How RBI tackled Inflated indian economy in 2008

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You may remember that the main culprits of inflation last year were:
 
1. Higher crude prices – Due to rapid growth of global economy in 2007 and early 2008 there was a huge demand for crude. Also, when stock market started showing weaknesses across the globe, investors started parking their money in commodities such as Crude.
 
2. Supply constraint – Unprecedented drought in Australia and some part of Americas caused shortage of food grains in the global market. India too had a very bad production year and we had to import grains from the global market. This led to increase in general increase in food grains prices.
 
3. Excess liquidity – High growth in emerging economies like India attracted huge amount of foreign capital. A situation like too much money chasing too few goods lead to inflation. This exactly what happenedin India.

Why does rise in crude price lead to inflation?
Let us begin with a brief discussion on crude prices. It is an extremely important commodity which affects our day to day life in some form or other. Crude prices gave sleepless nights to almost everyone on this planet. It touched $140 per barrel within no time. Government across the world was busy thinking about how to tame inflation which resulted from crude prices. This indicates that thecrude price directly affects the inflation. I have done a comparative analysis of increase in crude price and inflation to figure this out. 

You can see the graphs for crude oil prices and inflation rate almost mirrors itself. Would it be safe to assume that crude influences inflation to a great extent? Well to a great extent YES. The crude price is an extremely important part of inflation calculation whether it is based on CPI or WPI. If we see the table below, fuel has over 10% weight in the WPI index, which is used to calculate inflation in India. Moreover, the change of fuel prices affects almost every goods and services in India because it increases transportation costs, cost of production for manufacturing and utilities prices. Thus, any change in fuel price affects inflation.
 
Major Group/Group
Base Year 1993-94

Weights in WPI (%)

All Commodities

100




1
Primary Articles

22.025
i)
Food Articles

15.402
ii)
Non-food Articles

6.138
iii)
Minerals

0.485




2
Fuel, Power, Light & Lubricants

14.226




3
Manufactured Products

63.749
i)
Food Products

11.538
ii)
Beverages, Tobacco & Tobacco Products

1.339
iii)
Textiles

9.8
iv)
Wood & Wood Products

0.173
v)
Paper & Paper Products

2.044
vi)
Leather & Leather Products

1.019
vii)
Rubber & Plastic Products

2.388
viii)
Chemicals & Chemical Products

11.931
ix)
Non-Metallic Mineral Products

2.516
x)
Basic Metals. Alloys & Metals Products
8.342
xi)
Machinery & Machine Tools

8.363
xii)
Transport Equipments &Parts

4.295
xiii)
Other Misc. Manufacturing Industries*

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