Introduction of Banking:-

Banking operations started in India as early as 1870 with the establishment of the Bank of
Hindustan, considered as the first bank in India.
The second development in the banking sector happened with the incorporation of the Bank of
Calcutta, the Bank of Bombay and the Bank of Bombay in accordance with the Presidency Bank's Act,
1876. All these banks joined hands to form the Imperial Bank of India. The reserve Bank of India was
engaged in the performance of central banking activities before the establishment of the Reserve Bank of
India.

Definition of Commercial Banks:-

An institution which accepts deposits, makes business loans, and offers related services. Commercial
banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions
are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve
System. While commercial banks offer services to individuals, they are primarily concerned with receiving
deposits and lending to businesses.
This sub sector can broadly be classified into:
1. Public sector
2. Private sector
3. Foreign banks

Public sector is the part of economic and administrative life that deals with the delivery of goods
and services by and for the government, whether national, regional or local/municipal.

Private Banks are banks that are not incorporated. A non-incorporated bank is owned by either
an individual or a general partner(s) with limited partner(s). In any such case, the creditors can look to
both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-partners'
assets.

Foreign banks organised under foreign laws and located outside the United States.

STRUCTURE OF COMERCIAL BANKS:-

The commercial banking structure in India consists of:
• Scheduled Commercial Banks in India
• Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of
Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the
criteria laid down vide section 42 (6) (a) of the Act.
As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918
branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8),
nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural
banks.
"Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act,
1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of
1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second
Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank".
 "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

Activities of Commercial Banks:-

The modern Commercial Banks in India cater to the financial needs of different sectors. The main
functions of the commercial banks comprise of transfer of funds, acceptance of deposits and then offering
those deposits as loans for the establishment of industries, purchase of houses, equipments, capital
investment purposes etc. The banks are allowed to act as trustees. On account of the knowledge of the
financial market of India the financial companies are attracted towards them to act as trustees to take the
responsibility of the security for the financial instrument like a debenture. The Indian Government
presently hires the commercial banks for various purposes like tax collection and refunds, payment of
pensions etc.

Modern Banking Techniques:-

The immense growth of the IT sector is reflected in the banking operation of the Commercial
Banks in India. Presently, the IT companies are engaged in the creating software packages to facilitate,
accelerate, and organize the banking operations. The Rangarajan Committee and the Reserve Bank of
India has played a major role in the popularizing the concept of computer application in banking activities.
The computerization process has reached its peak in the present scenario with the use of Total Branch
Automation Packages.

Products and Services offered by Commercial Banks in India:-

The Commercial Banks in India offer variety of products and services like Investment Advisory
Services, Tax Advisory services, Cash Management services, debit cards, ATM cards, credit cards,
personal loans, education loans, housing loans, car loans, Investment Advisory Services, and consumer
durable loans.

Functions of Commercial Banks:-

The functions of commercial banks are divided into two categories:

i) Primary functions, and

ii) Secondary functions including agency functions.

i) Primary functions:
The primary functions of a commercial bank include:

a) Accepting deposits; and

b) Granting loans and advances;

a) Accepting deposits-The most important activity of a commercial bank is to mobilize deposits from the
public. People who have surplus income and savings find it convenient to deposit the amounts with banks.
Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the
bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more
funds with the bank. There is also safety of funds deposited with the bank.

b) Grant of loans and advances-The second important function of a commercial bank is to grant loans
and advances. Such loans and advances are given to members of the public and to the business community at a
higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans
and advances varies depending upon the purpose, period and the mode of repayment. The difference between
the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a bank’s income.
 i) Loans-A loan is granted for a specific time period. Generally, commercial banks grant short-term loans.
But term loans, that is, loan for more than a year, may also be granted. The borrower may withdraw the entire
amount in lumpsum or in instalments. However, interest is charged on the full amount of loan. Loans are generally
granted against the security of certain assets. A loan may be repaid either in lumpsum or in instalments.

ii) Advances-An advance is a credit facility provided by the bank to its customers. It differs from loan in
the sense that loans may be granted for longer period, but advances are normally granted for a short period of
time. Further the purpose of granting advances is to meet the day to day requirements of business. The rate of
interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not
on the sanctioned amount.

c) Discounting of Bills-Banks provide short-term finance by discounting bills, that is,making payment of
the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds
without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can
recover the amount from the customer.

ii) Secondary functions:-Besides the primary functions of accepting deposits and lending money, banks
perform a number of other functions which are called secondary functions. These are as follows –
a) Issuing letters of credit, travellers cheques, circular notes etc.
b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit
vaults or lockers;
c) Providing customers with facilities of foreign exchange.
d) Transferring money from one place to another; and from one branch to another branch of the bank.
e) Standing guarantee on behalf of its customers, for making payments for purchase of goods, Machinery,
vehicles etc.
f) Collecting and supplying business information;
g) Issuing demand drafts and pay orders; and,
h) Providing reports on the credit worthiness of customers.

Public Sector Banks

Indian Bank Indian Overseas Bank Allahabad Bank
Bank of India Punjab National Bank Andhra Bank
Union Bank Dena Bank Canara Bank
Syndicate Bank State Bank of Hyderabad Bank of Baroda
Sate Bank of Saurashtra State Bank of Bikaner & Oriental Bank
State Bank of Travancore Jaipur Punjab & Sind Bank
Bank of Maharashtra State Bank of India IDBI Bank
Vijaya Bank State Bank of Mysore ICICI Bank
UCO Bank State Bank of Indore UTI Bank
Corporation Bank United Bank
Private Sector Banks
South Indian Bank Centurian Bank Cosmos Bank
IndusInd Bank City Union Bank Lakshmi Vilas Bank
HDFC Bank Federal Bank Bank of Rajasthan
Jammu & Kashmir Bank Catholic Syrian Bank Bank of Punjab
Nedungadi Bank Saraswat Bank ING-Vysya Bank
Development Credit Bank DhanLakshmi Bank Kalyan Bank
Ratnakar Bank Kotak Bank Karur Vysya Bank
Mandavi Bank United Western Bank
Internet Banking
ICICI Bank Bank of Baroda IndusInd Bank
 Federal Bank HDFC Bank UTI Bank
State Bank of India State Bank of Travancore Bank of Punjab
IDBI Bank Canara Bank
HSBC
Bank of Baroda Corporation Bank
Punjab National Bank ING-Vysya
Foreign Banks in India
Standard Chartered Bank Citi Bank Abu Dhabi C.Bank
American Express Bank ABN Amro Bank ANG Bank
Banque Nationale De Paris Asian Developmant Bank HSBC

Analysis of Data-

TABLE1: FINANCIAL POSITION OF COMMERCIAL BANKS

YEAR 2004 2005 2006 2007 2008

TOTAL BRANCHES 69,248 70,498 71,898 74,346 77,773

TOTAL DEPOSITS 15,42,284 17,32,858 21,09,049 26,08,309 6,32,828

TOTAL CREDIT 1,288 1,645 2,169 2,685 3,96,599

TABLE 2: DISTRIBUTION OF OUTSTANDING CREDIT OF COMMERCIAL BANKS

CATEGORY 2004 2005 2006 2007 2008
AGRICULTURE 34,300 42,619 37,867 43,919 33619,29

INDUSTRY 57,747 94,133 81,666 1,18,481 253511,67

TRANSPORTATION/ - 9,149 5,335 9,673 8259,02

TRANSPORT
OPERATIONS
PERSONAL LOANS/ - 11,741 10,641 5,978 42410,94
PROFESSIONAL
SERVICES
TRADE - 29,104 90,855 25,593 55076,07

ALL OTHERS - 65,599 3,58,080 87,873 16026,30

TABLE 3:DISTRIBUTUION OF COMMERCIAL BANKS

YEARS & NO.OF RURAL SEMI- URBAN/ TOTAL
GROUPS REPRTIN BANKS URBAN METRO
G BANKS BANKS BANKS
2004
Regional 65 68900 48900 7891 49010
Rural Banks
Nationalized 52 76120 65100 6500 76098
Banks
FOREIGN 43 65533 2134 765 56720
BANKS
SCHEDULED 74 43678 57879 543 65532
BANKS
2005
Regional 65 41568 65431 324 32789
Rural Banks
Nationalized 43 10983 5609 543 76541
Banks
Foreign 65 25435 3156 654 65987
BANKS
SCHEDULED 76 26311 2145 876 54377
BANKS
2006
Regional 62 15767 2087 765 32765
Rural Banks

Nationalized 65 14533 3054 456 24586

Banks
Foreign 76 12678 4709 435 21345
BANKS
SCHEDULED 78 10354 5609 324 24310
BANKS
2007
Regional 82 11453 2603 677 14802
Rural Banks
Nationalized 20 13014 7707 8231 37227
Banks
Foreign 29 2 44 272
BANKS
SCHEDULED 25 988 2099 2238 7401
BANKS
2008
Regional 20 11489 2670 727 14957
Rural Banks
Nationalized 23 13164 8101 8823 38726
Banks
Foreign 28 2 51 280
BANKS
SCHEDULED 23 1030 2392 2533 8265
BANKS

TABLE 4:DISTRIBUTION BY TYPE BROAD BANKS GROUP WISE & CATEGORY

WISE (DISTRIBUTION OF DEPOSITS)
GROUP TYPE OF 2004 2005 2006 2007 2008
DEPOSIT
S
REGIONAL CURREN 3621,43 3719,10 3908,12 4070,34 4185,45
RURAL T
BANKS ACCOUN
T
TERM 25987,10 29687,20 30987,60 34203,45 32430,87
DEPOSIT

TOTAL 60789,10 68568,20 75843,27 80324,30 81630,50

NATIONALIZ CURREN 119356,65 120943,78 125723,90 128164,68 131722,72

ED BANKS T ASSET
TERM 507665,29 548891,30 692654,48 702761,54 779994,46
DEPOSIT
TOTAL 9542895,80 981245,10 1034584,98 1198752,21 1258302,24

FOREIGN CURREN 37024,97 38954,87 39765,49 40775,50 43399,68

BANKS T ASSET
TERM 72981,10 76542,20 79345,10 80195,24 80992,36
DEPOSIT
TOTAL 126789,26 136754,10 143678,18 142675,34 145881,46

SCHEDULED CURREN 69454,15 70156,24 72435,58 75793,67 77892,80

BANKS T ASSET
TERM 258907,29 306651,31 324489,23 359723,98 369607,02
DEPOSIT
TOTAL 462476,36 498674,38 500124,43 501682,45 535769,63

TABLE 5:MATURITY PERIOD OF TERM DEPOSITS

PERIOD NATIONALISED BANKS

OF
MATURIT
Y
UPTO 90 2004 2005 2006 2007 2008
DAYS
91DAYS- 106276 103588 112860 119907 76339,52
6MONTHS
6MONTHS 189757 199834 203213 211541 120482,97
-1YEAR
1 YEAR- 190736 234897 354654 395231 268362,19
2YEARS
2YEARS- 198464 300572 325654 395231 59428,74
3YEARS
3YEARS- 201987 213976 103432 104273 134874,32
5YEARS
5 216799 223969 204357 244270 58627,95
YEARS&
ABOVE

PERIOD OF FOREIGN BANKS

MATURITY
UPTO 90 2004 2005 2006 2007 2008
DAYS
91DAYS- 135889 138678 140876 14407 24439,36
6MONTHS
6MONTHS 131700 137397 139775 14610 16789,96
-1YEAR
1 YEAR- 398767 401756 435869 53649 24408,59
2YEARS
2YEARS- 438288 449357 456799 53649 59428,74
3YEARS
3YEARS- 498675 502690 523 534 2392,20
5YEARS
5 20 21 23 32 58627,95
YEARS&
ABOVE

PERIOD OF REGIONAL RURAL BANKS

MATURITY
UPTO 90 DAYS 2004 2005 2006 2007 2008
91DAYS- 354869 367969 37804 39718 2426,57
6MONTHS

6MONTHS- 678657 739767 74087 75197 2613,79

1YEAR
1 YEAR- 167842 173969 176007 180548 6152,35
2YEARS
2YEARS- 155868 167356 170753 180548 4431,05
3YEARS
3YEARS- 98434 10656 108647 118196 8815,92
5YEARS
5 YEARS& 95377 97657 100328 103835 6227,09
ABOVE

PERIOD OF SCHEDULE COMMERCAIL BANKS

MATURITY
UPTO 90 2004 2005 2006 2007 2008
DAYS
91DAYS- 132876 147979 168248 167042 34565,56
6MONTHS

6MONTHS- 143699 159124 206329 283035 89791,96

1YEAR
1 YEAR- 224291 249091 330376 522672 130272,80
2YEARS
2YEARS- 108652 113742 118283 114853 17371,44
3YEARS
3YEARS- 1786076 192613 201227 245393 27325,20
5YEARS
5 YEARS& 78533 89709 103963 115794 15886,63
ABOVE

TABLE 6: BANK GROUP WISE COMPOSITION OF NON-RESIDENT DEPOSITS

BANKS NRI DEPOSITS

NATIONALIZED 66702

OTHER BANKS 9021

FOREIGN BANKS -

SCHEDULED BANKS 8442

TABLE 7: PATTERN OF INVESTMENT BY GROUP WISE

BANK GROUP INDIAN GOVT. OTHER SHARES & OTHER TOTAL

& YEARS SECURITIES TRUSTIES DEBENTURES OF SECURI
SECURITIES JOINT STOCK TIES
INVESTMENTS
2004
NATIONALISE 198436 2876 4547 178676 5175647
D BANKS
OTHER 137547 287 2549 185645 386889
BANKS
FOREIGN 51970 68 5176 8468 985345
BANKS
SCHEDULED 645809 183246 103531 18865 851,554
BANKS
2005
NATIONALISE 200432 2956 4974 187544 536789
D BANKS
OTHER 14068 329 2698 19867 399654
BANKS
FOREIGN 52688 75 5267 8956 102467
BANKS
SCHEDULED 653496 183246 103531 18865 851,554
BANKS
2006
NATIONALISE 203578 3096 5087 190756 584269
D BANKS
OTHER 14286 332 2764 20865 400754
BANKS
FOREIGN 55844 81 5498 9368 113668
BANKS
SCHEDULED 661518 176157 91093 14994 854657
BANKS
2007
NATIONALISE 208370 3260 5162 19534 593723
D BANKS
OTHER 159549 341 2953 21845 414751
BANKS
FOREIGN 56220 85 5604 9526 126339
BANKS
SCHEDULED 750722 12764 80555 62315 1981235
BANKS
2008
NATIONALISE 435060 7014 39477 2788 1203782
D BANKS
OTHER 193885 281 23870 43578 518402
BANKS
FOREIGN 82927 33 2560 13296 161133
BANKS
SCHEDULED 920241 10587 85440 102481 2477037
BANKS

TABLE 8: EARNINGS OF SCHEDULED COMM. BANKS

YEARS INTEREST & DISCOUNT
SBI NATIONALIZE FOREIGN SCHEDULED BANKS
D BANKS

2004 33753 67434 100674 125667

2005 34545 68907 10154 136678

2006 35978 72446 10676 146686

2007 36148 74396 10945 156249

2008 51354 37173 15712 221151

TABLE 9: INCOME OF SCHEDULED COMMERCIAL BANKS

YEARS Income on investment

SBI NATIONALIZED FOREIGN SCHEDULED BANKS

BANKS

2004 14065 29676 4967 51960

2005 14267 30465 5077 53256

2006 14579 31675 5239 62445

2007 14858 32259 5334 65294

2008 16916 37173 7017 79050

TABLE 10: EXPENSES OF SCHEDULED COMM. BANKS

YEARS INTEREST PAID
SBI NATIONALIZED FOREIGN SCHEDULED BANKS
BANKS

2004 20677 46780 4097 94545

2005 21678 54798 4134 102589
2006 22544 59767 4233 106765

2007 28260 60536 4747 119862

2008 41588 91130 7279 179661

TABLE 11: OPERATING EXPENSES OF SCHEDULED COMMERCIAL BANKS
YEARS Operating expenses

SBI NATIONALIZED FOREIGN BANKS SCHEDULED BANKS

2004 12456 23567 7244 54789

2005 13678 24789 7435 62466

2006 14789 25783 7655 63566

2007 15986 27269 7746 66315

2008 16992 29605 10356 77213

TABLE 12: PROFIT BY BANKING

YEARS PUBLIC BANKS PVT.BANKS FOREIGN SCHEDULED
BANKS BANKS

2004 2.67 2.27 3.68 2.66

2005 2.18 1.80 2.98 2.17

2006 1.88 1.71 3.34 1.95

2007 1.75 1.84 3.51 1.91

2008 1.67 2.05 3.84 1.93

 Suggestions-

• The government could aid private sector participation in PPPs through expeditious awarding of
contracts, facilitating land acquisition and ensuring better coordination between the centre and states. In
particular, large size PPP projects may be put out for bidding after obtaining mandatory clearances and approvals
— say, through a Shell Company/Special Purpose Vehicle (SPV) as was recently done in the case of the Ultra
Mega Power Projects;

• Information on the development of PPPs, prior to their being bid out, would be appreciated by the
private sector, perhaps as part of a national database;

• The tax regime applicable to dividends paid out by SPVs needs to be rationalized; currently, in cases
where a holding company is implementing multiple projects through SPVs, dividends are being taxed twice, first at
the level of project-specific SPVs and then at the holding company level;

• The entry of financial investors will introduce a longer-term perspective than construction-oriented
concessionaires, and this can be encouraged by allowing concessions to be more tradeable;

• The government should take measures to deepen debt markets and encourage insurance funds to
invest in infrastructure projects.

Findings-
The present study examines the link between the revenue portfolio and risk- adjusted
performance of banks in Indian context. The comprehensive results are presented both at aggregate level
and at the bank level using the data of the year 2004 through 2008. Traditionally, it is believed that
earnings from non-interest generating revenues are more stable than loan based earnings and the
increase focus on these activities overall revenue and profitability volatility is reduced via diversification
effects. Our results don't support the traditional thinking. On an average it is found that non-interest
income is more volatile than interest income. The greater reliance on non-interest income lowers risk-
adjusted performance of a typical bank. Further, the comparison of domestic and foreign banks reveals
that domestic banks have relatively lower revenue and profitability volatility.

• Financially repressive monetary regulations affect the portfolio management of the scheduled
commercial banks adversely;

• The scheduled commercial banks in India act as a channel for transmission of monetary policy, which
impinge on aggregate macroeconomic activity and

• Efficient monetary policy is a prime mover in stabilizing the economy and the banking system.
Significant policy implications emerge from the study.

• The group of New Private Sector banks, (refer to annexure) dominated the league tables of growth, as
against the average of other bank groups, with an average y-o-y growth in Assets at 38.7%, for Deposits at
38.8%, Advances at 39.9% and Operating Profit at 46.7%.

• The group of Old Private Sector banks (refer to annexure) showed relatively lower growth in business.
The annual growth rate for this group for FY07 stood at 7.1% in Assets, 6% in Deposits and 12% in Advances.
However, this group fared better in Net profit, which grew by 30%. All bank groups reported a capital adequacy
ratio of more than 12%.

• The ratio of standard assets was highest in the case of Foreign Banks and New Private Sector banks at
98.1% each, followed by 97.3% in Public Sector banks and 96.9% in Old Private Sector banks. The ratio of Net
NPAs to Total Assets was 0.6% in public sector and Old Private Sector banks, 0.5% in New Private Sector banks
and 0.3% in Foreign banks.

• Public sector banks accounted for 74% of the total deposits, 73% of total advances and 64% of the
aggregate net profits, amongst SCBs. The share of the New Private Sector banks in these three areas was in the
range of 15-17%. Credit Deposit Ratio of these bank groups was between 67-84%.

• There has been a sizeable increase in the banking infrastructure. Banks in India together have 56,640
branches/offices, 893,356 employees and 27,088 ATMs. Public sector banks accounted for a large part of the
infrastructure, with 87.7% of all offices, 82% of the staff and 60.3% of all ATMs.

Conclusion-
The main theme of this is to present a systematic analysis of the impact of Banking Sector Reforms in the
areas of efficiency and profitability of commercial banks, both in public and private sector over a period of 11
years since the initiation of reforms measures in 1992-93. It starts with a historical review of the development of
Indian Commercial Banking in the pre-reform period and the circumstances and conditions necessitated initiation
of reforms. It also reviews the main recommendations of the 'Committee on the Financial System' (1991) and the
'Committee on the Banking Sector Reforms' (1998), both presided over by Shri M. Narasimham and their
implications for the banking sector. The focus of the analysis is on the evaluation of response of banks in public
and private sector individually and as a group to reform measures in the areas of efficiency and profitability during
the study period. It also makes a study of comparative performance of public and private sector banks as a group
in each area of indicators selected relating to the areas of efficiency and profitability. The implementation of
Prudential Norms relating to Asset Classification and Capital Adequacy by banks is assessed. In addition to
quantitative analysis, the study examines the customers' perceptions regarding Service Quality of Public and
Private Sector Banks. The performance of banks groups are analyzed in two ways: (i) Time-Series, and (ii)
Period-wise using principal component analysis.This topic thus provides a comprehensive review of banking
reforms and shifts that have taken place in the perceptions, policies and practices of commercial banks. It
concludes with major findings of the study and the suggestions that emanate to improve operational and financial
performance of commercial banks.

ARTICLES RELATED TO COMMERCIAL BANKS IN INDIA-

Profits of commercial banks increase 40%, says study

New Delhi, Aug 9: Commercial banks have witnessed 40% growth in net profits during the first quarter of
the current fiscal. This is primarily due to a surge in commercial credit and about 300 basis points increase in
interest rates, an Assocham Eco Pulse study stated. Interestingly, this is despite the State Bank of India's (SBI)
bottomline plunging by 35%. According to the industry body, the drop was more than made up by other peers
whose profitability chart showed an increase between 16% and 163%.The banks whose performance was
measured in the study included Vijaya Bank, which registered the highest net profit growth of 163%, Centurion
Bank of Punjab, recording a growth of 160%, and ING Vysysa with a growth of 62%.
In addition, Yes Bank recorded 50% growth, Andhra Bank 37%, HDFC 30%, UTI Bank 30%, J&K Bank
29%, Bank of India 21%, and ICICI Bank and Corporation Bank both registering 17% growth.
 State Bank of India: Competitive Strategies of a Market Leader

State Bank of India (SBI) is the largest nationalized commercial bank in India in terms of assets, number
of branches, deposits, profits and workforce. With the liberalization of the Indian banking industry in the mid-
1990s, SBI faced stiff competition from the private sector and foreign banks which resulted in significant loss of its
market share. The case describes the efforts of SBI to regain its lost market share by undergoing a major
restructuring exercise which involved redesigning its branch network, providing alternate banking channels,
emphasis on lean structure and technology up gradation. The case also discusses how SBI is building its image
as a customer friendly bank by launching innovative products & services and promoting its brand.
Finally, it discusses the challenges faced by SBI in 2004 and its plans in the future. The case includes a
note on the recent trends in the Indian banking industry.

The Indian Economy: Dealing with Inflation

In early 2007, in India, the inflation rate, as measured by the wholesale price index (WPI)5, hovered
around 6-6.8%, well above the level of 5-5.5% that would have been acceptable to the Reserve Bank of India
(RBI), the country's central bank. On February 15, 2007, the inflation rate reached a two-year high of 6.73%. In
the past7, the main cause of high inflation in India used to be rises in global oil prices. However, in early 2007, the
chief component of the inflation was the increase in the prices of food articles - caused by increased demand as
well as supply constraints. According to analysts, the increased demand was due to high economic growth and
increased money supply, while stagnant agricultural productivity was behind the supply constraints.
Apart from the rise in prices of food articles, fuel and cement prices too recorded high increases. The
Government of India (GoI), together with the RBI, took several measures to contain inflation. For example, the
RBI increased the Cash Reserve Ratio (CRR) and repo rates in an effort to check money supply; the GoI reduced
import duties on several food products and cut the price of diesel and petrol.