Inflation and Cash Reserve Ratio

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Issues:
» Understand the concept of inflation and its causes.

» Critically analyze the various initiatives taken by the Indian government and the RBI to address inflation.

» Analyze the significance of Government and Central Bank in controlling inflation and the possible effect of their initiatives on the economy. Keywords:
Indian economy, Inflationary trends, Effect of High Growth on Inflation, Wholesale or Consumer Price Index, Foreign Exchange rate, Bank Rate, Cash Reserve Ratio, Monetary policy, Reserve Bank of India.

"As far as inflation is concerned, we are adopting a multi-prolonged strategy that will yield results soon."1 - Dr. Manmohan Singh, Prime Minister of India, in February 2007. "The main instrument that the Finance Minister has used in the budget is fiscal controls which will show results in three months. Fiscal deficit at 3.3% of GDP is the lowest in 25 years. But price controls are measures which should be left to the market to decide."2 - Dr. Amit Mitra, Secretary General, FICCI 3, in March 2007. "The current rate of inflation is not as high as 2000-01. The (then) Government took 12-18 months to moderate inflation rate in 2000-01. Inflation spurts in the past have been moderated and we are confident of moderating the current rise. We will continue to take fiscal, monetary and supply side steps to moderate inflation rate."4 - P. Chidambaram, Finance Minister of India, in March 2007.

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Introduction
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In early 2007, in India, the inflation rate, as measured by the wholesale price index (WPI)5, hovered around 6-6.8%, well above the level of 5-5.5% that would have been acceptable to the Reserve Bank of India (RBI), the country's central bank.6 On February 15, 2007, the inflation rate reached a two-year high of 6.73%. In the past7, the main cause of high inflation in India used to be rises in global oil prices. However, in early 2007, the chief component of the inflation was the...
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