Inflation and its calculation in the Indian context

1. Impact of Inflation J.Karthikeyan Director – Research & Consulting Finerva Financial Solutions Pvt Ltd

2. What is Inflation? It is the rise in prices of goods and services.

3. What is Inflation? How is it measured? By Creating an Index Measuring the rise or fall in the index value Methodology and Frequency of Data Collection for index is predetermined India – WPI, CPI

4. Idiosyncrasies in our Index Weightages and Constituents: Name of Commodity : Telephone Instruments Weight: 0.05208 Name of Commodity : Railway Sleepers Weight : 0.09898 Name of Commodity : Zerda Weight : 0.03557 Name of Commodity : T.V. sets (B&W) Weight : 0.37192

5. Theories of Inflation Demand – Pull Inflation Theory - Housing

6. Theories of Inflation Cost – Push Inflation (Supply Shock) Theory - Oil

7. Theories of Inflation Built – in Inflation – Agricultural Products (Milk, Rice, etc), Pay hikes

8. Who is Affected by Inflation? The Citizens – Different Classes

9. Who is Affected by Inflation? The Industries – Domestic, Exporters & Importers

10. Who is Affected by Inflation? The Government – Regulators, Political

11. Can I See Inflation? - Citizens Yes, you can!!!! Inflation is more than just a number.

12. Can I See Inflation? - Citizens Price of Petrol, Price of a loaf of bread Cost of education

13. Can I See Inflation? - Citizens Salary increments have no meaning Effective returns come down More expenses – difficulty @ retirement

14. How will it impact me? – Business Manager Companies closing down – Pioneer Poultry Dreams Shattered – Tata Nano Targets not Achieved – Fridges, Washing Machines, Bikes New projects are costlier – Break-even longer Exports becoming costlier. Imports not justifying the returns.

15. What can I do about it? - Regulator Controlling Money Flow – Economic Theory Increasing CRR & SLR (To reduce money supply) Increasing Interest Rate (To reduce money demand) Ultimately reducing purchase and production

16. What can I do about it? - Regulator Controlling Money Flow – Economic Theory Increasing CRR & SLR (To reduce money supply) Increasing Interest Rate (To reduce money demand)

17. What can I do about inflation? - Politician Subsidies Change in powers Blame-game

18. Impact on the Economy Exponentially higher social cost – less savings, less infrastructure, higher dependence

19. Impact on the Economy Exponentially higher social cost – less savings, less infrastructure, higher dependence Hoarding of goods – leads to sudden spurt in demand – fueling further inflation Rebalancing in investment portfolios – preference to retain assets than produce

20. Impact on the Economy Exponentially higher social cost – less savings, less infrastructure, higher dependence Hoarding of goods – leads to sudden spurt in demand – fueling further inflation Rebalancing in investment portfolios – preference to retain assets than produce

21. Hyper Inflation Zimbabwe: 355,000% now-a-days Argentina: 200% in one month alone. 5000% in 1989 Russia: 2000% in 1992

22. Are we in an OK state today? Based on Oil Prices alone – Yes we are Ok. Lessons to learn – Reduce oil dependence, - get strategic reserves, find other sources Don’t meddle with the economy – subsidy is only charging a bill elsewhere. Not to make it political To accept that some inflation is good