Effectiveness of Monetary Policy to Control Inflation In

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Effectiveness of monetary policy to control inflation in India Rajesh. R Financial economics

Transcript of Effectiveness of Monetary Policy to Control Inflation In

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Effectiveness of monetary policy to control inflation in India

Rajesh. R Financial economics Madras School of Economics

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INTRODUCTIONInflation is a major obstacle to achieve high economic growth in the modern economy. Policy makers are working hard to bring down inflation through monetary and fiscal policies.

In India inflation has been a big worry for policy makers they have been working effectively to control inflation.

Monetary policy is an effective tool if inflation arises due to excess demand but inflation arises due to cost push factors then monetary policy will not be an effective tool to control inflation

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Objectives The main objective of this study is to find out the supply side factors affecting inflation in India and the effectiveness of monetary policy to control inflation

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This paper based on cost push theory of inflation

Cost push theory of inflation deals with variable which influence inflation other than monetary expansion.

Though strong correlation between inflation and monetary expansion will clearly explained that inflation is a monetary phenomenon but there are other factor which influence inflation like supply shocks, Cost of production and exchange rate.

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Inflation and policy responses

Inflation in India becomes major issue when food prices started to raise abnormally. Sudden raise in food product , crude price and exchange rate Made the inflation on the top.

RBI has hiked its key policy rates 13 times, totally 350 basis points, since March 2010 to tame demand and curb inflation. The rate of price rise has been above the 9 per cent mark since December 2010.

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Policy responses from 2010 to 2012

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Inflation and agricultural productionIncrease in the production of agriculture products will reduce the inflation sharply. In the whole sale price index has more than 20% wait for agriculture to calculate Its index. In the period of 1960 to 70 agriculture production has started to increase Quickly helps to reduce inflation more than expected.

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Industrial production and inflationManufactured goods are having more weight in the calculation of WPI. Not only does rising inflation hit the costs of companies, via increases in price of inputs, it also limits the pass on of prices to consumers who are already spending less on discretionary products. Rising prices of essential commodities like food and fuel means that consumers have less to spend on other goods. As a result, consumer non-durable goods’ production has actually shrunk

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Exchange rate and inflationSince credit crisis in European countries widening demand for American dollar has been increasing it leads to continues appreciating in US$ and Indian currency Has been depreciating. Depreciation in rupee will make our import costlier thanBefore . We are importing 70% of our oil consumption from abroad and we need to Pay in terms of US$ so currency depreciation will make our import costly and this increased cost will spread to other consumption goods.

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Oil price and inflationSince demand for crude increased drastically price for crude also increased In the same manner. Oil is one of the main raw material for most the manufactured Goods thus increased oil price will reflect in the cost of production. If the cost of Production increased then price of the final goods also will get increase. Thus oil Price hikes will increase the cost of production and high cost of production will lead to increase in the price level.

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methodology

y= α – βx1- βx2-βx3-βx4+βx5+βx6

y = InflationX1 = growth in index of agriculture productionX2 = growth in index of industrial productionX3 = growth in exchange rateX5 = changes in oil priceX6 = repo rate

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ReferencesKC CHAKRABARTI(1978) INFLATION TRENDS IN INDIAIn this paper author tried to explain the cost push factors which heavily influence inflation in India. Though he had Valid arguments his statistical numbers hasn’t support to His paper.Price level = α+βx1+βx2+β x3X1 is rate of change in agri productionX2 is rate of change in industrial productionX3 is rate of change in money supply

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Work in progress

Statistical relationship between variables and statistical evidence to support my project, data collecting and some theory based work.