The Indian Financial System

Synopsis Inflation And Its Effect On Our Economy

Table of Contents
Topic of Discussion

The Indian Financial System: An Overview

1. The Financial System : An Introduction 2. Financial System: Functions and Implementation 3. Financial Tools And Instrumentations . Components of Financial System!An Introduction

Core Pro ect

1. Inflation : An Introduction 2. "ffects of Inflation 3. Causes of Inflation . Inflation rate of India and other countries

I!"IA! FI!A!CIA# S$STE%

Financial System is an institutional frame#or$ e%istin& in a country to enable financial transactions. There are three main parts in Indian financial system. They are as follo#s: Financial assets comprises of loans' deposits' bonds' e(uities' etc. Financial institutions such as ban$s' mutual funds' insurance companies' etc. Financial mar$ets include money mar$et' capital mar$et' fore% mar$et' etc. )e&ulation is another aspect of the financial system. The re&ulatory authorities are )*I' S"*I' I)DA' and F+C.

The economic de,elopment of a nation is reflected by the pro&ress of the ,arious economic units' broadly classified into corporate sector' &o,ernment and household sector. -hile performin& their acti,ities these units #ill be placed in a surplus.deficit.balanced bud&etary situations. There are areas or people #ith surplus funds and there are those #ith a deficit. A financial system or financial sector functions as an intermediary and facilitates the flo# of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of ,arious institutions' mar$ets' re&ulations and la#s' practices' money mana&er' analysts' transactions and claims and liabilities.

The #ord /system/' in the term /financial system/' implies a set of comple% and closely connected or interlined institutions' a&ents' practices' mar$ets' transactions' claims' and liabilities in the economy. The financial system is concerned about money' credit and finance!the three terms are intimately related yet are some#hat different from each other. Indian financial system consists of financial mar$et' financial instruments and financial intermediation. These are briefly discussed belo#0 FI!A!CIA# %A&'ETS A Financial +ar$et can be defined as the mar$et in #hich financial assets are created or transferred. As a&ainst a real transaction that in,ol,es e%chan&e of money for real &oods or ser,ices' a financial transaction in,ol,es creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and .or periodic payment in the form of interest or di,idend. %oney %ar(et! The money mar$et ifs a #holesale debt mar$et for lo#!ris$' hi&hly!li(uid' short! term instrument. Funds are a,ailable in this mar$et for periods ran&in& from a sin&le day up to a year. This mar$et is dominated mostly by &o,ernment' ban$s and financial institutions. Capital %ar(et ! The capital mar$et is desi&ned to finance the lon&!term in,estments. The transactions ta$in& place in this mar$et #ill be for periods o,er a year. Fore) %ar(et ! The Fore% mar$et deals #ith the multicurrency re(uirements' #hich are met by the e%chan&e of currencies. Dependin& on the e%chan&e rate that is applicable' the transfer of funds ta$es place in this mar$et. This is one of the most de,eloped and inte&rated mar$et across the &lobe. Credit %ar(et! Credit mar$et is a place #here ban$s' FIs and 1*FCs pur,ey short' medium and lon&!term loans to corporate and indi,iduals. India has a financial system that is re&ulated by independent re&ulators in the sectors of ban$in&' insurance' capital mar$ets' competition and ,arious ser,ices sectors. In a number of sectors 2o,ernment plays the role of re&ulator. +inistry of Finance' 2o,ernment of India loo$s after financial sector in India. Finance +inistry e,ery year presents annual bud&et on February 23 in the 4arliament. The annual bud&et proposes chan&es in ta%es' chan&es in &o,ernment policy in almost all the sectors and bud&etary and other

allocations for all the +inistries of 2o,ernment of India. The annual bud&et is passed by the 4arliament after debate and ta$es the shape of la#. )eser,e ban$ of India 5)*I6 established in 1738 is the Central ban$. )*I is re&ulator for financial and ban$in& system' formulates monetary policy and prescribes e%chan&e control norms. The *an$in& )e&ulation Act' 17 7 and the )eser,e *an$ of India Act' 173 authori9e the )*I to re&ulate the ban$in& sector in India. India has commercial ban$s' co!operati,e ban$s and re&ional rural ban$s. The commercial ban$in& sector comprises of public sector ban$s' pri,ate ban$s and forei&n ban$s. The public sector ban$s comprise the :State *an$ of India; and its se,en associate ban$s and nineteen other ban$s o#ned by the &o,ernment and account for almost three fourth of the ban$in& sector. The 2o,ernment of India has ma<ority shares in these public sector ban$s. India has a t#o!tier structure of financial institutions #ith thirteen all India financial institutions and forty!si% institutions at the state le,el. All India financial institutions comprise term!lendin& institutions' speciali9ed institutions and in,estment institutions' includin& in insurance. State le,el institutions comprise of State Financial Institutions and State Industrial De,elopment Corporations pro,idin& pro<ect finance' e(uipment leasin&' corporate loans' short!term loans and bill discountin& facilities to corporate. 2o,ernment holds ma<ority shares in these financial institutions. 1on!ban$in& Financial Institutions pro,ide loans and hire!purchase finance' mostly for retail assets and are re&ulated by )*I. Insurance sector in India has been traditionally dominated by state o#ned =ife Insurance Corporation and 2eneral Insurance Corporation and its four subsidiaries. 2o,ernment of India has no# allo#ed FDI in insurance sector up to 2>?. Since then' a number of ne# <oint ,enture pri,ate companies ha,e entered into life and &eneral insurance sectors and their share in the insurance mar$et in risin&. Insurance De,elopment and )e&ulatory Authority 5I)DA6 is the re&ulatory authority in the insurance sector under the Insurance De,elopment and )e&ulatory Authority Act' 1777. )*I also re&ulates forei&n e%chan&e under the Forei&n "%chan&e +ana&ement Act 5F")A6. India has liberali9ed its forei&n e%chan&e controls. )upee is freely con,ertible on current account. )upee is also almost fully con,ertible on capital account for non!residents. 4rofits earned' di,idends and proceeds out of the sale of in,estments are fully repatriable for FDI. There are restrictions on capital account for resident Indians for incomes earned in India. Securities and "%chan&e *oard of India 5S"*I6 established under the Securities and "%chan&e aboard of India Act' 1772 is the re&ulatory authority for capital mar$ets in India. India has 23 reco&ni9ed stoc$ e%chan&es that operate under &o,ernment appro,ed rules' byla#s and re&ulations. These e%chan&es constitute an or&ani9ed mar$et for securities issued by the central and state &o,ernments' public sector companies and public limited companies. The Stoc$ "%chan&e' +umbai and 1ational Stoc$ "%chan&e are the premier stoc$ e%chan&es. @nder the process of de!mutuali9ation' these stoc$ e%chan&es ha,e been con,erted into companies no#' in #hich bro$ers only hold minority share holdin&. In addition to the S"*I Act' the Securities Contracts 5)e&ulation6 Act' 178> and the Companies Act' 178> re&ulates the stoc$ mar$ets.

Introduction Of The Topic:

I!F#ATIO! is a rise in the &eneral le,el of prices of &oods and ser,ices in an economy o,er a period of time. -hen the &eneral price le,el rises' each unit of currency buys fe#er &oods and ser,ices. Conse(uently' inflation also reflects erosion in the purchasin& po#er of money A a loss of real ,alue in the internal medium of e%chan&e and unit of account in the economy. A chief measure of price inflation is the inflation rate' the annuali9ed percenta&e chan&e in a &eneral price inde% 5normally the Consumer 4rice Inde%6 o,er time. InflationBs effects on an economy are ,arious and can be simultaneously positi,e and ne&ati,e. 1e&ati,e effects of inflation include a decrease in the real ,alue of money and other monetary items o,er time' uncertainty o,er future inflation may discoura&e in,estment and sa,in&s' and hi&h inflation may lead to shorta&es of &oods if consumers be&in hoardin& out of concern that prices #ill increase in the future. 4ositi,e effects include ensurin& central ban$s can ad<ust nominal interest rates 5intended to miti&ate recessions6' and encoura&in& in,estment in non!monetary capital pro<ects. *y inflation one &enerally means rise in prices. To be more correct inflation is persistent rise in the &eneral price le,el rather than a once!for!all rise in it' #hile deflation is persistent fallin& price.These days economies of all countries #hether underde,eloped' de,elopin& as #ell de,eloped suffers from inflation. Inflation or persistent risin& prices are ma<or problem today in #orld. *ecause of many reasons' first' the rate of inflation these years are much hi&h than e%perienced earlier periods. Second' Inflation in these years coe%ists #ith hi&h rate of unemployment' #hich is a ne# phenomenon and made it difficult to control inflation.

A situation is described as inflationary #hen either the prices or the supply of money are risin&' but in practice both #ill rise to&ether. In the Ceynesian sense True inflation be&ins #hen the elasticity of supply of output in response to increase in money supply has fallen to 9ero or #hen output is unresponsi,e to chan&es in money supply. If there is full employment then condition #ill of clearly inflationary' if there is increase in the +oney Supply. Inflation can ta$e many form as: "eflation: is the opposite of inflation #hen fall in prices occurs. "isinflation: is process of brin&in& do#n prices moderately from their hi&h le,el. Sta*flation: is state #here there is sta&nation as #ell as inflation both side by side as pre,ailed in India in 17D !D8 and 17D7!3E.

+yperinflation: If inflation &ets totally out of control 5in the up#ard direction6' it can &rossly interfere #ith the normal #or$in&s of the economy' hurtin& its ability to supply &oods. Fyperinflation can lead to the abandonment of the use of the countryBs currency' leadin& to the inefficiencies of barter.

Dependin& upon the reason of inflation' it can be di,ided in many types as!
51.6 Demand!4ull inflation: This represents a situation #here there is increase in A&&re&ate Demand for resources either from the &o,ernment or the entrepreneurs or the households. )esult of this is that the pressure of Demand can;t be met by the Currently a,ailable A&&re&ate Supply #hich result in A&&re&ate Demand G A&&re&ate Supply #hich is bound to &enerate inflationary pressure in the economy. 52.6 Cost!4ush inflation: This represents the condition #here e,en thou&h there is no increase in A&&re&ate Demand' prices may still rise. This may happen if the costs of especially #a&e cost rise. 53.6 Structural inflation: This type of inflation occurs because of chan&e in structure of economies as happened in India from A&ricultural Structure i.e. 2reen )e,olution to Industriali9ation. Thus because of chan&e in "conomic Structure &i,es rise to increase in prices thus &enerate inflationary pressure. Inflation is ,ery unpopular happenin& in an economy. Hpinion sur,ey conducted in India' @SA and many other countries re,eal that inflation is the most important concern of the people as it badly affects their standard of li,in&. So #hy it is called Inflation is enemy number one. India is facin& the problem of inflationary pressure because of the increase in A&&re&ate Demand #hile A&&re&ate Supply is respecti,ely constant. The inflationary pressure faced by Indian "conomy is due to Demand!4ull inflation i.e. A&&re&ate Demand G A&&re&ate Supply. Thus to curb inflation need to fill the &ap bet#een A&&re&ate Demand and A&&re&ate Supply. For this either need to increase AS or decrease AD that can hamper economic de,elopment. Thus to increase AS is the best tool #hich can be used. To increase AS either need to increase production capacity of all current production unit of to build ne# production plants. *ut as (uoted in an sur,ey done by )*I that all the production plants are runnin& at their full production capacity thus all resources all!full employed the other #ay is to built ne# plant but to do this #ill ta$e at least 13months to 2years. Thus mean#hile need to decrease +oney Supply' #hich is opted by )*I. As in short run it;s not possible to meet the &ap bet#een AD and AS thus )*I is plannin& to decrease li(uidity by reducin& +oney Supply from the mar$et. For this it has been planned that by decreasin& C))' repo rate and re,erse repo rate =i(uidity from the mar$et #ill be drained.

C&& : Cash )eser,e )atio is the percenta&e of deposit that a commercial ban$ need to $eep #ith
)*I by #hich )*I control li(uidity Currently C)) is >.8? in the Indian Conte%t. in the mar$et and create +oney Supply.

&epo &ate: is the rate at #hich )*I lends money to other commercial *an$s.

)*I planned that =i(uidity from the mar$et can be drained by decreasin& money supply and to do so it is increasin& C))' repo rate' re,erse repo rate and ta$in& other measure li$e that. *ut interest is that #hether hi$e to C)) and other factors #ill curb inflation and #hat are the other factors' #hich are influencin& inflation.

Inflation Is Caused "ue To Several Economic Factors:

-hen the &o,ernment of a country print money in e%cess' prices increase to $eep up #ith the increase in currency' leadin& to inflation. Increase in production and labor costs' ha,e a direct impact on the price of the final product' resultin& in inflation. -hen countries borro# money' they ha,e to cope #ith the interest burden. This interest burden results in inflation. Fi&h ta%es on consumer products' can also lead to inflation. Demands pull inflation' #herein the economy demands more &oods and ser,ices than #hat is produced. Cost push inflation or supply shoc$ inflation' #herein non a,ailability of a commodity #ould lead to increase in prices

The Pro,lems "ue To Inflation -ould .e:

-hen the balance bet#een supply and demand &oes out of control' consumers could chan&e their buyin& habits' forcin& manufacturers to cut do#n production. The mort&a&e crisis of 2EED in @SA could best illustrate the ill effects of inflation. Fousin& prices increases substantially from 2EE2 on#ards' resultin& in a dramatic decrease in demand. Inflation can create ma<or problems in the economy. 4rice increase can #orsen the po,erty affectin& lo# income household' Inflation creates economic uncertainty and is a dampener to the in,estment climate slo#in& &ro#th and finally it reduce sa,in&s and thereby consumption. The producers #ould not be able to control the cost of ra# material and labor and hence the price of the final product. This could result in less profit or in some e%treme case no profit' forcin& them out of business. +anufacturers #ould not ha,e an incenti,e to in,est in ne# e(uipment and ne# technolo&y. @ncertainty #ould force people to #ithdra# money from the ban$ and con,ert it into product #ith lon& lastin& ,alue li$e &old' artifacts.

%easures To Control Inflation:

A ,ariety of methods ha,e been used in attempts to control inflation:! /0 +onetary policy:! +onetary policy is the process by #hich the monetary authority of a country controls the supply of money' often tar&etin& a rate of interest for the purpose of promotin& economic &ro#th and stability. I1J The official &oals usually include relati,ely stable prices and lo# unemployment. +onetary theory pro,ides insi&ht into ho# to craft optimal monetary policy. +onetary policy is referred to as either bein& e%pansionary' or a contractionary' #here an e%pansionary policy increases the total supply of money in the economy more rapidly than usual' and a contractionary policy e%pands the money supply more slo#ly than usual or e,en shrin$s it. "%pansionary policy is traditionally used to try to combat unemployment in a recession by lo#erin& interest rates in the hope that easy credit #ill entice businesses into e%pandin&. Contractionary policy is intended to slo# inflation in hopes of a,oidin& the resultin& distortions and deterioration of asset ,alues. +onetary policy is contrasted #ith fiscal policy' #hich refers to: ta%ation' &o,ernment spendin&' and associated borro#in&

10 Consumer Price Inde) The Consumer Price Inde) or C4I is a measure of the prices of consumer &oods and ser,ices bou&ht at retailprices. This includes food' fuel' clothin& and pharmaceuticals. The percenta&e chan&e in C4I measures inflation. To compile the Consumer 4rice Inde%' a predetermined set of &oods' formin& a typical bas$et of &oods bou&ht by an a,era&e urban consumer' is selected. All the items are #ei&hted accordin& to the percenta&e ofincome that households spend per cate&ory. An a,era&e of thechan&e in the prices of these items is calculated on a monthly basis. Core C4I e%cludes food and ener&y prices' #hich are often ,olatile' and is an indicator of the headline inflation rate.

2ses of Consumer Price Inde)

Apart from measurin& inflation' the inde% is useful in indicatin& the need to ad<ust:

K #a&es to $eep pace #ith a rise in the cost of li,in& K pensions K re&ulated prices 3 ta) ,rac(ets to avoid increases in the rate of ta)es induced ,y inflation

40 5"P deflator 2D4' &ross domestic product' deflator is a method to menstruate the price chan&e of all ne# domestic &oods and ser,ices in the economic system. It &i,es the net ,alue of all &oods and ser,ices procured o,er a specific time. =i$e consumer price inde%' 5"P deflator doesnBt rely upon a constant mar$et bas$et. The bas$et is chan&eable' so ne# consumption patterns can be sho#n throu&h this deflator accordin& to the peopleBs reaction to the chan&in& mar$et prices.

Interpretation:
The 5"P deflator can ,e depicted mathematically ,y this e6uation *iven ,elow: 5"P deflator 7 8 !ominal 5"P 9 &eal 5"P:;/<<0

!ominal 5"P: In a nominal 5"P= inflation is not ta(en into account or consideration0 It is evaluated on the ,asis of the current mar(et price0

&eal 5"P: &eal 5"P is computed ,y ta(in* the mar(et price of some ,ase year0.y measurin* t the nominal 5"P of a ,ase year price level 1 the real 5"P is calculated0 &eal values are ad usted for different price level in a year0

.y dividin* the nominal 5"P with 5"P deflator= the real 5"P is computed= and hence= deflates the nominal 5"P0 Actually= the difference ,etween the deflator and a price inde)= li(e the CPI= is not hu*e0 5"P deflator almost *ives the accurate measurement of chan*in* prices in the overall economy0

@tility:

The 2D4 deflator can be seen as a con,ersion factor that transfi&ure the )eal 2D4 into 1ominal 2D4. 2D4 deflator &i,es the construction of an implicit inde% of price le,el for one year. It is used to calculate the rate of inflation or deflation.

>0Fi)ed e)chan*e rates:?

A fi%ed e%chan&e rate' sometimes called a pe&&ed e%chan&e rate' is a type of e%chan&e rate re&ime #herein a currencyBs ,alue is matched to the ,alue of another sin&le currency or to a bas$et of other currencies' or to another measure of ,alue' such as &old. A fi%ed e%chan&e rate is usually used to stabili9e the ,alue of a currency a&ainst the currency it is pe&&ed to. This ma$es trade and in,estments bet#een the t#o countries easier and more predictable' and is especially useful for small economies #here e%ternal trade forms a lar&e part of their 2D4. It can also be used as a means to control inflation. Fo#e,er' as the reference ,alue rises and falls' so does the currency pe&&ed to it. In addition' accordin& to the+undellAFlemin& model' #ith perfect capital mobility' a fi%ed e%chan&e rate pre,ents a &o,ernment from usin& domestic monetary policy in order to achie,emacroeconomic stability.

3. -a*e and price controls:? %easures ta(en ,y a *overnment under its incomes policy to control wa*es in an attempt to chec( cost?push inflation and wa*e?push inflation0 Collective *overnmental effort to control the
incomes of la,or and capital= usually ,y limitin* increases in wa*es and prices0 The term often refers to policies directed at the control of inflation= ,ut it may also indicate efforts to alter the distri,ution of income amon* wor(ers= industries= locations= or occupational *roups0

>05old standard:?

A monetary system in which ,oth the value of a unit of the currency and the 6uantity of it in circulation are specified in terms of *old0If two currencies are ,oth on the *old standard= then the e)chan*e rate ,etween them is appro)imately determined ,y their two prices in terms of *old0

I1T)H:!

The Indian economy #eathered the &lobal crisis of 2EE3!E7 (uite #ell. *ut Indian economy has clearly seen a spurt of inflation. The effect of inflation on financial mar$et is comple%' but it &enerally leads to an increase. As inflation increases' the price of the stoc$' li$e other prices of &oods in the economy' #ill &enerally rise as #ell. Inflation can ha,e ,arious effects on a companyBs health. -hile some companies may be unin<ured or e,en benefit from inflation' others may be seriously harmed if customers can no lon&er afford their products. ",en as much of the de,eloped #orld is still (uite some distance from its pre!crisis &ro#th rate' se,eral emer&in& mar$et economies5"+"s6 ha,e made up the lost &round relati,ely (uic$ly. )isin& inflation ma$e hard for the in,estors to estimate their future returns and also safe &uard their in,estments. )is$ is a Characteristic feature of most of commodity and capital mar$ets. This paper attempts ,arious options a,ailable to miti&ate and mana&e this inflation ris$ throu&h Deri,ati,es. A deri,ati,e Security is a financial contract #hose ,alue is deri,ed from the ,alue of somethin& else' such as a stoc$ price' commodity price' an e%chan&e rate' an interest rate or inde% of prices 5inflation6.Deri,ati,e securities pro,ide them a ,aluable set of tools for mana&in& this ris$.

Crashed Financial %ar(ets:?

Financial stoc$ mar$et in the #orld trembled due to =i(uidity crisis. Indian stoc$ mar$et is stated as Sensiti,e "%chan&e #hich shortly $no#n as S"1S"L. It is ,olatile to such an e%tent that sin&le and small &ood or ad,erse ne#s can affect it #ell. Si&nificant amount of forei&n in,estment ha,e been made in India throu&h stoc$ mar$et. Marious modes of in,estments in Indian companies are made throu&h 4!1otes' 2lobal Depository )eceipts' American Depository )eceipt and direct in,estments. 1eeds of funds in domestic mar$et and cheaper stoc$s of home companies lead forei&n in,estors to ma$e hea,y sell in our mar$et. Failure of =ehman brothers and other bi&&is #ere sufficient for domestic in,estors to percei,e slo#do#n to the &reater e%tent. The effect #as that the mar$et fall up! to 3EEE app. from hi&hest end i.e. 21EEE points in Nanuary 2EE3. 1o doubt stron& fundamentals and ade(uate influence of stable &o,ernment and )*I ha,e cau&ht in,estment bac$ to country. Durin& the period )*I put ban on 4!notes #hich also affected mar$et on lar&e e%tent. Hne of the ar&uments is also made by research people that ban on 4!notes affected much because blac$ money #as routed throu&h these 4!notes. Fea,y deri,ati,es losses and permanent reduction in ,alue of the in,estments on balance sheet of the companies ha,e made them unattracti,e. 1ot only the ,alue of current in,estments slashed do#n but it had badly affected primary mar$ets. This had restricted ne# flo# in mar$et. Since Nanuary 2EE3 after issue of )eliance po#er no company #as able to successfully e%cess primary mar$et. -ell reputed companies li$e Tata +otors #as also compelled to finance it deal throu&h ban$ finance. )ecently in Nuly E7' Adani po#er' a company of Adani &roup had initiated action to access primary mar$et by I4H.

Threat of corporate defaults:?

In addition to abo,e' Indian economy is fairly dependent on e%ternal fundin& #hich impaired due to li(uidity crisis in rest of the #orld. Indian companies #hich completely depend on @S and "uropean economy had suffered and they ha,e to learn a lesson not to depend only on outside economy' no

matter e,en if they loo$ lucrati,e. To stren&then their position in mar$et companies ha,e le,era&ed themsel,es and too$ ad,anta&e of boost durin& 2EE3!ED. The economic do#nturn and financial crisis ha,e threatened to corporate distress and raised (uestion a&ainst their sol,ency especially in @S. As per 2lobal Financial Stability )eport April 2EE7' emer&in& economies #ould face rollo,er needs of more than O1.3 trillion in 2EE7. "%ternal fundin& #ill be curtailed more sharply that e,en prospected in the baseline pro<ections in the conte%t of deterioratin& economic prospects and intense &lobal dele,era&in&. This #ould also affect small and medium enterprises as those lar&e borro#ers #ho #ere dependent on forei&n borro#in& #ould turn to ban$s for their financial needs. It became double! sided s#ord for S+"s as they #ere hu&e cut in demand for their products and they #ere e,en unable to maintain their li(uidity. It is to remind that &ro#th of the S+"s is most important for o,erall &ro#th and de,elopment of economy. )apid deterioration in e%chan&e rate #ould further ma$e situation #orst by ma$in& balance sheet burdened #ith hea,y repayment liabilities. If #e tal$ about re,enue' many lar&e corporate ha,e sold their recei,ables to ban$s and factors #ith or #ithout recourse. Fence they #ould not able to earn premium on those buyers #ho are sound and pay in time and they #ould e,en spend more interest for liberal reco,ery of debts.

Current account and .alance of Payment:?

All countries in the #orld #ith current account deficits and stron& credit cycles are findin& it difficult to brin& cost of capital do#n in the current en,ironment. India is no different. Increased &o,ernment e%penditure and pac$a&es declared had also lead to lo#er collection of re,enue to create enou&h li(uidity in the mar$et. These leaded to more current account deficit and also destroyed our path!#ay to curb current account deficit e%pected by 2E1E. 1e# measures do not chan&e our ,ie# on the &ro#th outloo$. Indeed' #e remain concerned about the ban$in& sector and financial sector. The *H4! *alance of 4ayment deficit A at a time #hen domestic credit demand is ,ery hi&h A is resultin& in a ,icious loop of reduced access to li(uidity' slo#in& &ro#th' and increased ris$!a,ersion in the financial system.

Sectoral Effects:?
In total the recession ha,e turned do#n the &ro#th process and ha,e set the minds of economists and others for findin& out the real solution to sustain the economic &ro#th and stability of the mar$et #hich is desired for the smooth runnin& of the economy. Complete business. industry is in dolled rum situation and this situation persist for a lon&er duration #ill create the small business to ,anish as they ha,e lo#er stability and to run smoothly re(uire continuous flo# of li(uidity #hich is deri,ed from the mar$et. "ffect on ,arious sector of Indian "conomy can be summed up as it has mostly affected companies dependin& on forei&n business i.e. ITies' *4Hs' "H@s' and S+"s etc. and those #hich #ere dependent on primary products includin& infrastructural material as their ra# material. PThe @S slo#do#n #ill immensely hit the mid!si9ed IT companies and also the bi& players to some e%tent. Hn the hi&her end' you ha,e scenarios #here people are cuttin& bac$ on contracts. They are reducin& the fees per manpo#er in their contracts. *ut at the same time they are usin& IT as a tool to reduce their o,erall costs. 4erhaps' it is balanced out. There are people #ho ha,e

&one up to that sta&e and used IT to reduce their costs because IT is the best #ay to be used as an eminent tool for cuttin& do#n monetary burden.Q The problems of @S slo#do#n ha,e not only impacted the IT sector on all ed&es' it has made the Indian manufacturin& and ener&y sector #orrisome too. The challen&es that Indian industry is encounterin& #ith is a uni,ersal problem of risin& ener&y and fuel cost. It is al#ays follo#ed that as the ener&y prices &o up there is a probability of recession. The second factor that #e see today is the &lobal de,elopments in India. The te%tile' &arment and handicraft industry are #orse affected. To&ether' they are &oin& to lose four million <obs by April 2EE7. Accordin& to the Federation of Indian "%port Hr&ani9ation sur,ey there has also been a decline in the tourist inflo# lately. IT industries' financial sectors' real estate o#ners' car industry' in,estment ban$in& and other industries as #ell are confrontin& hea,y loss due to the fall do#n of &lobal economy. Federation of Indian chambers of Commerce and Industry 5FICCI6 found that faced #ith the &lobal recession' in,entories industries li$e &arment' &ems' te%tiles' chemicals and <e#ellery had cut production by 1E per cent to 8E per cent. In this conte%t A<ay Shan$ar' Secretary' +inistry of Industry and Commerce opined that' P-e ta$e pride in sayin& that Indian economy is insulated to some e%tent from the &lobal en,ironment' #hich is really not true' because #e can ,ery clearly see the impact of that for the past fe# months #here there is definite indication of economic slo#do#n in the country. The slo#do#n is ta$in& place as the result of rise in the costs of the materials all o,er the #orld' sur&in& commodity prices' the impact of sur&in& food &rain prices. -e ha,e been fortunate in case of the food inflation #hich has been ,ery hi&h and in seein& that #e are able to insulate our consumers from the $ind of food inflation #hich the rest of the #orld has e%perienced until no#. Therefore' the &o,ernment tried to use all the means of espousal to reduce inflation as far as the items of consumption of the common man is concerned. Hn the flip side this is a &lobal shoc$ for the hi&h commodity and fuel prices. +oreo,er' our feelin& is that #orst is probably behind us and in the comin& months thin&s #ill definitely #or$ #ell. Fea,y "%penditure on Infrastructure by ,arious de,elopin& countries li$e China' India' and +alaysia etc had created Inflationary condition related to infrastructural material. This has not only #ea$ened Industrial e%pansion but also se,erely effected property mar$et. In fact' the input prices ha,e risen up mainly because of the steel prices that ha,e sur&ed up. The reason behind the s$y!scrappin& input costs is not only because of risin& steel prices' but also due to hi$e in prices of aluminum and copper. Steel prices ha,e &one up by E to 8E percent and aluminum has &one up by 8E percent accurately' says Dr. S.1. Dash' Secretary' +inistry of Fea,y Industries R 4ublic "nterprises. In,estment ban$ers ha,e &one o,erboard by &i,in& loans to people' #hich #ere more than their repayin& capacity. This crisis could be #orse than #hat has been ima&ined' as the ban$s ha,e not come out #ith the truth. It;s better to &o slo# on &ro#th and $eep inflation under control rather than bearin& inflation #ith 1E percent 2D4 5&ross domestic product6.Q PIndia;s pro&ress is remar$able' but it is disheartenin& to see that it has been done at the cost of ne&lectin& more than 3E percent of the common people of India #ho do not share the success story.

Inflation is a state in the economy of a country' #hen there is a price rise of &oods as #ell as ser,ices. Inflation is not only caused by an increase in money supply but also is caused by the e%pectation of inflation. -ith the increase in inflation e,ery sector of the economy is affected. There is a serious effect in interest rates' e%chan&e rates' in,estment and last but not the least Stoc$ mar$et. 4rices of stoc$ are determined by the net earnin&s of the company. It depends on ho# much profit the company is li$ely to ma$e in the near future. "ffect of inflation on the stoc$ mar$et is also e,ident from the fact that it increases the rates of interest. If the inflation rate is hi&h interest rate is also hi&h. In this scenario the creditors #ill ha,e the tendency to compensate for rise in the interest rate. This compels the debtors to a,ail loan at a hi&her rate of interest. This affects funds from bein& in,ested in the stoc$ mar$ets. -ith the hi&h input cost and also lesser mar$et the company;s profit is also bound to be reduced resultin& fall of company stoc$ prices. Durin& inflation' this economic &ro#th is unsustainable and the stoc$ mar$ets face an ine,itable crash since the "conomy mana&ers #ill ha,e to ti&hten the rope sooner or later. The risin& prices fuelled by inflation rob the in,estors since there is no correspondin& increase in ,alue. This has a correspondin& implication too. The companyBs financials &et o,er!stated as a result of inflation' since the re,enue and earnin&s also rise in the same rate as the inflation and this in combination #ith additional ,alue #hich is &enerated by the company. -hen there is a decline in the inflation' the pre,iously inflated earnin&s and re,enues li$e#ise &ets deflated. -hen a lot of money is chasin& after &oods that are fe#er in supply' it happens to be a classic case of inflation Then the option is to ma$e money more e%pensi,e to borro#. The e%cess capital &ets remo,ed and the cycle of price increase is slo#ed do#n. Inflation also impacts the future e%pectations of returns from assets. In this situation it is (uite necessary that in,estors ha,e to protect their income bein& affected by adoptin& suitable strate&y. *elo# hi&hli&hts some of the strate&ies that can be adopted to hed&e a&ainst inflation. Strate&ies to protect inflation ris$ in India In,estors can prepare for une%pected inflation by adoptin& one of the t#o strate&ies. They are! a6 Fed&in& the immediate effect b6 "arnin& a total return that outpaces inflation o,er time. As an in,estor' a substantial portion of the portfolio ou&ht to be in fi%ed income securities. Since the inflation erodes the purchasin& po#er' fi%ed securities are the best option to counterfoil the mar$et ,olatility. ",en the retirees are ad,ised to $eep some amount of their assets as a stoc$ in,estment. The interest rate sensiti,e stoc$s should be handled #ith utmost caution durin& the inflationary period. It is important to ma$e a distinction bet#een properly anticipated inflation and unanticipated inflation. From strate&ic point of ,ie#' in,estors may #ish to consider an allocation of assets that preser,e purchasin& po#er durin& inflationary periods. In,estors should carefully re,ie# their financial circumstances and in,estment &oals before ma$in& chan&es in their portfolio to &uard a&ainst inflation ris$.

In,estors should ta$e a total return approach rather than assets based on correlation #ith C4I 5Consumer 4rice Inde%6. *y choosin& assets #ith hi&her e%pected lon&!term returns and maintainin& broad di,ersification' in,estors can see$ to &ro# real #ealth and preser,e purchasin& po#er of their cash. Fed&in& techni(ues The follo#in& Fed&in& techni(ues are su&&ested to o,ercome the inflation ris$ in Indian financial mar$ets:! =eadin& Inflation Fed&es:! These are assets that tend to perform in ad,ance of inflation becomin& ,isible in the broader economy. A typically di,ersified asset portfolio tends to ha,e a &reater proportion of leadin& hed&es since most funds are e%cessi,ely reliant on the e(uity ris$ premium to achie,e their lon& term stoc$ returns. . Contemporaneous hed&es:! These include Inflation lin$ed bonds or inflation s#aps. Inflation lin$ed bonds are insulated a&ainst the raise of inflation by e%plicitly imbeddin& floatin& rate of inflation into the interest coupon that they pay or by ad<ustin& the capital ,alue of the bonds to reflect the pre,ailin& inflation rate. Inflation S#ap pro,ides in,estors #ith price mo,ements in underlyin& inflation rate. It #or$s as the e%chan&e of stream of inflation inde%ed payments.coupon for a stream of nominal interest payments. These type of hed&es are &enerally o,er the counter trade products. Countries li$e Australia' @SA' @C' France and S#eden use such products.

=a&&in& inflation Fed&es:! These are in assets that offer returns follo#in& bouts of inflation. For e%ample as inflation drifts hi&her' the central ban$s see$ to curb demand by pushin& up short term interest rate. This product #as ,ery successful in Australia. )eser,e *an$ of Australia has been able to maintain a,era&e inflation rate of 2.7?o,er the last 1E years #ith a correspondin& )eser,e *an$ of Australia cash rate of 8. ?. As a result the in,estors are to loc$in& in real rates of return by o#nin& cash. -ith addition of mar&in for acti,e mana&ement and #ith ele,ated cash rates' absolute return fi%ed interest loo$s a ,ital strate&y for achie,in& real rates of return and a &ood inflation hed&e. Commodity Fed&es:! -ith the increasin& inflation trend the prices of commodities are also bound to &o up in the future time. Fence in,estin& in Commodity Hptions and Futures are (uite ad,anta&eous in the inflationary times. Commodity futures as #ell as in,estments in &old' oil are also &ood and effecti,e inflation hed&es because their returns are positi,ely correlated #ith inflation

1ote:! In many de,eloped financial mar$ets the e%istence of inflation lin$ed financial securities pro,ides mar$et based measures of inflation e%pectation as a measure of hed&e a&ainst inflation ris$. Some "+"5"mer&in& +ar$et "conomies6 li$e Chile' Israel ha,e been able to de,elop an inflation lin$ed &o,ernment bond mar$et. The &o,ernment can de,elop a brea$ e,en rate #ith the follo#in& components built in it 5i6"%pected inflation durin& the remainin& maturity period of the bonds0 5ii6inflation ris$ premium and 5iii6 li(uidity premium. Inflation lin$ed bonds are one of the best #ays adopted by se,eral countries in the #orld to o,ercome the inflation ris$. Inflation lin$ed bonds are re&arded as ris$ free asset of choice for a lon& term pool li$e a Superannuation fund. The rele,ance of an inflation lin$ed security or inflation deri,ati,es is hi&h in a country li$e India #here the inflation en<oys its o#n crests and trou&hs displayin& a hi&h ,olatility. It rose from 8.81? in Nan 2EE3 to 7. D? in dec 2E1E

I!"IA I!F#ATIO! &ATE $ear @an Fe, %ar Apr %ay @un 1<// 7.3E 1</< 1>.22 1 .3> 1 .3> 13.33 13.71 13.D3 1<<A 1E. 8 7.>3 3.E3 3.DE 3.>3 7.27 1<<B 8.81 8. D D.3D D.31 D.D8 D.>7 S The table abo,e displays the monthly a,era&e. @ul Au* Sep Oct !ov "ec

11.28 7.33 7.32 11.37 11.D2 11.> 3.33 7.E2 7.DD

7.DE 3.33 7. D 11. 7 13.81 1 .7D 1E. 8 1E. 8 7.DE

Inflation in India touches 1E.1>? recently and this inflations spreads its hand on manufactured &oods also5As per recent press release.6 Situation is #orryin& the &o,ernment. 2o,ernment announced that )*I #ill ta$e correcti,e measures to control the inflation. The inflation is increasin& steadily at a hi&her rate. It seems to be the &o,ernment is not seein& the situation in subtle and al#ays as$ )*I to ta$e action. Also Food inflation <umped to a scorchin& 13.32? in the #ee$ ended December 28' 2E1E. This #as a&ainst an already menacin& 1 ? inflation cloc$ed in the pre,ious #ee$. The main culprits #ere soarin& prices of onions and other ,e&etables. "%perts e%pect the )*I to ti&hten monetary policy to chec$ further escalation in commodity costs' in its (uarterly re,ie# on Nanuary 28' 2E11.

"mer&in& economies li$e India' China are not directly affected by factors #hich #ere responsible for crisis in de,eloped economies. 1o doubt the cascadin& effect of said crisis

ha,e made situation #orst. "ast Asians li$e Napan ha,e been hit hard due to collapse in demand for manufactured products. India #ould also see se,ere drop in e%port earnin&s on same footin&s but it #ould be able to maintain 1.8 to 2? &ro#th in 2EE7 #hich #ould further rise to ? due to its domestic demand. In India' crisis can be cau&ht from short supply of a&ricultural products due to ad,erse climate condition in 2EED!E3 #hich #as multiplied by rise in population and their use as input in industrial production. This had factors initiated inflationary phase at hi&her rate in the economy

Inflation Tar*etin* the -orld

E2&O A&EA I!F#ATIO! &ATE

$ear 2E11 2E1E 2EE7 2EE3 @an 2.3E 1.EE 1.1E 3.2E Fe, 2. E E.7E 1.2E 3.3E %ar 1. E E.>E 3.>E Apr 1.8E E.>E 3.3E %ay 1.>E E.EE 3.DE @un 1. E !E.1E .EE @ul 1.DE !E.DE .EE Au* 1.>E !E.2E 3.3E Sep 1.3E !E.3E 3.>E Oct 1.7E !E.1E 3.2E !ov 1.7E E.8E 2.1E "ec 2.2E E.7E 1.>E

S The table abo,e displays the monthly a,era&e.

"uro area annual inflation #as 2. ? in February 2E11' up from 2.3? in Nanuary. A year earlier the rate #as E.3?. +onthly inflation #as E. ? in February 2E11. "@ annual inflation #as 2.3? in February 2E11' unchan&ed compared #ith Nanuary. A year earlier the rate #as 1.8?. +onthly inflation #as E. ? in February 2E11.

In February 2E11' the lo#est annual rates #ere obser,ed in Ireland 5E.7?6' S#eden 51.2?6 and France 51.3?6' and the hi&hest in )omania 5D.>?6' "stonia 58.8?6 and *ul&aria 5 .>?6. Compared #ith Nanuary 2E11' annual inflation rose in fifteen +ember States' remained stable in three and fell in ei&ht. The lo#est 12!month a,era&es up to February 2E11 #ere re&istered in Ireland 5!1.1?6' =at,ia 5E.E?6 and the 1etherlands 51.2?6' and the hi&hest in )omania 5>.8?6' 2reece 58.E?6 and Fun&ary 5 . ?6.

The main components #ith the hi&hest annual rates in February 2E11 #ere transport 58.D?6' housin& 5 .7?6 and alcohol R tobacco 53.8?6' #hile the lo#est annual rates #ere obser,ed for clothin& 5!2.>?6' communications 5!E. ?6 and recreation R culture 5E.E?6. Concernin& the detailed sub!indices' fuels for transport 5TE.>2 percenta&e points6' heatin& oil 5TE.236' electricity 5TE.116 and &as 5TE.1E6 had the lar&est up#ard impacts on the headline rate' #hile &arments 5!E.286 and telecommunications 5!E.E76 had the bi&&est do#n#ard impacts.

The main components #ith the hi&hest monthly rates #ere recreation R culture 5E.7?6' food' housin&' transport and hotels R

restaurants 5all E.8?6' #hile the lo#est #ere clothin& 5!E.8?6' alcohol R tobacco 5E.E?6' health and education 5both E.1?6. In particular' pac$a&e holidays 5TE.E> percenta&e points6' accommodation ser,ices and heatin& oil 5TE.E3 each6 had the lar&est up#ard impacts' #hile &arments 5!E.E36' restaurants R cafUs and foot#ear 5!E.E2 each6 had the bi&&est do#n#ard impacts.

CA!A"A I!F#ATIO! &ATE

$ear 2E11 2E1E 2EE7 2EE3 @an 2.3E 1.7E 1.1E 2.2E Fe, 2.2E 1.>E 1. E 1.3E %ar 1. E 1.2E 1. E Apr 1.3E E. E 1.DE %ay 1. E E.1E 2.2E @un 1.EE !E.3E 3.1E @ul 1.3E !E.7E 3. E Au* 1.DE !E.3E 3.8E Sep 1.7E !E.7E 3. E Oct 2. E E.1E 2.>E !ov 2.EE 1.EE 2.EE "ec 2. E 1.3E 1.2E

S The table abo,e displays the monthly a,era&e

CanadaBs inflation rate rose 2.2? in the 12 months to February' follo#in& the 2.3? increase posted in Nanuary. "ner&y prices rose 1E.>? durin& the 12 months to February' after postin& a 7.E? increase the pre,ious month. 2asoline prices continued to increase in February' risin& 18.D?' after recordin& a 13.E? increase in the 12 months to Nanuary.

"%cludin& &asoline' the Consumer 4rice Inde% 5C4I6 rose 1.>? in the 12 months to February' compared #ith a 1.3? increase in

The lar&est increase occurred in the transportation component' #here prices rose 8.1? in the 12 months to February' after a .3? increase in Nanuary.
Nanuary and also Shelter costs rose 2.2?.

The *an$ of CanadaBs core inde% ad,anced E.7? in the 12 months to February' follo#in& a 1. ? rise in Nanuary. The seasonally ad<usted monthly core inde% fell E.1? in February' follo#in& a E.1? increase the pre,ious month.

C+I!A I!F#ATIO! &ATE

$ear 2E11 2E1E 2EE7 2EE3 @an .7E 1.8E 1.EE D.1E Fe, .7E 2.DE !1.>E 3.DE %ar 2. E !1.2E 3.3E Apr 2.3E !1.8E 3.8E %ay 3.1E !1. E D.DE @un 2.7E !1.DE D.1E @ul 3.3E !1.3E >.3E Au* 3.8E !1.2E .7E Sep 3.>E !E.3E .>E Oct . E !E.8E .EE !ov 8.1E E.>E 2. E "ec .>E 1.7E 1.2E

S The table abo,e displays the monthly a,era&e.

China said inflation remained hi&h in February' fuelin& further doubt about the &o,ernmentBs ability to tac$le #hat officials ha,e called their main economic priority this year. The consumer!price inde% in the #orldBs second!lar&est economy rose .7? in February from the same month last year' the 1ational *ureau of Statistics said on +arch 11. Food prices alone rose 11 percent in February. ChinaBs February economic data are distorted by the timin& of its =unar 1e# Vear holiday' #hich fell earlier in the month this year than in 2E1E. The holiday' ChinaBs bi&&est of the year' alters spendin& patterns' especially for food' limitin& the ability of economists to e%trapolate lon&er!term trends. ChinaBs producer price inde%' a measure of pipeline inflation pressures' rose D.2? from a year earlier' up from NanuaryBs >.>? rise and hi&her than e%pectations for a D? rise.

I!"IA vs C+I!A
+a$in& an in depth study and analysis of India ,s. China economy seems to be a ,ery hard tas$. *oth India and China ran$ amon& the front runners of &lobal economy and are amon& the #orldBs most di,erse nations. *oth the countries #ere amon& the most ancient ci,ili9ations and their economies are influenced by a number of social' political' economic and other factors. Fo#e,er' if #e try to properly understand the ,arious economic and mar$et trends and features of the t#o countries' #e can ma$e a comparison bet#een Indian and Chinese economy. 2oin& by the basic facts' the economy of China is more de,eloped than that of India. -hile India is the 11th lar&est economy in terms of the e%chan&e rates' China occupies the second position surpassin& Napan. Compared to the estimated O1.3123 trillion 2D4 of India' China has an a,era&e 2D4 of around O 7E7.23 billion. In case of per capital 2D4' India la&s far behind China #ith <ust O112 compared to OD'813 of the latter. To ma$e a basic comparison of India and China "conomy' #e need to ha,e an idea of the economic facts of the countries.

Facts 2D4 2D4 &ro#th 4er capital 2D4 Inflation =abor Force @nemployment Fiscal Deficit Forei&n Direct In,estment 2old )eser,es Forei&n "%chan&e )eser,es -orld 4rosperity Inde%

India around O1.3123 trillion 3.7E? O112 D. 3 ? >D million 7. ? 8.8? O12. E 18? O2. 1 billion 33Th 4osition

China around 7E7.23 billion 7.>E? OD'813 8.1? 313.8 million .2E ? 21.8? O7.D billion 11? O2.>8 trillion 83th 4osition

If #e ma$e the analysis of the India ,s. China economy' #e can see that there are a number of factors that has made China a better economy than India. And that can be the reason #hy inflation rate in India is hi&her as compared to china.