Inflation Trends During the Current Fiscal

Based on the statistics provided by the official website of Central Statistical Organisation, I have prepared the following graph indicating the Annual Rate of Inflation based on point-to-point basis or year-on-year basis. For Example, the inflation rate for the week ended 16/06/2007 is calculated by considering the Wholesale Price Index (WPI) for all commodities as on 16/06/2007 (211.90) and corresponding figure a year back i.e. on 17/06/2006 (203.50), by calculating the percentage increase of the WPI over the year at 4.13 percent [(211.90-203.50)/203.50*100] and by rounding off (and not truncating) the result into two decimal points.

If you see the trend in inflation, the rate of inflation has been declining from the beginning of the current fiscal till 16/06/2007, before being range bound between 4 to 4.50 percent, thanks to various credit squeezing measures taken by RBI. The major contributor to inflation is the rise prices of food articles, which hits every common man. Hence, it is all the more important to contain the inflation. With the second real estate boom on the corner, with agriculture becoming unviable due to high prices of land combined with the shoratge of agricultural labour force, with the reducing return on agriculture invetsment and with the rising cost of living, the acreage under vegaetables and fruits is declining in Telgana region of Andhra Pradesh. Similar may be the scenario in all other states. If this continues, there is no surprise that the prices for vegetables, fruits, diary products and other essential agriculture prducts will rise.

The RBI wants to keep the inflation rate below 5 percent during the current fiscal. Its medium term objective is to reduce the inflation to 4-4.50 percent on sustained basis, as per the economic outlook report of the RBI rleased on August 31, 2007. The RBI has raised the Prime Lending Rate (the benchmark lending rate), Cash Reserve Ratio and Reverse Repo Rate (the rate at which the banks lend from RBI for shortage of short term funds) during the current financial year to suck the excess liquidity out of the system as well as to reduce the money supply in the market. It has also cautioned the banks to go slow on their lending spree for high risk areas like real estate and reatil sectors. The press release of RBI's Annual Report 2006-07 says "On the sources side, growth of bank credit remained high, although there was some moderation. Demand for bank credit was largely broad-based with agriculture, industry and personal loans absorbing 14 per cent, 36 per cent and 24 per cent, respectively, of incremental expansion in overall non-food credit during 2006-07. Growth of credit to sectors such as real estate remained high, albeit with some moderation. In order to maintain asset quality, the Reserve Bank further tightened the provisioning requirements in respect of sectors witnessing high growth in credit".

The Government also took various fiscal and supply-side measures to contain inflation during the latter part of 2006-07. These measures taken by the Government and RBI contained inflation to a certain extent. With the Indian economy integrating with world economy, with Indian economy's robust growth attracting foreign inflows, it becomes difficult to contain inflation with the monetary measures alone. We have to effectively manage startegies for supply side managment of inflation by increasing the productivity of our industry, encouraging imports and also transforming to full capital account covertibilty gradually so that our foreign inflows and foreign exchange reserves are utilised properly to control inflation and rupee appreciation.