Monetary Policy Case Study

Case Title:

Is Monetary Tightening India’s Best Response to the Ongoing Inflation

Abstract:
The inflation rate in India jumped to 11.98% for the week ending 19 July 2008. In order to arrest inflation levels, the Reserve Bank of India, the country's central bank, increased the key short-term lending rate (repo rate) by 50 basis points to 9%. The cash reserve ratio was also raised to 9%. The bank rate and the reverse repo rate were however kept constant at 6%. The economists did not rule out further monetary tightening measures. However, many economists felt that since inflation was a cost push one, monetary tightening measures taken to curb demand, might give some respite in the short run, but these measures would not be very effective in the long run.

Pedagogical Objectives:

• To understand the concepts of inflation particularly demand pull and cost push inflation.
• To understand the inflationary scenario in India.
• To understand the policies adopted by government and RBI to bring down inflation levels.
• To understand the effectiveness of these policies.

Keywords : Inflation, Monetary tightening policies, Devaluation of currency, Imported inflation, BOP (balance of payments) crisis, Primary commodity prices, Structural reforms, Import compression, Case reserve ratio, Repo rate, Production capacity, Impact