Critically analyze the measures taken by the Indian Government & the RBI to control the inflation. What impact does tackling of inflation through monetary means have on economic growth?
In early 2007, Inflation rate as measured by the wholesale price index hovered around 6-6.8%, well above the level of 5.5% that was well above the forecasted index by Country’s Central Bank. This inflation rate touched a two year high as 6.73% on Feb 15, 2007. As per the Prime Minister of India Dr. Manmohan Singh’s statement “As far as inflation is concerned, we are adopting a multi-prolonged strategy that will yield results soon”. And the then Finance Minister of India Mr. P. Chidambaram said that the current rate of inflation is not as high as 2000-01. Govt. took 12-18 months to moderate inflation in 2000-01. Inflation spurts in the past have been moderated & we are confident of moderating the current rise. We will continue to take fiscal monetary & supply side steps to moderate inflation rate.
In the past, main cause of high inflation in India use to be rises in global oil prices. However early 2007 the chief component of the inflation was the increase in the price of food articles caused by increased demand as well as supply constraints. According to analysts, increase demand was due to high economic growth & increase money supply, while stagnant agricultural productivity was behind the supply constraints. Apart from the rise in prices of food articles fuel & cement prices too recorded high increases. The Govt. of India together with RBI took several measures to contain inflation. Eg. RBI increased the cash reserve ratio (CRR) & Repo Rates in an effort to check money supply. Govt. reduced import duties on several food products & cut the price of diesel & petrol. RBI also choose not to intervene when Indian Rupee rallied against US Dollar between March & May 2007. This decision was based on an idea that stronger rupee will... [continues]
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