Presented By:

Siddharth Iyer

Ashish Kumar Jain

Pankaj Jain

Satish Kachhawa

Jharna Tinani

IndiaGDP Growth Moderate

Inflation Low

Saving Rate High

Current Account Deficit Under 6 % of GDP

Exchange Regime Floating

Trade Less Important

Macroeconomic FundamentalsMacroeconomic Fundamentals

Circle of InflationCircle of Inflation

Rate of Interest ↓

Investment ↑

Production ↑

Aggregate Demand ↑Consumption ↑

Price ↑

Income ↑

Inflation ↑

Monetary PolicyMonetary Policy

ObjectivesObjectives•Price stability

•Ensuring adequacy of credit to support growth•Financial Stability

InstrumentsInstruments•Move from direct to indirect instruments

•LAF (Repo & Reverse Repo) •OMO •MSS

Fiscal PolicyFiscal Policy

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

external

Inflation as measured by WPI(Base Year 1993-94)

-

50.00

100.00

150.00

200.00

250.0019

90-9

1

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

Inde

x Va

lue

(15.00)

(13.00)

(11.00)

(9.00)(7.00)

(5.00)

(3.00)

(1.00)

1.00

3.00

5.00

7.009.00

11.00

13.00

15.00

Infla

tion

Rate

(%ag

e te

rms)

100GulfWar

Rising OilPrices

Balance of Payments

Crisis

Asian Crisis

IMD Redemption

Comparison of Interest rates and Inflation

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.0019

90-9

1

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

Rate

(%ag

e te

rms) CRR

Bank Rate

WPI

1991-Balance of Payment Crisis1991-Balance of Payment Crisis

Causes

• Excess Demand was more important cause.

• Increase in oil prices. (Gulf War)

• Gross savings of Govt was (-ve)

• The Monetized deficit rose from 1.6% to 3.1% of GDP

• Increase in budget deficit would generalized inflationary pressure in the economy.

Actions

• Excess demand of Govt was met from 3 sources

• PDS System further expanded

• 1.5 million tonnes of foodgrains off-loaded by FCI

• Imports of edible oils• Reducing subsidiary and

external support to production so as to make them more responsive to price and demand change.

1992-93, 1993-941992-93, 1993-94Causes

• Decline was due to prices of Agri product fell (with a good Kharif Harvest)

• WPI for all commodities reached 250.7 in Jan 1994

• WPI Base Changed

Actions

• Continued with the disinflationary policies.

• Reduction in the fiscal deficit played important role.

• Financial sector reformed (relaxation in SLR, CRR)

• Agricultural Price Policy• Min Support Price/

Procurement Prices• PDS System improved.

1994-951994-95Causes

• Growth in fiscal deficit• Monetized deficit recorded a

high rate of growth of 15.6%• Central issue were Rise

(23%), Wheat (21.8%), Sugar (9%), production shortfall.

• High growth of monetary variables, due to strong forex reserves.

• Cumulative impact of large increase in MSP in the last 3 years.

Actions

• Containment of fiscal deficit, operational frame work. ceiling on net RBI credit to Govt.

• RBI intervened • Money supply growth M3

contained within 16%• CRR increased from 14% to

15%, May 1994, imposed on FCNR(B), NRNR A/c

1. Max IR on NRE A/c ↓2. Stability in Wheat prices by

open market sales3. Monthly sugar supply for PDS

maintained.

1997-98, 1998-99, 1999-001997-98, 1998-99, 1999-00Causes

• Low inflation because of success achieved in moderating money supply growth & keeping fiscal deficit within prudent limits.

• Inflation increased due to shortfall in essential agri commodities (onions & potatoes) in 1998-99

Actions

• Monetary & Credit Policy 1998 reduced Bank Rate to 9%

• CRR increased from 10% to 11%.

• Interest rate deregulation in banks.

• inflation record 18 years low of 2% at the end of July 99.

Significant reduction in inflation since mid-1990s

Inflation contained despite supply shocks and large capital flows

Inflation expectations stable

Outcomes – Monetary Policy Outcomes – Monetary Policy InflationInflation

Why is inflation better behaved?Why is inflation better behaved?

More credible monetary policy• Central banks learned from the errors of the 1970’s and stabilized their policies.• Central banks have increased their focus on inflation• Control as a result of institutional reforms like central Bank independence and preventative measures.

Lower inflation environment• Consistent and predictable low inflation has made Inflation more stable because the anticipation of low Inflation makes firms re-price their goods less often.

Any Questions?