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Economics Case Study

1. The document discusses inflation in the Indian economy, noting that wholesale price inflation reached 10.5% in April 2021, the highest in a decade, while consumer price inflation was 4.3%. Rising global commodity and fuel prices are major contributors. 2. The Reserve Bank of India's typical measures to control inflation include raising policy rates, cash reserve ratios, and reducing bank deposit rates. However, these measures are not very effective and tend to stunt economic growth rather than lowering demand-driven inflation. 3. For effective inflation control, policies should focus more on curbing excess demand as well as boosting supply to better meet consumer needs.

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Devz Nambiar
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74 views2 pages

Economics Case Study

1. The document discusses inflation in the Indian economy, noting that wholesale price inflation reached 10.5% in April 2021, the highest in a decade, while consumer price inflation was 4.3%. Rising global commodity and fuel prices are major contributors. 2. The Reserve Bank of India's typical measures to control inflation include raising policy rates, cash reserve ratios, and reducing bank deposit rates. However, these measures are not very effective and tend to stunt economic growth rather than lowering demand-driven inflation. 3. For effective inflation control, policies should focus more on curbing excess demand as well as boosting supply to better meet consumer needs.

Uploaded by

Devz Nambiar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Name – KV Devika Ratheesh

Roll No. – 43

BUSINESS ECONOMICS CASE STUDY:

1. Inflation situation in the current Indian Economy:

Inflation refers to the rise in the prices of most goods and services of daily or
common use, such as food, clothing, housing, recreation, transport, consumer
staples, etc. Inflation measures the average price change in a basket of
commodities and services over time. Today about 130 crore people are in the
subcontinent are coping with a common problem of high inflation. Official data
tells us that wholesale price index (WPI)-linked inflation went double-digit at
10.5% year-on-year in April 2021 (from 7.4 per cent in March), for the first time
since 2010. The CPI inflation, moderated to 4.3 per cent (from 5.5 per cent in
March) – led by a high base of the previous year (it had spiked to 7.2 per cent
in April 2020). But last year’s base may not reflect accurate trends, as data
collection was disrupted in April and May 2020. A month-on-month analysis
may put the picture in better perspective. The sharp rise in commodity prices
across the world is a major reason behind the inflation spike in India. Brent
crude prices crossed $65 per barrel in May 2021, more than double of what it
was a year ago. Price of vegetable oils, a major import item, shot up 57% to
reach a decadal high in April 2021. Metals prices are near the highest in 10
years and international freight costs are escalating. “The trend of WPI rising for
inputs is showing up in manufacturing costs including in chemicals, paper, and
textile sectors,” said Dharmakirti Joshi, Chief Economist at Crisil. As per Crisil
estimates, CPI inflation was likely to moderate to 5% this fiscal from 6.2% last
fiscal. This was based on lower food inflation benefitting from the high base of
last year and assuming a normal monsoon. However, upside inflation risks are
growing. On top of rising input prices, supply disruptions brought on by the
second Covid wave in rural India are adding to inflationary pressure. These are
the major reasons behind such change in projections.
 

1. Measures taken by the GOI and RBI to control inflation:

  The steps generally taken by the RBI to tackle inflation include a rise in repo
rates (the rates at which banks borrow from the RBI), a rise in Cash Reserve
Ratio and a reduction in rate of interest on cash deposited by banks with RBI.
The signals are intended to spur banks to raise lending rates and to reduce the
amount of credit disbursed. The RBI's measures are expected to suck out a
substantial sum from the banks. In effect, while the economy is booming and
the credit needs grow, the central bank is tightening the availability of credit.
The RBI also buys dollars from banks and exporters, partly to prevent the
dollars from flooding the market and depressing the dollar - indirectly raising
the rupee. In other words, the central bank's interactions have a desirable
objective - to keep the rupee devalued - which will make India's exports more
competitive, but they increase liquidity.To combat this, the RBI does what it
calls sterilisation- it takes out the rupees it pays out for dollars through sale of
sterilisation bonds. It then sells these bonds to banks. Economists point out
that there has not been much success in such sterilisation attempts in India.
The central bank's attempt to offload Government bonds on banks has not
been too successful inasmuch as the banks sell the bonds and get rupees
instead.
These measures generally taken by the RBI do not effectively tackle inflation
but on the other hand effectively stunts the growth pattern of the economy.
The RBI seems to believe that by merely reducing the credit flow and money
flow in the economy, inflation can be curtailed. Inflation is a consequence of
increasing demand and supply in the economy. The demand must be
effectively curtailed or pushed down, which the present CRR policy is not
managing to do effectively. The RBI, in an ideal world, would have also looked
towards a mechanism to bolster the supply forces to meet the requirements of
the consumers and thereby combat inflation.

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