INDIAN ECONOMY

SUBMITTED TO:

SUBMITTED BY:

Ms. Hardeepika

WASEEM AKRAM

(Management Faculty)

MBA Sec B
PMCC/1043/13

DATABASE: INDIAN 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.

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 Indian
economy during the quarter. India is the worlds tenth largest economy and the second most populous. The most important and 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.

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 value
will 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.

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.
2.
3.
4.

Banks raises its loan interest rate

Businessmen borrow less money from Banks
Businessmen do not start new business. Do not expand existing business
Result=Less jobs. Even existing employees discharged. If anyone remains in the job, he doesnt get pay raise. He starts cutting down
unnecessary 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.

Situation: Economy has inflationary trend. Prices of goods and services increasing every day.
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 its
loan rates (to keep the profit margin same).

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
Reverse
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%.
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%.

Situation: Economy has inflationary trend. Prices of goods and services increasing every day.
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.
2.
3.
4.
5.
6.

Banks raises its loan interest rate (to keep profit margin same)
Businessmen borrow less money from Banks.
Businessmen do not start new business. Do not expand existing business.
Less jobs
Less income
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

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

Direct action

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.

Means 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

1. Reserve ratios (SLR, CRR)

2. Open Market Operation
3. Policy rate (Repo Rate)

Qualitative
1.
2.
3.
4.
5.
6.

Margin requirements / LTV

Consumer credit regulation
Selective credit control
Moral Suasion
Rationing of Credit
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.