Topic:
One of the basic principles of economics is that prices rise when money supply
increases. In India, in order to control prices, the Reserve Bank of India has tried
several times to reduce the money supply by increasing the bank rate. However,
there seems to be no effect on the prices
and the Indian Economy is still going through a critical phase of price rise.
Is the price inflation in India a monetary phenomenon. Had you been a finance
minister, what could have been your strategies to control price rise
situations?
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How to Control Prices ?
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In order to control the price rise our main and basic step would have been finding the source or the real cause of price rise..
ReplyDeletenecessary steps could have been taken there after . But looking at the current state the reserve bank should set allowance for exporter so that the exporter could indirectly help to slow down or even bring down the price level.
REASON BEHIND DECLINING RUPEE
ReplyDeleteThe government’s reaction has been predictable: Officials like Finance Minister P. Chidambaram have been assuring the public and investors that the drop in the currency is a temporary phenomenon that has also been witnessed in other countries and that they are working at stabilizing the rupee by addressing issues that affect the inflow of capital.
The question, however, is whether their reassurances are enough to stem the rupee’s fall. To answer that, we have to look at the two sets of factors working to undermine the rupee. The first is fundamentals and the other is sentiment, both domestic and global.
At the basic level, the rupee falls when more money is coming into the country than what is leaving. Foreign institutional investor flows have been negative for all the trading days in June (for a total of $2 billion), though they were positive in May ($4.4 billion). But what is more important is that foreign investors have been moving out of debt, which gives a signal to the Reserve Bank of India, or R.B.I., to avoid cutting interest rates in the near future.
The second fundamental factor involves the country’s trade deficit, which is becoming a more serious problem, judging by the government’s mounting concern about gold imports. The latest comments came Thursday from Mr. Chidambaram, who pleaded with Indians to stop buying gold. Gold and oil constitute around 45 percent of imports, and with oil price remaining steady, evidently gold imports have upset the apple cart.
Further, one can surmise that foreign direct investments and other inflows have not quite made up for the trade deficit, as evidenced by a decline in the country’s foreign currency assets by $3.1 billion in the last week of May. Clearly, India’s balance of payments has turned perverse, which justifies a decline in the rupee.
However, investor sentiment is also playing a critical role in the rupee’s accelerated slide, and this germinates from both global and domestic waves. At the global level, investors have been worried that the Federal Reserve will end its government bond-buying program, which was designed to keep American interest rates low to stimulate the economy, after the Fed chairman, Ben S. Bernanke, suggested that the program may be scaled back in the near future.
The implication is that if this happens, then the foreign funds that have been moving to emerging markets looking for better returns will return to the United States once bond yields there firm up. This would mean that there will be fewer flows to these developing countries, including India, which would pressure the balance of payments and in turn the domestic currency.
This explains to a large extent an apparent paradox in the global currency market, where the dollar has been weakening against the euro, yet has strengthened against the currencies of most emerging markets that have been recipients of fund flows. Brazil’s currency has depreciated 7 percent in May, while the Mexican peso has fallen 4.9 percent, the South Korean won by 2 percent and the Russian ruble by 3.5 percent. This is a point that the Indian government has been emphasizing, that the rupee’s fall is part of a global phenomenon and so there is no reason to worry as things will settle down eventually.
The problem is that when fear sets in the foreign exchange market, it often reinforces the fundamentals. The threat of a further decline in the currency causes importers to rush in to buy dollars while exporters will hold back their dollars for conversion, thus exacerbating the demand-supply gap. This is where the Reserve Bank of India intervened last year, by forcing exporters to bring in their dollars when the rupee fell to its previous low.
The other sentiment wave flows domestically, from the government and the Reserve Bank of India. The more the government and central bank point out that the gold import situation is serious, the more investors believe that economic conditions are worsening and that nothing much can be done to control the slide.
REASON BEHIND DECLINING RUPEE
ReplyDeleteA falling rupee is a concern because it is a signal of weakness to the external world, and a weaker currency makes it more expensive to buy imported goods like oil, which in turn aggravates the problem of inflation. And a softening rupee increases the implicit cost of India’s high foreign debt.
The government’s reaction has been predictable: Officials like Finance Minister P. Chidambaram have been assuring the public and investors that the drop in the currency is a temporary phenomenon that has also been witnessed in other countries and that they are working at stabilizing the rupee by addressing issues that affect the inflow of capital.
The question, however, is whether their reassurances are enough to stem the rupee’s fall. To answer that, we have to look at the two sets of factors working to undermine the rupee. The first is fundamentals and the other is sentiment, both domestic and global.
At the basic level, the rupee falls when more money is coming into the country than what is leaving. Foreign institutional investor flows have been negative for all the trading days in June (for a total of $2 billion), though they were positive in May ($4.4 billion). But what is more important is that foreign investors have been moving out of debt, which gives a signal to the Reserve Bank of India, or R.B.I., to avoid cutting interest rates in the near future.
The second fundamental factor involves the country’s trade deficit, which is becoming a more serious problem, judging by the government’s mounting concern about gold imports. The latest comments came Thursday from Mr. Chidambaram, who pleaded with Indians to stop buying gold. Gold and oil constitute around 45 percent of imports, and with oil price remaining steady, evidently gold imports have upset the apple cart.
Further, one can surmise that foreign direct investments and other inflows have not quite made up for the trade deficit, as evidenced by a decline in the country’s foreign currency assets by $3.1 billion in the last week of May. Clearly, India’s balance of payments has turned perverse, which justifies a decline in the rupee.
However, investor sentiment is also playing a critical role in the rupee’s accelerated slide, and this germinates from both global and domestic waves. At the global level, investors have been worried that the Federal Reserve will end its government bond-buying program, which was designed to keep American interest rates low to stimulate the economy, after the Fed chairman, Ben S. Bernanke, suggested that the program may be scaled back in the near future.
The implication is that if this happens, then the foreign funds that have been moving to emerging markets looking for better returns will return to the United States once bond yields there firm up. This would mean that there will be fewer flows to these developing countries, including India, which would pressure the balance of payments and in turn the domestic currency.
This explains to a large extent an apparent paradox in the global currency market, where the dollar has been weakening against the euro, yet has strengthened against the currencies of most emerging markets that have been recipients of fund flows. Brazil’s currency has depreciated 7 percent in May, while the Mexican peso has fallen 4.9 percent, the South Korean won by 2 percent and the Russian ruble by 3.5 percent. This is a point that the Indian government has been emphasizing, that the rupee’s fall is part of a global phenomenon and so there is no reason to worry as things will settle down eventually.
The problem is that when fear sets in the foreign exchange market, it often reinforces the fundamentals. The threat of a further decline in the currency causes importers to rush in to buy dollars while exporters will hold back their dollars for conversion, thus exacerbating the demand-supply gap. This is where the Reserve Bank of India intervened last year, by forcing exporters to bring in their dollars when the rupee fell to its previous low.
Inflation cannot be controlled by taking a single measure. However, if monetary and fiscal measures are wisely coordinated, it can greatly help in controlling the continuous process of rising prices.
ReplyDelete(A). Monetary measures:
1. Bank rate policy: In case of inflation, the bank rate is increased; the supply of money is controlled.
2. Open market operation: During inflation, the central bank sells govt. securities and price bonds in the open market in order to contract the supply of money.
3. Variable reserve ratio: In order to control inflation, the central bank increases the reservation.
(B). Fiscal Measures:
Measures in connection with public borrowing, public expenditures and public revenues are called fiscal measures.
1. Public Borrowing: During inflation, increase the public borrowing .
2. Public Revenues: In order to control inflation, the increase in public revenues by the Govt.
3. Public expenditures: Inflation is also controlled by decreasing the public expenditures by the Govt.
(C). Other Measures:
1. Increase the supply of goods and services: When the supply of goods and services is increased, the prices will come down.
2. Population planning: Control on population by adopting different measures of family planning will reduce the demand and finally prices will be controlled.
3. Price control policy: The govt. should adopt strict price control policy against the profiteers and hoarders.
4. Economic Planning: Effective economic planning is necessary to control the inflation in the country.