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The major changes in the Indian Monetary policy during the decade of 1990.

Reduced Reserve Requirements : During 1990s both the Cash Reserve Ratio (CRR) and

the Statutory Liquidity Ratio (SLR) were reduced to considerable extent. The CRR was at

its highest 15% plus and additional CRR of 10% was levied, however it is now reduced by

4%. The SLR is reduced form 38.5% to a minimum of 25%.

Increased Micro Finance : In order to strengthen the rural finance the RBI has focused

more on the Self Help Group (SHG). It comprises small and marginal farmers,

agriculture and non-agriculture labour, artisans and rural sections of the society.

However still only 30% of the target population has been benefited.

Fiscal Monetary Separation : In 1994, the Government and the RBI signed an

agreement through which the RBI has stopped financing the deficit in the government

budget. Thus it has seperated the Monetary policy from the fiscal policy.

Changed Interest Rate Structure : During the 1990s, the interest rate structure was

changed from its earlier administrated rates to the market oriented or liberal rate of

interest. Interest rate slabs are now reduced up to 2 and minimum lending rates are

abolished. Similarly, lending rates above Rs. Two lakh are freed.

Changes in Accordance to the External Reforms : During the 1990, the external sector

has undergone major changes. It comprises lifting various controls on imports, reduced

tariffs, etc. The Monetary policy has shown the impact of liberal inflow of the foreign

capital and its implication on domestic money supply.

Higher Market Orientation for Banking : The banking sector got more autonomy and

operational flexibility. More freedom to banks for methods of assessing working funds

and other functioning has empowered and assured market orientation.

1. based on degree

Moderate InflationIt is a mild and tolerable form of inflation. It occurs when pricesare rising slowly When the rate of inflation is less than 10 per centannually, or it is a single digit inflation rate, it is considered tobe a moderate inflation in the present the economy.

b. Running and c. Galloping InflationWhen the movement of price accelerates rapidly, running inflationemerges. Running inflation may record more than 100 per cent rise inprices over a decade. Thus, when prices rise by more than 10 per centa year, running inflation occurs. a double digit inflation of 10-20per cent per annum is a running inflation. If it exceeds that figure,it may be called „galloping‟ inflation. when prices are rising at double or triple digit rates of 20, 100 or 200 per cent a year, thesituation is described as „galloping‟ inflation.

ACCORDING TO THE NATURE OF THE TIME PERIOD OF OCCOURANCE.

2. War, Post-War and Peace-Time Inflation

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On the basis of the nature of time-period of occurrence, we have:• War-time inflation;• Post-war inflation; and• Peace-time inflation.

a. War-Time InflationIt is the outcome of certain exigencies of war, on account ofincreased government expenditure on defense which is of anunproductive nature. By such public expenditure, the governmentapportions a substantial production of goods and services out of totalavailability for war which causes a downward shift in the supply; as aresult, an inflationary gap may develop.

b. Post-war InflationIt is a legacy of war. In the immediate post-war period, it is usuallyexperienced. This may happen when the disposable income of the

community increases, when war-time taxation is withdrawn or publicdebt is repaid in the post-war period.

c. Peace-time InflationBy this is meant the rise in prices during the normal period of peace.Peacetime inflation is often a result of increased government outlayson capital projects having a long gestation period; so a gap betweenmoney income and real wage goods develops. In a planning era, thus,when government‟s expenditure increases, prices may rise. 

3.. SCOPE• From the coverage or scope point of view, we have:• Comprehensive or economy-wide inflation, and• sporadic inflation. 

a. Comprehensive InflationWhen prices of every commodity throughout the economy rise, it iscalled economy-wide or comprehensive inflation. It is a normalinflationary phenomenon and refers to a rise in the General Pricelevel

b. Sporadic InflationThis is a kind of sectional inflation. It consists of cases in whichthe averages of a group of prices rise because of increases inindividual prices due to abnormal shortage of specific goods. When thesupplies of some goods become inelastic, at least temporarily, due tophysical or structural constraints, sporadic inflation has its sway.For instance, during drought conditions when there is a failure ofcrops, food grain prices shoot up. Sporadic inflation is a situationin which direct price control, if skillfully used, is most likely tobe beneficial to the community at large.

4.ACCORDING TO THE GOVERNMENT REACTION.

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 a. Open InflationWhen the government does not attempt to prevent a price rise,inflation is said to be open. Thus, inflation is open when prices risewithout any interruption. In open inflation, the free market mechanism

is permitted to fulfill its historic function of rationing the shortsupply of goods and distribute them according to consumer‟s ability to pay. Therefore, the essential characteristics of an open inflation liein the operation of the price mechanism as the sole distributingagent. The post-war hyperinflation during the twenties in Germany is aliving Example of open inflation.

b. Repressed InflationWhen the government interrupts a price rise, there is a repressed orsuppressed‟ inflation. Thus, suppressed inflation refers to those conditions in which price increases are prevented at the present time

through an adoption of certain measures like price controls andrationing by the government, but they rise on the removal of suchcontrols and rationing. The essential characteristic of repressedinflation, in contrast to open inflation, is that the former seeks toprevent distribution through price rise under free market mechanismand substitutes instead a distribution system based on controls. Thus,the administration of controls is an important feature of suppressedInflation . However, many economists like Milton and G.N.Halm opinethat if there has to be any inflation, it is better open thansuppressed. Suppressed inflation is condemned as it breeds number ofevils like black market, hierarchy of price controllers and rationingofficers, and uneconomic diversion of productive resources fromessential industries to non-essential or less essential goodsindustries since there is a free price movement in the latter andhence are more profitable to investors.

ACCORDING TO THE CAUSE

a. Credit Inflation.Inflation which is caused by excessive expansion of bank credit or

money supply is referred to as credit or money inflation.

b. Deficit Inflation.It is the inflation caused by deficit financing. When the governmentbudgets contain heavy deficit financing, through creating new money,the purchasing power in the community increases and prices rise. Thismay be referred as to as deficit-induced inflation. During a planningera, when government launches upon heavy investment, it usuallyresorts to deficit financing, when adequate resources are not found.An inflationary spiral develops due to deficit financing, whenadequate resources are not found. An inflationary spiral develops due

to deficit financing, when the production of consumption goods failsto keep pace with the increased money expenditure.

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 c. Scarcity Inflation.Whenever scarcity of real goods occurs or may be artificially createdby the hoarding activities of unscrupulous traders and speculatorswhich may result into black-marketing, thereby causing prices to go

up, such type of inflation may be describedas scarcity inflation.

d. Profit Inflation.In his recent book, Growth less Inflation by Means of Stockless Money,Prof. Brahmananda profit inflation is a unique category of inflation.The concept of profit inflation was originated by Keynes in hisTreatise on Money. According to Keynes, the price level of consumptiongoods is a function of the investment exceeding savings. He consideredthe investment boom as a reflection of profit boom. Inflation isunjust in its distribution effect. It redistributes income in favor of

profiteers and against the wage-earning class. During inflation, thus,the entrepreneur class may tend to expect an upward shifting of themarginal efficiency of capital (MEC); hence, entrepreneurs are inducedto invest more even by borrowing at higher interest rates. Eventually,investment exceeds savings and economy tends to reach a higher levelof money income equilibrium. If economy is operating at fullemployment level or if there are bottlenecks of market imperfections,real output will not rise proportionately, so the imbalance betweenmoney income and real income is corrected through rising prices.

e. Foreign-Trade Induced Inflation.For an international economy, we may categorize the following twotypes of inflation as being caused by factors pertaining to thebalance of payments.i. Export-Boom Inflation; andii. Import Price-hike Inflation.

i. Export-Boom Inflation.When a country having a sizeable export component in its foreign tradeexperiences a sudden rise in the demand for its exportable against theinelastic supply of exportable in the domestic market, it obviously

implies an excessive pressure of demand which is revealed in terms ofpersistent inflation at home. Again, trade gains and sudden influx ofexchange remittances may lead to an increase in monetary liabilitieswhich is further reflected in the rising pressure of demand fordomestic output causing an inflationary spiral to get furthermomentum. Such a permanent case for export-boom inflation is, nothowever, ruled out in the Indian economy, because neither export tradeis a significant portion of Domestic National Product nor is there acontinuous boom of export-demand, causing tens of trade to move upfavorably all the time.

ii. Import Price-hike Inflation.When prices of import components rise due to inflation abroad, the

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domestic costs and prices of goods using these imported parts willtend to rise. Such inflation is referred to as imported inflation. Forinstance, hike in oil prices by the Arab countries was responsible foraccelerating. Inflationary price rise in many oil-importing countries,including India to some extent.

j. Tax Inflation.Year to year increase in commodity taxation such as excise duties andsales tax may lead to rise in prices of taxed goods. Such inflation istermed as tax inflation or tax-induced inflation.

g. Cost Inflation.When inflation emerges on account of a rise in cost factor, it iscalled cost inflation. It occurs when money incomes (wage rate,particularly) expand more than real productivity. Cost inflation hasits course through the level of money costs of the factors of

production and in particular through the level of wage rates. Due to arising cost of living index, workers demand high wages, and higherwages in their turn increase the cost of production, which a producergenerally meets by raising prices. This process of spiraling may eachhigher and higher level. In this case, however, cyclicalanti-inflation remedies of monetary controls are not relativeeffective. Wage inflation is an important variant of cost inflation.Wage push inflation occurs when money wages are raised withoutcorresponding improvement in the productivity of the workers.

h. Demand Inflation.When there is an excess of aggregate, demand against the availableaggregate supply of goods and services, prices tend to rise. It iscalled demand-induced inflation. Population-growth, rising moneyincome, etc. forces play a significant role in generating demandinflation.

CAUSES (broad terms)

a. Demand-Pull InflationAccording to the demand-pull theory, prices rise in response to anexcess of aggregate demand over existing supply of goods and services.Demand-pull or just demand inflation may be defined as a situationwhere the total monetary demand persistently exceeds total supply ofreal goods and services at current prices, so that prices are pulledupwards by the continuous upward shift of the aggregate demandfunction.

b. Cost-Push InflationA group of economists hold the opposite view that the process of

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inflation is initiated not by an excess of general demand but by anincrease in costs, as factors of production try to increase theirshare of the total product by raising their prices. Thus, it has beenviewed that a rise in prices is initiated by growing factor costs.Therefore, such a price rise is termed as “cost-push” inflation as 

prices are being pushed up by the rising factor costs.