Anti-inflationary Policy In India
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- Words: 663
- Pages: 14
Presented By: Siddharth Iyer Ashish Kumar Jain Pankaj Jain Satish Kachhawa Jharna Tinani
Macroeconomic Fundamentals India GDP Growth
Moderate
Inflation
Low
Saving Rate
High
Current Account Deficit Exchange Regime Trade
Under 6 % of GDP Floating Less Important
Circle of Inflation Rate of Interest ↓
Inflation ↑
Price ↑
Investment ↑
Consumption ↑ Income ↑
Aggregate Demand ↑ Production ↑
Monetary Policy Objectives •Price stability •Ensuring adequacy of credit to support growth •Financial Stability
Instruments •Move from direct to indirect instruments •LAF (Repo & Reverse Repo) •OMO •MSS
Fiscal Policy • Potential to increase tax • Reprioritize expenditures • Increase borrowing, domestic or external
Inflation as measured by WPI (Base Year 1993-94) 250.00
15.00 13.00 11.00
Rising Oil Prices
200.00
9.00 5.00
100.00
3.00
IMD Redemption
Gulf War
100
1.00 (1.00)
Asian Crisis
(3.00) (5.00) (7.00)
Balance of Payments Crisis
50.00
(9.00) (11.00) (13.00)
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
(15.00) 1991-92
1990-91
Index Value
150.00
Inflation Rate (%age terms)
7.00
Comparison of Interest rates and Inflation 16.00 14.00
10.00
CRR Bank Rate
8.00
WPI
6.00 4.00 2.00
2006-07
2004-05
2002-03
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
Rate (%age terms)
12.00
1991-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, 1993-94 Causes •
• •
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.
1994-95 Causes • • •
• •
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 •
• • • 7. 8. 9.
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 Max IR on NRE A/c ↓ Stability in Wheat prices by open market sales Monthly sugar supply for PDS maintained.
1997-98, 1998-99, 1999-00 Causes •
•
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.
Outcomes – Monetary Policy Inflation Significant reduction in inflation since mid-1990s Inflation contained despite supply shocks and large capital flows Inflation expectations stable
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?
Macroeconomic Fundamentals India GDP Growth
Moderate
Inflation
Low
Saving Rate
High
Current Account Deficit Exchange Regime Trade
Under 6 % of GDP Floating Less Important
Circle of Inflation Rate of Interest ↓
Inflation ↑
Price ↑
Investment ↑
Consumption ↑ Income ↑
Aggregate Demand ↑ Production ↑
Monetary Policy Objectives •Price stability •Ensuring adequacy of credit to support growth •Financial Stability
Instruments •Move from direct to indirect instruments •LAF (Repo & Reverse Repo) •OMO •MSS
Fiscal Policy • Potential to increase tax • Reprioritize expenditures • Increase borrowing, domestic or external
Inflation as measured by WPI (Base Year 1993-94) 250.00
15.00 13.00 11.00
Rising Oil Prices
200.00
9.00 5.00
100.00
3.00
IMD Redemption
Gulf War
100
1.00 (1.00)
Asian Crisis
(3.00) (5.00) (7.00)
Balance of Payments Crisis
50.00
(9.00) (11.00) (13.00)
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
(15.00) 1991-92
1990-91
Index Value
150.00
Inflation Rate (%age terms)
7.00
Comparison of Interest rates and Inflation 16.00 14.00
10.00
CRR Bank Rate
8.00
WPI
6.00 4.00 2.00
2006-07
2004-05
2002-03
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
Rate (%age terms)
12.00
1991-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, 1993-94 Causes •
• •
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.
1994-95 Causes • • •
• •
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 •
• • • 7. 8. 9.
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 Max IR on NRE A/c ↓ Stability in Wheat prices by open market sales Monthly sugar supply for PDS maintained.
1997-98, 1998-99, 1999-00 Causes •
•
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.
Outcomes – Monetary Policy Inflation Significant reduction in inflation since mid-1990s Inflation contained despite supply shocks and large capital flows Inflation expectations stable
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?
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