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SUBMITTED BY :
SAMEER ARORA(09BS0002038)
VARUN VINAYAK(09BS0002656)
VIREN KOTHARI(09BS0002729)
ANUJA SHAH(09BS0002142)
SMITA GUPTA(09BS0002315)
SWATI JAIN(09BS0002506)
INFLATION
Sustained increase in the general level of prices for goods and services.
Measured as an annual percentage increase.
As inflation rises, the value of currency goes down. Thus the purchasing power of the currency, i.e. the goods and services that can be bought in a unit of currency, too goes down.
MEASUREMENT OF INFLATION
Wholesale Price Index
Consumer Price Index
Wholesale Price Index
WPI was first published in 1902
Used to measure the change in the average price level of goods traded in wholesale market
“Market Basket” of 435 commodities is tracked to find out the WPI
India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy
Calculated on Weekly basis
Consumer Price index
Adopted by developed countries in 1970’sUsed to measure the average price of goods
and services purchased by the consumer Is the official barometer of Inflation in
developed CountriesCalculated on Monthly Basis
Consumer Price Index
7
Weight edge to CPI & WPI
chart
Inflation Rate
PI for a certain year - PI for a comparative year X 100
PI for a comparative year *
Price Index of 2004-05 is considered as Base Year in India for WPI
CAUSES OF INFLATION
Cost Push
Inflation
Demand Pull
Inflation
Cost Push Inflation
Rising Labor Costs
Higher Indirect Taxes imposed by the govt.
Rise in Imported Raw Material
Ep1
E
E1
SS1
D
Cost Push Inflation
Demand Pull Inflation
• Faster Economic Growth in Other Countries
• Increase in growth rate of houses
• Rapid Growth of Money Supply
• Reduction in Direct/Indirect taxation
• Depreciation of Exchange Rate
Ep
Ep1
D
D1
S
Eq Eq1
Demand Pull Inflation
MEASURES TO CONTROL INFLATION
Monetary Measures
Fiscal Measures
Others
MONETARY MEASURES
Issue of CurrencyDemonetization
of CurrencyCredit Control
Bank rate
Open market operations
Reserve Ratios
Credit Rationing
FISCAL MEASURES
Increase in Public Borrowing/Debt
Reduction in Public expenditure
Increase in Public Revenue
Increase in TaxesSurplus Budget
Increase in Savings
OTHER MEASURES
Price control policy
Economic Planning
Population Planning
Increase in Supply of goods and services
Inflation Trend in India
FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
ALL COMMODITIES I PRIMARY ARTICLEII FUEL POWER LIGHT & LUBRICANTS III MANUFACTURED PRODUCTS
Inflation Trend in India
Food Articles & Crude Oil are the most volatile items of WPI to affect general price levels.
Monetary Measures by RBI :Repo at 5.5% & Reverse Repo at 4%CRR at 6%
Economic & Political Implications.
IMF projected the headline inflation in advanced economies at 1.3 per cent in 2010 and in emerging and developing economies at 6.2 per cent
High Rural Consumption (58% in FY 07)
FOOD INFLATION SCENARIO
Prices of Primary Food Articles rose 20% in Dec
‘09, highest in 11 years (E.g Price of Pulses)
Prices of Manufactured Food Products surged to
over 26%, fastest in 17 years.
Food inflation based on CPI(Industrial workers)
for April 2010 at over 13%
Rice, Wheat, Pulses, Vegetables, Potatoes,
Onions, Fruits, and Milk etc
Direct result of the triad of late monsoons,
drought and flood
Government’s handling of public distribution
system
Structural drivers in form of implementation
of NREGA
Rapid growth in nominal disposable
incomes
EFFECTS OF INFLATION
Uncertainty about the future purchasing power of money discourages investment and saving.
They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term
EFFECTS OF INFLATION
Higher income tax rates.
Inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.
There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.
Increase in the price of CNG
EXAMPLE
Increase in the price of wheat
Increase in the price of world oil
Increase in the price of rice
CURRENT TRENDS & FIGURES
CURRENT TRENDS & FIGURES
April May June Sept Mar-11
0
2
4
6
8
10
12
9.6 10.2 10.55 10
6.5
Recent Inflation Trend
Recent Inflation Trend
Forecast
RECENT INFLATION TREND & FORECAST
INFLATION TREND & ANALYSIS
IMPACT
High Disposable Income – A Cushion
Consumption – Disposable Income Ratio dropped by 20%
Higher Savings
Sufficient Income Growth – A Shield
Pressure on Food prices & Global Commodity Prices
Consumption Demand Could be dampened by continuous Inflation
Fuel Price Hike : Adding to Cost
SUGGESTIONS
Improved Public Distribution System
Decreasing Large numbers of intermediaries in Agriculture Supply Chain & The Margins
Continuous Increase in the minimum support price to farmers.
Increased Employment Opportunities
Monetary Tightening Required – Not frequently : Could Derail the Growth Momentum
Increased Reverse Repo Rate
Increased Repo Rate
SUGGESTIONS
Looking at the liquidity position : A Gradual Hike in CRR
Control Social Unrest – Can lead to Output Loss
Slowdown in Global Growth – Help Control Manufactured articles Inflation