anti-inflationary policy in india
TRANSCRIPT
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?