“INFLATION & BANKING”

By- ABINASH SWAINNIT ROURKELA

INFLATION:

• Meaning• Causes: with reference to Banking • Role of RBI: Monetary Policy• Role of the Govt. : Fiscal Policy• Relationship with growth• Effects of inflation : good or bad?• Combating procedure

Inflation • Inflation is defined as a sustained increase in the general level of prices

for goods and services. It is measured as an annual percentage increase. As inflation rises, every rupee you own buys a smaller percentage of a good or service.

• Many developing countries use changes in the Consumer Price Index (CPI) as their central measure of inflation. India used WPI (Wholesale Price Index )as the measure for inflation , but new CPI(combined) is declared as the new standard for measuring inflation ( April 2014) .India uses changes in the Wholesale Price Index (WPI) to measure its rate of inflation.

Calculations:• The WPI measures the price of a representative basket of wholesale

goods. In India, this basket is composed of three groups: 1. Primary Articles (20.1% of total weight), 2.Fuel and Power (14.9%) and 3.Manufactured Products (65%)• Food Articles from the Primary Articles Group account for 14.3% of the

total weight. The most important components of the Manufactured Products Group are Chemicals and Chemical products (12%); Basic Metals, Alloys and Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%).

• WPI numbers are typically measured weekly by the Ministry of Commerce and Industry. This makes it more timely than the lagging and infrequent CPI statistic.

Macro causes of inflation:

• Demand pull effect• Cost push effect

• Role of Banks to regulate Inflation?

BANKS

• Central Bank of India• Commercial Banks

ROLE OF RBI

• Why a central bank?

RBI and banks: Transaction

• Interest Rates• Cash Reserve Ratio (CRR)• Repo Rate• Reverse repo rate• How these rates are used to combat inflation?

Interest Rates & Inflation

• Effect of change in lending rate• Effect of change in saving rate

What does RBI do with interest rate to stabilize inflation?

Effect of change of these rates:

• CRR- Cash Reserve Ratio• RR- Repo rate• RRR- Reverse repo rate

RBI and Government

• Government: Growth (But growth can be possible at the cost of poor people)• RBI- Price stability, low inflation• Fiscal policy & monetary policy

Commercial Banks & Govt.

• Statutory Liquidity Ratio (SLR)• How it helps in combating inflation?

Anything good about high Inflation?

• GDP/growth and Inflation• Another interesting point : later

If you have money and price of goods is high=> inflation is high and growth is high (normal case) , if in recession: demand > supply with less money to spend=> inflation is high and growth is less.

Current scenario

Increase in inflation shows growth in manufacturing sectors as well as result of constant lowering of interest rates. Now inflation is 3.78% (low), govt and industries are forcing RBI to lower interest rate further.

The Rajan Magic: • It is difficult to maintain inflation low and simultaneously

hoping for high growth. But he made it possible.

Steps by Rajan:

The rating they give:

One last interesting fact!• Inflation hike is the indirect outcome of the

consequence of devaluation of own currency.• It is done by circulation of more money in the

economy.• Example: china and India• It helps increase FOREX (foreign exchange

reserve) => Export increases => current account deficit decreases

Case study of the fact!• Monetary policy after the Pokhran Blasts in 1998- This has been

regarded as the root cause of inflation crisis rather than the domestic inflation.

• According to some experts the policy of RBI to absorb all dollars coming into the Indian Economy contributes to the appreciation of the rupee.

• When the US dollar has shrieked by a margin of 30%, Reserve Bank of India had made a massive injection of dollar in the economy make it highly liquid and this further triggered off inflation in non-traded goods.

• The RBI picture clearly portrays for subsidizing exports with a weak dollar-exchange rate. All these account for a dangerous inflationary policies being followed by the central bank of the country.

Keywords & current values• Interest rate- commercial banks decide (nearly

10% )• Cash Reserve Ratio- 4% • Repo rate- 7.25% (recently decreased from 7.5%)• Reverse repo rate-6.25% (RR-1 % normally)• Statutory liquidity ratio- 21.50% • FOREX value- 355.354 bn$ -Sept 2015• INFLATION- 3.78% -August 2015• Growth expectation for current FY-nearly 7%

• Thank you!• https://in.linkedin.com/in/abinash-swain-

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