Broad information related to RBI policy effect on inflation and how various measures helps in solving the problem of inflation.

1. STUDY ON IMPACT OF RBI POLICY RATES
ON INFLATION
Project Report
Macroeconomics
Submitted by
Group 10 – Section D
Yash Panchal (20DM251)
Yashvardhan Gehlot (20DM253)
Tanya Jain (20DM261)
Prateek Wadhwa (20DM293)
Shrey Sharma (20DM295)
Research Guide
Dr Amrendra Pandey,
Associate Professor,
BIMTECH

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ACKNOWLEDGEMENT
We are grateful to Birla Institute of Management Technology, Gr.
Noida for giving us an opportunity to pursue our project “STUDY
ON IMPACT OF RBI POLICY ON INFLATION”. We wish to
thank Professor Dr. Amrendra Pandey, BIMTECH, who has been a
perpetual source of inspiration and offered valuable suggestions by
serving as our Project Guide. Without his guidance, it would have
never been possible for us to complete the project.
We would also like to thank my parents, friends, and acquaintances,
whosoever was included in this project directly or indirectly.
GROUP 10, SEC D
PGDM, BIMTECH
Batch 2020-22

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TABLE OF CONTENTS
S.No. Particulars Page no.
1. Inside Cover 1
2. Acknowledgement 2
3. Table of contents 3
4. Introduction 4
5. Literature Review 5-6
6. Data analysis – RBI policy in year 2019 7-8
7. Data analysis – Effect of inflation on supply
and demand in year 2011-12 & 2019-20
9-10
8. Data analysis – Effect of inflation on economy
of India in year 2011-12 & 2019-20
11-12
9. Data Analysis – Effect of inflation on price of
commodities in year 2011-12 & 2019-20
12-13
10. Data Analysis – Effect of inflation on various
sector of economy in year 2011-12 & 2019-20
13-14
11. Conclusion 15
12. References 16

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INTRODUCTION
This project report covers the study of the Impact of Reserve Bank of India
policy on inflation- Article by Pallavi Kiran Ingale (May 2014) for project
report of second term. Before making the report, we worked together in a group
and studied on article. We researched and gathered information relevant to the
article as the part of the project literature review. Article was broadly talking
about how Reserve Bank of India policy changes affects the inflation and what
major tools Reserve Bank of India is using to reduce the affect of inflation in
the economy.
In the article, various data was given related to the affect of inflation on the
economy, supply and demand, impacts on different sector, price of the
commodity and industries as well.
Then we did the further study on the data analysis part and we did the thorough
data analysis related to 2011-12 and 2019-20:
 How RBI balance between the inflation and economic growth of
economy
 Did analysis of WPI data to know reason of increase in inflation either
due to supply side or demand side.
 Which major sectors got affected by inflation (both the years)
 Affect of inflation on the price of the commodity
 Impact of inflation on the different sector of the economy.
After gathering all the information we began our report making process
which contains the thorough information related to the impact of the
Reserve Bank of India policy on the inflation. Thus, this report was made
to keep the records of all our research on article and data.

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Literature Revise
Study of impact RBI Policy rates on inflation
-Author Pallavi Kiran Ingale
Soaring inflation in India is a grave source of concern, given the difference
between rich and poor. Reserve bank of India makes changes to its monetary
policy to affect inflation. Reserve bank of India today mainly uses inflation
targeting in the injunction to keep economic growth steady and price stable. The
RBI as a Banker’s Banker and lender of the last resort which works as a
umbrella to the financial sectorof the India which includes private and public
banks. From regulating the banking system of the India to debt management of
the government, RBI handles vast number of responsibilities. Various aspects
which covers-Price stability, credit control, issues of the currency, managing the
foreign reserve, managing money supply and promoting banking in the rural
area. Inflation targeting views the primary goal of the central bank as retaining
price stability. All of the tools monetary policy that a central bank has including
open market operation and discounting lending can be utilized in a general
policy of inflation targeting. Inflation targeting can be contrasted to techniques
of central bank aimed at other measures of economic performance as their
primary objectives such as targeting currency exchange rates, the
unemployment rate or the rate of nominal GDP growth. Central bank target the
rate of inflation like if the price increase faster than expected, central bank
tighten monetary policy by raising interest rates and interest rate increases
borrowing more valuable , reducing both consumption and investment both of
which rely heavily on credit. Likewise if inflation falls and economic output
decreases, the central bank will reduce interest rates makes cheaper, along with
several other possibletools. During inflation, RBI increases the bank rate,

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Central Bank begins to sell securities in the open market, it raises the cash
reserve ratio, also liquidity ratio.
RBI raised its Repo rate and Reverse Repo rate 13 times in its monetary policy
of 2011-12. Forfinancial year 2011-12, the central bank also revised the GDP
growth rate to 7.6% from the earlier 8%, while the estimation of Wholesale
Price Index (WPI) inflation has been kept unchanged at 7% for 2012 March.BI
shown good sign in controlling inflation in 2011 it was 9.08%. Food inflation
also shrank by 2.9% as per the Commerce & Industry Ministry. But, inflation in
Non-Food Articles increased by 1.3%. International commodity prices rose due
to depreciation in Indian currency. Inflation in manufactured products did not
decrease. That low economic growth period was due to less private final
consumption growth which dropped to 16.09% in the second quarter of 2011-
12. In 2011, the government already hiked the petrol and diesel prices which
hiked the prices of consumer durable goods becausetheir distribution cost
increased. Then, the government of India stopped its decision to increase the
petrol and decision prices so that inflation could be concern in the economy
.The sectors like real estates, auto, cement and steel were hitted badly. Because
increase in interest rates and commodity prices slowed down the demand of
autos which also hurted the demand for steel and cement. Banks also faced
higher Non-Performing Assets and their also credit growth also got down. IT
companies were least affected. Such type of rise in interest rate and high prices
were seen in year 2006-07. No doubt, RBI’s effort of increasing interest rate
which badly hitted the growth rate but it was an effort to level back the
economy to its normal level and eventually economy to its growth path.

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Data Analysis
Monetary Policy Rates of RBI
Reserve bank of India makes changes to its monetary policy to affect inflation.
Various aspects Reserve bank of India covers are price stability, credit control,
issue of the currency, managing the foreign credit control, issue of the currency,
maintaining the foreign reserve and maintaining money supply.
The Reserve Bank of India (RBI) in its Monetary Policy Statement 2011-12
raised the key policy rates by 50 basis points as resurgence of inflation was once
again exhibited in the last quarter of the fiscal year 2010-11. The rate hike was
despite lower growth of 15.9% in broad money supply due to slow deposit
growth and acceleration in currency growth.
Thus now the policy rates are as under:
 Repo rate increased by 50 basis points from 6.75%to 7.25%
 Reverse Repo rate increased by 50 basis points from 5.75%to 6.25%
 CashReserve Ratio is kept unchanged at 6.00%to keep the broad
money supply growth.
 Statutory Liquidity Ratio (SLR) has also been kept unchanged at its last
reduced level of 24% which was done in the third quarter.
 Bank rate too has been left unchanged at 6.00%.
 Interest rate on savings bank accountis raised from 3.5% to 4.0%.
Reason for such a policy stance:
Inflationary pressures
The resurgence in the WPI inflation witnessed in the last quarter of the fiscal
year 2010-11 has caused hawkish stance. The RBI is at present worried about
inflationary pressures building on account of non-food items contributing to the
up-move in inflation so this was done with keeping view to reduce inflation
pressure in the economy.
Brent crude oil at present is trading over the US $ 120 per barrel mark and in
India fuel prices are increased to correct the under-recoveries of oil distribution

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companies, then that may ignite WPI inflation. In year 2011 India’s fuel price
index has galloped to 13.53% which created problem.
The stance of monetary policy of the Reserve Bank will be as follows:
 Maintain an interest rate environment that moderates inflation and
anchors inflation expectations
 Fosteran environment of price stability that is conducive to sustaining
growth in the medium-term coupled with financial stability
 Manage liquidity to ensure that it remains broadly in balance, with
neither a large surplus diluting monetary transmission nor a large
deficit choking off fund flows
Expectedoutcome from the policy stance:
The central bank’s stance of increasing policy rates by 50 basis points is
expected to:
 Contain inflation by reining in demand side pressures, and anchor
inflationary expectations
 Sustain the growth in the medium-term by containing inflation policy
stance mean and its impact on economy
 The repo rate is the rate of interest charged by the central bank on
borrowings by the commercial banks. Increasing repo rate means, there
will be increase in the borrowing cost of commercial banks. Hence as a
reaction to such a move, cost of borrowing for individuals and corporate
may go up, as the commercial banks in the country may hike lending
rates further.
 The reverse repo rate is the rate of interest, at which the banks park their
surplus money with the central bank. Increasing them will result in

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commercial banks continuing to enjoy higher interest rates for parking
their surplus funds with RBI.
 The Statutory Liquid Ratio (SLR) is the amount that the commercial
banks require to maintain in the form of cash, or gold or govt. approved
securities before providing credit to the customers. Keeping them
unchanged would help in keeping a check on the prevailing surplus
liquidity situation.
 The savings bank account enables many investors to park their immediate
liquidity requirement. An increase in the interest rate on saving bank
accounts (from 3.5% p.a. to 4.0% p.a.) will entice many investors to keep
more cash in their savings bank account.
Affect of inflation on supply and demand
Year 2011-12
Both the supply and demand are responsible for the inflation in the economy.
In 2011, inflation was driven by demand factors, despite higher supply levels.
This was in contrast to the fact that in the last fiscal, inflation was mostly driven
by a deficient monsoon, leading to scarcity of certain food products like pulses,
cereals and sugar. While signs of inflation were visible, they were driven
primarily by food. However, food price pressure spilling over into more
generalised inflation was clearly a risk as the recovery consolidated and
domestic resource utilisation rose to levels which stretched capacities.
In other words, demand was strong enough to allow significant pass-through of
input price increases. Significantly, this happened even when there were visible
signs of moderating growth, particularly in capital goods production and
investment spending, indicating an impact on prices.
Based on the drivers of inflation, the year 2011-12 can be broadly divided into
three periods.
First period - The increase in wholesale price index (WPI) by 3.5 per cent was
driven largely by food items and the fuel and power group, which together
contributed more than 60 per cent of the increase in WPI.

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Second period - While WPI showed a lower increase of 1.8 per cent, more than
70 per cent of the increase was contributed by food and non-food primary
articles and minerals.
Third period - WPI increased sharply by 3.4 per cent, driven mainly by fuel
and power group and non-food manufactured products, which together
contributed over 80 per cent of the increase in WPI.
Inflationary pressures - Which emanated from food, clearly became
generalised as the year progressed. Over the same period, WPI inflation
remained elevated reflecting increases in non-food primary articles prices and
importantly, non-food manufactured product prices. This led to a broad
convergence of WPI and CPI inflation by the end of 2011-12.
Keeping in view the domestic demand-supply balance and the global trends in
commodity prices and the likely demand scenario, the baseline projection for
WPI inflation for March 2012 was placed at 6 per cent with an upward bias.
Inflation was expected to remain at an elevated level in the first half of the year
due to expected pass-through of increase in international petroleum product
prices to domestic prices and continued pass-through of high input prices into
manufactured products.

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2019-20
Inflation reflecting the slowdown in domestic demand and excluding food and
fuel has softened across major goods and services. Looking ahead, inflation
expectations feed into future inflation through price and wage contracts.
According to the Reserve Bank’s consumer confidence survey for September,
inflation expectations moderated from the previous round. The annual rate of
inflation, based on monthly WPI, stood at 2.76% (provisional) for the month of
January, 2019 (over January, 2018) as compared to 3.80% (provisional) for the
previous month and 3.02% during the corresponding month of the previous
year. Build up inflation rate in the financial year so far was 2.49% compared to
a build up rate of 2.47% in the corresponding period of the previous year.
Impact on economy
2011-12
The current high inflationary situation and consequently higher
interest rates are definitely impacting the growth of the
economy. The fact is well-captured in the observations based on
Composite Leading Indicators (CLIs) developed by the OECD
(Organization for Economic Cooperation and Development) on
the basis of parameters like IIP data, passenger car sales, call
money rate, etc that provide early signals of turning points with
regard to economic expansion and slowdown.

12. 12
2019-20
Inflation on December 2019 was 7.35 and the supply contributed a lot in the rise
of inflation in the economy and there was other factors impacted by inflation in
the economy as follows:
1.Decline in fixed investment rate - Drop in fixed investment by households
from 14.3 per cent to 10.5 per cent explains most of the decline in overall fixed
investment between 2009-14 to 2014- 19 . Fixed investment in the public sector
marginally decreased from 7.2 per cent of GDP to 7.1 per cent during the two
periods. However, the stagnation in private corporateinvestment at
approximately 11.5 per cent of GDP 2011-12 to 2017- 18 has a critical role to
play in explaining the slowing cycle of growth and, in particular, the recent
deceleration of GDP and consumption.
2. Delayeddecline in private consumption - Private consumption increased as
a proportionof GDP from 2009-16, particularly in 2014-16. Thereafter, it
declined in 2017-18 and roseagain in 2018- 19, before declining sharply in H1
of 2019- 20, the effect of GDP growth on consumption manifests after a lag of
1-2 years.
IMPACT ON THE PRICE OF COMMODITY
2011-12
India has encountered persevering and high food inflation in past. Inflation rates
in India are usually quoted as changes in the Wholesale Price Index (WPI), for
all commodities
The WPI measures the price of a representative basket of wholesale goods. In
India, this basket is composed ofthree groups: Primary Articles (22.62% of
total weight), Fuel and Power (13.15%) and Manufactured Products (64.23%)
and there index has been increased from previous year due to rise in inflation.

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2019-20
Inflation rate in India was 5.5% as of May 2019, as per the Indian Ministry of
Statistics and Programme Implementation. And there increase in the consumer
price index due to high inflation.
Index as follows:
Primary Articles (increased 144.0 to 144.1) Fuel and Power (99.3 to 105.3)
Manufactured Products (127.7 to 128.1).
Impact on different sectors/ industries
2011-12
The sectors that were affected most by the inflation were of capital intensive in
nature like construction power and telecom.
Total project lined up as per the data of CM IE were worth rupees 220 crore to
be commissioned as
Rs 5500000 in year 2010-11
Rs 8500000 in year 2011-12
Rs 8000000 in year 2012-13
As per CMIE the power sectorwas expected to be commissioned project worth
rupees 440000 crore by the March 2013 for producing at the capacity of 81000
megawatt.
.Sectorwhich hit most due to inflation is construction, telecom and steel due to
more of capital intensive in nature and interest costwas so high.
IT sector was enjoying and even observed decrease in the interest rates.

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2019-20
Agriculture and allied activities
 Growth of agriculture sectorhas been fluctuating: it increased from -0.2%
in 2014-15 to 6.3% in 2016-17, and then declined to 2.8% in 2019-20.
 The contribution of agriculture to the GVA has decreased from 18.2% in
2014-15 to 16.5% in 2019-20.The share has been declining on account of
relatively higher growth performance of non-agricultural sectors.
Industry and infrastructure
 The overall industrial sector growth was estimated to be 2.5% in 2019-20.
Manufacturing sectoris estimated to grow at 2.0% during 2019-20.
 The National Infrastructure Pipeline (NIP) has projected an investment of
Rs 100 lakh crore over five years (2020-25) in various projects.
However, financing of the NIP will be a challenge.
Services sector
 Services sectoris estimated to grow at 6.9% in 2019-20. The services
sectoris estimated to contribute 55.3% to India’s GVA in 2019-20. Sub-
sectors suchas trade, hotels, transport, communication & services related
to broadcasting, financial and real estate services saw a deceleration
during this period. The share of services exports in overall exports of
India has been increasing.

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References:
1. Article
https://www.researchgate.net/publication/22003379
9_A_Study_of_Impact_of_RBI_policy_rates_on_in
flation
2. https://www.thehindu.com/business/Economy/Budg
et-2011-12-to-focus-on-inflation-and-
growth/article15461152.ece
3. https://tradingeconomics.com/india/inflation-cpi
4. https://m.rbi.org.in/Scripts/AnnualReportPublicatio
ns.aspx?Id=1287
5. RBI POLICY STATEMENT OF YEAR 2011-12
6. RBI POLICY STATEMENT OF YEAR 2019-20