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percent, 16.3 percent and 12.4 percent. The country strives to attain 8.5 percent growth of GDP in fiscal year 2010-2011 with the aim of realizing 9 percent growth in the following year.

 

INFLATION

 

Inflation is no stranger to the Indian economy. It is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Inflation is an upward movement in the average level of prices. Because inflation is a rise in the general level of prices, it is intrinsically linked to money. It denotes too much money chasing too few goods.

 

High rates of inflation can have critical effects on economy. It is characterized by depreciation in the value of money. Economists attribute a number of factors to inflation that can be broadly categorized under supply side factors like increased production costs and demand side factors like excessive demand created by tax cuts, cheaper borrowings etc. High rates of inflation can have serious consequences for the economy in general. Therefore, for governments all over the world, reducing movements of prices to a minimum is seen as a primary economic objective.

 

The above effects can be exemplified by taking the current scenario of the Indian economy. Annual Inflation in India in May 2008 was 7.4% which was the highest since November 2004. As a result Industrial production growth declined to 8.6 % in February 2008 as compared to 11 % in February 2007. Thus, high inflationary rate is harmful because the value of the money falls, cost of living rises, reduces the value of savings, discourages future investment and savings and slows down the overall growth of the economy. The India’s economic story can be traced by seeing the general trend of inflation rate in the year 2008.

 

In the Year 2008, RBI had revised its key rates several times to maintain the liquidity in the banking system. The lower interest rates will allow the banks to cut their benchmark lending rates, though the deposits will also see the reduction in interest rates. Lower commodity prices and crude oil prices is driving the Inflation on a downside. This will be wonderful as the lower inflation means, lower cost of credit, which drives the economy on the upside. For 2009, Indian inflation stood at 11.49% Y-o-Y.

 

On March 19, 2010, the Reserve Bank of India raised its benchmark reverse repurchase rate to 3.5% percent, after this rate touched record lows of 3.25%. The repurchase rate was raised to 5% from 4.75% as well, in an attempt to curb Indian inflation. The inflation rate in India was 13.73 percent in June of 2010. This is because of the prices of pulses were up by 34.40 per cent from a year ago, milk by 21.12 per cent, fruits by 13.67 per cent, cereals by 5.41 per cent, rice by 6.76 per cent and wheat by 3.97 per cent. On 19th august, cheaper vegetables pull down inflation to 10.35%.

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