CHANGING TRENDS Discussion on GDP, Inflation and Monetary policies of INDIA
Factors India is the world’s largest consumer of sugar at 23.0 million metric tons (MMT) raw value in the 2008/09 (October/September) marketing year. Human consumption of sugar in India is up 35 percent from 10 years ago and double the consumption of 20 years ago. India is also the second or third largest producer behind Brazil and trades positions year- to-year with the EU. It had a record large crop in 2006/07 at 30.8 MMT and its second largest crop in 2007/08 at 28.6 MMT before a decline to 16.8 MMT in 2008/09 due to poor monsoon rainfall. Higher acreage in 2009/10 was expected to lead to a recovery in production to 20.6 MMT according to earlier estimates from the Foreign Agricultural Service (FAS) of USDA. The latest projections from government officials and private market analysts are 15-17 MMT.
Sugar PriceRS 30/kg in 2010RS 18/kg in 2000 SOURCE : http://www.indiaonestop.com/sugar/sugar.htm
THE ANSWER IS :INFLATION
What is INFLATION?In economics, inflation is a rise in thegeneral level of prices of goods and services in an economy over a period of time. ORThe overall general upward price movement ofgoods and services in an economy (often causedby a increase in the supply of money), usually asmeasured by the Consumer Price Index and theProducer Price Index.
IMPACT Higher inflation would lead to a spurt in interest rates and hit the home, car and other retail loans market, besides hampering the expansion and launch of projects planned by corporates. GOVERNMENT changing monetary policies to liquify money in the market Larger inflow of money in the market and increase in GDP
CHANGES IN MONETARYPOLICIES by RBI
2001Bank rate 6.5%CRR rate was 7.25%GDP = 3.885
2002The Reserve Bank of India announced a cut in Bank Rate by 0.50 percentage point, from 7.0 per cent to 6.50 per cent to touch its lowest since May 1973.The RBI reduced CRR by 2.0 percentage points from 7.50 per cent to 5.50 per cent, releasing on additional liquidity of Rs 60 billion to banks.Interest rate paid on eligible CRR balances increased further to the level of Bank Rate i.e. 6.5 per cent (from 6.0 per cent since April 21, 2001 and 4.0 per cent earlier).GDP = 4.558INFLATION = 4.060%
2003 Inflation - 4.5% GDP – 6% Objective: To increase the money supply in the market.Implications: Bank rate was decreased from 6.25% to 6%. Repo rate was retained at 4.5%
2004 Inflation: 5.1% Gdp:6.5%Implications: Bank rate: 6% Repo rate: 4.5% per annum Reverse repo rate: 6% CRR: 4.5%, remained constant.
2005In the mid-term Review of October 2004, the Bank Rate was kept unchanged at 6.0 per centTo increase the fixed reverse repo rate by 25 basis points under the liquidity adjustment facility (LAF) of the Reserve Bank effective from April 29, 2005 to 5.00 per cent from 4.75 per cent.The repo rate will continue to be linked to the reverse repo rate, as at present. However, the spread between the reverse repo rate and the repo rate is reduced by 25 basis points from 125 basis points to 100 basis points with effect from April 29, 2005.The cash reserve ratio (CRR) of scheduled banks is currently at 5.00 per cent. While the Reserve Bank continues to pursue its medium-term objective of reducing the CRR to the statutory minimum level of 3.0 per cent, on a review of the current liquidity situation, it is felt desirable to keep the present level of CRR (5.00 per cent) unchanged.GDP = 9.211INFLATION 4.1%
2006 The Bank Rate has been kept unchanged at 6.0 per cent. In view of macroeconomic enviornment and overall monetary conditions, it was considered desirable to keep the reverse repo rate unchanged at 5.5 per cent.GDP = 9.817INFLATION = 5.9
2007Bank Rate, Repo Rate, Reverse Repo Rate, Cash Reserve Ratio kept unchanged. Statutory Liquidity Ratio restored to 25%RBI hikes Cash Reserve Ratio (CRR) by 0.75%GDP = 9.372INFLATION = 7.8
2008The Bank Rate has been kept unchanged at 6.0 per cent.The repo rate under the LAF is kept unchanged at 7.75 per cent.The reverse repo rate under the LAF is kept unchanged at 6.0 per cent.Scheduled banks are required to maintain cash reserve ratio (CRR) of 7.75 per cent with effect from the fortnight beginning April 26, 2008 and 8.0 per cent with effect from the fortnight beginning May 10, 2008 as announced on April 17, 2008. GDP = 7.346Inflation = 0.8%
2009 The Bank Rate has been retained unchanged at 6.0 per cent Reduction of repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0 per cent to 4.75 per cent with immediate effect. Reduce the reverse repo rate under the LAF by 25 basis points from 3.5 per cent to 3.25 per cent with immediate effect. The cash reserve ratio (CRR) of scheduled banks has been retained unchanged at 5.0 per cent of net demand and time liabilities (NDTL). GDP = 5.355 INFLATIOn = 12%
2010 increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect. increase the reverse repo rate under the LAF by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect. increase the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.INFLATION =9.7 %GDP = 8.9%
INFERENCEThe expected outcomes of the actions are:(i) Inflation will be contained and inflationary expectations will be anchored.(ii) The recovery process will be sustained.(iii) Government borrowing requirements and the private credit demand will be met.(iv) Policy instruments will be further aligned in a manner consistent with the evolving state of the economy.