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Milton Friedman, the father of monetarism and Nobel Laureate in Economics, said
that inflation is always and everywhere a monetary phenomenon and argued that the
changes in overall price level are only brought about by the changes in monetary stock or
money supply. Influence of changes in money supply over price level is an area of
controversy. Despite several years of research, which has gone in to understand the precise nature
of relationship between money supply and price level, there seems to be no final
conclusion that can be relied upon for policy formulation.
This paper makes an attempt to study the interrelationship between the rate of
inflation and rate of growth in money supply in India with a very simplistic approach, which
relies on the use of simple statistical tools like growth rate, averages, correlations, etc.,
instead of taking recourse to econometrics. Several studies carried out in the Indian context
make use of econometric models for understanding the interrelationship between money,
output and prices. In this study, however, no attempt is made to perform econometric analysis
of inflation, rather the analysis is mostly descriptive.
First, a brief review of monetarist's version of quantity theory of money is
attempted, which is followed by the presentation and analysis
of Indian data pertaining to rate of growth of money supply and rate of inflation as measured by the Wholesale Price Index (WPI).
The unique feature of the present work is that, it has divided the analysis of inflation and
money supply in four stages defined by major historical events—Establishment of the RBI–1935, Nationalization of the RBI–1949, Nationalization of commercial banks – 1969,
and Introduction of New Economic Policy–1991. |
