January 2012

Why deflation can be equally if not more harmful than inflation?

Money, Deflation, Inflation, Economy, GDP, Crisis, Current Account Deficit, Money Supply , Interest Rates

Deflation happens when there is a decrease in the general prices. The prices can be of goods and services. This is exactly the opposite of what happens in inflation. In case of inflation there is a general increase in the prices. The value of money reduces in inflation and the value of money increases in case of deflation. This means that with the same amount of money, you can buy more goods and services at later period of time due to decrease in the prices.

Deflation can happen when there is reduction in spending either by government, personal spending or investment spending. It can happen when either of the following happens :

  1. Decrease in Money Supply
  2. Increase in supply of Goods or services
  3. Decrease in demand for goods or services
  4. Increase in demand for money

On the surface it appears that increase in value of money is a good thing. In fact it is good for those who are holding cash or for those who are creditors.

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July 2010

RBI hikes short-term rates; CRR unchanged

rbiThe central bank raised interest on Tuesday in the face of inflation has been above 10 percent for the past five months. The Reserve Bank of India said it would continue to normalize policy in line with the growth and inflation rate in the economy.


The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, which was in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by a steeper than expected 50 basis points to 4.50 percent.

The central bank left the cash reserve ratio (CRR) unchanged at 6 percent.

Inflation in India emerged last year in the wake of a poor monsoon that drove up food prices but has spread broadly throughout the economy, spawning protests against a government whose voter base is predominantly poor and rural.  New Delhi’s decision to increase fuel prices is expected to add nearly a percentage point to wholesale price index (WPI) inflation starting in July and led the opposition to call a one-day nationwide strike early this month.

The government is hoping on normal summer monsoon rains to results in better crop yields and ease pressure on food prices, and has said inflation should decline to 6 percent by December, which in my opinion is a task in itself…..