INFLATION: CAUSES, IMPACT, MEASURES BY THE RBI (QUESTION ANSWER FORMAT)

Q) RBI had earlier said that for 24 odd months we've had a sustained increase in inflation, and inflation in layman's term is when too much money chases too few goods then you have what we call as the inflation. But there are times when people say that it's good for the economy because companies borrow a lot of money for expansion, people visit super markets, college kids have extra pocket money to spend. So, there is what they call the good inflation and bad inflation. Where are we right now in India? Is it good or is it bad? Is it good inflation or is it bad inflation? A). To begin with, inflation can be either demand led or it can cost push led and in our particular case, it's a combination of the two. Cost push when we say, we have the import inflation through oil. We have seen large inflation rise because of the oil. We have a scenario where by 60% of the price paid for petrol or diesel essentially is tax that is one. Two, we are facing high inflation on account of food articles and that inflation is happening because of low productivity, we don't have sufficient cold storage units. For Example, whatever efficiency that we have seen in our services industry IT in particular if that is on a scale of 100 and it is at 100, our efficiency for food articles will not be even 30 or 40 and that's the gap which has to be breached and which is what is hurting the common man. Certainly its a matter of concern because its not driving investments. When there is a large inflation scaling at you it does impact the investment climate typically when you have high inflation you have high interest rate also which impacts the entire economy, cost of doing business goes up and it has a negativity associated to it . Q) Recently, 'The Economic Times' carried news that for the first time in 42 months the two wheeler sales have shown a drop. So it's directly affecting the common man. Some of it is attributed to inflation, some other is general gloom or the slow growth rate that the economy is undergoing but given the situation it is a big question among the invertors

that where to put/invest the money? A) To create wealth one has to ensure that the entire investment rotates around an average return higher than inflation and then only we can say that the wealth creation is happening. If it's lower than inflation then it's actually eroding the wealth which means that investing should not only in one asset class but it has to be in multiple different assets. So you have got different assets available, you have equity, you have got gold, you have got real estate, you have got fixed income and one has to ensure that the money is spread out across all these four assets in different proportions keeping basics in mind which is investment horizons are directly linked with the kind of risk that the asset class carries, because higher the risk, longer should be the investment horizon so as to mitigate that risk Q) How can mutual funds help in all of this, is it a good time to invest a substantial part in equity, in mutual funds? A) When we look at the asset classes that we have, when one looks at mutual funds, the typical tendency is that one looks at mutual funds as equity mutual funds or a debt mutual fund. Remember, mutual fund is a collective investment scheme which is investing in different asset classes. Typically, Mutual Funds in India offer 3 kinds of asset classes one is equity, second is fixed income that is debt & third is gold. And all these 3 investment classes say equity - you'll have a different risk levels within equity, e.g. being we would have a exchange dated fund which would invest only in nifty which will be amongst the lowest risk, Amongst all the schemes that we offer or funds that we offer, then you may have a large cap fund, you may have a mid cap fund, you may have a flexi cap fund, you know those kind of categorizations are there within the asset class. Q) If we move from consumers to the other side, that is the banks; how are banks reacting to the inflationary situation around them? A) Indian banking system is one of the most robust banking systems. When we talk to Global investors they are surprised to hear that there has not been a single banking failure in this country over the last 65 years. We have never ever seen any depositor losing money. When you put money in a bank there's, a guarantee that your money will not go down, you are guaranteed that you will get a particular rate of interest. That is when you are putting your money, say in a fix deposit. The Inflationary situation doesn't impact the Indian banking system as compared to

other countries because of extremely solid risk management that we have in the Indian banking system. Yes, it does impact profitability but not the depositor. Q) What are the measures that the Reserve Bank of India is taking to stem the rising prices? A) The Reserve Bank of India (RBI) today cut the cash reserve ratio (CRR) by 25 basis points to 4.50 per cent in its monetary policy review. The decision will infuse Rs 17,000 crore into the banking system. The central bank kept the key interest rates unchanged, stating that the primary focus of monetary policy remains fighting inflation. The repo rate was kept status quo at 8%. Here is a look at six key takeaways from the monetary policy review: 1. 25 basis points cut in Cash reserve ratio will release Rs 17,000 crore into the system. 2. Weak growth due to poor investment sentiment could now reverse, given the pro active steps being taken by the Government on the policy front. 3. RBI's primary focus continues to be anchoring inflationary pressures. 4. Inflationary pressures and twin deficits ie current account and fiscal deficits constraint the possibility of a rate cut from the RBI. 5. Monetary easing in other parts of the world to have an impact on the global commodity prices 6. RBI will make sure there is ample liquidity in the system to ensure adequate flow of credit to the productive sectors.

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