Database on Indian Economy Waseem Akram (1)

8/10/2019 Database on Indian Economy Waseem Akram (1)

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INDIAN ECONOMY

SUBMITTED TO: SUBMITTED BY:

Ms. Hardeepika WASEEM AKRAM

(Management Faculty) MBA Sec BPMCC/1043/13


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DATABASE: INDI AN ECONOMY

QUARTERLY ESTIMATES OF GROSS DOMESTIC PRODUCT AT FACTOR COST(At Constant Prices) New Series (Base: 2004-05)

Q1, Q2, Q3 & Q4 denotes: April to June, July to Sept, Oct to Dec & Jan to March Quarters respectively.


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REASONS:

Actual Previous Highest Lowest Dates Unit Frequency

1.20 1.90 5.80 -1.90 1996 - 2014 Percent Quarterly

In India, the growth rate in GDP measures the change in the seasonally adjusted value of the goods and services produced by the Indianeconomy during the quarter. India is the worlds tenth largest economy and the second most populous. The most important a nd the fastest

growing sector of Indian economy are services. Trade, hotels, transport and communication; financing, insurance, real estate and business

services and community, social and personal services account for more than 60 percent of GDP. Agriculture, forestry and fishing constitute

around 12 percent of the output, but employs more than 50 percent of the labor force. Manufacturing accounts for 15 percent of GDP,construction for another 8 percent and mining, quarrying, electricity, gas and water supply for the remaining 5 percent. This page provides -

India GDP Growth Rate - actual values, historical data, forecast, chart, statistics, economic calendar and news. Content for - India GDP Growth

Rate - was last refreshed on Sunday, November 2, 2014.

India's Economic Growth Eases More than Expected in Q4

In the fourth quarter of 2012, India's economy grew only 4.5 percent due to the widespread weakness in farm, mining and

manufacturing output.

Manufacturing output grew only 2.5 percent, while the mining sector reported an annual fall of 1.4 percent. Farm output gained 1.1 percent. The

construction output expanded 5.8 percent and financing, insurance, real estate and business services grew 7.9 percent.


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FORIEGN EXCHANGE:

REASONS: The following are some of the principal determinants of the exchange rate between two countries:

1. Differentials in Inflation

As a general rule, a country with a consistently lower inflation rate exhibit a rising currency value, as its purchasing power increases relative

to other currencies. Those countries with higher inflation typically see depreciation in their currency in relation to the currencies of their

trading partners. This is also usually accompanied by higher interest rates.

2. Differentials in Interest Rates

Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, exert influence over both inflation and

exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher

return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of

higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the

currency down. The opposite relationship exists for decreasing interest rates - that is, lower interest rates tend to decrease exchange rates.

3. Current-Account Deficits

The Current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods,

services, interest and dividends. A Deficit in the current account shows the country is spending more on foreign trade than it is earning, and

that it is borrowing capital from foreign sources to make up the deficit. In other words, the country requires more foreign currency than it

receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products. The excess demand for

foreign currency lowers the country's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are

too expensive to generate sales for domestic interests.

4. Public Debt

Countries will engage in large-scale deficit financing to pay for public sector projects and governmental funding. While such activity

stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors. A large debt encourages

inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.

5. Terms of Trade

A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the BOP If the price of a country's

exports rises by a greater rate than that of its imports, its terms of trade have favourably improved. Increasing terms of trade shows greater

demand for the country's exports. This, in turn, results in rising revenues from exports, which provides increased demand for the country's

currency (and an increase in the currency's value). If the price of exports rises by a smaller rate than that of its imports, the currency's valuewill decrease in relation to its trading partners.

6. Political Stability and Economic Performance

Foreign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such

positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political

turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries.


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Monetary Policy: Quantitative & Qualitative Tools, MSF, LAF, Repo, OMO, CRR, SLR, etc.

What is monetary policy?

Policy made by the central bank.

To control money supply in the economy.

Quantitative Tools

1: Reserve Ratios (SLR and CRR)

SLR A Bank has to set aside this much money into gold or RBI approved securities. 23%

CRR A Bank has to set aside this much as reserve. Bank cannot lend it to anyone. Bank earns no interest rate or profit on this. 4%

Reserve ratio: SLR, CRR

Suppose economy is showing inflationary trend. Prices of all goods and services are increasing day by day.

How can RBI stop it using Reserve ratio as a tool?

In this case, RBI should RAISE the reserve ratios.

Situation: Economy has inflationary trend. Prices of goods and services increasing every day.

Solution: RBI raised reserve ratio (CRR, SLR)

Result:SBI is left with less money to lend

Consequences:

1. Banks raises its loan interest rate

2. Businessmen borrow less money from Banks

3. Businessmen do not start new business. Do not expand existing business

4. Result=Less jobs. Even existing employees discharged. If anyone remains in the job, he doesnt get pay raise. He starts cutting downunnecessary expenditure.

5.

Result= Less income

6.

Result= Less demand of goods and services

7.

Ultimately shopkeeper will bring down the prices to attract people into buying more things. Thus inflation is reduced.

2: Open Market Operation (OMO)

Open Market Operation= when RBI starts buying/selling government securities to control money supply.

Government securities= piece of paper. It says something like this give me Rs.100, Ill give you 8% interest rate for next ten years and

after that Ill repay the principle of Rs.100. This is how government borrows from others.


Solution: RBI starts selling government securities in open market.

Result: Banks buys them and thus Banks lending money is reduced.

3. Policy Rate

Policy rate= in case of India its Repo rate. Before moving further, lets refresh our concepts of Bank rate, LAF, MSF, Repo and Reverse repo.

Bank Rate

When banks borrow long term funds from RBI. Theyve to pay this much interest rate to RBI. At present, Bank rate= 9%

Collateral: nothing. (Bank can borrow money without pledging government securities to RBI)

Bank rate is not the main tool to control money supply these days.

Nowadays, RBI uses LAF Repo rate as the main tool, to control money supply.

What if RBI wants to fight inflation using bank rate as a tool?

Obviously they should increase bank rate. That way it becomes harder (more expensive) for banks to borrow from RBI.=> Banks increases itsloan rates (to keep the profit margin same).


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Result:

Less people get home loan, bike loan, business loans.

Less business expansion

Less jobs

Less incomes

Less demand

Ultimately shopkeeper will bring down the prices to attract people into buying more things. Thus inflation is reduced.

Repo Rate:

Repo If client borrows money from RBI (for short term) then client has to pay this much interest rate to RBI. At present Repo is 8%.

Reverse

Repo

If client lends money to RBI (for short term) then RBI has to pay this much interest rate to client. RBI doesnt like headache. So they

made a simple formula: Reverse repo rate= Repo MINUS 1%=8-1=7%.


Solution: RBI increases Repo rate. (Say from 7.75% to 8%).

Result: it becomes expensive for Banks to borrow from RBI. Theyll increase their own rates as well.

Whatll be the consequences (if repo rate is hiked / increased)?

Consequences:

1.

Banks raises its loan interest rate (to keep profit margin same)

2.

Businessmen borrow less money from Banks.

3.

Businessmen do not start new business. Do not expand existing business.

4.

Less jobs

5.

Less income

6. Less demand Thus inflation is reduced.

Qualitative Tools

1: Margin Requirements

This tool has direct impact on money supply.

2: Consumer credit regulation

Thus, RBI can control money supply by changing down payment and instalment (EMI) rules.

3: Selective credit control


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Under this, RBI can specifically instruct bankers not to give loans to traders of certain commodities e.g. sugar, gur, edible oil etc.

Even if the said trader is ready to mortgage his shares/bonds/factory/machine/vehicle anything.

This prevents speculations/ hoarding of commodities using money borrowed from banks.

4: Moral Suasion

RBI will try to influence those bankers via- direct meetings, conference, giving media statements, giving speeches @public seminars,

university convocations etc. (even where bankers are not present.) Hell do so, to build a public opinion, media opinion and influence those

bankers by making them feel guilty.

Rationing of

credit

Found in Planned economies/communist nations.

Here central bank will decide upper limit to loans in each sector (heavy industries, service, agriculture, small-scale

etc.)

So once that quota is over. Additional loans cannot be given to that borrowers from that sector. This also controls

money supply.

Direct actionMeans RBI gives punishment to erring banks. Punishment can involve: penal interest, refuses to lend them money from LAF

etc. and in worst case even cancels their banking license.

Monetary policy tools: Quantitative vs. Qualitative

Quantitative Qualitative

1. Reserve ratios (SLR, CRR)

2. Open Market Operation

3. Policy rate (Repo Rate)

1. Margin requirements / LTV2.

Consumer credit regulation

3.

Selective credit control

4.

Moral Suasion

5.

Rationing of Credit

6.

Direct Action

Indirect in nature. (Even if RBI changes repo rate, its not necessary Banks will

immediately change its base rate / loan interest rates.)Direct in nature. (e.g. those margin requirements)

General- they affect money supply in entire economy- be it housing, automobile,

manufacturing- everything.

Selective- can affect money supply in a specific sector of

economy e.g. automobile.


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Database on Indian Economy Waseem Akram (1)

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