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Case Study On Inflation PDF

Inflation in India is caused by an increase in demand for goods and services outpacing supply. GDP growth between 2000-2007 increased demand for goods by around 6% annually, but supply of key foods did not keep pace, driving up food prices. The wholesale price index (WPI) saw inflation pressures from food articles rising due to temporary and structural supply constraints. The Reserve Bank of India (RBI) took measures in 2006-2007 to control inflation by increasing bank rates and cash reserve ratios, reducing available money supply. However, some economists argued the steps were not enough and interest rates should not have been increased as it could slow economic growth. High inflation was also seen as a sign of economic mismanagement that could

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Mansi Gupta
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157 views2 pages

Case Study On Inflation PDF

Inflation in India is caused by an increase in demand for goods and services outpacing supply. GDP growth between 2000-2007 increased demand for goods by around 6% annually, but supply of key foods did not keep pace, driving up food prices. The wholesale price index (WPI) saw inflation pressures from food articles rising due to temporary and structural supply constraints. The Reserve Bank of India (RBI) took measures in 2006-2007 to control inflation by increasing bank rates and cash reserve ratios, reducing available money supply. However, some economists argued the steps were not enough and interest rates should not have been increased as it could slow economic growth. High inflation was also seen as a sign of economic mismanagement that could

Uploaded by

Mansi Gupta
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What is causing Inflation?

Inflation is the rise in prices which occurs when the demand for goods and
services exceeds their available supply. In simpler terms, inflation is a
situation where too much money chases too few goods. In India, the
wholesale price index (WPI), which was the main measure of the inflation rate
consisted of three main components - primary articles, which included food
articles, constituting 22% of the index; fuel, constituting 14% of the index; and
manufactured goods, which accounted for the remaining 64% of the index.
For purposes of analysis and to measure more accurately the price levels for
different sections of society and as well for different regions, the RBI also kept
track of consumer price indices. The average annual GDP growth in the
2000s was about 6% and during the second quarter (July-September) of
fiscal 2006-2007, the growth rate was as high as 9.2%. All this growth was
bound to lead to higher demand for goods. However, the growth in the supply
of goods, especially food articles such as wheat and pulses, did not keep
pace with the growth in demand. As a result, the prices of food articles
increased. According to Subir Gokarn, Executive Director and
Chief Economist, CRISIL, "The inflationary pressures have been particularly
acute this time due to supply side constraints [of food articles] which are a
combination of temporary and structural factors."
Measures Taken :
In late 2006 and early 2007, the RBI announced some measures to control
inflation. These measures included increasing repo rates, the Cash Reserve
Ratio (CRR) and reducing the rate of interest on cash deposited by banks
with the RBI. With the increase in the repo rates and bank rates, banks had
to pay a higher interest rate for the money they borrowed from the RBI.
Consequently, the banks increased the rate at which they lent to their
customers. The increase in the CRR reduced the money supply in the system
because banks now had to keep more money as reserves. On December 08,
2006, the RBI again increased the CRR by 50 basis points to 5.5%. On
January 31, 2007, the RBI increased the repo rate by 25 basis points to
7.5%...
Some Perspectives
The RBI's and the government's response to the inflation witnessed in
2006-07 was said to be based on 'traditional' anti-inflation measures.
However, some economists argued that the steps taken by the
government to control inflation were not enough...
Outlook 
Several analysts were of the view that the RBI could have handled the
2006-07 inflation without tinkering with the interest rates, which according to
them could slow down economic growth. Others believed that high inflation
was often seen by investors as a sign of economic mismanagement and
sustained high inflation would affect investor confidence in the economy.
However, the inflation rate in emerging economies was usually higher than
developed economies
 RBI has decided to reduce the Cash Reserve Ratio (CRR) for Scheduled
Commercial Banks by 50
basis points from 5.50 per cent to 5.00 per cent and Repo Rate is 4.75% of
their net demand with
effect from January 17, 2009.

Instructions :
Mode of submission is Online.
Read the case study carefully and present a summary of 2 pages and answer
the following questions :

Questions:
Q1. Explain the concept of Inflation in Indian context.
Q2. Difference between demand pull inflation and cost push Inflation.
Q2.Give out the ways of curbing inflation.

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