Managerial economics

TOPIC: -TREND OF INFLATION in

india
SUBMITTED BY,

Amrendra Kumar Singh

Roll no.-RS1902A01
Reg.no.- 10900038
Program- M.B.A
Section- RS1902

SUBMITTED TO, Prof.

Mrs. Preety singh
CONTENTS

1. MEANING AND DEFINITION OF INFLATION

2. METHODS OF MEASURING INFLATION

3. EFFECTS OF INFLATION

4 .INFLATIONARY TRENDS LAST FIVE YEAR IN INDIA

5. INFLATION TREND AND IMPACT OF MONETARY

POLICY

6. STEP TAKEN BY RBI ON INFLATION

7. CRITICALLY EVALUATION OF STEPS TAKEN BY RBI

8. METHODOLOGY

9. REFERENCE
10. CONCLUSION

1. MEANING AND DEFINITION OF INFLATION

Inflation means 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.

The behaviour of general prices is measured through price indices. The trend of
price indices reveals the course of inflation or deflation in the economy. As Lerner

says,” a price rise which is unforeseen and uncorrected is inflationary’’

Another definition of inflation, according to Pious, ‘’Inflation exists

when money income is expanding more than in proportion to increase in earning

activity.’’ Inflation is a situation of ‘’too much money chasing too few goods.’’

Inflation is a persistent and appreciable rise in the general level or average of

prices.’’ In simple words it can be said that in this situation in which the volume of

purchasing power is persistently more than the goods and services available to

consumer. Thu prices of goods rise and value of money falls because inflation is

arise in the general level of prices; it is intrinsically linked to money. In the other

words, inflation means things getting more expensive. It is when the price rise is

persistent that the phenomenon is called inflation.

Economists categorise inflation into broad categories: price

inflation and money inflation. Whenever the term inflation is referred, it implies

price inflation. The two have cause and effect relationship; often price inflation is

the effect of money inflation that is when money supply increases persistently, it

causes price inflation too. A moderate of inflation is considered to be desirable for

the economy. Inflation is a rise in consumer prices, increasing the cost of living.

Some inflation is caused because the country has printed too much money very

huge financial disaster, causing its currency to more than metal weight.

One may think that any price rise in excess of

2-3% in the developed and 4-5% in the developing economies can be called

inflation. But every price rise is not inflation. When prices tend to rise due to

change in the composition of GDP, it is not inflationary. Price rise due to qualitative
change in products is not inflation. Short-rise in price due to sudden increase in

demand and decrease in supply is not inflation. Price rise after depression or

recession is not inflation also.

2. METHODS OF MEASURING INFLATION IN INDIA

In general, inflation is measured by calculating the percentage rate of change of a

price index, which is called the inflation rate. The price index is an indicator of the

average price movement over time of a fixed basket of goods and services. The

general measure of inflation could be given as:

Two different price indices are published in India: the Wholesale Price Index

(WPI), and the Consumer Price Index (CPI); and a third type of index viz., the

Implicit National Income Deflator (NID), can be constructed from the national

income data. Therefore, inflation rate in India can be measured in terms of these

three indices.

The existing WPI series in India, with base year 1993-94=100, comprises 435

commodities classified under the three major groups (I) primary articles (98), (ii)

fuel, power, light and lubricants (19) and (iii) manufactured products (318) with

weights of 22.02 per cent, 14.23 per cent and 63.75 per cent, respectively. The

total number of price quotations for these commodities was 1918. The WPI is the

weighted arithmetic mean of these group indices based on the Lapser’s formula2

which has a fixed base-year weighting diagram operative through the entire life

span of the series. Weights used in the WPI are value weights not quantity weights

as they find it difficult to assign quantity weights. The WPI is compiled and
released every week by the Office of the Economic Adviser in the Department of

Industrial Policy and Promotion, Ministry of Commerce and Industry. The WPI data

is available on weekly frequency with a lag of two weeks from the date of release

for provisional index and ten weeks lag for the final index. Currently, the OEA

releases weekly WPI inflation every Thursday. The WPI is only a commodity price

index and it does not capture price changes in non-commodity producing sectors

viz. services and non-tradable commodities.

India is the only major country that uses WPI as a measure of headline inflation.

Most of the developed countries use the Consumer Price Index to calculate

inflation, as this actually measures the increase in the cost of living. The CPI is a

price index that tracks the prices of a specified basket of goods and services that a

typical consumer purchases. In India, there are four official series on CPI that are

specific to different groups of consumers, that is, CPI for Industrial Workers (CPI-

IW), CPI for Urban Non-Manual Employees (UNME), CPI for Agricultural

Labourers (AL), and CPI for Rural Labourers (RL). CPI-UNME is compiled by the

CSO and the other three CPIs are released by the Labour Beauteous in the

Ministry of Labour. CPI-IW is the most well known of these indices as it is used for

wage indexation in Government and in the organized sectors. The CPI is available

on monthly basis, but with a lag of one month. The relative merit of CPI in India is

that it also cover some basic services, whereas, WPI is only a commodity price

index. Moreover, the CPI is more relevant in measuring inflation as it measures

impact of price changes on households; however, its low coverage and quality are

questioned. Consumer Price Index for Industrial Workers (CPI-IW), the most

commonly quoted of the four CPI measures in India, covers only 260 commodities

The CPI is a more non-transparent index and this non-transparency has

encouraged mistrust of the CPI and conspiracy theories ago So, while the CPI

fundamentally makes more sense than the WPI.

3. EFFECTS OF INFLATION

 Effects on production and growth

 Effect on employment

 Effect on income distribution

 Effects of inflation on different sections of society

 Effect on distribution of wealth

4. INFLATIONARY TRENDS LAST FIVE YEAR IN INDIA

Last Five Year Comparison of Inflation Rates in India

In this section, a review of inflationary trends in India for the last five years is

presented. The data required for the analysis in the section is collected from the

office of the Economic Advisor, Ministry of Commerce and Industry, Government

of India, Reserve Bank of India (RBI), Labour Beaureau, Ministry of Labour, and

Central Statistical Organization (CSO).The annual average inflation for the last five
years is 5.2%.The supply side factors have been more instrumental in moderating

the inflationary trend this period.

India uses WPI to gauge the headline inflation in the country, this

can however be justified only if it is a reliable predictor of the CPI inflation. We

need to verify empirically whether the WPI inflation is a good predictor of CPI

inflation.

5. Inflation trends and impact of monetary policy

2003-In this year the inflation trend is highly volatile .It increases from 3.5% in

January to 6.6% in april.It then declines to 3.8% in august, and again increase to

5.86% in December. This is the last time Bank Rate was changed. It was lowered

to 6% in March. Reverse Repo Rates was changed 2 times. It was lowered from

5.5% to 4.5% in August. Repo Rate was changed two times. It was lowered from

7.5% to 7.0% in March.CRR was changed once. It was lowered from 4.75% to /

4.5% in June. All commodities change percent was 6.5% in this year, primary

articles changed with 6.1 %, fuel group changed with 10.8% and manufacturing

products changed with 5.1% in this year.

2004- In this year the Inflation was again volatile as seen in2003. It declined from

6.5% to 4.3% in April. It again rose to touch 8.7% in August, and then declined to

6.5% in December. Bank rate did not change. Reverse rates were changed once

and were increase to 4.75% in October. Repo rate were also changed once and
are lowered to 6% in October, and CRR rates were changed twice. It was

increased to 4.75% in September and 5% in October. All commodities were

changed with 4.6%, primary articles changed with 1.6%, fuel group was changed

with 2.5%, and mfg. Products change with 6.7%.

2005- In this year the inflation rate was declined from 6% in January to 3.6% in

August. It again increased to 4.6% by December, in Bank rate did not changed,

reverse repo rates were changed twice. Both times it was increase to 5% in April

and 5.25% in October. Repo Rate changed once and increases to 6.25% in

October.CRR was not changed. All commodities were changed with 5.1%, primary

articles were changed with 1.3%, fuel group was changed with 10.5%, and Mfg.

Products were changed with 4.6%.

2006-In this year the inflation rate was declined to touch 3.7% levels in April and

then rises persistently to touch near 6% by December, Bank rate was not affected,

Reverse Repo Rate were changed thrice. Increased by 25% in January, June and

July and was noted at 6%. The repo rates are changed 4 times. Increased by 25%

in January, June, July and October. It was noted at 7.25%.CRR increased once to

5.25% in December. All commodities were changed with 4.1%, primary articles

were changed with 5.4%, fuel group was changed 8.9%, and Mfg.products

changed with 1.7%.

 2007- The inflation increased initially and touched 6.5% in March. It then declined

to touch around 3.8% by December. Bank rate was same; Reverse Repo Rate

was also not changed. Repo rate was changed two times. Increased to 7.5% and

7.75% in January and March respectively.CRR was changed 7 times. Increased

from 5.25% in January to 7.50% in November. All commodities were changed with

6.5%, primary articles were changed with 11.7%, fuel group was changed by

1.2%, and Mfg. Products were changed with 6.7%.

Current inflation rate

Ye Ma Au
Jan Feb Mar Apr Jun Jul Sep Oct Nov Dec Ave
ar y g
- - - - - - -
20 0.0 0.2 0.3
0.7 1.2 1.4 2.1 1.4 1.2 0.1 NA NA NA
09 3% 4% 8%
4% 8% 3% 0% 8% 9% 8%
20 4.2 4.0 3.9 3.9 4.1 5.0 5.6 5.3 4.9 3.6 1.0 0.0 3.85
08 8% 3% 8% 4% 8% 2% 0% 7% 4% 6% 7% 9% %
20 2.0 2.4 2.7 2.5 2.6 2.6 2.3 1.9 2.7 3.5 4.3 4.0 2.85
07 8% 2% 8% 7% 9% 9% 6% 7% 6% 4% 1% 8% %
20 3.9 3.6 3.3 3.5 4.1 4.3 4.1 3.8 2.0 1.3 1.9 2.5 3.24
06 9% 0% 6% 5% 7% 2% 5% 2% 6% 1% 7% 4% %
20 2.9 3.0 3.1 3.5 2.8 2.5 3.1 3.6 4.6 4.3 3.4 3.4 3.39
05 7% 1% 5% 1% 0% 3% 7% 4% 9% 5% 6% 2% %
20 1.9 1.6 1.7 2.2 3.0 3.2 2.9 2.6 2.5 3.1 3.5 3.2 2.68
04 3% 9% 4% 9% 5% 7% 9% 5% 4% 9% 2% 6% %
20 2.6 2.9 3.0 2.2 2.0 2.1 2.1 2.1 2.3 2.0 1.7 1.8 2.27
03 0% 8% 2% 2% 6% 1% 1% 6% 2% 4% 7% 8% %
20 1.1 1.1 1.4 1.6 1.1 1.0 1.4 1.8 1.5 2.0 2.2 2.3 1.59
02 4% 4% 8% 4% 8% 7% 6% 0% 1% 3% 0% 8% %
20 3.7 3.5 2.9 3.2 3.6 3.2 2.7 2.7 2.6 2.1 1.9 1.5 2.83
01 3% 3% 2% 7% 2% 5% 2% 2% 5% 3% 0% 5% %
20 2.7 3.2 3.7 3.0 3.1 3.7 3.6 3.4 3.4 3.4 3.4 3.3 3.38
00 4% 2% 6% 7% 9% 3% 6% 1% 5% 5% 5% 9% %

6. STEPS TAKEN BY RBI ON INFLATION

6.1:- RBI Monitoring inflation:-

The Reserve Bank of India has put liquidity, inflation and credit growth under the

scanner to assess if more steps are required to tighten the monetary system.

RBI Deputy Governor said that everything depends on evolving

circumstances have to look at inflation, liquidity and credit growth. Central bank

planned a pause on tightening the monetary system.

The Reserve Bank of India, it may

be recalled, had announced a 0.5 percentage point increase in the cash reserve

ratio last week as part of its strategy to contain inflation.

RBI did take international developments into consideration, there were no direct

links between domestic interest rates and moves by the US Federal Reserve

which, in recent days, decided against tinkering with interest rates in view of the

slowdown in U.S. economic growth.

6.2 RBI ACTS TO REIN IN INFLATION

Tightening policy Cash reserve ratio hiked 50 basis points, from 5.5 per cent to

5.75 per cent. The RBI marked up the Cash Reserve Ratio by 50 basis points to 6

per cent and impound for free about Rs 14,000 crore of bank funds.

The CRR will hike and kick in February and second

starts in March. The RBI had lifted CRR by 50 basis points to 5.5 per cent,

absorbing around Rs 13,500 crore of bank deposits. , the RBI had increased the

repo rate by 25 basis points to 7.5 per cent. The government and corporate debt
markets to make borrowings, across sectors, dear. Over the past few days,

financial markets had been expecting a rise in CRR, as it does not cost RBI

anything with the held up bank funds not earning interest incomes for banks

6.3 RBI ATTACKS ON INFLATION

The Reserve Bank of India raised the Cash Reserve Ratio by 50 basis points in

order to curb the high levels of credit expansion that despite earlier money-

tightening measures has continued at 30 per cent. By raising the CRR, that will

impound close to Rs 14,000 crore of bank funds thus making that much

unavailable for lending and with the earlier repo rate hikes, the RBI hopes to

dampen the capacity to lend and, as a result, inflation that the apex bank feels is a

consequence of the highest credit expansion in years.

The high rate of inflation, of 6.58

per cent, has its sources in supply constraints, the RBI expects its monetary

measures will have a dampening effect by curbing demand for credit, especially for

retail trade and real-estate. Monetary Policy works best when its target is clearly

identified. If credit growth of 30 per cent is considered too high, the RBI may affect

a co. When the RBI wishes to curb inflation it deals with a target because the

extent to which asset prices contribute to the general price rise is unclear. Neither

the RBI nor North Block has any aggregate data on real-estate prices in the

absence of an index or indices for real-estate.

 The RBI uses monetary measures with deliberation but the script is

not in its favour. Demand-aided inflation could have been tackled through interest

rate changes, as it is done by central banks in developed nations. India had the

fastest but equally lopsided growth in the last four years.

6.4 STEPS TAKEN BY THE RBI TO TACKLE INFLATION

Food articles have contributed significantly to inflation during 2006-07. At the same

time, prices of manufactured products account for well above 50 per cent of

headline inflation. The recent hardening of international crude prices has

heightened the uncertainty surrounding the inflation.

The steps generally taken by the RBI to tackle inflation include a rise in repo rate a

rise in Cash Reserve Ratio and a reduction in rate of interest on cash deposited by

banks with RBI. The signals are intended to spur banks to raise lending rates and

to reduce the amount of credit disbursed. The RBI's measures are expected to

suck out a substantial sum from the banks. In effect, while the economy is

booming and the credit needs grow, the central bank is tightening the availability of

credit.

The RBI also buys dollars from banks and exporters, partly to

prevent the dollars from flooding the market and depressing the dollar indirectly

raising the rupee. In other words, the central bank's interactions have a desirable

objective to keep the rupee devalued which will make India's exports more
competitive, but they increase liquidity. The net effect is that the RBI has to resort

to indirect methods of sterilisation, such as raising interest rates and raising CRR

to contract liquidity. This makes India more attractive for foreign capital flows that

seek better returns and a vicious cycle follows. RBI has to buy more foreign

currency and sterilize. The cycle had become worse.

6.5 CRR-REPO POLICY ADOPTED BY RBI TO COMBACT

INFLATION

Their huge numbers are attested to by the RBI figures, which reveal that the 85

commercial banks, with a predominant presence in urban India, account for 78 per

cent of the country's financial assets. The 3,000 cooperative banks and Regional

Rural Banks, with greater presence in semi-urban and rural pockets, contribute a

meagre nine per cent and three per cent respectively.

Secondly, in spite of its being an indirect weapon of credit control, CRR does

impact the level of money supply in the economy and plays some role in the fight

against inflation. But the impact of the CRR hike will not distinguish as between

productive credit and credit meant for consumption. This will hurt growth and the

creation of assets in the economy.

Farmers today keep several acres of land uncultivated as the financial returns are

not commensurate with the expenses incurred for cultivation. Irrespective of the

increasing cost of funds, large segments of the borrowing public, especially the
small, medium and large farmers, have no option but to approach the commercial

and cooperative banks, or the multitude of unregulated moneylenders at the

beginning of every crop cycle.

As a result, lendable resources of the system will be reduced to that extent and

bank credit will be dearer. This hike will result in increase of the lending rates,

whether for production or consumption. The RBI can address only the demand

side through such an approach. The need of the hour is to curb only consumption

credit and not production. On the other hand there is urgent need to increase

supplies of food products and manufactured goods, for which credit flow to the

farm sector and industry must increase.

The combined effect of the CRR hike and the REPO rate hike will tell upon

expansion of productive credit as well and this is not desirable at this stage.

The monetary measures are meant to increase the cost of funds for banks, make

loans dearer and temper the demand for credit. While there is a greater possibility

of banks passing on the increased costs to the consumer, it is debatable whether

this will choke the demand for funds in some specific inflation-impacting sectors.

7. CRITICALLY EVALUATION OF STEPS TAKEN BY RBI

For the last five years, India has faced what amounts to a virtual investment

disaster. This has had a disastrous impact on the growth rate of industry and the

increasing in manufacturing sector which remains India’s first long term bet for

providing employment.

The Government has tried everything, from tax cuts to

some relatively minor and politically uncontroversial reforms. Nothing has helped.

India continues to be in the sorrow.

In its latest report on currency and finance, the RBI

has suggested that the time may have come to respond to the criticism. The real

possibility that the current low rate of inflation will continue for some time, and

given that Indians find 5 per cent inflation rate endurable a higher inflation and

lower real interest rates may actually promote growth.

A large part of the blame for this state of affairs has attached to the high

interest rates. The RBI has been singled out for some very strong criticism that in

its attraction with inflation and the health of the public sector banks, it has

neglected to lower interest rates as rapidly as it should have.

All the support he can get to cut interest rates. The RBI

makes its case in the report on currency and finance, released last week. The

case rests on three main arguments. One, that the long run real interest rates

should be close to the expected long run growth rate. Two, that the impact of

increasing the availability of credit with banks is very small, and it is mainly the

interest rate channel that is the main mechanism of monetary transmission. Third,

the RBI has criticism regarding the effect of monetary expansion through lower
interest rates on inflation by arguing that inflation is below the threshold level. The

RBI has also argued that in a low inflation environment, a further reduction in the

inflation rate in India. RBI increases the CRR and Repo Rate. It has also buy

dollars to low the inflation but it is not good for India because in India there have

much borrow and India will fall in borrow than India’s inflation increase more than

this time.

METHODOLOGY

Secondary source:-Secondary data is available to the preparation of topic. The

research must thoroughly search secondary data source before finding any effort

for collecting primary data, defence relation etc.

REFRENCES AND BIBLIOGRAPHY

Managerial economics ------- Geetika, piyali ghosh, purba

Roy chaudhary
Website:-

www.investopedia.com

www.inflationdata.com

www.investorwords.com

8. CONCLUSION

Inflation means increase in the level of price. The Indian inflation is measured by

WPI.The follow based year to 1993-94.Aftert the measuring of inflation and

analysing the trend of inflation last five year we found that the average inflation for

the last five year was 5.2%.In 2003 the inflation rate was increase from 3.5% in

January and 6.5% in April, then declines 3.8% in august and again increased to

5.8% in December. Bank rate was changed. Repo rate was changed two times,

reverse repo rate also changed. All commodities changed 6.5% in this year. In

2004 the interest rate was decline from 6.5% to 4.3%. Reverse repo rates were

increased. In 2005 inflation rate was declined and after the ends of the year

increase. In 2006 interest rate also increase, bank rate was not changed. Reverse
repo rate was changed thrice. In 2007 interest rate touched 6.5% in march and

around 3.8% by December, bank rate was same, reverse repo rate was also not

change,CRR was changed seven times.

After that RBI taken many steps on inflation. Central bank planned pause of

tightening the monetary system by which the inflation rate will be reduce.RBI

increase in CRR. Financial market had been expecting arise in CRR. For the

tackle of inflation RBI change the interest rate. RBI was rise the repo rate and

CRR and reduction in rate of interest. RBI also buys dollar from foreign banks.

Aftterthat we find that inflation rate was ups and down in last five year and RBI

taken steps on this and try to controlled the inflation but the all steps were not

good for our india.