177

CHAPTER 6

ANALYSIS OF THE IMPACT OF INFLATION MANAGEMENT MEASURES

IN BRICS COUNTRIES

Inflation is a persistent rise in the price level in an economy over a period of time. It determines

performance of any economy, hence timely management of inflation is always desirable.

Though BRICS nations have largely maintained macroeconomic stability, there are some

concerns related with inflation management. Thisdescribes briefly the chronology of inflation

and the highlights of important measures adopted for inflation management by BRICS nations.

6.1 INTRODUCTION

Inflation is measured as the percentage rate of change in price index of a country. Over the

time, BRICS countries have used different techniques to measure inflation, e.g. IPCA,

CPI, WPI and CPIX. But, now for international comparison purposes all countries are using CPI

as main measure of inflation. The methodology for measuring inflation (CPI) in BRICS

countries is as follows.

In Brazil, the official and main indicator of inflation is Extended National Consumer Price

Index (IPCA), which is calculated by The Brazilian Institute of Geography and Statistics

(IBGE). The central bank uses this measure to monitor the objectives of inflation targeting. The

index is computed monthly. This index covers 10 metropolitan regions, Goiânia and Campo

Grande cities and also Brasília (Brazil's capital). The indicator covers approximately 90% of

urban areas in the geographical scope of the research. The weights applied to the calculation of

the current consumer price indices of IBGE are based on the Consumer Expenditure Survey

(POF) conducted in 2008/2009.

CPI of Russia indicates time fluctuations of prices on goods and services purchased by the

consumers for non production consumption within a specified period of time. It measures a ratio

of value of a fixed basket of main goods and services at the prices of the current period as

related to its value at the prices of the base period. CPI is calculated monthly on the basis of

statistical data collected while observing price changes in retail trade and service establishments

and also in commodity, mixed and food market and as well as on data of actual structure of
178

consumer expenditures of households for two previous years. CPI is computed for the urban

population and it is diffused for the whole population. India also uses same methodology; but it

considers data of actual structure of consumer expenditures of households for previous year

only.

In India, inflation was earlier measured by Wholesale Prices Index (WPI), but now CPI is the

main measure of Inflation. WPI was calculated on weekly basis, with a gap of about two weeks.

The major disadvantage of this measure is that it does not include in its basket the services and

non-tradable commodities. In India, CPI is calculated in four categories i.e. CPI for industrial

workers (CPI-IW), CPI for agricultural labourers (CPI-AL), CPI for rural labourers (CPI-RL),

CPI for urban non-manual employees (CPI-UE). In the present study researcher has used CPI

(IW). It measures a change over time in prices of fixed basket of goods and services consumed

by Industrial Workers. CPI-IW is used for regulation of wages and dearness allowances of

millions of employees and workers in the organised sector. It also serves as an indicator of retail

prices in the country and is used for formulation of wages and interest policies. The Labour

Bureau, an attached office of the Ministry of Labour& Employment, has been compiling and

disseminating CPI-IW since its inception in the year 1946. This index series till 2005 was based

on 1982=100. A new series on base: 2001=100 has been released from January, 2006. The data

on Consumer Expenditure have been obtained from an ad-hoc survey “Family Income and

Expenditure Survey” conducted during September 1999 to August 2000 in respect of 78

selected centres by the National Sample Survey Organization (NSSO) on behalf of Labour

Bureau.

China Mainland uses the CPI as a measure of inflation. It reflects the trend and degree of

changes in prices of consumer goods and services purchased by urban and rural households

during a given period. They are obtained by combining consumer price indices of urban

household and consumer price indices of rural household. The indices enable the observation

and analysis of the degree of impact of the changes in the prices of retail goods and services on

the actual living expenses of urban and rural residents.

 179

In South Africa,inflation is measured by CPIX. It is computed by South African Reserve Bank

(SARB), and is defined as Consumer Price Index for metropolitan and other urban areas

excluding the interest cost on mortgage bonds. The bank chooses this variant of the consumer

price index because the headline or overall CPI gets influenced directly by changes in the

Reserve Bank’s monetary policy. Then afterwards the country adopted CPI as the measure of

inflation.This new CPI covers the primary and secondary urban areas as detailed by the

Statistics South Africa (SSA).

6.2 MANAGEMENT OF INFLATION IN BRICS COUNTRIES: AN OVERVIEW

After the recession of 2008, the expectations of the economic agents to the magnitude of, and

developments from the international financial crisis changed radically. The crisis spread to the

whole world economy by a contagion effect, affecting the credit and capital markets as well as

international trade, especially by countries dependent on commodity exports, whose prices fell

abruptly. Thus, most of the emerging countries experienced not just macroeconomic instabilities

(in terms of economic activity/ price volatility), but also situations of fiscal and external

fragility, regardless of whether or not - prior to the crisis - they had displayed what were

regarded as sound macroeconomic fundamentals.

The international financial crisis get transmitted to these economies through different ways, e.g.

withdrawal of portfolio capital/ capital flight eventually affecting stock markets and foreign

direct investment, interruption of credit, particularly for foreign trade, falling commodity prices,

declining exports to developed countries, volatile exchange rates, and rising levels of profit

repatriation by transnational corporations.Historically double-digit inflation has been a major

threat to economic growth in many developing countries, but the monetary authority in these

countries continues to maintain a pro-growth monetary policy stance, as these economies have a

large negative output gap or excess productive capacity. Emerging markets have substantial

excess capacity with regards to labour, and thereby require higher public investment/

infrastructure to create conditions for sustained growth.

As a result, understanding the real effect of monetary policy shocks in BRICS countries is

crucial. BRICS growth has been slowed from almost 9 percent in 2010 to about 4 percent in
180

2015, increasingly because of moderating potential growth. Until 2013, the slowdown was

predominantly driven by external factors, but the role of domestic factors has increased since

2014. External drivers included weak global trade and commodity prices and bouts of financial

market turmoil. Domestic factors included slowing productivity growth, rising domestic policy

uncertainty and eroding buffers that have constrained the use of accommodative policies.

Deceleration in productivity growth suggests that a return to pre global crisis rates of BRICS

growth is unlikely. By 2015, China, Russia and South Africa had been slowing for three or

more consecutive years and Brazil was in a steep recession. Thus the effect of inflation and

monetary policy measures adopted by each country in BRICS grouping has been discussed in

detail in the below sub-sections.

6.2.1 INFLATION MANAGEMENT IN BRAZIL

Brazil has adopted the strategy to target inflation well in advance. Before adopting the inflation

targeting as the monetary policy framework in 1999 the Brazil discarded the crawling peg

regime: the real was forced to float on January 1999. The data concerning inflation targeting

(measured by IPCA) in Brazil is as follows.

Table 6.0: Inflation Targets in Brazil (1999–2015)

Annual Actual /
Target Lower and Upper
Year Regulation Band (PP) Effective Inflation %
(%) Limits (%)
(IPCA)
1999 Decision 2615 8 2 6–10 8.94
2000 Decision 2615 6 2 4–8 5.97
2001 Decision 2615 4 2 2–6 7.67
2002 Decision 2744 3.5 2 1.5–5.5 12.53
2003* Decision 2842 3.25 2 1.25–5.25 9.3
Decision 2972 4 2.5 1.5–6.5
2004* Decision 2842 3.75 2.5 1.25–6.25 7.6
Decision 3108 5.5 2..5 3–8
2005 Decision 3108 4.5 2.5 2–7 5.69
2006 Decision 3210 4.5 2 2.5–6.5 3.14
2007 Decision 3291 4.5 2 2.5–6.5 4.46
2008 Decision 3378 4.5 2 2.5–6.5 5.9
2009 Decision 3463 4.5 2 2.5–6.5 4.31
2010 Decision 3584 4.5 2 2.5–6.5 5.91
2011 Decision 3748 4.5 2 2.5–6.5 6.5 6.64
2012 Decision 3880 4.5 2 2.5–6.5 5.84 5.40
2013 Decision 3991 4.5 2 2.5–6.5 5.91 6.20
2014 Decision 4095 4.5 2 2.5–6.5 6.41 6.33
2015 Decision 4237 4.5 2 2.5–6.5 10.67 9.03
2016 8.74
2017 3.45
2018 3.66
2019 3.73
 181

*The Open Letter of 21/1/2003 set out adjusted goals of 8.5% for 2003 and 5.5% for 2004.
Source: Brazil Central Bank.

In 2001 the Brazilian economy got hit by a speculative attack because of the Argentine currency

crisis, terrorists attack to the United States and Brazilian presidential elections. The currency

devaluation explained 38 percent increase in inflation rate while in 2002 its contribution

increased to 46 percent resulting to pressure on prices in the year 2003 also. Thus, the inflation

was above the target interval in 2003 and only in 2004 it returned to the interval specified by the

Central Government. Afterwards, the inflation is within the targeted limit. After the recession of

2008 the expectations of the economic agents to the magnitude of, and developments from, the

international financial crisis has changed radically. Not a long time ago, Brazil was growing at

the fastest pace since the 1990's and no one expected the global economic crisis to have a

significant impact in the biggest national economy in Latin America.

Inflation in Brazil shown in graph indicate that the CPI i.e. actual inflation remained within

control limits over a period from 1999 to 2015 except in the year 2001, 2002, 2003 and 2015. It

indicates that the inflation target system in Brazil is successful in controlling the general price

level.

FIGURE 6.0 INFLATION IN BRAZIL

12.00
10.00
8.00
% CHANGE

6.00
4.00
2.00
0.00
1 3 1 3 1 3 1 3 1 3 1 3 1 3
0 9 Q 09 Q 10 Q 10 Q 11 Q 11 Q 12 Q 12 Q 13 Q 13 Q 14 Q 14 Q 15 Q 15 Q
20 20 20 20 20 20 20 20 20 20 20 20 20 20

Above graph shows that inflation in Brazil was high after the crisis in 2011 (Q3), 2013 (Q2)

then in 2015 (Q3). During the year 2009 the Extended National Consumer Price Index (IPCA)

was released by the Brazilian Institute of Geography and Statistics (IBGE). Itindicated 4.31
182

percent inflation that decreasedby 1.59 pp compared to the previous year. It wasclose to the set

target range set by the National Monetary Council (CMN) under the inflation targeting system.

The deceleration of twelve-month consumer price trailing inflation in the year was because of

increase in regulated price inflation and also by the pressures brought by seasonal pressures

associated with increased prices of perishable foodstuffs, educational costs and public

transportation fares, showed the impact of enhanced domestic activity by the middle of the first

half of the year. Thus due to the recession, the demand for Brazilian products get deteriorating

which is resulting in a sharp slowdown for the Brazilian economy. The monetary policy

committee has taken steps to carefully monitor the risk of pass-through of possible wholesale

price upward pressures and spread of initially localized pressures on to the consumer prices. It

says that the impact of international financial crisis over the economy could become persistent

but can’t be permanent. It considers that accommodation of demand, driven by the tightening of

financial conditions and the deterioration of the agents’ confidence, as well as by the contraction

of the global economy shows persistent signs of having been overcome despite the persistence

of uncertainty, which should be resolved over time, towards positive and negative outlooks for

the pace of economic recovery.

The COPOM (Monetary Policy Committee) in light of the inflation prospects for the targets

path, unanimously decided to maintain the Selic rate at 8.75% p.a. without bias and evaluates

that such level of basic interest rate is consistent with a benign inflationary scenario,

contributing to assure the maintenance of inflation in line with the targets path over the relevant

horizon for the non-inflationary recovery of economic activity. The fiscal area has stressed on

adoption of temporary tax relief measures with emphasis on the exemption or reduction on the

Industrialized Products Tax (IPI) levied on home appliances, vehicles, building materials,

furniture and capital goods, which has contributed to an annual drop of the public sector

primary surplus of 1.48 p.p. to 2.06% of the Gross Domestic Product (GDP) in 2009. Thus it

has proved to be effective to guarantee a secure employment level to the labour intensive

segments and helped to strengthen the upturn in domestic demand, a key factor to the recovery

of Brazil’s economy throughout the year. Thus the increase in inflation overcome or started
 183

improving by a process led by the behaviour of market prices, especially goods, while regulated

price and services inflation continue to show more persistence, the domestic demand started to

show signs of recovery, due to the stimulus factors effects, such as income growth. Domestic or

localized pressures impose risks to the inflationary trajectory remains limited.

The upward trajectory of inflation in 2010 reached 5.91 percent, 1.60 pp above the one observed

in 2009. The increase in inflation in 2010 was influenced due to market price behaviour,

especially food, apparel and service sectors. Thus, the inflation was strongly and negatively

impacted by the dynamics of food prices, which in part reflected domestic and external supply

shocks, heightened by the high liquidity environment in international financial markets and

global demand increase. The COPOM unanimously decided to increase the Selic rate to 11.25%

p.a., without bias, starting a process of adjustment of the basic interest rate, whose effects,

combined to those stemming from macro prudential actions, will contribute to inflation

convergence towards the target path. Despite the recession in 2009 – the Brazilian GDP

decreased 0.6%, on the contrary to previous experiences; Brazil’s economic recovery was

strong in 2010 – according to the IBGE (2011).

The Inflation rate (IPCA) in 2011 stood at 6.50% as compared to 5.91% in 2010) within the

target range set up by National Monetary Council (CMN) in the framework of the inflation

targeting system. The upward trend of IPCA reflects the performance of regulated prices, with

emphasis on price increases in the segments of gasoline, urban buses, airline tickets and water

and sewage fees. Market prices, revealing deceleration in the segments of food and domestic

goods, registered less significant increase in 2011. The increase in inflation is because of high

price hikes observed in 2011 reflecting the fact that services inflation remains at high levels

indicating the reduction of the pressures stemming from wholesale prices over consumer prices.

In the shorter term the inflation shows resistance because of recently observed great dispersion

in the increase in consumer price, the reversal of tax exemptions, combined with seasonal

pressures and pressures localized in the transportation segment. Thus the moderation process of

the Brazilian economy was intensified by the weakness of the global economy.
184

The IPCA in 2012 reached 5.84%, showing deceleration due to high levels in service inflation

and pressures in the food and beverages segment. The Committee considers that the exchange

rate depreciation and volatility is a source of inflationary pressure in shorter periods and in the

long run it stood within the tolerance interval established by the National Monetary Council

(CMN). Inflation in 2013 reached to 5.91 percent then 5.84 in 2012. The persistence of inflation

reflects that there is acceleration in the service inflation and the wages dynamics remains

originating inflationary cost pressures. The monetary policy Committee unanimously decided to

raise the Selic rate by 0.50 pp, to 12.25% p.a., without bias. For the year 2014, the increase of

the consumer price index IPCA 6.41 percent showed in large part the two important adjustments

undergone in the economy i.e. the realignment of regulated prices relative to the market prices

and the increase in services prices. These price adjustments caused inflation to rise in 2015,

requiring determination and perseverance to prevent its transmission to longer horizons. Thus at

the mid of year 2014 Brazil economy started experiencing an economic crisis. It is noteworthy

that the government had controlled the fuel and energy prices to avoid the impact on general

inflation indices. The monetary policy committee thus maintains the Selic rate at 14.25% p.a.,

without bias.

In the year 2015 the inflation hit a 12 year high inflation rate of 10.67 percent since 2003 with

IPCA-9.3 percent. The inflation this year moved away from the target inflation due cost

inflation which arises mainly because of government regulated prices like electricity, housing,

water, public transportation and fuel prices and the rise in the price of the dollar against the real.

Another main reason behind the slowdown was the weaker demand for Brazil's commodities,

particularly from the slowdown of the Chinese economy. The central bank of brazil has target

an inflation rate of 4.5 percent and raised the interest rate to 14.25 percent among highest of

major economies to contain rising prices.

According to the International Monetary Fund, the country's economy is set to shrink by 1.5%

this year. The Monetary policy evaluates that the aggregate demand tends to be relatively robust

in the relevant horizon for the monetary policy. On the one side, due to income growth and

moderate credit expansion the household consumption tends to follow a moderate expansion
 185

pace while on the other hand, relatively favourable financial conditions, especially in the case of

real estate financing, the concession of public services, the broadening of oil exploration areas,

among other factors, tend to benefit investments. Thus these elements and the developments in

the quasi fiscal framework and in the assets market are important parts on the basis of which

future monetary policy decisions will be taken. The country's President, Dilma Rousseff, tried to

force through measures to cut the country's deficit by cutting spending and raising taxes.

Brazil’s long slowdown between 2011 and 2014 turn into a negative growth in 2015-2016 due

to the impact of tighter fiscal and monetary policies combined with more restrictive liquidity

conditions in major economies and less favourable commodity prices As a result, GDP was

expected to shrink by 2.4% this year and by -0.5% in 2016.

Inflation expectations for 2016-2019, 2020, 2021, and 2022 collected by the Focus survey are

around 3.5%, 3.8%, 3.75%, and 3.5%, respectively.

Selic rate that ends 2019 at 5.00% p.a. and remains at that level until the end of 2020.

6.2.2 INFLATION MANAGEMENT IN RUSSIA

Russia among the BRICS bloc has witnessed the highest inflation rate due to domestic as well

as reasons related to international trade. The monetary policy and other inappropriate measures

were held responsible for high inflation episodes in Russia. Russia adopted inflation targeting

much later than Brazil. Russian Bank sets these targets through “Guidelines for the Single State

Monetary Policy”. Russia failed to achieve targeted rate of inflation over the period from 1999

to 2015 except in 2010 and 2012 when actual inflation rate was 6.9 and 5.0 percent against

target rate of 9-10 percent and 5-6 percent respectively. The inflation events and the control

measures adopted by Russia since 1993 indicates that in the initial years (i.e. 1993 & 1994),

country witnessed three digit inflation, but gradually it has reached to double digits. The country

experienced decelerating oil prices and the global financial crises (Asian crises) in 1998, due to

which there were huge capital outflows from the economy. In this year the inflation rate reached

27.68 %. The adverse external factors along with growing public debt led to currency crisis and

default national obligations. To contain inflation and control adverse situation in the country,
186

the Central Bank of Russia start protecting the exchange rate (rouble) and intervening in foreign

exchange market, like, discarding the crawling band regime, devaluing the rouble exchange rate

more than three times.

The Inflation rate (CPI) in 2002 stood at 15.8% as compared to 21.47% in 2001. The reasons

behind the deceleration were the favourable situation in world commodity markets. Due to this

there was increase in exports and domestic demand. For the first time in the year 2002 the

Russian Central Bank decided to target the CPI and started announcing inflation target set for

the year 2003. The actual CPI was 13.7% in 2003 which surpassed the set target of 10-12%. The

country witnessed slowdown in inflation during this year because of surplus budget, world

economic growth and favourable foreign trade conditions. Afterwards for next 3 years (2004 -

2006) the Russian bank announced the inflation target. The inflation targets and actual inflation

in Russia is presented in table 6.1.

In 2004 the CPI showed the slowdown trend compared to 2003 and stood at 10.9%. This

downfall was due to the strong balance of payments, surplus budget, growth in household real

money income, growth in fixed capital investment and in the output of goods and services.

Table 6.1: Inflation Targets in Russia (1999–2015)

Year Target Actual Year Target Actual
1999 30 85.8 2008 N.A 14.1
2000 18.6 20.8 2009 N.A 11.7
2001 12-14 21.5 2010 9-10 6.9
2002 12-14 15.8 2011 6-7 8.5
2003 10-12 13.7 2012 5-6 5.0
2004 8-10 10.9 2013 4.5-5.5 6.8
2005 6.5-8.5 12.7 2014 4-5% 7.8
2006 5.5-7.5 9.7 2015 4.5 15.5
2007 N.A 9.00
Source: own calculation

Thus, the inflation target set for the year was surpassed and the country has economic stability

during the year. The creation of stabilisation fund in 2004 was the major factor helped to

reinforce the fiscal prudence and lessening inflationary pressure in the country. This

stabilisation fund collected additional revenues from high oil prices on the world market and at

the end of year accumulated 522.3 billion Rubles.

 187

FIGURE 6.1 INFLATION IN RUSSIA

18.00
16.00
14.00
12.00
% CHANGE
10.00
8.00 CPI
6.00
4.00
2.00
0.00
1 3 1 3 1 3 1 3 1 3 1 3 1 3
0 9Q 09Q 10Q 10Q 11Q 11Q 12Q 12Q 13Q 13Q 14Q 14Q 15Q 15Q
20 2 0 2 0 20 2 0 20 2 0 2 0 20 2 0 20 2 0 2 0 20

In 2005, CPI showed the rising trend and stood at 12.7% and in 2006 the CPI trend slow down

and stood 9.7%. The reasons for reduction in inflation were largely due to slow growth of paid

services prices to the households (i.e. 13.9pp against 21.0pp in 2005), slowing down of core

inflation and more importantly because of appreciation of exchange rate (Ruble) against the

major world currencies. Thus this deceleration was also because of temporary freeze on petrol

prices and control of regulated prices by the authorities. In the year 2007 the inflation shows the

downward trend with CPI rate 9.0% lesser compared to 2006.

The CPI in 2008 reached 14.1% showing acceleration due to inflow of huge foreign capital

which limits the production capacity and creates a favourable output gap. The other main factors

contributing to inflation rate were, rise in the domestic and global food prices, rapid growth in

the aggregate demand, devaluation of the exchange rate (Ruble) because of fall in oil prices,

huge capital outflow of foreign investors and global financial crises. Thus the inflation rate

passed the annual target set by the authorities during the year. After global financial crises the

year 2009 shows the improved inflation rate of 11.7% as compared to 14.1%, 2008. The factors

which contributed to inflation during last year started declining to contain inflation. Thus

slowdown of the aggregate demand, decreased money supply, reduced global food prices,

decline in world oil prices, reduced capital outflow helps in restraining the growth of inflation.

The most significant decline in production was seen in manufacturing and construction sectors

which also help in combating the inflation. This improvement of CPI was also reflected in the

year 2010.
188

In 2010 the CPI is 6.9% which shows that the Russian economy started recovering from the

deep recession caused by the global financial and economic crisis. The gradual recovery of the

global economy and improvements in the terms of trade led to growth in Russian exports and

production. The Russian bank under monetary policy framework took measures to expand the

aggregate demand, increase the exports, consumption and investments to control inflation.

During the year the CPI was within the target range.

The CPI (8.4%) shows the upward trajectory in 2011 as against 2010. The increase was because

of rising domestic and global food prices as a result of poor grain harvest, rapid growth of prices

of non food products and the services provided to the households and rising consumer demand.

The other major factors contributing to inflation during the year was Euro zone debt crisis and

downturn of the major countries which lead to decrease the demand of Russian exports. At the

end of the year, the growth in food prices started declining (12.9 pp to 3.9pp) because of

lowered prices of fruit and vegetables (45.6 to 24.7 pp), appreciation of exchange rate (rouble),

growing agricultural production, decelerating growth rate of the producer prices

(manufacturing, production & distribution) of electricity, gas & water and tariff rates of freight

transportation, thus helps in limiting the inflation rate.

Afterwards in 2012 the Russian bank monetary policy was successful in combating inflation.

The inflation rate during the year is 5.1%, the 3.3 percentage point lower than in 2011. This

lowest rate since 1993 is within the target range (5-6%) set by Guidelines for the Single State

Monetary Policy. This shows that the recent years have witnessed effective monetary policies

which benefitted the country through controlling and curbing the inflation rates. The improved

inflation during the year was because of constructive development of domestic and global

agricultural market, reschedule of the planned increase in administered tariffs, fall of core

inflation and increase of the exchange rate (rouble). Thus, during the year the Russian country

remain stable with increased industrial production and domestic demand, decreased

unemployment and improved exports. Thus from 2008 to 2012 the trend of inflation rates have

declined except of 2011 when it rose to 8.4 %. After the year 2012 the inflation rate goes on

increasing by reaching 15.5 in 2015.

 189

The year 2013 shows increasing trend of CPI which stood 6.8% exceeding the target range (5-

6%) set by the Russian government in “Guidelines for the Single State Monetary Policy in 2013

and for 2014 and 2015”. This increase in the CPI was due to rising food prices (7.3%, 0.2 p.p.

less against 2012), poor harvest due to bad weather conditions, depreciation of exchange rate

(Ruble), rise in prices of tariffs & excise duties, reduced growth of administered prices and rates

and price indexation of services provided by natural monopolies. Thus to curb out or limit the

inflation the Russian bank adopted several measures and decisions like to improve domestic

food market with new harvest supply, decrease the prices of world grain, change the current

system of instruments and interest rates for the effectiveness of monetary policy and efficiency

of transmission mechanism.

In 2014 the CPI is 7.8% exceeding the target set at 5.0 percentage point. The bank of Russia

adopted the point targets instead of target ranges in the current year as point targets provide

clearer signal of inflation rate. This ensures the clear cut understanding of monetary policy

objectives by the economic agents. The inflation target upward and downward deviations were

considered unfavourable by the Russian bank. The factors contributing to increase in inflation

were Ruble depreciation, restrictions of foreign trade, worsening market conditions of various

food products. Because of depreciation of Ruble the inflation expectations get increased which

leads to high prices of domestic goods thereby increasing the exports of grain and oil seeds.

This increase in prices is also reflected in imports of raw materials and components for the

production of goods and services. The increased outflow of private capital from Russia because

of external debt repayment by the Russian private sector and purchase of foreign currency by

the households and corporate s also contribute to rising inflation. Thus in some markets imports

get banned temporarily, restricted the launch of new funding mechanisms and prohibited the

poor harvest of some crops.

Thus we can say that the main factors contributing to inflation during the year were mainly

driven by the external factors. The measures taken by the Russian bank to limit inflation were

exchange rate was made flexible aimed at reducing the rouble exchange rate so that the

economic participants are able to adjust fluctuations of exchange rate due to external shocks.
190

The other steps taken were to weaken the demand, reduce the indexation of administered prices

& services and restrict the domestic producer prices mainly of mining sector which follows the

fall in the global oil prices.

In the year 2015 the inflation witnessed a 13 year high inflation rate of 15.5 percent since

2002.The inflation this year moved away from the set target of 5.0 percent due to exchange rate

dynamics. The economic agents of Russia suffered the high costs of imports (mainly of food

prices) because of devaluation of exchange rate (Ruble) which was at its highest peak during the

year because of huge capital outflows, drop in crude oil prices and expectations of further

devaluation. It was estimated that if there was one percent fall in Ruble then there will be 0.1%

to 0.2% increase in inflation during the year. The other factors that increase inflation in the

country were increased growth of producer prices (primarily food industry prices) and the

counter-sanctions introduced at the end of 2014 on a number of food products. Thus there was

need to modify the existing monetary policy framework which mainly focus on exchange rate

objective to combat the inflation. Thus the exchange rate targeting policy operations were

officially discarded by the Russian bank in November 2014 because of its inability to control

prices and interest rates, which impacted the economy adversely during the past years. Thus

Russian bank focused on market interest rates to meet inflation targets.

The idea behind inflation targeting and free floating exchange rate policy was discussed by the

expert’s for a long time and the experts were doubtful whether to go for targeting or not,

whether the Russian bank has appropriate instruments to combat inflation, whether the adoption

of inflation targeting will succeed the exchange rate policy targeting. Since 2006 the Russian

government started continuing move towards inflation targeting policy where they announced

price stability as a main long term goal of monetary policy and started publishing one year

inflation targets. In 2014, the Bank of Russia stated that “Starting from 2015, the monetary

policy will be conducted under the inflation targeting regime” (Bank of Russia, 2014).

Thus the bank of Russia to fight inflation, maintain price stability and financial stability in the

economy, officially moved into full-fledged inflation targeting in the year 2015. Through this

policy the Russian bank ensures to achieve the inflation target by having considerable impact on
 191

price of money through interest rates. This directly affects the short term interest rates of money

market which helps in keeping close watch on the key rates. The changes in key rates get

reflected in the interest rates on bank loans & deposits, which affects the consumption, saving &

investment decisions, economic activity and inflation. Through this mechanism the Russian

bank tries to improve the monetary policy operational framework thereby forwarding the money

market interest rates in more efficient way. Thus the bank of Russia at the end of year was able

to neutralise exchange rate and inflation risks, reduce the global agricultural raw materials and

produce prices, stabilised the oil shocks experienced in mid of 2015 and maintaining the

efficient interest rates.For the year 2016 the monetary policy planned to decrease the annual

inflation by 4% thereby keeping it close to the target set by the authorities.

6.2.3 INFLATION MANAGEMENT IN INDIA

India has experienced the high inflation fluctuations since 1993. The figure 6.2 shows the

highest peaks of inflation in 2009 Q4, 2010 Q1, 2012 Q2 and in 2013 Q1, thereby supporting

the inflation events in India. The official and unofficial versions of the range of inflation in

India have been pointed out from time to time. The Chakravarty Committee in 1985 pointed 4

% inflation, Government of India pointed 4-6% in 1997-98 and RBI governor Mr. C.

Rangarajan 6-7% and then Tarapore committee recommended range 3-5% for the 3 years (from

1997-98 to 1999-2000) acceptable for economy.

FIGURE 6.2 INFLATION IN INDIA

20.00
15.00
% CHANGE

10.00 CPI
5.00
0.00
1 3 1 3 1 3 1 3 1 3 1 3 1 3
0 9Q 09Q 10Q 10Q 11Q 11Q 12Q 12Q 13Q 13Q 14Q 14Q 15Q 15Q
2 0 20 20 20 2 0 2 0 2 0 2 0 2 0 20 20 20 20 2 0

Since 2002 Indian economy has underwent three different phases (i.e. 2002Q1 – 2008Q3,

2008Q3 - 2013 Q1, and 2013Q1 - 2015Q2) of inflation trajectory and the policy response.

Before adopting inflation targeting framework the country was following Multiple Indicator
192

Approach (MIA) to contain inflation. In this approach interest rates in different markets of high

frequency including fiscal position, inflation rate, foreign exchange transactions trade, credit,

exchange rate, capital flows, refinancing and currency movements are juxtapose with the output

data for depicting the policy outlook. Though Reserve Bank of India (RBI) used CPIs and WPI

to understand the price movements, monetary policy assessment of inflation is mainly based on

WPI.

From 2003 onwards RBI maintained inflation below 5% compared to the target set by

government (4-4.5%). Thus, in 2015 Government of India started targeting inflation. The

country in the year 2014 adopted the consumer price inflation combined (CPI-C) as the key

measure of inflation and adopted “formally” the inflation targeting in February 2015. Thus an

agreement “Agreement on Monetary Policy Framework”, between government of India (GOI)

and Reserve Bank (RBI) was signed.

During 1995’s economy experienced a substantial hike in administered prices, reduced

production of cash crops, huge fiscal deficits and money supply. The inflation scenario from

1999 to 2005 shows the moderation of inflation and remained less than 5%. During 2002 and

2004 the economy faced deficient monsoons, reduced food inflation due to poor harvest, fiscal

deficits were in decreasing trend (from 6.13% in 2001 to 3.96% in 2005). In 2003 the

government adopted Fiscal responsibility and budget management (FRBM) Act to control the

rising fiscal deficits (due to which government supply more money) leading to push inflation in

upward trajectory. Afterwards 2005 there is raising trend of inflation up to the year 2010. In

2008 due to high global prices and large credit expansion of three years the country experienced

a higher inflation. Then the trend of inflation is upward trajectory up to the year 2010. The

country experienced the highest peak of inflation in 2010. The prominent contributing factors

were high administered prices, deficient monsoon (drought), rise in global commodity prices

because of financial crises, rise in domestic oil & fuel prices because of high international crude

oil prices, high interest rates, increased money supply & fiscal deficit and depreciation of the

exchange rate (rupee) thereby leading to huge trade deficits.

 193

In 2011 & 2012 the inflation is somewhat get reduced (due to declining international oil prices,

appreciation in value of rupee and softening of non fuel commodity prices in international

markets) as compared to 2010, but again shows the high trend of CPI (10.9%) in 2013 was

particularly due to food inflation. Afterwards the inflation in the year 2014(6.3%) and 2015

(5.9%) is in decreasing trend because of reducing global commodity prices (mainly crude oil),

decelerating agricultural prices and rural wages, economic slowdown, improvement in

availability of food grains and de-clog of the distribution channel. In 2014 the Reserve Bank of

India (RBI) under governance of Mr. RaghuramRajan adopted CPI as the key measure of

inflation recommended by Mr. Urjit Patel (Deputy Governor of RBI) Committee. Since 2012-

2015 the CPI in 2015 (5.9%) shows the lowest inflation rate than the set target of 2015 (8%) and

2016 (6%), indicating that monetary policy is successful in combating inflation.

The highest CPI from 2002-2015 in the country was in the year 2010 and the lowest in the year

2004. The country adopted the inflation targeting framework in 2015. The agreement on

inflation targeting adopted in 2015 focused on maintaining price stability along with economic

growth. The main high light of the inflation targeting agreement is to maintain the CPI below

6% by January 2016. Then the target for the financial year 2016-17 and the subsequent years

will be within 4% with a band of +/-2 percent. RBI in every 6 months should publish report

indicating the sources of inflation and forecasts of inflation (6-18 months from publication

date). RBI should publish Operating Target (s) and Operating Procedures of the monetary

policy and if there is any change in it should also be published. RBI if fails to meet the target

should also indicates the reasons of failure, remedial actions proposed and time period within

which the target will be achieved should also be published by the RBI to GoI. Thus India joined

the club of inflation targeting countries (like USA, UK, Japan, China, Brazil, Indonesia, and

European Union) in 2015. New Zealand was the first country opted inflation targeting

framework in 1989 in the world.

Thus, the Indian country experienced the highest peaks of inflation rates since 1993, in the year

1998 (13.1%), 2009 (10.8%), 2010 (12%) and in 2013 (10.9%), staying at double digits, which

then is under controlled limits set by the government. The country since 1990 experienced three
194

highest episodes of inflation in 1991 (due to Balance of Payment crises), 1998 and then 2010.

The huge rise in food prices contributed to all three episodes.

6.2.4 INFLATION MANAGEMENT IN CHINA MAINLAND

The trend of inflation in China Mainland shows that the country is successful in managing its

inflation rate. The country experienced the double digit inflation in the years1993, 1994 and

1995.The inflation rate after the year 1995 remains in single figure (instead of double digit)

except the years when there was deflation in the country. The country witnessed deflation

(negative annual growth in CPI) during 1998 (- 0.8), 1999 (- 1.4) and at the end of 2002 (- 0.8).

The prominent factors that contributes to avert an expansion in inflation were firstly the

acceleration in price adjustment & liberalisation (completed in mid of 1990’s) and secondly the

expansionary expenditure of local governments and SOEs. The price adjustment includes a huge

increase in administered prices (controlled by central government) of agricultural procurements

and limited introduction of ‘guided prices’. These reforms thus leads to sharp rise in aggregate

demand as farmers income rose markedly and State Owned Enterprises increased the

investments and wages. State owned banks during the year were reformed with the aim of

restricting and reducing the nonperforming loans. These reforms thus help in restricting the

rising inefficient credit growth. Afterwards from 2003-2008 the CPI is below five percent.

FIGURE 6.3 INFLATION IN CHINA MAINLAND

7.00
6.00
5.00
% CHANGE

4.00 CPI
3.00
2.00
1.00
0.00
1 3 1 3 1 3 1 3 1 3 1 3 1 3
-1.00
0 9Q 09Q 10Q 10Q 11Q 11Q 12Q 12Q 13Q 13Q 14Q 14Q 15Q 15Q
20
-2.00 20 20 20 20 20 20 20 20 20 20 20 20 20

Thus the monetary policies of China are successful in providing safeguard against inflation and

had strengthened the economy. The country then has deflation condition in the year 2009 (-0.7).

In the year 2010 CPI (3.3%) shows upward trajectory. The country recovered the situation of
 195

deflation with improved structure of fixed asset investments, acceleration in external trade and

agricultural output increase in consumption. The People Bank of China (PBC) during the year

loosened the monetary policy and has taken corrective steps to make the monetary policies

better and flexible. The PBC take on the various measures to strength liquidity management in

banking system and guided financial institutions in properly managing the speed, aggregate and

structure of credit provision thereby maintaining the stable financial and economic environment.

Thus money supply and credit growth slowed down from the high levels experienced in 2009.

In the year 2011 CPI increased and is 5.4% and afterwards 2012-2014 is below 3%. The CPI

growth in 2014 get narrowed due to lowering aggregate demand, reduced supply of industrial

goods, stable exchange rate and lowering of international commodity prices.

In the year 2015 the CPI stood 1.4% lower by 0.6pp as compared to 2014 (2.0%). Thus the CPI

during the year remained subdued. The reasons behind downfall of inflation rate were, rising

prices of global commodities, economic slowdown, huge capital outflow (due to repayment of

external debt) and depreciation in value of exchange rate (Renminbi). Thus the country till 2015

has not adopted the inflation targeting framework to combat inflation as adopted by other

countries in the BRICS bloc.

6.2.5 INFLATION MANAGEMENT IN SOUTH AFRICA

South Africa has adopted the strategy to target inflation well in advance. The Minister of

Finance, Government of South Africa and South African Reserve Bank (SARB) in its monetary

policy adopted the target range of 3-6% for the years from 2001 to 2015. The SARB succeeded

to achieve inflation targets during the period 2002 to 2015 except in years 2002 (9.1 %), 2007

(7.1%), 2008 (11.5%), 2009 (7.1%) and 2014 (6.9 %).

Prior to 1990’s the economy has experienced the double digit inflation due to which monetary

authorities credibility get vanished and afterwards 1990’s the South African Reserve Bank

(SARB) by discarding the exchange rate pegging policy adopted inflation targeting to contain

inflation. Thus, in the year 2000 South Africa officially adopted inflation targeting as the

monetary policy framework. The Consumer Price Index (CPIX) for metropolitan and other

urban areas, excluding the interest cost on mortgage bonds was used as a measure of inflation.
196

The above graph shows the trend of inflation in South Africawith highest peaks after the crisis

in 2009 Q1, 2011 Q3 and in 2014 Q2.

FIGURE 6.4 INFLATION IN SOUTH AFRICA

8.00
6.00
% CHANGE

4.00
2.00
0.00
1 3 1 3 1 3 1 3 1 3 1 3 1 3
9 Q 9Q 0Q 0Q 1Q 1Q 2Q 2Q 3Q 3Q 4Q 4Q 5Q 5Q
0 0 1 1 1 1 1 1 1 1 1 1 1 1
20 20 20 20 20 20 20 20 20 20 20 20 20 20

In 2001 the CPIX stood 5.7% higher compared to 2000 (5.3%). The increase in rate of inflation

was due to depreciation or weakness in value of exchange rate (Rand). The CPIX in 2002

(9.1%) again showed upward trajectory, a 3.1 percentage points above the upper target limit and

surpassed the target set for the year. The reason behind this was rapid rise in the prices of

consumer goods & services due to depreciation of exchange rate (Rand), rising domestic food

prices, rising international oil prices (due to US attack on Iraq & strikes in Venezuela) and

increase in administered prices. Thus, monetary policy doesn’t have control on these unforeseen

events thereby worsening the economic environment. The (MPC) monetary policy committee

take corrective actions to contain inflation and decided to increase repurchase rate of Bank by

100 basis points leading to an increase in the short term interest rates thereby tightening the

monetary policy.

In 2003 CPIX gradually get reduced to 5.8% reflecting a significant improvement in the

inflation scenario. The CPIX remained within the upper limit of target range (3-6%) during the
 197

year. This improvement or decline in CPIX was due to appreciation of exchange rate (Rand),

favourable international environment, lowered interest rates and most importantly the adoption

of monetary policy targeting framework. The key policy rate (repo rate) was reduced many

times during the year to contain inflation. The monetary policy decisions get reflected and there

was significant decline in the short term interest rates. The year 2004 with CPIX 1.4%,

witnessed the lowest inflation rate since 2002. This significant decline was due to decline in

inflation expectations and reduced repurchase (repo) rate by 50 basis points. The other

contributing factor was the reducing interest rate by the bank.

CPIX in 2005 was recorded at 3.4% and it was again within control limits. The increase in

CPIX was caused by growth in international crude oil prices, and robust domestic demand and

output. In 2006 the CPIX (4.7%) was again within set target range. However, increase in

inflation was mainly because of growth in food and energy prices, international oil prices and

exchange rate dynamics. The repo was increased by 200 basis points. The growth in household

expenditure and credit extensions led to pressure on the monetary policy. Domestically,

consumer demand pressures and exchange rate appeared to pose major risks to inflation.

In 2007, CPIX surpassed or breached the control limits for the first time since 2003. It is in

upward trend with 7.1% inflation rate because oil, petrol and food price shocks. During 2008

the finance Minister in his budget policy statement (21 October 2008) announcedfor change in

inflation targeting measure by 25 February 2009. The revisions in methodology employed to

compile CPI resulted in change in treatment of housing, the CPIX get replaced with the headline

CPI (CPI for all urban areas) as the target measure. However, the range of the continuous

inflation targeting for headline CPI remained 3-6%. This new CPI covers the primary and

secondary urban areas as detailed by the Statistics South Africa (SSA).

In2009country witnessed highest inflation (7.1%) against set target of 3-6% mainly driven by

growth in food, fuel and power (i.e. electricity prices rose up to 34 percent), energy and petrol

prices (i.e. transport). Global economy shows the conflicting pressures due to which the country

experiences the slow growth and high inflation. The country also get impacted by the

consequences of financial crises which led to decline in commodity prices, widening output gap
198

and restrained household consumption expenditure. However, the economy didn’t get much

affected because the domestic banking system remained relatively unaffected. The strong

domestic infrastructure expenditure programme also helped to support growth. Thus, the

economy experienced a marked slowdown due to widening output gap, lower domestic demand

and increase in inflation was due to declining demand and lower commodity prices. The

repurchase rate was lowered by 350 basis points during the end of year.

The downward trend in inflation continued in 2010 also with CPI 4.3%. The main drivers of

this slowdown were transport, miscellaneous goods and services categories. The appreciation of

the exchange rate (Rand) and relatively weak domestic demand also contributed in moderation

of inflation during the year. The food prices at consumer level remained controlled despite

higher global food prices. In 2011 the inflation rate (5.0%) is increased by 0.7 percentage

points. The main reasons for this were growth in food, petrol and electricity prices, transport

&housing and utilities, Administered price inflation (excluding petrol). The CPI in 2012 and

2013 stood 5.6% and 5.7% respectively. The increase in inflation in 2012 was due to restrained

global price inflation and weak domestic price pressures. However, the repurchase rate (5.0

percent) during 2012remained unchanged and exchange rate (Rand) was relatively resilient.

In 2013 the main factors driving inflation were rising domestic consumer price inflation along

with food and petrol prices. Due to petrol price volatility the transport prices get increased

which affected inflation. Administered prices also had impact on inflation, specifically through

electricity, education, petrol and water price changes. The CPI in 2014 is 6.1% higher against

2013 by 0.4 pp. The CPI during the year remained close to but above 6% upper end of target

range driven mainly by the rising food and petrol prices, exchange rate (rand) depreciation and

wage price spiral. The economy suffered a series of short-term shocks, especially strikes in the

mining and manufacturing sectors. The output gap remained negative, although smaller than

previously estimated, and credit growth is slow, contributing to minimal inflationary pressures

from the demand side.

The collapse of world commodity prices (mainly cheap oil prices) in 2015 lowered the CPI (4.6

percent) by 1.5 pp against 2014. The slowdown was also reflected in moderation in food, petrol
 199

and electricity prices factors indicating that the monetary policy is successful in containing

inflation. The depreciation in value of exchange rate (Rand) against US$, pushed up the

domestic fuel prices. The electricity shortages, drought and strikes were contributing to inflation

during mid of 2015. The increased food prices also had impact on inflation due to severe

drought conditions. The repo/ repurchase rate during the year increased by 25 basis points to

6.25 percent per annum.For the year 2016 the monetary policy planned to contain the annual

inflation within the targeted range 3-6% as set by the respective authorities. Thus, it can be

concluded that South Africa has succeeded in maintaining CPI within the target range of 3-6%,

resulting in lower level of inflation volatility. The country didn’t experience a very high

inflation episode (except in 2008) during period from 2002 to 2015.

6.2.3 Concluding Remarks

The analysis conclude that in case in case of Brazil, the inflation management measures taken

by central bank are successful in combating inflation as from earlier 1990s country has adopted

inflation targeting measure to control inflation, but experienced a rising trend in 2015. Russian

Government and the Central Bank of the country, despite inflation targeting since 1999 and

several other measures to control inflation, experienced high inflation in 2015. India also

experienced episodes of high inflation, but it could manage it to certain extent and in 2015

started targeting inflation. In case of China, the inflation management measure depicts that

country is successful in managing its inflation rate but had experienced deflation. The inflation

management measure adopted in South Africa reveal that the country is successful in managing

inflation as it started inflation targeting in year 2000.