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DEMYSTIFYING INFLATION

PRESENTED BY: MANJARI KUMARI(10/MBA/07) RONY ROY(10/MBA/08) ARINDAM MONDAL(10/MBA/10) PINAKI RANJAN SARKAR(10/MBA/64)

INFLATION
Inflation is nothing more than a sharp upward rise in price level. Too much money chasing, too few goods. Inflation is a state in which the value of money is falling i.e. price are rising.

EFFECT OF INFLATION

NEGATIVE
1) A decrease in the real value of money and other monetary items over time, 2)uncertainty over future inflation may discourage investment and saving

POSITIVE
1) Ensuring central banks can adjust nominal interest rates and encouraging investment in non-monetary capital projects

MONEY

Money is any object or record that is generally accepted as payment for goods and services. Medium of repayment of debts in a given country or socio-economic context

TYPES OF MONEY
M1 M2 M3 M4

M1:

M1 & M2
with the public

Currency

Demand deposits with the banking system

Other deposits with the RBI.

M2: M1 + Savings deposits with Post office savings banks.

M3
M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Governments currency liabilities to the public Net nonmonetary liabilities of the banking sector (Other than Time Deposits).

M4 & M0
M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).

Reserve Money (M0): Currency in circulation + Bankers deposits with the RBI + Other deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBIs claims on banks + RBIs net foreign assets + Governments currency liabilities to the public RBIs net non-monetary liabilities.

MEASUREMENT OF INFLATION

Consumer Price Index (CPI)

Wholesale Price Index (WPI)

CPI
CPI measures the change in the prices paid by consumers for a market basket of goods and services. Market Basket: A fixed list of commonly purchased items used to track inflation.

CPI = Market basket in the year you are counting for 100 Market basket in Base year

WPI
WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. Some countries (like India and The Philippines) use WPI changes as a central measure of inflation.

WPI of a commodity in current year= (price of commodity in current year)-(price of commodity in base year) 100 (price of commodity in base year)

Calculation of Inflation Rate

Inflation Rate =

X 100

150 - 140 Inflation Rate = 140

X 100

=7.12%

MEASURES TO CONTROL INFLATION:


Supply Side
Increased production y Control of illegal activities y Main energy sources
y

Demand Side
Population Control Fiscal Policy Control of Money Supply

BANK RATE POLICY


RBI lends to the commercial banks through its discount window to help the banks meet depositors demands and reserve requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 5 May, 2011 the bank rate was 6%.

CRR
CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks dont hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivalent to holding cash with themselves.

SLR

SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits) It regulates the credit growth in India.

REPO RATE

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive.

GROWTH OF MONEY SUPPLY IN INDIA

Weightage of Different Commodities

SENSEX VS INFLATION

EFFECTS ON SENSEX

As inflation rises , as a measure to control it the Reserve Bank of India will increase the CRR and SLR , hence it will reduce the supply of money in the economy. Thus it may lead to downfall of Sensex.

INFLATION OF BRIC+US+UK

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