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After months of mirroring the Wall Street (Indian markets going down with it), domestic markets ‘decoupled’ again this week from global markets (sadly, when the global markets were recovering). In the beginning of this year, the domestic markets were supposed to have ‘decoupled’ due to India’s high GDP growth trajectory. Continue Reading »

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Much to the fear and embarrassment of the UPA government, inflation rate almost doubled during the three months of 2008 to reach the 39-month high mark of 7 per cent. Although 2008 began with inflation rate of 3.79 per cent for week ended January 5, prices rose as the year progressed.

Such a sudden spurt in prices has thrown the household budget of the common man into disarray, putting pressure on the government and the Reserve Bank to take steps to control the inflationary pressure.

What is Inflation exactly?

Inflation is a measure of rise in general price levels of goods and services. Inflation is measured by taking a set of goods and services, and then the prices of the items in the set are compared to prices one time period ago.

In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale prices. Inflation is primarily of two types - Cost push and Demand pull. Cost push inflation is due to rise in costs of input materials or labour, whereas demand pull inflation is due to increase in demand beyond installed capacity.

Inflation comes in many varieties. The worst variety, from the viewpoint of politicians, is food-led inflation. In a poor country like India, where half or more of family spending is on food, rising food prices spell electoral doom.

Inflation went up quite a bit in the beginning of last year (around seven percent) due to high liquidity in the markets (huge funds inflows in the form of FII and FDI). The RBI controlled inflation by tightening the monetary policy (raising cash reserve ratio and interest rates) and letting the rupee appreciate against foreign currencies. Inflation came well within the control limits in the second half of last year. However, inflation is going up again this year from the last few weeks. This week, inflation figures reached the 7% mark. The reasons of rising inflation this time are quite different from those last year.

What are the effects of inflation?

Controlled inflation is good for the economy as it increases motivation levels of people. The government, in consultation with the RBI, decides the inflation threshold in the country (current inflation threshold range in India is 4-5 per cent). The inflation target is one of the key parameters that go into determining fiscal and monetary policies.

When inflation accelerates, as is the case today, governments across the globe tend to panic and rush out with anti-inflationary packages. The government is panic-stricken today because food prices are going through the roof. Overall, wholesale price inflation has accelerated from 4.5% in January to almost 7% today, and looks headed for double digits. Consumer prices are rising even faster because of consumer panic. The consumer price index is available only with a lag of two months, but newspaper reports suggest that in some cities the consumer price of rice is up 20%, edible oils 40%, dairy products 12% and some pulses 20%.

Life in the four metros across the country is getting tougher for poor and middle class consumers as their budget for grocery and other food items have shot up by almost 40 per cent in the last one year, with Delhi being worst hit. The maximum surge in food prices was witnessed in the national capital, followed by Kolkata, Mumbai and Chennai.

What are the main reasons behind rising inflation? Continue Reading »

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Microsoft, playing a bully yet again, has threatened to take its offer directly to the shareholders of the Internet giant Yahoo! and hinted even at a proxy contest for a new board, if an agreement is not reached within the next three weeks. Continue Reading »

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