ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

InflationSubscribe to Inflation

Indexation Policy of the 7th Central Pay Commission Report

There is a need to revise the manner in which the pay commissions have indexed inflation and the concomitant pay rise. This critique looks at the weaknesses of the existing methodology and proposes some revisions to make it more representative and robust.

Inflation with Disinflation?

Price inflation in India as measured by the Wholesale Price Index and the Consumer Price Index has shown diverging trends. While WPI indicates a disinfl ationary situation for 16 months, CPI indicates inflation. Explaining the construction of the two indices, the trends of subgroups of both indices are presented. It is found that the different sample sizes and weightages of commodity groups of both indices and price interventions in the market explains, at least in part, this odd situation of infl ation along with disinfl ation.

Formula Does Matter

Amid the chaos around the new gross domestic product figures put out by the Central Statistics Office, profound improvements made in another prominent statistical marker--the Consumer Price Index--also compiled by the CSO, went unnoticed. The CPI series was revised to a more recent base year, 2012. This alone probably deserves commendation as base years of other national price indices have grown significantly remote. It is indeed a tectonic shift in estimation procedure and conforms to international best practice concerning CPI. Here we discuss the decision of CSO to replace the arithmetic mean with the geometric mean in the updated CPI indices by going through each of the established approaches to index number theory used to identify the appropriate formulation to calculate basic indices.

Capital Account Management in India

India has been subject to capricious capital flows since its integration with the global capital markets in the early 1990s. In a bid to balance diverse objectives, India, like many other emerging markets, has resorted to active management of various types of capital flows. This paper finds that while the calibrated liberalisation approach resulted in altering the composition of capital flows towards more stable flows, and has helped India to negotiate the "Trilemma," the use of sporadic capital account management measures in the face of surge or stop of capital flows has not been very effective in achieving their objectives of reducing external vulnerability or mitigating macro-prudential risks.

Monetary Policy Dilemmas at the Current Juncture

Monetary policies in advanced economies and emerging markets face quite different challenges at the current juncture. In the advanced countries, current dilemmas derive from the normalisation of unconventional monetary policies. The short-term dilemma is to determine when to start exiting extraordinary policies and selecting appropriate tools, as conventional tools may not be very relevant during this phase. The medium- to long-term challenges relate to the sequencing, pace and mechanics of normalisation. Monetary policy in emerging markets needs to cope with the familiar dilemmas of fiscal dominance, the growth-inflation trade-off and the "impossible trinity." With fiscal parameters in control, and food and commodity prices subdued, the chief dilemma currently confronting emerging markets involves a trade-off between targeting divergent domestic and external cycles. Although they are now better placed to absorb a sudden stop, the impact is likely to be differential, with those with weaker macroeconomic parameters suffering greater pain.

Calm before the Storm?

It is generally believed that India is doing far better than most emerging market economies in these times of global economic turmoil. Emerging markets are facing capital flight, with large-scale outflows, especially since the second half of 2015, with the trend expected to continue in 2016. India has been less affected than others, but is clearly vulnerable due to the large number of Indian firms that are exposed to external borrowings, a weak rupee, a year or more of declining merchandise exports, falling corporate profitability, and stressed corporate balance sheets.

Continuous Revisions Cast Doubts on GDP Advance Estimates

Two recent press releases by the Central Statistics Office substantially revise the new series of National Accounts Statistics. The new releases are more than just routine updates, and entail methodological changes and incorporate new sources of data, perhaps in response to various critiques. Yet, on comparing the advance estimates released with past such estimates, the CSO's latest growth projections once again turn out to be far too optimistic.

Fuel Pricing Policy Reform in India: Implications and Way Forward

This paper undertakes an examination of the differential impact of international oil prices on domestic inflation and output growth in India under two alternative scenarios. One scenario is, when domestic fuel prices are allowed a formula-based automatic alignment with international oil prices and the second, when as per current policy, fuel prices have evolved as a consequence of revisions specified periodically by the government. The differential impact analysis has been undertaken in a structural Vector Autoregressive framework using the technique of innovation accounting.

Impact of Fiscal Deficit

Fiscal Deficit and Inflation in India: A Study in Nexus by Ashutosh Raravikar; Macmillan India, 2003; pp x+252, Rs 385

Dynamics of Inflation in Services

Price developments in services need to be analysed on the basis of CPI to study their contribution to inflation in relation to that of goods. At present, services sectors account for almost 50 per cent of the aggregate GDP. Higher price increases, rising productivity and increased tradability could create a â??virtuous circleâ?? associated with a higher share of services in GDP. However, reforms and privatisation programmes, if not associated with increased efficiency, may also contribute to a rise in charges and services prices.

Exchange Rate Policy and Management

The objective of this study is to present the Indian experience of exchange rate management against the backdrop of international developments both at the theoretical and empirical levels. No single exchange rate regime is most appropriate for all countries and the regime that is appropriate for a particular country may change over time. The stated objective of India�s exchange rate policy is managing volatility with no fixed rate target while allowing the underlying demand and supply conditions to determine exchange rate movements over a period. Against this background, the empirical exercise undertaken indicates that monetary policy has been successful in ensuring orderly conditions in the foreign exchange market and containing the impact of exchange rate pass-through effect on domestic inflation. Real shocks are predominantly responsible for movements in real as well as nominal exchange rate; monetary policy shocks have been relatively unimportant. Deviations from uncovered interest parity can be observed suggesting role for sterilised foreign exchange market intervention in ensuring orderly conditions; at the same time, the excess returns are insignificant and get eliminated relatively quickly. Overall, the analysis indicates that exchange rate management in India has been consistent with macroeconomic stability.

Growth vs Inflation Control

The reduction in the Bank rate and in the cash reserve ratio effected in the latest credit policy statement may appear small, but what is significant is the signal conveyed to the market that the policy of supporting investment by providing adequate liquidity and a softer interest rate environment will continue.


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