Assignment Of Managerial economics

Topic :Steps Taken By RBI To Control Inflation

Submitted to: Lect Mr Mandeep Sir

Submitted by: Liyakat Ali Khan Section : 330 Roll No : 28 Group : G1 Reg.N:10807803

inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply (monetary inflation); however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflation. Inflation can also be described as a decline in the real value of moneya loss of 1 purchasing power in the medium of exchange which is also the monetary unit of account. When the general price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate, which is the percentage change in a price index over time. Inflation can cause adverse effects on the economy. For example, uncertainty about future inflation may discourage investment and saving. Fixed nominal payments unadjusted for inflation in the monetary medium of exchange as a result of the implementation of the Historical Cost Accounting model will widen the real salary gap between those with fixed payments for constant real value salaries and those with inflation-adjusted payments for constant real value salaries. High inflation may lead to shortages of goods as consumers begin hoarding them out of concern their prices will increase in the future.

http://www.wikipedia.com

Steps taken by RBI to control inflation

Increase in CRR The Reserve Bank of India has raised the 'cash reserve ratio' (CRR), the second in the last three months, by a steep 50 basis point to 6 per cent. As reported, the hike will be effected in two phases to 5.75 per cent from 17 February 17, and to 6 per cent from 3 March. In its latest monetary statement, the RBI had given clear indications that it would use "all policy instruments including CRR to ensure appropriate modulation of liquidity in responding to the evolving situation." The bank had said it would further tighten the system, depending on the market conditions and other relevant factors." While a further rise in CRR was widely expected considering the runaway rise in inflation (WPI inflation at 6.58 per cent; highest since December 2004) and the RBI's increasing discomfort with it, what has come as a bit of a surprise is the size of the hike. A hike of 50 basis points in CRR appears too steep a rise, especially when the economy is growing at clip of 9 per cent and there are no concrete indications of overheating of the economy. According to analysts, since the current inflation is due to a supply constraint, the government should have taken more measures to cool the rise in prices of essential commodities. The government has already taken a few steps in this direction, like bringing down customs tariffs on construction, especially for infrastructure projects, and palm oil imports and now a curb on wheat imports, but more such steps need to be taken.

Nevertheless, the hike is seen more as a measure to control the inflationary expectations rather than curbing the inflation itself. This is because any monetary intervention by the RBI to control inflation usually takes time to take effect. And measures like CRR rise or changes in repo rates are aimed at controlling expectations. According to analysts, the Government should have done more on the supply side front as this is one of the major contributors to the inflation kitty. Like it did in the recent past what with reducing import duty on a host of commodities and banning futures trading in tur and urad, the government should have taken more of such measures to sober down the inflation rate. "I think what the RBI is essentially hoping is that a restatement of its resolve to adhere to price stability will contain inflation expectations because although this is essentially a supply side pressure, the fact is that a sequence of supply side shocks are beginning to elongate inflation at a slightly higher point than is usually the case. I do not think that even the RBI would believe that a CRR hike is going to be very effective against the rains.

http://searchandhra.com/politics/rbi-steps-in-to-control-inflation

Hike interest rates to curb inflation Corporate India is worried about increasing interest rates in the country. There are reports that the Reserve Bank of India would explore options to increase bank rates in a bid to contain inflation in the country. There are signs of hardening of rates with inflation standing at a 13 month high as on March 15, 2009 the central bank is expected to announce the annual monetary policy on April 29, 2008. The prices of commodities such as crude oil, edible oil, food items and metals, the geo-political situation and the general outlook of the domestic and international economies will have a bearing on the RBI policy decision, it is felt. It is expected that there would be a small hike in the repo and reverse repo rates in the RBI policy. This would be instrumental in impacting market interest rates. The hike in interest rates has been explained in terms of the need to contain inflation. The Indian industrial sector believes that growth could well decelerate on account of the interest rate hike. They say that the loan rates would rise and slow down bank credit. Consumer spending would also decline. As a result, the profitability of firms which depend not merely on price increases but also on the volume of sales would fall and lead to deferment of investment projects. The Indian government, which has been vouching for a softer interest rate regime in the country has also changed tack taking into account the rise in commodity prices.

Inflation has soared to 8.75 per cent for the week ended May 31. It is set to cross the 9 per cent mark when the official data is released on June 20, which reflect the impact of hike in fuel prices, according to analysts. As part of inflation control measures, the Reserve Bank of India had last week increased the repo rate to 8 per cent, prompting the banks to consider a rise in lending rates for consumers and industries. The continuous rise in inflation has forced the banks to increase interest rates which analyst feel could further add to the cost factor. However, the monetary measures are aimed at cooling the high demand which is pushing up prices. Most of the banks have the prime lending rates pegged at around 13 %. Besides raising the short-term lending rate (repo rate), RBI had also sucked over Rs 27,000 crore out of the economy by increasing the Cash Reserve Ratio by 0.75 per cent in three phases.

http://www.dancewithshadows.com/business/interest-rate-hike.asp

Bibliography
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http://searchandhra.com/politics/rbi-steps-in-to-controlinflation http://economictimes.indiatimes.com/Specials/War_on_Inflat ion/RBI_must_take_steps_t http://www.wikipedia.com

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4. http://www.dancewithshadows.com/business/interest-ratehike.asp