Inflationisoneofthemostmisunderstoodeconomicindicators.

Itiscomplex
phenomenaassociatedwithmoneysupplyandcurrencyvalues.Anincreaseinthe
moneysupplyleadstoadecreaseinthevalueassociatedwiththecurrency,a
persistentdecreaseinthepurchasingpowerofmoney.
InflationinIndiahasseenadrasticriseoverthelastfewyearsandthereasonshave
beenmany,chiefamongthemthegrowingmoneysupplyduetoanincreasein
governmentspendingandthepressuretomeetdeficitfinancing.
As the theories of Keynasian economics suggest, demand is the key
variable governing the overall affect of economic activity. So it is
demand pressures that need to be dampened to ensure that
inflation does not become a structural problem in india, and the
policies of the RBI are conducive to this effort. Increasing interest
rates limits peoples purchasing power, thereby reducing currency in
circulation. Due to a hike in savings bank rate would increase the
cost of funds for the banks, thereby increasing their leading rates,
leading to contracted demand for funds and softer inflation.
Moreover, nominal effective savings rate does not reflect the real
value of money as over time, inflation erodes the value of money.
Real interest rates on the other hand, adjust for inflation and
measure the real value of money. And in view of the turbulent global
economic scenario, Indias high savings rate and forex reserves will
weather global economic troubles.
NowIagreethatreducingcurrencyincirculationcertainlyanaffectoneconomic
growth,asrecentlystatedbyFICCIpresidentRVKanoria.Turningtothedomestic
macroeconomicsituation,economicgrowthdeceleratedlastyear,droppingfrom7.7
to6.1percentinthethirdquarter,mainlyaffectingrealestateandautomobiles.TT
However,amajorityofbanksbackedtheReserveBankofIndia'smonetarypolicy
stanceofnotslashingthepolicyrateandinstead,focusoncontrollinginflation.Andit
isasmallpricetopay,forthestatisticsspeakforthemselves.HeadlineWPIinflation
whichremainedabove9percentfornearlytwoyearshasmoderatedsignificantlyto
below7percentbyMarch2012.Moreimportantly,nonfoodmanufacturedproducts
inflationhasdroppedfromahighof8.4percentinNovember2011to4.7percentin
March2012,actuallycomingbelow5percentforthefirsttimeintwoyears.
Theneedtoincreasegrowthdesperatelyincoreindustriesandagriculturalgoodscan
bebroughtaboutbythesavingsgeneratedduetotheincreasedinterestrate.So,the
problemdoesnotliewiththeactualmonetarypolicyitselfbutwiththecorrect
mobilizationandallocationofthesavingsofthebanksboostedbyabetterandmore
efficientfiscalpolicy.Thegovernmentmustspeedupdecisionmaking,prune
wastefulsubsidies,andspeeduplandacquisitionandenvironmentalclearancesthat
havestalledmanyprojects.
Ineveryeconomicdrawback,thereisnoclearcutsolutionbecauseeveryproblemhas
manyfacetsandeverypolicyvariousrepercussions.Itisallaboutcreatingabalance
betweentheoutcomesofeveryeconomicdecision.Letusnotforget,theRBIs

policieshavebeeninstrumentalinhelpingIndiaremainrelativelyunaffectedbythe
globaleconomicturmoil.TheRBIhasbeentryingtoreinininflationwiththeleast
negativeconsequences,whichhasbeeneffectivelydisplayedwiththeirdecisionto
maintainahighbankinterestratesuntilthefiscaldeficitiseffectivelycurbed.Thank
you.