculture

•Rising Global crude oil prices (India’ dependence of 75% on crude oil imports since 2009)

•Banking & Financing Sectors are not structured esp in Rural Areas.

Policy

•Slowdown in Productivity & Rising Incomes contributing to high pricing of items for common population

Supply

Primary drivers of Inflation

http://petroleum.nic.in/petstat.pdf, Ministry of Petroleum & Natural Gas, GOI

Monetary policy contraction

Increasing rates relevant to bank lending and commercial rates to discourage borrowing Repo rate: Short term rates against securities Reverse repo rate: Reverse lending rates Bank rates: Long term lending rates

Reducing liquidity• Cash reserve ratios (CRR)• Statutory Liquidity Ratios (SLR)• Marginal Standing Facility (MSF)

RBI’s Policy Measures

Policy trends 2008 - 2011

2008 2009 2010 2011Inflation 8.30% 10.90% 13.18% 8.95%Bank Rate 6% 6% 6% 6%

Repo Rate 9% to 6.5% 5.5% to 4.75% 5% to 6.25% 6.5% to 8%

Reverse Repo Rate

5% 4% to 3.25% 3.5% to 3.75% 7%

Cash Reserve Ratio (CRR)

5.5% to 9% 5% 5.50% 6%

Statutory Liquidity Ratio (SLR)

24% 25% 24% 24%

Referencing Required

Money Supply

Increase in Interest Rate

Consumption Decreases

Investment Decreases

Increase in Currency Rate

Export Decreases

Import Increases

Aggregate demand

Decreases

GDP Decreases

Inflation

Working of RBI’s Policy

Inflation rate

Decreases

Money Supply

Increase in Interest Rate

Consumption Increases

Investment Decreases

Increase in Currency Rate

Export Decreases

Import Increases

Aggregate demand

Increases

GDP Increases

Disparity in Purchasing, Supply Shocks, Agricultural Shocks

Rise in Global Crude Oil Prices

Ideal Situation

Actual Situation

Fiscal Policies in tandem with Monetary Policies

Supply Side Constraints Agriculture Sector Infrastructure Development of SME Sectors Relative downward inflexibility in the

commercial interest rate structure

Way Forward

Thank You