INFLATION MANAGEMENT

Inflation continues to be a headache for countries across the world and governments from time to time have been striving hard to contain inflation. India is not an exception to this situation. Inflationary pressures on Indian economy has been aggressive during the past around one year and the Reserve Bank of India had to initiate stern measures to arrest its journey upward further. The latest among these steps are the revision of CRR and Repo rates. This is not the first time Reserve bank of India is using Repo as an intervention tool to contain inflation. In the past also RBI had changed the Repo and Reverse Repo rates to adjust the excessive money supply. These rates increase the cost of funds of borrowers since the banks are compelled to increase their lending rates to absorb the drain in liquidity and to reduce the demand. However, in a developing country like India, the increase in lending rates automatically push forward the deposit rates also which attracts surplus funds. Though this would accelerate capital formation, in an open economy, the higher interest rate would attract funds from abroad also, thus again increasing the money supply in the domestic market. The large inflow of foreign funds will definitely help the country to build up their foreign exchange, but it would be a bane to the exporters due to appreciation of the domestic currency. The inflation also affects the net return. For example if the current interest on deposits is 5.25 per cent and the inflation rate is 6 percent, the effective rate is –0.75 per cent, in other words, it produces negative result. In the case of credit, the rate increases as inflation goes up. However, higher borrowing cost increases the ultimate cost of the product to the consumers. The increase in price in the short-term market will induce the producers and traders to withhold the product from the market so as to get a higher price. The farm products, especially potato, onion etc. have a considerable say in the Indian wholesale price index. Coming to the capital market, the inflation did not do much harm and the market again started moving upwards. Despite having increased the cost to borrowers, people have money with them. Though the government is initiating various measures to bring down the inflation, the present plans are insufficient to meet this objective as evidenced by the frequent mid-course corrections. Unless the money with the public could be pulled down, the inflationary pressures will accumulate.