Monetery of Inflation

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Presentation Transcript

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Inflation is on the account of flawed monetary policy. Prepared BY Stuti Desai Wednesday, July 7, 2010 1 National Economic Planning 08-10

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Inflation Situation in which there is… Excess of demand over supply. Rise in prices of goods. Measuring Inflation (P1 – Po)/ Po x 100 Wednesday, July 7, 2010 2 National Economic Planning 08-10

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Monetary Policy Vs Inflation Monetary Policy is concerned with Managing the growth, Stability for the national currency Ensure adequate flow of credit to the productive sectors of the economy. Expansionary & Contractionary policy. Wednesday, July 7, 2010 3 National Economic Planning 08-10

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Tight Monetary Policy Heavy debt on banks and companies. Fall in share price and real estate led to financial crisis. High interest rate causes liquidity squeeze. Rising import price cause inflation. Wednesday, July 7, 2010 4 National Economic Planning 08-10

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Wednesday, July 7, 2010 National Economic Planning 08-10 5 Short term borrowing Short term borrowing are volatile and causes recession & bankruptcy. Speculative flow of money can be controlled by raising interest rates and making credit difficult for pvt. Sector. Controlled through restriction if short term money from abroad & entry of foreign financial institution in domestic market. Reserve bank should reduce interest rates and make more credit available for productive investment through credit control.

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India’s month-to-month Inflation Wednesday, July 7, 2010 6 National Economic Planning 08-10

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Current Inflation rate in India & other countries Countries Inflation Rate INDIA 8.98 US 3.70 CHINA 4.00 JAPAN 2.10 AUSTRALIA 5.00 RUSSIA 14.20 Wednesday, July 7, 2010 7 National Economic Planning 08-10

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Monetary policy challenges Challenges with globalisation Challenges for emerging market economies Wednesday, July 7, 2010 8 National Economic Planning 08-10

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Monetary & Liquidity Conditions Basis 2007 2008 Broad Money 21.5% 20.7% Aggregate Deposits 22.3% 21.2% Bank Credit 28.5% 22.3% Reserve Money 23.7% 30.9% Wednesday, July 7, 2010 9 National Economic Planning 08-10

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Arguments about inflation Objective is to achieve an average rate of CPI inflation of between 2 and 3 per cent Argument “ inflation is higher” Wages have not picked up Certainly not the labour costs Wednesday, July 7, 2010 10 National Economic Planning 08-10

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Inflation, and India status position in world economy Inflation is an excess in the money supply.. Price deflation and not inflation. Rise in general price level is reported in rates of change.. Wednesday, July 7, 2010 11 National Economic Planning 08-10

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Arguments about monetary policy Ineffective in controlling prices, because it is failing to restrain demand. Not that monetary policy is ineffective, but in fact that it makes the problem worse by actually raising prices. Not that monetary policy is ineffective, but that it is not terribly precise. Wednesday, July 7, 2010 12 National Economic Planning 08-10

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MONETARY POLICY AFFECTS DOMESTIC INDUSTRY PARTICULARY EXPORTERS! Central bank announces on export refinance. Rate at which RBI will lend to banks. Lowering of rates

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INFLATION AND THE INEFFECTIVENESS OF MONETARY POLICY Money policy with low interest rates can boost economic growth. Any attempt to boost growth through reducing rates is therefore counter productive.

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Boom Depression Depression Recession Prosparity BUSINESS CYCLE Wednesday, July 7, 2010 15 National Economic Planning 08-10

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Causes of Inflation in India Rise in Crude-Oil price Black money GDP Wage rate rise Smuggling Sub-Prime crisis Low per-capita Poverty Wednesday, July 7, 2010 16 National Economic Planning 08-10

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Control Int MS GDP Controlled Inflation Short -Term Measure CRR SLR Repo Long -Term Measure Economic development from deficit financing Y=C+I+G+NX Wednesday, July 7, 2010 17 National Economic Planning 08-10

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Objectives of Monetary Policy To maintain price stability Managing the growth, Stability for the national currency Ensure adequate flow of credit to the productive sectors of the economy. Wednesday, July 7, 2010 18 National Economic Planning 08-10

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Monetary Policy & Risks Inflation target of the Central Bank is set as 4%. Current level of the credit interest rates. Global inflation risk appetite. High increases in wages augments the risks regarding services prices. Government interventions. Wednesday, July 7, 2010 19 National Economic Planning 08-10

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Conclusion Inflation refers to situation of having to pay too much for too few things. Reason – Liquidity (decrease in value of money) - Short supply leading to higher demand - Price rise Rise in WPI Wednesday, July 7, 2010 20 National Economic Planning 08-10

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Contd. Crude oil prices (75% increase) The wholesale price based inflation rate touched 13 year high during mid-2008. Nov.1990 - July 1992 (16.3%). Lowest - Feb.2003 (1.4%) India is in a running inflation. Wednesday, July 7, 2010 21 National Economic Planning 08-10

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Contd. Ways to measure the effects of inflation: - Change in the real value like wages, salaries, rent, interests, dividends, profits etc. Distribution of income over time as a result of inflation. Wednesday, July 7, 2010 22 National Economic Planning 08-10

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Contd… RBI should use planned Monetary policy to achieve a judicious balance growth of production. Control of the general price level. RBI should use long-term measures. Wednesday, July 7, 2010 23 National Economic Planning 08-10

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