INFLATION IN INDIA 2007

In the year 2007, the inflation rate between 5-5.5% was set as an acceptable rate by Reserve Bank of
India (RBI). However, the actual inflation rate that was hovering around in the beginning of the year itself
was 6 – 6.8% giving rise to high inflation. The main cause behind the high inflation at that time was the
rise in prices of food articles due to increased constraints in supply and demand. According to analysts,
high economic growth and increased money supply resulted in an increase in the demand, whereas
stagnant agricultural productivity failed to deal with supply constraints. In order to curb inflation various
measures were taken by the government of India (GoI) along with RBI. The RBI decided to increase the
Cash Reserve Ratio (CRR) 8 per cent and repo rates 9 per cent to keep a check on money supply. Due to
increase in the repo rates, banks were forced to increase the rate at which they lent to their customers to
pay a higher interest rate their borrowings from the RBI. The GoI also reduced import duties on several
food products and decreased the price of diesel and petrol. Moreover, the RBI also decided not to
intervene when the Indian Rupee was recovering against the US Dollar between March 2007 and May
2007; this would help in reducing the domestic price of the goods by bringing down the cost of imports.

However, the measures taken by GoI were not sufficient to curb the inflation in the country and faced
harsh criticisms from various economists. According to some analysts, increased rates of interests would
induce recession in the Indian economy. Many economists also felt that strengthened Rupee may also
impact the long-term competitiveness of Indian exports reducing the profits of the export firms.

RECOVERY OF INDIA’S ECONOMY

In 2013, India was facing an economic crisis due to slow economic growth and high levels of
inflation. There was a current account deficit in the country as the rupee was at its all-time low.
On August 28, 2013, the value of the Indian rupee against the US dollar was recorded ` 68.80,
which was the lowest till date. During the first quarter (April-June) of the fiscal year 2013-14,
the economy of India experienced a slow growth rate of 4.4%, the lowest in the previous four
years. The revised forecast of economic growth rate of India by the World Bank for the year
2014 was 4.7% against the earlier estimate of 6.1%. In the opinion of economic experts, Indian
economy was going through the worst economic crisis since 1991. India’s financial condition
was going down as a result of the crisis. On September 04, 2013, Raghuram Rajan was appointed
as the 23rd governor of the RBI for a period of three years. His major challenge was to help the
Indian economy rise above the economic crisis and bring it back on the path of growth. After his
appointment as the RBI governor, the value of rupee strengthened in the international market.
Raghuram Rajan was appreciated by economists and analysts who continued to keep a strict
watch on economic strategies adopted by Rajan.

QUESTIONS:
1. Identify the reasons for the rise in inflation in India 2007?
2. Discuss how the measures taken by RBI could curb inflation. Suggest what other measures
could have been taken