Inflation – Reasons and Measures(??)

Today, the inflation is up almost at 7% despite several measures by the government to curb this inflationary pressure. What are the reasons for such nflation to rise to its highest level in the past 3 years?

Two main reasons can be attributed to this rise in inflation. One is the rise in prices of commodities like fuel (oil price is hovering around the 100 dollar mark in international markets), metals and edible oils. The second reason is the slow down in the economy maily in industrial and infrastructure sectors. Te former reason is at the top of the agenda for PM Manmohan Singh, FM Chidambaram and RBI Governor Y.V. Reddy

So what measures cam be taken so that the inflation is brought down to the acceptable level. Acceptable level in the sense that the "Aam Aadmi" referred to by the government who is bearing the brunt of these rising prices

First of all the rise in commodity prices is not led by demand. They are influenced by the pricing in the international markets. For example, rise in metal prices can be attributed to the fact that China is consuming a huge amount of the steel produced to fuel its growth in infrastructure. These prices will come down only when the threat of a global economic slow down becomes real and the demand for these products comes down

So what can the government and the RBI can do to curb this inflation. RBI can raise the interest rates and it is pretty sure that it will raise the Cash Reserve Ratio (CRR) for the banks to suck in the excess liquidity in the system. But there is a problem if the RBI raises its interest rates. The US and EU lowered their interest rates bt January end. So the higher rate will encourage foreign investors to invest in India due to the interest rate gap. This will strenghthen the rupee against the US dollar. This will severely impact the exporters who already were severely hit last year's rupee appreciation of 12%

So in an election year the government is caught up between concentrating on economic growth and curbing inflationary pressures. One measure the government is already undertaking is to cut excise duties on commodities like edible oils, oil seeds etc.

Lets keep our fingers crossed and hope that some good things come out of this crisis like an economic reform. I wish the finance minister all the best as he is now sitting on a throne (finance ministry) with a crown full of thorns (inflation and economic slow down)

A complete review can be found in the following link
http://in.reuters.com/article/businessNews/idINIndia-31587820080125

More blogs can be found in the following links
http://srshamil.blogspot.com