The Indian Economy: Dealing with Inflation


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Case Details:

Case Code : ECON020
Case Length : 12 Pages
Period : 2006-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : -
Industry : -
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Measures Taken

In late 2006 and early 2007, the RBI announced some measures to control inflation. These measures included increasing repo rates, the Cash Reserve Ratio (CRR) and reducing the rate of interest on cash deposited by banks with the RBI. With the increase in the repo rates and bank rates, banks had to pay a higher interest rate for the money they borrowed from the RBI. Consequently, the banks increased the rate at which they lent to their customers. The increase in the CRR reduced the money supply in the system because banks now had to keep more money as reserves. On December 08, 2006, the RBI again increased the CRR by 50 basis points to 5.5%. On January 31, 2007, the RBI increased the repo rate by 25 basis points to 7.5%...

Some Perspectives

The RBI's and the government's response to the inflation witnessed in 2006-07 was said to be based on 'traditional' anti-inflation measures. However, some economists argued that the steps taken by the government to control inflation were not enough...

Outlook

Several analysts were of the view that the RBI could have handled the 2006-07 inflation without tinkering with the interest rates, which according to them could slow down economic growth. Others believed that high inflation was often seen by investors as a sign of economic mismanagement and sustained high inflation would affect investor confidence in the economy.

However, the inflation rate in emerging economies was usually higher than developed economies (Refer Exhibit VI for inflation rates in some developed and developing countries)...

Exhibits

Exhibit I: A Brief Note on Inflation
Exhibit II: Weightage of Different Commodities in the WPI
Exhibit III: Rate of Inflation in India
Exhibit IV: Changes in CRR, Repo Rate and Bank Rate: 2001- 2006
Exhibit V: Indian Rupee-US Dollar Foreign Exchange Rate
Exhibit VI: A Comparison of Inflation Rates in Some Countries in 2007


 

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