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
Under 6 % of GDP
Deficit
Exchange Regime Floating
Trade Less Important
 Circle of Inflation
Inflation ↑ Rate of Interest ↓

Price ↑ Investment ↑

Aggregate Demand ↑
Consumption ↑

Income ↑ 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
200.00 Prices 9.00
7.00
5.00

Inflation Rate (%age terms)

150.00 3.00
IMD
Index Value

Redemption 1.00
Gulf (1.00)
100 Asian Crisis
War
100.00 (3.00)
(5.00)
(7.00)
Balance of
50.00 (9.00)
Payments
Crisis (11.00)
(13.00)
- (15.00)
1990-91

1996-97

1999-00

2000-01

2002-03

2003-04

2006-07
1991-92

1992-93

1993-94

1994-95

1995-96

1997-98

1998-99

2001-02

2004-05

2005-06
 Comparison of Interest rates and Inflation

16.00

14.00

12.00

10.00
CRR
Rate (%age terms)

8.00 Bank Rate

WPI
6.00

4.00

2.00

-
1992-93

1994-95

1996-97

1998-99

2000-01

2004-05
1990-91

2002-03

2006-07
 1991-Balance of Payment Crisis
Causes Actions

• Excess Demand was • Excess demand of Govt

more important cause. was met from 3 sources
• Increase in oil prices. • PDS System further
(Gulf War) expanded
• Gross savings of Govt • 1.5 million tonnes of
was (-ve) foodgrains off-loaded by
• The Monetized deficit FCI
rose from 1.6% to 3.1% • Imports of edible oils
of GDP • Reducing subsidiary and
• Increase in budget external support to
deficit would production so as to make
generalized inflationary them more responsive to
pressure in the price and demand
economy. change.
 1992-93, 1993-94
Causes Actions

• Decline was due to • Continued with the

prices of Agri product disinflationary policies.
fell (with a good Kharif • Reduction in the fiscal
Harvest) deficit played important
• WPI for all commodities role.
reached 250.7 in Jan • Financial sector reformed
1994 (relaxation in SLR, CRR)
• WPI Base Changed • 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
• 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
7. Max IR on NRE A/c ↓
8. Stability in Wheat prices by
open market sales
9. Monthly sugar supply for PDS
maintained.
 1997-98, 1998-99, 1999-00
Causes Actions

• Low inflation because • Monetary & Credit

of success achieved in Policy 1998 reduced
moderating money Bank Rate to 9%
supply growth & • CRR increased from 10%
keeping fiscal deficit to 11%.
within prudent limits. • Interest rate deregulation
• Inflation increased due in banks.
to shortfall in essential • inflation record 18 years
agri commodities low of 2% at the end of
(onions & potatoes) in July 99.
1998-99
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?