...------------------------------------------------- INFLATION TARGETING AND INTEREST RATE RULES A Project Report by: November 23, 2015 Group #3 Section E November 23, 2015 Group #3 Section E Kaustubh (PGP/19/264) Kavya (PGP/19/265) Kunal (PGP/19/266) Madhu (PGP/19/267) Madhur(PGP/19/268) Contents Introduction ------------------------------------------------------------------------------------------------------ 2 INFLATION TARGETING USING TAYLOR TYPE OF RULES -------------------------------------------- 2 RATIONALE FOR INFLATION TARGETING IN INDIA ----------------------------------------------------- 3 RATIONALE FOR NOMINAL GDP TARGETING IN INDIA ------------------------------------------------ 3 Introduction Inflation is increased money supply, and often causing a sustained increase in the general price level of goods and services in an economy over a period of time by "Too much money chasing too few goods", as common acknowledge by modern people. Inflation is of primarily four types – hyperinflation, disinflation, deflation and stagflation. Hyperinflation involves high growth of money supply i.e. in multiples of 100 and usually occurs when central bank is involved in excess money printing. Disinflation involves inflation that is growing at a decreasing rate. Deflation or negative inflation is decrease in money supply. Stagflation occurs when high growth in prices coincides with decelerated growth and unemployment. Inflation is measured using indices namely, CPI...
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...Macro Economics Project Topic: Inflation Targeting and Interest Rules Section - D Group – 3 Members: Shankho Bag (PGP/19/225) Soham Dutta (PGP/19/230) Sohom Karmakar (PGP/19/231) Sumanraj E (PGP/19/232) Sumeet Mahapatra (PGP/19/233) Abstract:In the recent past India has been grappling with high inflation and inflation stands highest amongst all the G-20 nations. Faced with a twin effect of declining growth which created an environment of “stagflation”, India needed to re-work its entire monetary policy framework. The monetary policy of our country was focused on targeting Multiple Indices like GDP Growth Rate, IIP, WPI Inflation which resulted on low accountability, lack of proper direction and ultimately inflation spirally out of control. To give a new direction and change the discourse of monetary policy, it was obvious some serious reforms were needed. In this report, we take a look at the ground breaking shift in monetary policy when India officially adopted as “Inflation Targeting” as the primary role of its Central Bank (The RBI) and we take a holistic view of the situation. Introduction:The Indian economy during the period 2012, 2013 was at crossroads. With manifold problems surrounding it, the economy needed a major boost and course correction to go towards the path of sustainable growth. The Indian economy was faced with stagflation – the double edged sword of persistently high inflation combined with fall/stagnation of...
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...Indian and Chinese policies to tackle inflation Abstract: India and china the two Asian giant, have shown economic growth in last few decades. The expansion of the economy brought high inflation in both countries. Inflation impacts all types of the consumers while rich or poor, it will become a real problem if the countries didn’t adopt policies to decrease the inflation rate. India and china have a very fast economic growth with fast population. The government and the central bank have to work beside to curb the inflation using two main policies are monetary policy and fiscal policy. In the monetary policy the central bank has to manage the many supply in the market and also control and decline the inflation, in terms of fiscal policy the government try to see the tax level to impact in the inflation rate. Monetary policy has more effect than fiscal policy, but also there are challenges implementations of the policies. Argument 1(monetary policy) India has faced a hyperinflation in years 2009 to 2011 to unprecedented level. The inflation in India affects the saving of the Indian household which decreased the value of saving in that nation. The monetary authorities are trying to impact the money supply directly without creating deformation in the economy by changes CRR (cash reserve ratio), repo and reverse repo rate. The main objective is to maintain price stability. The RBI (reserve bank of India) trying to control the money supply by using which called contractionary...
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...India AHEAD Ten Things for India to Achieve its 2050 Potential (BRICS estimation) >India could be 40 times bigger by 2050. > India could be 40 times bigger by 2050 than its current capacity as estimated by brics. >To achieve this, India needs to implement many changes. India needs to improve its governance, control inflation, introduce Credible fiscal policy, liberalize financial markets and increase trade With its neighbors. >It also needs to significantly raise its basic educational standards, And increase the quality and quantity of its universities. >India needs to boost agricultural productivity, improve its infrastructure And environmental quality. >Delivery of all these would ensure strong, persistent, medium to long-term Growth, allowing India to reach its amazing potential. In this project, we outline ten crucial steps that we believe India must take in order to achieve its full potential. In our latest brics analysis, India scores below the Other three BRIC nations, and is currently ranked 110 out of a set of 181 Countries. If India were able to undertake the necessary reforms, it could raise its growth potential by as much as 2.8% per annum, placing it in a very strong position to deliver the impressive growth. We highlight the ten key areas where reform is needed. In a way these are the covered ones, we consider them to be the most crucial: 1. Improve governance. Without better governance, delivery systems and effective...
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...relationship between inflation and growth has remained a controversial one in both theory and empirical findings. Over the past couple of years, a lot of economists have claimed that an increase in economic growth leads to an increase in inflation and that decreased growth reduces inflation. There are several theories to explain the nature and existence of the inflation-economic growth with the theories suggesting that variety of possible conclusions. These include: Classical, Keynesian, Neo-Keynesian, Monetarist, Neo-classical and Endogenous growth theories. Studies have shown that inflation and its variability have significant real costs to the economy with several of the studies indicating that a 10% inflation rate can cause up to 3% loss in the GNP thus many governments have adopted inflation targeting as a dominant economic policy framework. While all the studies agree with Bruno and Easterly conclusion that inflation threshold will occur somewhere below 20% they differ significantly on the specific threshold rates. Most of the studies reviewed conclude that there is indeed a significant negative relationship between inflation and economic growth at high inflation rates in the long run. However, while many sophisticated techniques have been applied in an attempt to explain the relationship between inflation and economic growth; many key questions still remain unresolved. Introduction: The objective of this paper is to study the relationship between inflation and economic growth...
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...LEVEL ARE AS FOLLOWS: * MONSOON: While the inflation trajectory has been positive in the last few months, there are worries that a poor monsoon may play truant. Indian agriculture and food production is majorly dependent on rainfall as irrigation is still not used everywhere. So a shortage of rainfall could impact food production output. This could have a direct bearing on rural incomes. It could also be potentially inflationary. Monsoon is yet to pick up in various parts of India, sparking fears of a drought. So far, rainfall remains 42.6% below normal, according to a report by Kotak Securities, a Mumbai-based brokerage. This has lead to deficiency in reservoir and water-basin levels by as much as 34%, the report said. * TECHNOLOGICAL FACTORS: Technology significantly influences product development and also introduces fresh cost-cutting processes. India is served with both 3G and 4G technology which has facilitated several of their technological projects. Furthermore, the country also possesses one of the strongest IT sectors in the world, promoting constant IT development, software upgrades and other technological advancements. Recently, India has also attempted to launch their satellites into space * INTEREST RATES: The deficient monsoon could lead to a rise in inflation. “Signs of a deficient monsoon and weak acreage have increased the risks of a repeat of the 2009 phase of high food inflation,” the brokerage said. This could force the RBI to continue...
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...Monetary policy Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.[1][2] The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or concretionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.[3] Overview Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance...
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...RBI & Its Monetary Policies Table of Contents NO. | Particulars | 1. | Introduction of RBI | 2. | Monetary policy | 3. | Monetary policy objectives | 4. | Monetary policy functions | 5. | Operations of Monetary policy * Quantitative credit control * Selective or qualitative methods | 6. | Operating procedures of Monetary policy * Liquidity adjustment facility (LAF) * Market stabilization scheme | 7. | Monetary policy tools | 8. | Recent changes in Monetary policy | 9. | Evaluation of Monetary policy | 10. | Limitations | 11. | Conclusion | 12. | Bibliography | 13. | | 14. | | 15. | | 16. | | INTRODUCTION OF RBI The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government...
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...Monetary policy: Is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary policy is referred to as either being an expansionary policy, or a contractionary policy. Expansionary Monetary Policy: Expansionary policy increases the total supply of money in the economy, and policy is traditionally used to combat unemployment in a recession by lowering interest rates. Contractionary Monetary Policy: Contractionary policy decreases the total money supply. and involves raising interest rates in order to combat inflation. Introduction: Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century...
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...|Exchange rate |Monetary Policy Framework | |arrangement (Number | | |of countries) | | | |Exchange rate anchor |Monetary aggregate|Inflation targeting framework |Other1 | | | |target | | | | |U.S. dollar (66) |Euro (27) |Composite (15) |Other(7) |(22) |(44) |(11) | |Exchange arrangement |Ecuador |Palau |Montenegro | |Kiribati | | | | | |with no separate |El Salvador |Panama |San Marino | | | | | | | |legal tender (10) |Marshall Islands |Timor-Leste ...
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... ABSTRACT This study seeks to investigate the extent to which the Fisher Hypothesis holds in Zambia. The Fisher hypothesis states that nominal interest rates move one-for-one with expected inflation, leaving the real rate of interest unaffected. Interest rate is an important variable for macroeconomists because it links the economy of today and the economy of the future through its effects on saving and investment decisions. The validity of the Fisher effect also has important implications for monetary policy and needs to be considered by central banks. Despite the importance of the Fisher Hypothesis, very few studies have been carried out in developing countries compared to developed countries. The study will utilize time series data for the period 1992 to 2011, this corresponds to the period in which interest rates were liberalized, and also the period in which Zambia was using monetary targeting as the monetary policy framework. The analysis will use the commercial bank lending rate as proxy measure of nominal interest rates and the Bank of Zambia (BOZ) inflation forecasts will be used as a measure of expected inflation. The Bounds test approach of Pesaran et. al. (2001) will be utilized to analyze the long run relationship between the nominal interest rate and expected inflation rate. * TABLE OF CONTENTS ABSTRACT…………………………………………………………………………………………………………………………………..i TABLE OF...
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...time of Independence in 1947, has depreciated by a little more than 65 times in the past 66 years. At the time of independence, there were no foreign borrowings on India's balance sheet. After independence, India had chosen to adopt a fixed exchange rate currency regime. The rupee was pegged at 4.79 against a dollar between 1948 and 1966. Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965; resulted in a huge deficit on India's budget, forcing the government to devalue the currency to 7.57 against the dollar. The rupee's link with the British currency was broken in 1971 and it was linked directly to the US dollar. In 1975, value of the Indian rupee was pegged at 8.39 against a dollar. In 1985, it was further devalued to 12 against a dollar. In 1991, India faced a serious balance of payment crisis and was forced to sharply devalue its currency. The country was in the grip of high inflation, low growth rate and the foreign reserves were not even worth to meet three weeks of imports. Under these situations, our currency was devalued to 7.90 against a dollar. So far two major rupee devaluations occurred in 1966 and the early 90s and the present one. The reasons for these devaluations are CAD, Fiscal deficit, soaring inflation, insufficient foreign exchange reserves, decontrol and liberalization. It was mostly at around Rs.45 against a dollar. It touched a high of Rs.39 in 2007. The Indian currency has gradually depreciated since...
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...MONETARY POLICY WHAT IS MONETARY POLICY? Policy to control the supply of money in the country Targeting a rate of interest to attain objective of growth and stability of the economy. TYPES OF MONETARY POLICIES Expansionary • Increases the total supply of the money in the economy • Used to combat unemployment in a recession by lowering interest rates TYPES OF MONETARY POLICIES Contractionary • Decreases the total supply of the money in the economy • Used to combat inflation by raising interest rates TOOLS OF MONETARY POLICY IN INDIA Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Repo and Reverse Repo Rate CASH RESERVE RATIO (CRR) • Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank • RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. STATUTORY LIQUIDITY RATIO (SLR) • SLR is the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. REPO AND REVERSE REPO RATE REPO RATE • It is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. REVERSE REPO RATE • It is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money...
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...operating close to its limits. Rather than chasing growth govt. has made shadow-banking regulation stricter, preserved with curbs on property speculation. The Economic Times 25th April 2013 • RBI strikes gold with its yellow metal stock It has earned 41% returns from gold reserves since 2009, 4 times more than other assets. • RBI may prod private bank to enforce KYC norms May push banks to rationalize commissions paid to their wealth & relationship managers in order to discourage dubious transactions. • Create more banks. Chit funds will die. Lack of financial inclusion. • Economists isn’t as smart as dentistry • When entrepreneurs become Angel Investors 26th April 2013 • Market surges as traders roll over bets ahead of RBI policy Punters purchase bank stocks to rake in the dividends on hopes of rate cut on 3 • Getting bank license will not be cake walk RBI’s insistence on priority lending & substantial presence in rural areas will make opening new banks difficult: Deputy Governor. 29th April 2013 •...
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...National National Herald case: HC terms Gandhis’ applications as ‘infructuous’ Updated: October 15, 2015 16:01 IST | PTI Congress president Sonia Gandhi and vice-president Rahul Gandhi during the during a rally at Ramlila Maidan in New Delhi. File photo The Congress leaders had alleged that a "different treatment" was meted out to a challenge filed by them in the case. The Delhi High Court on Thursday termed as “infructuous” the applications moved by Congress President Sonia Gandhi, her son Rahul and some other party leaders alleging a “different treatment” was meted out to a challenge filed by them in the National Herald case. The Congress leaders in their application had opposed the transfer of the case from the court of Justice Sunil Gaur who had part-heard the matter for eight months to another court of Justice P S Teji. Justice Gaur on Thursday termed their “applications” as infructuous as the matter has been listed before him by the high court registry. The judge also said that he had not recused from the matter and added that the petitions came back to him as it was part-heard by him. Even senior advocate Kapil Sibal, appearing for Sonia Gandhi, agreed with the court that the applications had become infructuous and also added that they can be withdrawn. The court, thereafter, said it will hear arguments in the matter later in the afternoon. The Gandhis in their application had said their petition challenging a trial court order in the case was transferred in violation...
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