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09/04/2023Trends in inflation & RBI initiative to Control
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Trend in inflation and RBI initiative to control it
Ganesh, Narayanan, Raman S, Neeraj
09/04/2023Trends in inflation & RBI initiative to Control
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What is Inflation? Inflation can be defined as a rise in the
general price level and therefore a fall in the value of money
Inflation occurs when the amount of buying power is higher than the output of goods and services
Inflation also occurs when the amount of money exceeds the amount of goods and services available
09/04/2023Trends in inflation & RBI initiative to Control
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Types of Inflation
Creeping inflation
Running inflation
Galloping/Hyper inflation
09/04/2023Trends in inflation & RBI initiative to Control
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Causes of Inflation Demand-pull inflation
Cost-push inflation
Imported Inflation
09/04/2023Trends in inflation & RBI initiative to Control
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Major reasons of Inflation in India
Rise in Crude oil prices
Rise in Food prices
Black Money
GDP
Wage rate wise
Sub Prime crisis
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Impact on Different Levels Persons
Inflation Kills Wages In Sectors
09/04/2023Trends in inflation & RBI initiative to Control
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Effects of Inflation Hoarding Increased risk Fixed income recipients Increased consumption ratio Lowers national saving Illusions of making profits Rising prices of imports Causes business cycles to go out of
business
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Measuring Inflation through WPI Index that traces the relative changes in
the price of an individual good (or a market basket of goods) over time
It is calculated for wholesale prices in which the quantities of the base year and current year are different
It gives an idea of the week-to-week fluctuations in the prices of all the traded commodities in the country as a whole
It is also substituted for the annual average inflation at times
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Measuring Inflation through WPI The latest series (2004-05) contains 676 items
in the commodity basket
"Primary articles" 20.118 % weight, "Fuel, Power, Light and Lubricants" 14.91 % weight "Manufactured products" 64.972 % weight
The wholesale price index comprises of the following indices:
Domestic Wholesale Price Index (DWPI) Export Price Index (EPI) Import Price Index (IPI) Overall Wholesale Price Index (OWPI)
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Calculation of WPI WPI is calculated on a base year. Assume for base
year 2004 and price is 100
Let’s calculate WPI for the year 2010 of wheat. Assume price of per kg of wheat in 2004 = Rs 6.00 and in 2010 = Rs 6.50
WIP for 2010 = ((Price in 2010 – Price in 2004 )/ Price in 2004) x 100
(6.50 – 6.00)/6.00 x 100 = 8.33
So WPI for 2010 will become 100 + 8.33 = 108.33.
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Calculation of Inflation Let us say that we have WPI for the beginning and the end
of year
Inflation rate = (WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100
WPI on Jan 1st 2010 is 108.33, WPI on Jan 1st 2011 is 112.33
Inflation rate for 2011 = (112.33 – 108.33)/108.33 x 100 = 3.69% .
That is to say that the inflation rate for the year 2011 is 3.69%.
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Trends of Inflation in the India
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Trends of Inflation in the India
Year WIP Inflation Rate
2006 104.74 4.74
2007 109.77 4.80
2008 119.3 8.68
2009 121.82 2.11
2010 133.22 9.36
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Measure to control Inflation by RBI
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Reserve Bank of India The central bank of the country is Reserve Bank of India Established in April 1935 with a share of Rs. 5
corers on the basis of the recommendations of the Hilton Young Commission
Reserve Bank of India was nationalized in the year 1949
No. of members on central board is 20(incl. governor and 4 deputy governors)
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Monetary Policy of the RBI Monetary policy is usually designed by the
central bank of the country Monetary means Money policy in relation to
money matter in economy is called the Monetary Policy
The RBI has certain specialised Qualitative and Quantitative instruments
Monetary policy was bimonthly before since the country has stabilized in 1998-99
5 year plan made the monetary policy a yearly affair
Recent times the RBI have started to publish a quarterly update
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Objective of the Monetary Policy of the RBI Price Stability
Exchange Rate Stability
Full Employment and Maximum output
High Rate of Growth
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Instruments of the Monetary Policy of the RBI-Quantitative Measure Quantitative Measure is a Direct method of
interference in the market It include instruments like Open market
operation and Bank Rate Open market operation are used to curb
excess liquidity in the market i.e. to reduce inflation
Bank Rate is the rate at which RBI allows finance to commercial banks
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Instruments of the Monetary Policy of the RBI-Qualitative Measure Qualitative Measures control inflation through
changes in CRR and SLR, so taking into consideration the reserve rates increased will reduce the credit creation and hence will decrease the amount of money in the market
CRR-Cash Reserve Ratio SLR-Statutory Liquidity Ratio Repos and Reserve Repos
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Current Monetary Policy Reverse Repo-7.50% Repo Rate-8.50% Bank Rate-9.50% CRR-4.75% Inflation-5.32%
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Inflation Control in India – 2012
Measures taken by Reserve Bank of India:
RBI monetary policy reduce the CRR rate by 0.5 per cent
A cut in CRR is advantageous to the banks as they would have more funds to lend/invest for profit generation
