Page 179 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Exchange Rates

Exchange rate movements also cause price level changes. This is, in fact, the essence of the
purchasing power parity theory of exchange rate determination. As far as the Indian economy is
concerned the depreciation of the external value of the rupee since the floating of rupee in 1975
has certainly been an inflationary factor.

Caselet High Commodity Prices: The Main Reason behind
Inflation?

n August, 23, 2011, the government of India said high commodity prices and
demand pressure in manufactured items have led to inflationary pressure, but
Oadded that the rate of price rise is likely to moderate to 6-7 per cent by the end of
this fiscal.
“The surge in headline inflation, despite an overall moderation is food inflation, was the
combination of two factors - an unanticipated increase in oil and commodity prices... and
demand pressures reflected in significant increase in inflation in non-food manufactured
products,” Minister of State for Finance Mr. Namo Narain Meena said in a written reply to
the Rajya Sabha.
Headline inflation, measured by Wholesale Price Index (WPI), has been above 9 per cent
since December 2010. Food inflation remained in double-digit for most of 2010, before
falling below the 10 per cent mark in March this year.
Inflation of manufactured items, which have a share of over 65 per cent in the WPI basket,
has been above 7 per cent since March this year. Mr Meena said the government and the
RBI has taken a number of steps to control inflationary pressure.
The RBI has hiked interest rates 11 times since March 2010 and “related measures to
moderate demand to levels consistent with the capacity of the economy to maintain its
growth without provoking price rise.”
Regarding steps by the government, he mentioned reduction of import duty to zero on
rice, wheat, pulses, edible oils and onion, ban on export of edible oils and pulses, suspension
of futures trading in rice, urad and tur and extension of stock limit orders in case of pulses
and rice.
Mr Meena also said that the government has reduced import duty on skimmed milk
powder, petrol and diesel and custom duty on crude oil. In reply to another question, he
said that headline inflation is expected to fall to 6-7 per cent by March 2012. “Overall WPI
headline inflation is expected to fall to ... 6 -7 per cent,” the minister said.
“Growth is expected to decelerate... to around 8 per cent in 2011-12, which should contribute
to some easing of demand- side inflationary pressure, particularly in the second half, as
the full impact of monetary tightening is realised,” Mr Meena added.

Source: www.thehindubusinessline.com

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