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INTRODUCTION
Inflation has been different in different dictionaries over the ages. Inflation is an economic
condition wherein the price of the goods and services increase steadily measured against
standard level of purchasing power, whereas the supply of the goods and services decline
along with the devaluation of money. When the economy of a country faces inflation it
brings bad news for the people because the supply of goods decreases and this scarcity causes
a predicament for the people.
Economists from different schools differ in their opinion regarding the genesis of inflation.
However, it is agreed that inflation occurs due to an unexpected rise in the supply of money
which causes devaluation or a decrease in the supply of goods and services. Again, the
inflation rate decreases with the increase in the production of goods and with the decrease in
the supply of money in the market. The purview of inflation has narrowed in the present day
since only the phenomenon of increase in the price level is termed as inflation these days.
Previously, the devaluation of money was also considered to be a condition of inflation. In
the present day this phenomenon is known as a monetary inflation.

INFLATION IN INDIA
The annualised inflation rate in India is 3.78% as of August 2015, as per the Indian Ministry
of Statistics and Programme Implementation.
Inflation rates in India were usually quoted as changes in the Wholesale Price Index, for all
commodities earlier. The consumer price index replaced the wholesale price index (WPI) as a
main measure of inflation in India as per the new standard for measuring inflation.

Table 1 historic inflation India (CPI) by year :-

Inflation is measured by a variety of indices, like the Consumer Price Index (CPI) and the
Wholesale Price Index (WPI).

Consumer Price Index: The Consumer Price Index expresses the current price of a basket of
goods and services (say July 2014) in terms of prices during the same period in the previous
year (July 2013).
Most countries, including India, use the CPI as their measure of inflation, which is measured
from the consumer's perspective.
Wholesale Price Index: The Wholesale Price Index shows the rise (or fall) of prices of
manufactured goods as they leave the factory.
Until recently, the Reserve Bank of India (RBI) used the WPI as their measure of inflation.
Under Raghuram Rajan's governance, the RBI has now adopted the CPI as their measure of
inflation, as suggested by the Urjit Patel Committee report, in April 2014.

Studying the data provided in Table No 1 , we can say the Indian Economy is going through a
period of disinflation.

A consumer price index (CPI) measures changes in the price level of a market basket
of consumer goods and services purchased by households. The CPI is a statistical estimate
constructed using the prices of a sample of representative items whose prices are collected
periodically.

Inflation fluctuation for 4 Quarters

Consolidated data:-

The inflation rate in India was recorded at 3.78 percent in July of 2015. Inflation Rate in
India averaged 8.33 percent from 2012 until 2015, reaching an all time high of 11.16 percent
in November of 2013 and a record low of 3.78 percent in July of 2015.
Inflation Rate in India is reported by the Ministry of Statistics and Programme
Implementation (MOSPI), India.
With inflation staying well below the 6 percent upper end of the Reserve Bank of India's
(RBI) target range and growth momentum weakening, analysts are expecting the central bank
to lower lending rates for a third time this year.

India's economy witnesses higher growth, lower inflation and a relatively


stable currency.

Inflation trend in India:-

TREND AND CAUSES OF INFLATION:


There are a few different reasons that can account for the inflation in our goods and services;
let's review a few of them.

1) Demand-pull inflation:
Refers to the idea that the economy actual demands more goods and services than available.
This shortage of supply enables sellers to raise prices until equilibrium is put in place
between supply and demand.

It basically occurs in a situation when the aggregate demand in the economy has exceeded the
aggregate supply. It could further be described as a situation where too much money chases
just few goods. A country has a capacity of producing just 550 units of a commodity but the
actual demand in the country is 700 units. Hence, as a result of which due to scarcity in
supply the prices of the commodity rises. This has generally been seen in India in context
with the agrarian society where due to droughts and floods or inadequate methods for the
storage of grains leads to lesser or deteriorated output hence increasing the prices for the
commodities as the demand remains the same.

2) Cost-push theory:
Also known as "supply shock inflation", suggests that shortages or shocks to the available
supply of a certain good or product will cause a ripple effect through the economy by raising
prices through the supply chain from the producer to the consumer. You can readily see this in
oil markets. When OPE Creduces oil supply, prices are artificially driven up and result in
higher prices at the pump.

Similarly, the high cost of labor eventually increases the production cost and leads to a high
price for the commodity.The energies issues regarding the cost of production often increases
the value of the final output produced. These supply driven factors have basically have
a fiscal tool for regulation and moderation. Further, the global level impacts of price rise
often impacts inflation from the supply side of the economy.

3) Money supply:
Plays a large role in inflationary pressure as well. Monetarist economists believe that if the
Federal Reserve does not control the money supply adequately, it may actually grow at a rate
faster than that of the potential output in the economy, or real GDP. The belief is that this will
drive up prices and hence, inflation. Low interest rates correspond with high levels of money
supply and allow for more investment in big business and new ideas, which eventually leads
to unsustainable levels of inflation, as cheap money is available. The credit crisis of 2007 is a
very good example of the same.

4) International Situation:
Rising demand due to buoyant economy in developing nations, production shortfall, higher
crude oil prices and diversion of food crop for bio-fuel have all contributed to the runaway
trend of commodity prices. These developments are largely demand driven. Inflation in India
is mainly due to the wrong policy of the Indian government, when too much money is
fuelling speculative drive.

5) Growth of Money:
The source of money that is fuelling inflation in India has three main sources: (a) money from
the parallel economy; (b) money from abroad through short-term borrowing and investments;
(c) foreign multinational companies inflows.

The exchange rate determination is an important component for the inflationary pressures that
arises in the India. The liberal economic perspective in India affects the domestic markets. As
the prices in United States Of America rises it impacts India where the commodities are now
imported at a higher price impacting the price rise. Hence, the nominal exchange rate and the
import inflation are a measures that depict the competitiveness and challenges for the
economy

6) Domestic Factors :
Developing economies like India have generally a lesser developed financial market which
creates a weak bonding between the interest rates and the aggregate demand. This accounts
for the real money gap that could be determined as the potential determinant for the price rise
and inflation in India. There is a gap in India for both the output and the real money gap. The
supply of money grows rapidly while the supply of goods takes due time which causes
increased inflation. Similarly Hoarding has been a problem of major concern in India where
onions prices have shot high in the sky. There are several other stances for the gold and silver
commodities and their price hike.

7) Global Trade:Inflation in India generally occurs as a consequence of global traded commodities and the
several efforts made by The Reserve Bank of India to weaken rupee against dollar. 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.
Further, on account of cheap products being imported in the country which are made on a
high technological and capital intensive techniques happen to either increase the price of
domestic raw materials in the global market or they are forced to sell at a cheaper price,
hence fetching heavy losses.

8) Money Supply and Inflation:The Quantitative Easing by the central banks with the effect of an increased money supply in
an economy often helps to increase or moderate inflationary targets. There is a puzzle
formation between low-rate of inflation and a high growth of money supply. When the
current rate of inflation is low, a high worth of money supply warrants the tightening of
liquidity and an increased interest rate for a moderate aggregate demand and the avoidance of
any potential problems. Further, in case of a low output a tightened monetary policy would
affect the production in a much more severe manner. The supply shocks have known to play a
dominant role in the regard of monetary policy. The normal growth cycles accompanied with
the international price pressures has several times being characterized by domestic
uncertainties.

The major determinant of the inflation in regard to the employment generation and growth is
depicted by the Phillips curve.

Effects of Inflation:
Inflation affects both the economy of a country and its social conditions, as well as the
political and moral lives of its inhabitants. However, the economic effects of Inflation are
stated and described below:
Price inflation has immense effect on the Time Value of Money (TVM). This acts as a
principal component of the rates of interest, which forms the basis of all TVM
calculations. The real or estimated changes occurring in the rates of inflation lead to
changes in the rates of interest as well.
Inflation exerts impact on the treasury of a nation as well. In United States of
America, Treasury Inflation-protected Securities (TIPS) ensures safety to the
American government, assuring the public that they will get back their money.
However, the rates of interest charged by TIPS are less compared to the standard
Treasury notes.
The most immediate effect of inflation is the decrease in the purchasing power of
dollar and its depreciation. Inflation influences the investments of a country. The
Inflation-protected Securities (IPSs) may act as a guard against the loss in the
purchasing power of the fixed-income investments (like fixed allowances and bonds),
which may occur during inflation.

Inflation changes the allocation of income. This exerts maximum effect on the lenders
than the borrowers at the time of persisting inflation, because the loans sanctioned
previously are paid back later in the form of inflated dollars.

Inflation leads to a handful of the consumers in making extensive speculation, to


derive advantage of the high price levels. Since some of the purchases are high-risk
investments, they result in diversion of the expenditures from regular channels, giving
birth to a few structural unemployment.

Control of Inflation :
Inflation is a complex phenomenon. It should be controlled in the beginning stage itself;
otherwise it will take shape of hyper-inflation which will completely ruin the country. Since
inflation is mainly caused by an excess of effective demand for goods and services at the full
employment level as compared to the available supply of goods and services , measures to
control inflation involve reduction in the total demand on the one hand and increasing output
on the other.

Broadly, the measures to control inflation can be categorized as follows:

a) Monetary policy :Monetary policy is adopted, by the monetary authority or the central bank of a
country to influence the supply of money and credit by changing interest rate structure
and availability of credit .
The RBI uses monetary policy to maintain price stability and an adequate flow of credit.
Reducing inflation has been one of the most important goals for some time.
Various monetary measures to control inflation are

Bank Rate
Open Market Operations (OMO):sale of Government Securities
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)

Bank Rate:The bank rate policy, however, has two dimensions:


(i) By changing the bank rate, the cost of credit is influenced. Thus, a rise in the bank rate
implies a rise in the banks cost of borrowings. A fall in the bank rate would mean a reduction
in the cost of credit, which, in turn, encourages banks borrowings from the RBI,
(ii) By widening or narrowing the list of eligible securities, the member banks borrowing
capacity is directly affected. Again, the significance of the bank rate variation lies in the
money market more as a pace-setter for the entire interest rate structure short-term as well as
long-term. It has been a common practice that a change in the bank rate is followed by
changes in the banks lending rate to their customers. Other agencies of the money market,
too, follow the trend. It has been observed that when the bank rate is raised, apart from
commercial banks, the financial institutions like the Industrial Development Bank of India,
the Industrial Finance Corporation of India (IFCI), the State Finance Corporations (SFCs),
etc., also have generally levered up the rates of interest charged by them in due course of
time. Thus, raising of the bank rate implies a dear money policy of the Reserve Bank of India,
which makes the money market tight.
This results in
(i) To improve interest rates on deposits and raise the cost of money lent to commercial
banks.
(ii) To increase the cost and reduce the availability of refinance from the Reserve Bank.
(iii) To curb overall loanable resources of banks.
(iv) To enhance the cost of credit to borrowers from banks.

Open Market Operations (OMO):An open market operation (OMO) is an activity by a central bank to buy or sell government
bonds on the open market at a very high rate of interest.
OMDs are more effective and superior to cash reserve ratio (CRR) as a tool of monetary
regulation for absorption of liquidity. Besides OMOs are transparent operations.
The open market operations policy has two dimensions:
(i)
it directly increases or decreases the loanable funds or the credit-creating capacity
of banks and
(ii)
it leads to changes in the prices of government securities and the term structure of
interest rates.

Cash Reserve Ratio (CRR):Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with the central
bank.
The amount specified as the CRR is held in cash and cash equivalents, is stored in bank
vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not

run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary
policy tool and is used for controlling money supply in an economy
An increase in CRR leads to an immediate curb on the excess funds of the banks. When
banks credit volume decreases, their profit quantum also decreases. To maintain the same
total profits, a decrease in profitability is to be compensated by raising the lending rate.
Eventually, when the banks lending rates are raised, the cost of credit increases.

Statutory liquidity ratio (SLR):


Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that the
commercial banks in India require to maintain in the form of gold, government approved
securities before providing credit to the customers.
Statutory Liquidity Ratio is determined and maintained by Reserve Bank of India in order to
control the expansion of bank credit.
By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit
expansion.

Selective Credit Control (SCC):


Selective credit control is a tool in the hands of Reserve Bank of India to restrict bank finance
against sensitive commodities. These sensitive commodities generally include:
(i)
Food grains i.e., cereals and pulses.
(ii)
Cotton textiles, which include cotton yarn, man-made fibres and yarn and fabrics
made out of man-made fibres and partly out of cotton yarn and partly out of man-made fibres.
(iii)
Selected major oil seeds indigenously grown viz. groundnut, rapeseed/mustard,
cottonseed, linseed and castor seed, oils thereof, vanaspati and all imported oils and vegetable
oils.
(iv)
Sugar, Gur and Khandsari.
(v)
Raw cotton and kapas.
All these commodities, as would be observed, are of mass consumption and Government
makes all efforts to ensure adequate supply of these commodities in the free market. The
policy, therefore, is to discourage advances against these commodities as far as possible and
the purpose is achieved through Selective Credit Control, which has two different aspects as
under:
(i)
(ii)

Minimum margin for lending against security of specified commodities is fixed.


Ceiling on the level of credit is fixed.

b) Fiscal Policy :Fiscal Policy is the budgetary policy of the government to control inflation which include
Increase in taxation
Reduction in public expenditure
Increase in public borrowing
Control of deficit financing.

c) Direct Controls:Direct control refer to the regulatory measures undertaken with an objective of converting an
open inflation into a suppressed one. Direct control on prices and rationing of scarce goods
are the two such regulatory measures.

d) Other measures :Besides monetary, fiscal and direct measures, there are some other measures which can be
taken to control inflation such as
Expansion of output
proper Wage policy
Encouragement to saving
Overvaluation
Population Control
Indexing

CONCLUSION :India's inflation is in a lower rate as of now.


Low or negative rate in inflation reduces the hardness of recession by allowing the market to
adjust more quickly in a down turn and reduces the trap which prevents from monetary policy
from stabilizing.
Generally these policies are the authorities for central banks which have monetary control
through interest rates, open markets operations, and reserve requirements. Issues which lead
to inflation are: optimal inflation rate, money supply and inflation, global trade. Other than
this there are several other factors which determine impact of inflation in India they are:
demand factors, supply factors, domestic factors, external factors, etc.

An increase in the general level of prices indicates a decrease in the purchasing power of the
currency. That is, when the general level of prices rises, each monetary unit buys fewer goods
and services.
There are two types of effects negative and positive. Negative effect has high or unpredicted
rates which can be harmful for the economy which includes cost push inflation, hoarding,
social unrest and revolts, hyperinflation, allocate efficiency menu costs, business cycle etc.
Positive effect includes Labour-market adjustments, discount rate, savings to money holders,
Instability with deflation, financial market inefficiency with deflation and many more.
Inflation is basically targeting the general frame work which is the new way in opening up its
capital account and moving in the direction of a flexible exchange rate.

Indian economy is likely to clock 8.1 percent growth in the current financial year, spurred by
strong consumer spending amid low inflation, infrastructure projects and government's
reform measures, says a UN report.
Growth is forecast to accelerate to 8.1 percent in 2015 and 8.2 percent in 2016, benefiting
from the acceleration of infrastructure projects, strong consumer spending due to lower
inflation and monetary easing and gradual improvements in market sentiments.

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