How RBI tackled Inflated indian economy in 2008

-
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*

0

Comments

Post a Comment

Popular posts from this blog

Factors affecting Commodity Market

-
The Indian economy is witnessing a mini revolution in commodity derivatives and risk management. Commodity options trading and cash settlement of commodity futures had been banned since1952 and until 2002 commodity derivatives market was virtually non-existent, except some negligible activation an OTC basis. Now in September 2005, the country has 3 national level electronic exchange and 21 regional exchanges for trading commodity future derivatives. As many as 103 commodities have been allowed for derivative trading. In this article we will discuss the various. as Modern Commodity market The modern commodity markets have their roots in the trading of agricultural products . While wheat and corn, cattle and pigs, were generally traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets. For a commodity market to be established there must be very wide consensus on the variations i...
Read more

Home Loan Solution for Early Birds-“STEP UP LOAN”

-
        World of Finance by M.Vijaya Sai A famous quote always reminds us –“Start Early, Drive Slowly and Reach Safely”. Same thing holds good for early birds (who are in beginning of their carrier) whose dream is to build a home of their choice. But often these early birds fall short of funds that could build their dream homes. For those who fall in this category. Step up loan is your recipe. A famous quote always reminds us –“Start Early, Drive Slowly and Reach Safely”. Same thing holds good for early birds (who are in beginning of their carrier) whose dream is to build a home of their choice. But often these early birds fall short of funds that could build their dream homes. For those who fall in this category. Step up loan is your recipe. What is this Step up Loan? Step up loan is a banking solution that helps you to plan and leverage your future expected salary increment to increase the quantum of home loan you avail at ...
Read more

Company Deposits

-
        World of Finance by M.Vijaya Sai With the macro environment being tippy these days markets worldwide are behaving very volatile. In this situation how can one position safe and be assured good returns. This can be tackled skilfully through various investment product’s. One of those products is Company Deposits or Company Fixed Deposits. One famous quote tells us -"The reason saving comes before investing is that you need to have seed before you can sow it in anticipation of a harvest." truly one need to save well, as your money should turn out to be a good yielding crop with high return. How can we make it happen? We know banks tend to give lower rate of return on our regular savings account. While the Gold reaching tall peaks making it not affordable for common man. Investing in equity market and mutual funds seems to be very risky because of high volatility. Furthe...
Read more