The document is a project report on analyzing the relationship between money supply, inflation, and interest rates in India from 2003-2004 to 2013-2014. It begins with an introduction to the Indian economy throughout history and currently. It then discusses money supply in India and the various measures used by the Reserve Bank of India to control money supply. Next, it covers inflation in India, how it is measured, and the relationship between money supply and inflation. Finally, it discusses interest rates in India, how they are determined, and the relationship between interest rates, money supply, and other economic factors. The report provides historical data and analysis on these economic indicators in India over the given time period.
In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. The theory was challenged by Keynesian economics,but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
This slide contains:
Incidence of Tax, its shift-ability, effect of residental status of assesse on taxability of income, effect on tax in different demand situations.
an analysis about the Indian banking system and the analysis of two major banking sector reforms; Narasimham committee (1 and 2) on banking sector reforms
1. Perspective of Indian Economy: Indian Economy as a Developing Economy, Basic Characteristics Overview of Economic Planning, Role of Monetary policy and Fiscal Policy, Budget terminology, Economic Growth, GDP and GDP Trends, Money Supply & Inflation, Inflation trends, RBI – overview of role and functions, Capital Markets – overview of role and functions, Concept of Poverty, Estimates of Poverty, Poverty Line, Economic Reforms and Reduction of Poverty, Concept of Inclusion, Need of inclusive growth, Financial inclusion. Concept of Hard & Soft Infrastructure. Hard Infrastructure - Transport Infrastructure, Energy Infrastructure, Water management infrastructure, Communication Infrastructure, Solid waste management, Earth monitoring and measuring networks. Soft Infrastructure - Governance Infrastructure, Economic infrastructure, Social infrastructure, Critical Infrastructure, Urban infrastructure, Green infrastructure, Education Infrastructure, Health Infrastructure. (6)
2. Human Resources and Economic Development : The Theory of Demographic Transition, Size and Growth Rate of Population in India, Quantitative Population Growth Differentials in Different Countries, The Sex Composition of Population, Age Composition of Population, Density of Population, Urbanization and Economic Growth in India, The Quality of Population, Population Projections (2001-2026), Demographic Dividend. Human Development in India
- The Concept and Measures of Human Development, Human development Index for Various States in India, National Human Development Report, Changing profile of GDP and employment in India, GDP, Employment and Productivity per Worker in India, Relative Shift in the Shares of NSDP and Employment in Agriculture, Industry and Services in Different States. (6)
3. Sectoral composition of Indian Economy: Primary, Secondary, Tertiary Sectors, Issues in Agriculture sector in India ,land reforms, Green Revolution and agriculture policies of India , Industrial development , small scale and cottage industries, Industrial Policy, Public sector in India, Services sector in India. Areas of Market Failure and Need for State Intervention, Redefining the Role of the State, Liberalization, Privatization and Globalization (LPG) Model of Development, Planning commission v/s NITI Aayog, Public Versus Private Sector Debate, Unorganised Sector and India's Informal Economy. (6)
4. Inequality and Economic Power in India: FDI, Angel Investors and Start-ups, Unicorns, M&A, Investment Models, Role of State, PPP (Public-Private Partnership), Savings and Investment Trends. Growth of Large Industrial Houses Since Independence, Growth of Monopolies and Concentration of Economic Power in India, Competition Policy and Competition Law, Growth and Inequality, India as an Economic Superpower, Growth of the Indian Middle Class, Indian MNCs : Mergers and Acquisitions, Outsourcing, Nationalism and Globalization, Small-scale and Cottage Enterprises, The Role of Small-scale Industries in India
In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. The theory was challenged by Keynesian economics,but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
This slide contains:
Incidence of Tax, its shift-ability, effect of residental status of assesse on taxability of income, effect on tax in different demand situations.
an analysis about the Indian banking system and the analysis of two major banking sector reforms; Narasimham committee (1 and 2) on banking sector reforms
1. Perspective of Indian Economy: Indian Economy as a Developing Economy, Basic Characteristics Overview of Economic Planning, Role of Monetary policy and Fiscal Policy, Budget terminology, Economic Growth, GDP and GDP Trends, Money Supply & Inflation, Inflation trends, RBI – overview of role and functions, Capital Markets – overview of role and functions, Concept of Poverty, Estimates of Poverty, Poverty Line, Economic Reforms and Reduction of Poverty, Concept of Inclusion, Need of inclusive growth, Financial inclusion. Concept of Hard & Soft Infrastructure. Hard Infrastructure - Transport Infrastructure, Energy Infrastructure, Water management infrastructure, Communication Infrastructure, Solid waste management, Earth monitoring and measuring networks. Soft Infrastructure - Governance Infrastructure, Economic infrastructure, Social infrastructure, Critical Infrastructure, Urban infrastructure, Green infrastructure, Education Infrastructure, Health Infrastructure. (6)
2. Human Resources and Economic Development : The Theory of Demographic Transition, Size and Growth Rate of Population in India, Quantitative Population Growth Differentials in Different Countries, The Sex Composition of Population, Age Composition of Population, Density of Population, Urbanization and Economic Growth in India, The Quality of Population, Population Projections (2001-2026), Demographic Dividend. Human Development in India
- The Concept and Measures of Human Development, Human development Index for Various States in India, National Human Development Report, Changing profile of GDP and employment in India, GDP, Employment and Productivity per Worker in India, Relative Shift in the Shares of NSDP and Employment in Agriculture, Industry and Services in Different States. (6)
3. Sectoral composition of Indian Economy: Primary, Secondary, Tertiary Sectors, Issues in Agriculture sector in India ,land reforms, Green Revolution and agriculture policies of India , Industrial development , small scale and cottage industries, Industrial Policy, Public sector in India, Services sector in India. Areas of Market Failure and Need for State Intervention, Redefining the Role of the State, Liberalization, Privatization and Globalization (LPG) Model of Development, Planning commission v/s NITI Aayog, Public Versus Private Sector Debate, Unorganised Sector and India's Informal Economy. (6)
4. Inequality and Economic Power in India: FDI, Angel Investors and Start-ups, Unicorns, M&A, Investment Models, Role of State, PPP (Public-Private Partnership), Savings and Investment Trends. Growth of Large Industrial Houses Since Independence, Growth of Monopolies and Concentration of Economic Power in India, Competition Policy and Competition Law, Growth and Inequality, India as an Economic Superpower, Growth of the Indian Middle Class, Indian MNCs : Mergers and Acquisitions, Outsourcing, Nationalism and Globalization, Small-scale and Cottage Enterprises, The Role of Small-scale Industries in India
The Indian economy, which is the third largest in the world in terms of purchasing power, is going to touch new heights in the coming years. As predicted by Goldman Sachs, the Global Investment Bank, by 2035 India would be the third largest economy in the world just after U.S. and China. It will grow to 60% of size of the U.S. economy. This booming economy of today has passed through many phases before it achieved the current milestone.
Unit: 1 Introduction to Indian Economy : Alternative Development Strategies – Trends in
National Income, Growth and Structure since 1991 - New Industrial Policy 1991 – Recent changes
in Trade Policy - Competition Policy - Public Sector Reform - Privatization and Disinvestments –
Progress of Human Development in India
Unit: 2 Planning and Economic Development : Redefining the Role of the State – Human Capital
Formation in India – Problem of Foreign Aid – Economic Reforms and Reduction of Poverty –
Measures to Remove Regional Disparities
Unit: 3 Indian Industries : Review of Industrial Growth under 10th and 11th Five year plan -
Growth and present state of IT industry in India – Outsourcing, Nationalism and Globalization –
Small Sector Industrial Policy
Unit: 4 a) Foreign Trade: Trends of Exports and Imports of India – Composition of India’s
Foreign Trade - Direction of India’s Foreign Trade – Growth and Structure of India’s Foreign
Trade since 1991 – Balance of Payments since the New Economic Reforms of 1991.
b) Foreign Capital : Need for Foreign Capital – Foreign Investment Inflows – Role of Special
Economic Zones (SEZ)
Unit: 5 India in the Global Setting : India in Global Trade – Liberalization and Integration with
the Global Economy – Globalization Strategies – India’s Foreign Exchange Reserves –
Convertibility of the Rupee – WTO and India.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
Import Substitution in India: Issues, Challenges and PromotionAakriti Agarwal
Explains the concept of Import Substitution, looks into the top imports of India, namely- Oil, Gold, Electronics and Machinery and tries to suggest methods of import substitution for the same.
rationale feature of economic reform.pdfuplevelway
The New Economic Policy (NEP) of India, introduced in 1991, was a landmark set of economic reforms that marked a departure from the traditional socialist economic model. It was a response to a severe balance of payments crisis and aimed to liberalize and modernize the Indian economy.
Here are the detailed rationale and features of the New Economic Policy of India in 1991:
Rationale:
Balance of Payments Crisis:
Depletion of Foreign Exchange Reserves: India was grappling with a sharp decline in foreign exchange reserves, leading to a balance of payments crisis.
External Debt Burden: The country faced a high level of external debt, making it difficult to meet its international payment obligations.
Economic Stagnation:
Low Growth Rates: The Indian economy was experiencing low growth rates, resulting in a stagnant job market and slow improvements in living standards.
Industrial Inefficiencies: Industrial sectors were characterized by inefficiencies, low productivity, and outdated technology.
Fiscal Imbalances:
High Budget Deficits: The government was struggling with high fiscal deficits, contributing to inflationary pressures.
Public Sector Inefficiencies: Subsidies and inefficiencies in the public sector were putting a strain on the fiscal health of the government.
External Pressures:
Changing Global Dynamics: The end of the Cold War and shifts in global economic dynamics necessitated adjustments in India’s economic policies.
International Financial Assistance: In exchange for financial assistance, international organizations like the International Monetary Fund (IMF) and the World Bank pushed for economic reforms.
Business Environment - Unit-4 - IMBA - Osmania UniversityBalasri Kamarapu
Business Environment - Unit-4 - IMBA - Osmania University
Liberalisation, Privatisation, and Globalisation (LPG) in Indian Economy:
Concept of LPG
Process of LPG followed in India
Globalization and role of WTO
Regional Trading Blocks
India’s Foreign Trade and Agreements with Trading Blocks.
Highlights of the LPG Policy
Foreign Technology Agreements
Foreign Investment
MRTP Act 1969 (Amended)
Industrial Licensing
Deregulation
Beginning of Privatisation
Opportunities for overseas trade
Steps to regulate inflation
Tax reforms
Abolition of License-Permit Raj
Advantages of Globalisation in India
Industrial Licensing
Deregulation
Beginning of Privatisation
Opportunities for overseas trade
Steps to regulate inflation
Tax reforms
Abolition of License-Permit Raj
Advantages of Globalisation in India
Types of Regional Trading Blocs
Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade Agreement (NAFTA) or part of a regional organization (such as the European Union).
Depending on the level of economic integration, the trade blocs can fall into the 6 different categories, such as preferential trading areas, the free trade areas, the customs unions, the common markets, the economic union and monetary unions & the political union.
Preferential Trade Area: Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.
Fiscal policy in India refers to the use of government spending and taxation to influence the economy. It is a critical component of the overall economic policy framework and is aimed at achieving macroeconomic objectives such as economic growth, employment generation, price stability, and equitable distribution of income.
Key Elements of Fiscal Policy in India:
Budgetary Process:
The Union Budget is the annual financial statement of the government, presented in Parliament. It outlines the government’s revenue and expenditure plans for the fiscal year.
Revenue and Expenditure:
The government’s revenue comes from sources like taxes, non-tax revenue, and capital receipts. Expenditure includes both revenue expenditure (day-to-day expenses) and capital expenditure (investment in infrastructure and assets).
Taxation:
The government uses taxation as a tool to raise revenue and influence economic behavior. It can adjust tax rates, introduce new taxes, or provide tax incentives to achieve specific economic goals.
Subsidies:
The government may provide subsidies to support specific sectors, reduce the cost of essential goods and services, or promote inclusive development.
Deficit Management:
Fiscal deficit, revenue deficit, and primary deficit are key indicators of the government’s fiscal health. The government aims to manage these deficits to ensure fiscal sustainability.
Public Debt Management:
The government borrows funds through the issuance of government securities. Effective debt management is crucial to prevent excessive reliance on borrowing and to manage interest costs.
Similar to Money Supply and its Impact on Inflation and Interest Rate: A case study of India during 2003-04 to 2013-14 (20)
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
Yes of course, you can easily start mining pi network coin today and sell to legit pi vendors in the United States.
Here the telegram contact of my personal vendor.
@Pi_vendor_247
#pi network #pi coins #legit #passive income
#US
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Transkredit Finance Company Products Presentation (1).pptx
Money Supply and its Impact on Inflation and Interest Rate: A case study of India during 2003-04 to 2013-14
1. Macroeconomics
Project Report
_____________________________________________________________________________________________________
Money Supply and its Impact on Inflation and Interest Rate:
A case study of India during2003-04 to 2013-14
____________________________________________________________________________________________________
Submitted To:
Prof. Jagdish Shettigar
__________________________________________________________________________________
Made By : Group-, Section-B, PGDM 14-16 (First Year)
Gokul K Prasad(14DM086)
HariharaPrabhu(14DM088)
Humam Khaliz(14DM095)
Jitendre Badyal(14DM120)
Manjeet Poonia(14DM104)
Jerin M Joy(14DM109)
2. Macroeconomics for Business
Decision Making – Project Report
Contents
List of Figures.............................................................................................................................. 3
Acknowledgement ...................................................................................................................... 4
1. Indian Economy - An Introduction............................................................................................ 5
1.1 IndianEconomybefore ColonialPeriod............................................................................... 5
1.2 IndianEconomyduringColonial Period ............................................................................... 6
1.3 IndianEconomybefore Liberalization.................................................................................. 6
1.4 IndianEconomyafterLiberalization .................................................................................... 6
1.5 CurrentScenario ................................................................................................................ 7
2. MoneySupply inthe Indian Economy ...................................................................................... 8
2.1 Introduction....................................................................................................................... 8
2.2 Monetary ToolsUsedby RBI to control Moneysupply:......................................................... 9
3. Inflationin the IndianEconomy ............................................................................................. 10
3.1 Measuresof Inflation....................................................................................................... 10
3.2 Which isbetterCPIor WPI?............................................................................................... 11
3.3 Why countrylike IndiapreferWPIoverCPI ?...................................................................... 11
3.4 Typesof inflation............................................................................................................. 11
3.5 Factors AffectingInflation................................................................................................. 12
3.6 RelationshipbetweenMoneySupplyandPrice Level ......................................................... 13
3.7 Moneysupplyandinflationbetween2005-2006 and 2012-2013.......................................... 14
4. InterestRate in the Indian Economy ...................................................................................... 16
4.1 InterestRate – Definition.................................................................................................. 16
4.2 A Brief Historyof InterestRate VariationinIndia ............................................................... 16
4.3 Implicationsof Decrease inInterestRate........................................................................... 17
4.4 How are the InterestRatesDeterminedinIndianEconomy? .............................................. 18
4.5 Factors affectingthe InterestRate .................................................................................... 19
4.6 Variationof SavingsInterestRate,AverageLendingRate,BankRate,RepoRate withM3
Average MoneySupply :......................................................................................................... 20
5. Conclusion............................................................................................................................ 21
6. References............................................................................................................................ 22
7. Annexure.............................................................................................................................. 24
Page 2 of 24
3. Macroeconomics for Business
Decision Making – Project Report
List of Figures
Figure No. Particular
Figure 2.1 Yearly Average Money Supply M3 (in Billion INR) and GDP at Constant Prices
Figure 3.1 Average Money Supply (M3) & Income Velocity
Figure 3.2 Average Money Supply (M3), M3 Growth Rate, GDP Growth Rate, Inflation
Figure 4.1 Saving Rate, Lending Rate, Repo Rate & Bank Rate Variation
Figure 7.1 Year wise data of Money Supply, GDP, Inflation & Interest Rate
Figure 8.1 Interest rate repo rate table
Figure 9.1 India’s prime lending rate
Figure 10.1 India’s Interest rate
Page 3 of 24
4. Macroeconomics for Business
Decision Making – Project Report
Acknowledgement
We are in debt to our teacher and project guide Mr. Jagdish Shettigar (Prof. & Advisor –
BIMTECH) for helping us and giving his useful ideas for making this project.
We are also thankful to Prof. Pooja Misra for her useful guidance.
We also want to acknowledge that we had learned a lot while working with our batch
mates of Bimtech.
Page 4 of 24
5. 1. Indian Economy - An Introduction
India is one of the fastest growing economies in the world. In recent times the country
has witnessed a tremendous rise in its growth rate. The history of Indian Economy can be
broadly classified into four parts
1.1 Indian Economy before Colonial Period
India had been successful to develop international trade since as early as the first century BC.
Evidences suggest that the Coromandel, the Malabar, the Saurashtra and the Bengal coasts
were usedfor trade to parts of Middle East,Southeast Asia,Europe and Africa. In the medieval
period, the Mughal Empire introduced centrally administered uniform revenue policy and
political stability in India leading to further development of trade. During this era, India was
self-sufficient, dependent on agriculture. After the downfall of the Mughal Empire, the
Maratha Empire ruled over most parts of India. Later, with the defeat of Maratha the
economy of India turned highly disturbed in most parts of the country. Later, by the end of
eighteenth century, the British East India Company became a part of the Indian political
machinery, following which there were drastic changes in the country’s economic activities
and the trade conducted from the India.
1.2 Indian Economy during Colonial Period
During the reign of the British East India Company, there was a drastic shift in the economic
activities conducted across the country. More stress was laid on commercialization of
agriculture. During this phase, there was a constant decline in the production of food grains
which resulted to the mass impoverishment and destitution of farmers. Though, after and
during this phase, there was a sharp decline in the economic structure of the country, major
developments took place including the establishment of railways, telegraphs, common law
and legal system.
1.3 Indian Economy before Liberalization
After independence, till 1991, strong emphasis was laid on increasing the domestic self-
sufficiency and reducing the reliance on imports.The economic planning process during this
phase was conducted centrally through the Five Year Planning process of the commission.
Industries like mining, steel, machine tools, insurance, telecommunications and power plants
were effectively nationalized during this era. The Government of India laid prime focus on the
development of heavy industry in country by both the public and the private sector. However,
despite all its efforts, the economy of India was unsuccessful to grow at pace with other Asian
countries for the first three decades after independence. Later, in 1965, Green Revolution in
country, triggered by the improved irrigation facilities, increased use of fertilizers and the
introduction of high-yielding varieties of seeds improved the economic conditions of the
country and enabled a better link between industry and agriculture in India.
Page 5 of 24
6. Macroeconomics for Business
Decision Making – Project Report
1.4 Indian Economy after Liberalization
In 1991, as a result of the reforms demanded by the IMF in return of allotting India a bailout
loan of US$ 1.8 billion, the government of India adopted the economic reforms of 1991.
Under these reforms, the tariffs and the interest rates were reduced which in turn ended
the public sector monopolies in certain sectors. Also, these reforms approved the foreign
direct investment in many sectors. Later, by the end of the twentieth century, the Indian
economy had progressed towards a free market economy and was marked with increased
financial liberalization. During this phase, the Indian economy also witnessed a tremendous
improvement in the literacy rates, food security and life expectancy.
1.5 Current Scenario
The last decade has been one of the most volatile times for both, the global as well as Indian
economy. Economic reforms picked up pace in 2000-04 and fiscal deficits trended down after
2002 and there was a upswing in Indian industrial output and investment from the second
half of 2002. India’s Tenth Five-Year Plan (2002-07) targeted an annual growth rate of eight
per cent. Along with this growth target, the government alsolaiddown targets for human and
social development. A reduction of the poverty rate by five percentage points by 2007,
providing gainful employment to at least those who join the labour force during 2002-07,
education for all children in schools by 2003, and an increase in the literacy rate to 75 percent
by March 2007.
Currently the economy is expected to grow at 4.9% for the current financial year despite
favourable monsoon brightening the scope for agriculture performance. The industrial and
services sector growth performance in 2013-14 is likely to be lower than 2012-13. While in
general economic growth performance in FY14 is likely to be similar to the FY13 levels, the
current account may improve considerably. This will strengthen rupee to stabilize to around
59-61 to the dollar by the end of 2013-14. Bolstered by agriculture and exports, the economic
growth is expected to improve from the third quarter of FY14. Three consecutive months of
double-digit exports growth and healthy agriculture performance due to 6% above normal
rainfall in 2013 would increase demand for industrial goods and services.
Page 7 of 24
7. Macroeconomics for Business
Decision Making – Project Report
2. Money Supply in the Indian Economy
2.1 Introduction
Up to 1967-68, the RBI adopted only the narrow measure of money supply (M). It was the
sum of currency and demand deposits, which are held by the public. A broader measure for
money supply called aggregate monetary resources is published from 1967-68 by RBI.
The RBI has adopted four alternative definitions of money supply which are labelled as M1,
M2, M3, & M4.
M1 = currency with public + demand deposits with the banking system+ other deposits with
RBI
M2 = M1 + saving deposits with post office savings
banks M3 = M2 + time deposits with the banking system
M4 = M3 + all deposits with post office savings banks excluding National Saving Certificates
Reserve money (M0) =Currency in circulation + Bankers’ deposits with the RBI + ‘Other’
deposits with the RBI.
For practical purposes, mainly M1 (narrow money) and M3 (broad money) concepts are used
in India.
Money Supply M3 in India increased to 81600 INR Billion in February 2013 from 81004 INR
Billionin January of 2013. Historically,from 1972 until 2013, India Money Supply M3 averaged
13127.16 INR Billion reaching an all-time high of 81600 INR Billion in February of 2013 and a
record low of 123.52 INR Billion in January of 1972.
Average Money Supply (M3) & GDP at Constant Prices
(Billion INR)
100000.00
80000.00
60000.00
40000.00
20000.00
0.00
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Year
M3 Average MoneySupply… GDP at Constant Prices…
Figure 2.1 : Yearly Average Money Supply M3 (in Billion INR) and GDP at Constant Prices
Data Source : RBI Annual Reports
Page 8 of 24
8. Macroeconomics for Business
Decision Making – Project Report
2.2 Monetary Tools Usedby RBI to control Money supply:
Repo Rate :
Repo is a money market instrument, which enables collateralized short term borrowing and
lending through sale/purchase operations in debt instruments. Under a repo transaction, a
holder of securities sells them to an investor with an agreement to repurchase at a
predetermined date and rate. In the case of a repo, the forward clean price of the bonds is
setin advance at a level which is different fromthe spot cleanprice by adjusting the difference
between repo interest and coupon earned on the security.
[3]
The present Repo Rate is 7.75%
Reverse Repo Rate :
A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are acquired
with a simultaneous commitment to resell.Hence whether a transaction is a repo or a reverse
repo is determined only in terms of who initiated the first leg of the transaction. When the
reverse repurchase transaction matures, the counterparty returns the security to the entity
concerned and receives its cash along with a profit spread. One factor which encourages an
organization to enter into reverse repo is that it earns some extra income on its otherwise
idle cash.
[3]
The Reverse Repo Rate is 6.75%
Bank Rate :
Bank rate is the rate at which the Central bank lends money to the commercial banks for their
liquidity requirements. Bank rate is also called discount rate. In other words bank rate is the
rate at which the central bank rediscounts eligible papers held by commercial banks. Inflation
will cause bank rate to increase.
The current Bank Rate is 8.75%
Cash reserve Ratio :
Cash Reserve Ratio (CRR) is the amount of funds that all Scheduled Commercial Banks (SCB)
excluding Regional Rural Banks (RRB) are required to maintain without any floor or ceiling
rate with RBI with reference to their total net Demand and Time Liabilities (DTL) to ensure
the liquidity and solvency of Banks (Section 42 (1) of RBI Act 1934).
At present the Cash Reserve Ratio is 4%
Page 9 of 24
9. Macroeconomics for Business
Decision Making – Project Report
Statuary Liquidity Ratio (SLR):
Apart from keeping a portion of deposits with RBI as cash, banks are also required to
maintain a minimum percentage of deposits with them at the end of every business day, in
the form of gold, cash, government bonds or other approved securities. This minimum
percentage is called Statutory Liquidity Ratio. In times of high growth, an increase in SLR
requirement reduces lendable resources of the banks and pushes up interest rates.
The current SLR is 23.0%
3. Inflation in the Indian Economy
In a broad sense of the term, inflation means a considerable and persistent rise in the general
level of prices over a long period of time. It can also defined as a situation I which supply of
money increases at a rate much faster than the supply of real output. Inflation also reflects
an erosion in the purchasing power of money. Inflation’s effects on an economy can be
positive or negative. The rate of inflation is measured by the annual percentage change in the
level of prices as measured by the consumer price index.
In India, inflation rate in the month of Oct 2013 is around 7% (WPI). Historically, from 1969
until 2013, the inflation rate in India averaged 7.7% reaching an all time high of 34.7% in
September 1974 and a record low of -11.3% in May 1976. The average inflation of India in the
year 2013 (Up to Sept month) is 11.04% (CPI).
3.1 Measures ofInflation
Percentage change in Price Index Numbers (PIN), where the price index is an indicator of the
averageprice movement over time of afixed basket of goods and services.There are different
indictors used to measure inflation namely Wholesale Price Index (WPI), Consumer Price
Index (CPI) and the GDP Deflator or Implicit Price Index, which is constructed from the
National Income Data.
Wholesale Price Index (WPI) was first published in 1902, and was one of the economic
indicators available to policy makers until it was replaced by most developedcountries by
the Consumer Price Index in the 1970s. WPI is the index that is used to measure the
change in the average price level of goods traded in the wholesale market
Consumer Price Index (CPI) is a statistical time-series measure of a weighted average
of prices of a specified set of goods and services purchased by consumers. It is a
price index that tracks the prices of a specified basket of consumer goods and
services, providing a measure of inflation.
Page 10 of 24
10. Macroeconomics for Business
Decision Making – Project Report
3.2 Which is better CPI or WPI?
The Wholesale Price Index (WPI) is used extensively as a measure of inflation and
important monetary and fiscal policy changes are often linked to it. But, the WPI in its role
as a guide to policy formulation has several critical limitations like
Non-inclusion of services
Following a fixed weighting scheme while the economy is undergoing major structural
changes
Use of gross transactions data rather than data on final purchases
3.3 Why country like India prefer WPI over CPI ?
The demographic and structure of India does not allow it to use the advance method i.e CPI.
Consumer Price Index in India is difficult to adopt as 4 types of CPI indices are there in India:
CPI Industrial workers
CPI Urban Non – Manual Employees
CPI Agricultural Labourers
CPI Rural Labour
Then lag in reporting, as CPI is released on monthly basis whereas WPI is released on weekly
basis. So, these things makes countries like India to use CPI method for calculating inflation.
3.4 Types ofinflation
Moderate Inflation, where the general level of price rises at a moderate rate over a
long period of time. Such an inflation is also called creeping inflation. Inflation rate
will be in single digit & its predictable value. For example, country like India facing a
inflation of 7% (WPI) in the month of Oct 2013.
Galloping Inflation, where the inflationrate is exceptionallyhigh. Here, the inflationrate
goes in double digit number. For example, during 1970s or 1980s, countries like
Argentina, Brazil were facing triple digit inflationi.e 416.9 %, 327.6% respectively.
Page 11 of 24
11. Macroeconomics for Business
Decision Making – Project Report
Hyper Inflation, where the price rise is at more than three digit number rate. For
example, Hungarian inflation of 1945-46 is the worst case of hyperinflation ever
recorded. The rate of inflation averaged about 20,000 percent per month for a
year and in the last month prices sky rocked 42 quadrillion percent.
3.5 Factors Affecting Inflation
There are several factors which help to determine the inflationary impact in the country
and further help in making a comparative analysis of the policies. The major determinant of
the inflation in regard to the employment generation and growth is depicted by the
Phillips curve.
Demand-Pull situation, where inflation is caused by aggregate demand being more
than the available supply. Aggregate demand is made up of consumer spending,
investments, government spending, and whatever is left after subtracting imports
from exports. Factors that commonly lead to demand-pull inflation include a
sudden increase in the amount of money in an economy and decreases in taxes on
goods, which leaves consumers with more disposable income. Since people have
more money to spend, manufacturers raise the general prices of goods and
services. And this ultimately leads to inflation in the country.
Cost-push situation, where inflation occurs when manufacturers and businesses
raise prices as a result of shortages, or to balance their increase in production
costs. An example of this is rising labour costs. When workers demand more wages,
companies usually pass on these costs to their customers or increase in the taxes
imposed on goods may also lead to a cost-push situation. This also often happens
when one or several companies has a monopoly in the market, and decides to raise
their prices above demand to increase their profit.
Built-in situation, where inflationhappens as a result of previous increases in prices
caused by demand-push or cost-pull. In this type of situation, people expect prices to
continue to rise, so they push for higher wages. This raises costs for manufacturers,
which then raise the cost of goods to compensate, causing a cycle of inflation.
External factors, like the exchange rate which also an important factor which affects
countrieslike India.Asthe pricesin UnitedStatesof Americarisesit impacts India where
the commodities are now imported at a higher price impacting the price rise.
Page 12 of 24
12. Macroeconomics for Business
Decision Making – Project Report
3.6 RelationshipbetweenMoney Supply and Price Level
The relationship between money supply and the general price level, is given by the following
equation of exchange:
MV = PY
Where:
M = Money supply/Quantity of money
V = Velocity of circulation of money
P = General Price level Y
= Real national income
It reveals that total value of payments (MV) equals the money value of national output (PY).
In the above equation, if ‘V’ is assumed to remain constant, then every change in M will
produce a similar change in either price level or real national income. If, however, the
economy is operating at full employment or close to full employment level of output, then
changes in Y are harder and therefore, every change in M will cause only the P to change. On
the other hand, if the economy operates at less than full employment level of output, then a
change in M will get reflected more in Y than in P. Hence, the proponents of this version state
that changes in money supply always produce changes in either P and/or Y. According to
them, money does matters and whenever there appears an excessiveincreaseinP (inflation),
it is primarily because of the excessive increase in the money supply.
The relationship between money supply, real income and general price level described above
willbe observed only when the velocity of money remains stable.Thus, what lies atthe center
of this relationship is the velocity of money, that is, the ratio of national income in money
terms to the quantity of money.
Thus we can say that growth in money supply will bring about growth either in price level or
real national income, depending upon the state of the economy, only if the velocity of money
does not change to neutralize the growth in money supply. The income velocity and demand
for money are inversely related. That is, if people want to save more money than spending it,
they save more and the velocity of money decreases. Thus demand for money and income
velocity are both related.
Two types of velocities are distinguished, one, transaction velocity and two, income velocity.
In this report, income velocity has been estimated by using the formulation Y/M, where Y
refers to national income for a period and M denotes average money supply in the economy
during the same period.
Page 13 of 24
13. Macroeconomics for Business
Decision Making – Project Report
3.7 Money supply and inflationbetween 2005-2006 and 2012-2013
There is an increasein money supply from 2005-2013 and the money supply (M3) growth rate
was close to 21% in 2005-2007 and decreased to around 13% by 2012-2013 (shown in figure)
The income velocity showed a decreasing trend from 2005-2009, being least in 2009-2010 at
1.25. This shows that the demand for money was high in 2009-2010, which can be attributed
to recessionary situation in 2008-2010. There is also a significant decrease in GDP in 2008-
2009 because of the recession.
Average Money Supply (M3) & Income Velocity
1.55 90000.00
1.50 80000.00
1.45 70000.00
1.40 60000.00
1.35 50000.00
1.30 40000.00
1.25 30000.00
1.20 20000.00
1.15 10000.00
1.10 0.00
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
M3 Average Money Supply Income Velocity
(in Billion INR) (%)
Figure 3.1 : Average Money Supply (M3) & Income Velocity
Data Source : RBI Annual Reports
The money supply and the inflation has a correlation of 0.605 which shows that they vary in the
same direction, but it doesn’t give any details of which one varies because of the other. The
dependence of money supply and inflationcan further be tested using regression analysis.
Page 14 of 24
14. Macroeconomics for Business
Decision Making – Project Report
Average Money Supply (M3), M3 Growth Rate, GDP Growth Rate, Inflation
25.00 90000.00
80000.00
20.00
70000.00
60000.00
15.00
50000.00
40000.00
10.00
30000.00
5.00
20000.00
10000.00
0.00 0.00
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Year
M3 Growth Rate (%) GDPGrowth Rate (%) Inflation(%) M3 Average Money Supply
(WPI) (in Billion INR)
Data Source : RBI Annual Reports
Figure 3.2 : Average Money Supply (M3), M3 Growth Rate, GDP Growth Rate, Inflation
Page 15 of 24
15. Macroeconomics for Business
Decision Making – Project Report
4. Interest Rate in the Indian Economy
4.1 Interest Rate –Definition
When a lender (creditor) lends money to the borrower (debtor), he wants to earn a profit on
the money he has given. This extra money charged by the lender to the borrower is caller the
interest and the rate charged by the lender is called interest rate.
Interest rate is the percentage of principal paid in a certain period of time.
For example, if a company borrows some money from a bank to buy new assets for its job,
then the bank will charge a predetermined rate of interest to the borrower (i.e. the company)
as the company is deferring the payment.
4.2 A Brief History of Interest Rate VariationinIndia
Pre liberalization Era - A Regulated One
Interest rate could also be called as the opportunity cost of money. Till very late in Indian
economy, the interest rates were regulated RBI.This trend continued tillthe year 1991. Hence
banks were not allowed to fix their interest rates according to their cost of funds, RBI used to
fix the interest rates.
The PLR was fixed by the RBIand banks used to set their interest rate accordingly. The interest
rates of the banks was the determinant for the corporate borrowing and hence the money
pumped by the businessmen depended on this. Hence the RBI used to regulate the corporate
funding in the GDP and control the whole structure.
Post Liberalization Era - A Deregulated One
The Indian Economy went through a drastic change in the year 1991 which is also known for
the year of Liberalization of Indian Economy. Gradually the interest rates were being
deregulated by the RBI. Indian Economy started to move towards the market determined
interest rate from the regulated one.
The Bank Rate, Repo Rate, Reverse Repo Rate CRR, SLR were the new tools used by RBI to
give only indications to the market operations and now it only fixes the interest rate to be
paid by the banks on the saving bank deposits.
Page 16 of 24
16. Macroeconomics for Business
Decision Making – Project Report
The PLR and other interest rates based on their cost of funds are now decided by the banks.
This was also accompanied by the cuts and the increase in the CRR, SLR and bank rate. This
was all possible because of the liberalization of the economy. But RBI at every step and took
the necessary action to develop a well-functioning money market.
Primary Dealer was the new concept which came into being. Apart from the banks some financial
institutions were allowed in the money market. This increased the funds available and the
turnover was increased in the money market. Interest rates of the economy depends a lot on the
well-functioningof the money market hence RBI keeps a close check on this.
The Fall Out
It created wonderful results for the Indian Economy. The interest rates (i.e., prime lending
rates), which were as high as 16 - 17% in 1992 - 1993, came down to as low as 10.75% at
present.
This happened because of the increasing competition in the market and because the
operators were ready to operate on thin margins. Also, the RBI (Reserve bank of India), was
fixed on decreasing interest rates in the economy and kept on lowering the CRR, SLR and the
Bank Rate.
4.3 Implications of Decrease inInterest Rate
Decrease in interest rates had various implications for the Indian economy.
Firstly, it provided a much - needed boost to the industrial activity. Many Corporates,
who had their loans outstanding, replaced their costlyloans by the new loans atlower
interest rates. This increased the investment activity in the country and thus
increased the economic growth.
This decreased the advantage of a price difference betweentwo or more markets, which
were earlieravailable.It was always helpful to control volatility.It also helpthe operators
to manage their balance sheets in an efficientmanner.
The market determined interest rate increases the width & maturity in the financial
markets. In Indian economy, the deregulation was accompanied by liberalization of
financial markets. This introduced new players in the market.
Low interest rates have put pressure to take excessive risks in search for high yields, which may
result in asset price bubbles.
Page 17 of 24
17. Macroeconomics for Business
Decision Making – Project Report
4.4 How are the Interest Rates DeterminedinIndianEconomy?
Call Rates :
The call rate is the interest rate paid by the bank for lending and borrowing for daily fund
requirement. The call rates sets all the interest rates in the economy.
The call money market is an overnight market and is considered to be the most liquidmarket in
an economy, therefore the interest rates in other markets have to be more than call rates. These
rates are determined each day on the basis of demand and supply situation.
Sovereign Securities :
Next comes the market for sovereign securities, i.e., T - bills and dated securities. These
securities are sold on the basis of competitive bidding system. The dealers make their bid on
the basis of call rates. Of all the bids, a cut - off rate is decided as yield to be payable on that
particular issue.
Interest Rates Charged by Banks :
Next in line comes the interest rates charged by the banks. The banks fix their interest rates
based on their cost of funds which includes the rates they pay on the deposits they get and
their operational expenses.
Prime lending rate (PLR) is the benchmark rate for all other interest rates charged by the
banks. PLR is the rate which the banks charge from their top clients who have the best credit
rating. All the other interest rates charged by the banks includes arisk premium for advancing
money to clients who don't have as good a credit rating.
Corporate Debt:
And finally comes the interest rates paid by the Corporates on their debt. The interest to be
paid on this debt is PLR plus a risk premium because of their business and financial risk.
Page 18 of 24
18. Macroeconomics for Business
Decision Making – Project Report
4.5 Relationship Between Interest RatesAndInvestment Expenditure
There is negative relationship between interest rate and investments. It means that as interest rate falls
investment rises, and the opposite is true when interest rate rises. When the interest rates are high,
investors make less real investment, On the other hand, if the interest rate is low, more and more
investment take place in the economy.
A central bank assesses the amount of funds required to oil the economy’s wheels, commensurate with
the desirable level of economic activity. It raises rates whenever it feels the economy is over-heating
and lowers these when it wishes to spur investment and growth. The rates are an important
determinant of the level of investment in an economy. Broadly, if rates increase across the board, then,
other things remaining the same, investment will decrease (as it will no longer be as profitable as before
to invest) and so will the growth rate. If interest rates fall, investment will pick up and so will growth.
Empirical research suggests three broad possibilities on the relationship between real interest rate and
economic growth: (a) higher real interest rates leading to higher growth – the “financial repression to
reform” view of McKinnon and Shaw (1973), (b) higher real rates leading to lower growth – the standard
“monetary policy” view, and (c) higher real rates leading to higher or lower growth depending on the
level of the real rate relative to the threshold level - i.e. the non-linear relationship highlighted by Fry
(1997). Pill and Pradhan (1995) noted that the McKinnon and Shaw relationship may not hold if the
capital account of a country is open. In other words, high growth could co-exist with both modest real
rates and an open capital account.
According to one G-10 study (1995), 100 bps increase in real interest rates to about 4 per cent in G-10
countries over a 35 year period since 1960s coincided with decline in saving rate by about 5 per cent of
GDP to below 20 per cent, which was more pronounced than the moderation in investment rate. This
high real interest rate period, nevertheless, coincided with lower investment rate, slowdown in growth
of total factor productivity, and decline in measured rates of return on capital, even though the study
did not ascribe all these outcomes to higher real rate. Taylor (1999), reviewing the empirical literature
on the relationship, underscored the mixed evidence on the existence of a positive relationship
between real rate and growth.
In India, Mallick and Agarwal (2007) found that none of the three measures of real interest rate (call
rate, 91 T Bill rate, and 364 T Bill rate) seemed to exert any direct influence on growth of real output.
This unusual result they ascribed to the possibility that investment, which is an important determinant
of growth, is conditioned by several factors other than real interest rate alone. Mohanty, Chakraborty
and Gangadaran (2012), on the other hand, highlighted the presence of inverse relationship between
growth and real lending rates in India, with empirical evidence on real lending rates Granger causing
both overall GDP and non-agricultural GDP growth. In India, the incremental capital output ratio (ICOR)
has increased in recent quarters, and correspondingly the implicit marginal productivity of investment
has also declined. As a result, lower levels of real interest rate would have also contributed to the
slowdown in growth.
Page 19 of 24
19. Macroeconomics for Business
Decision Making – Project Report
4.6 Variationof Savings Interest Rate, Average Lending Rate, Bank Rate,
RepoRate withM3 Average Money Supply :
Average Money Supply (M3), Saving Rate, Lending Rate, Repo Rate &
Bank Rate
16.00 90000.00
14.00 80000.00
12.00
70000.00
10.00
60000.00
50000.00
8.00
40000.00
6.00
30000.00
4.00
20000.00
2.00 10000.00
0.00 0.00
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
M3 Average MoneySupply Savings Interest Rate (%) Average Lending Rates (%)
(in Billion INR)
Bank Rate Repo Rate
(%) (%)
Data Source : RBI Annual Reports
Figure 4.1 : Saving Rate, Lending Rate, Repo Rate & Bank Rate Variation
M3 Average Money Supply (Shown on Secondary Axis) :
The Average money supply has been increasing over the period of 2005 to 2013 but the
rate of growth has been decreasing. It came down to 13.81% from 21.10% in 2005-06.
Saving Rate (Shown on Primary Axis) :
The Saving rate is the interest rate paid by the Banks to their customers when they deposit
their cash at the bank. This remained constant over period 2005 to 2011 which was 3.5%.
From 2011 it is 4% till date.
Page 20 of 24
20. Macroeconomics for Business
Decision Making – Project Report
Bank Rate (Shown on Primary Axis) :
Bank Rate remained constant at 6% for the period 2005 to 2011 but it showed a
sharp increase from fiscial year 2011-12 and in 2012-13 it is 8.97%.
Repo Rate (Shown on Primary Axis) :
The Repo Rate show slight fluctuation over the years compared to the previous year but it
shows a large dip in 2009-10 and came to 4.77%. This action was taken by RBI in order to
increase the money circulation in the economy.
As in the recession the money flow in the market is reduced then by lowering the repo
rate encourages the banks to lower their lending rate so that both common people and
industrialist can go for loan and money circulation increases.
Average Lending Rate (Shown on Primary Axis) :
From the graph, we observe that the average lending rate is sharply decreasing in the year 2009-
10 & 2010-11 and as we also know that in the year 2008-09, India went under recession, which
resulted in inflation. In order to reduce the inflation and keep the money supply going, all the
commercial banks took steps like reducing lending rates. The value of average lending rate is
decreased from 13.38% to 8.88 % from the year 2009-10 to 2010-11 respectively.
This was there due to the decrease in the repo rate which is controlled by the RBI. This action
helps in pumping money into the economy as more people shall go for loan and hence
spending shall also increase.
Prime Lending Rate (%) Repo Rate (%) CCR (%) SLR(%)
01-01-03 11.125 19-03-03 7 14-06-03 4.5 08-11-08 24
01-10-03 11 31-03-04 6 02-10-04 5 07-11-09 25
01-10-04 10.5 26-10-05 6.25 23-12-06 5.25 18-12-10 24
01-10-05 10.5 30-10-06 7.25 10-11-07 7.5 11-08-12 23
01-10-06
11.25 30-03-07 7.75 11-10-08 7.5
14-06-
2014 22.5
01-10-07 13 20-10-08 8 17-01-09 5 9-08-2014 22.00
01-10-08 13.88 21-04-09 4.75 24-04-10 6
01-10-09 11.5 16-09-10 6 22-09-12 4.5
01-09-10 7.75 25-10-11 8.5 09-02-13 4
01-10-11 10.38 17-04-12 8
01-10-12 10.18 29-10-13 7.75
01-10-13 10.03 28-01-14 8
Fig 7.1
21. Fig 9.1 India’sprimelendingrate
Fig 10.1India’sInterest rate
Lower the interest rate, higher is the supply of money in the economy and greater
purchasing power of individuals. This will result in increase in the price of Goods, since
there is more demand and less supply of the goods. Manipulating interest rates thus
creates a variation in growth and inflation in the economy.
Thus Interestrate is amongstthe mostsignificant components of the cost of many
companies and uncertainty of this variable only amplifies overall uncertainty in which
investment decisions have to be made. RBI has to maintain a balance between these two
factors which runs the economy. RBI's interest rate policy can help anchor expectations
and reduce uncertainty.
22. 5. Reserve Bank Of India And Its Monetary Policy
Monetary policy refers to the use of instruments under the control of the central bank to
regulate the availability, cost and use of money and credit.
Monetary Policy of India is formulated and executed by Reserve Bank of India. Monetary
policy primary function involves firstly supply of money, secondly cost of money or rate of
interest and thirdly availability of money to achieve specific objectives.
These functions results into control over Inflation, as Money Supply at particular time control
inflation.
The Objectives of Monetary policies are
• Maintaining price stability
• Ensuring adequate flow of credit to the productive Sectors of the economy to support
economic growth
• Rapid economic growth
• Balance of payment equilibrium
• Full employment
• Equal income distribution
The Reserve Bank's monetary policy stance will be determined by how growth and inflation
trajectories and the balance of payments situation evolve in the months ahead. Inflation has
moderated as projected however the depreciation in rupee value and imbalances in the
commodity markets pose a big challenge. Given that food price are still high, the inflation
figures will be influenced by efforts to break food inflation persistence and also the impact of
the ordinance passed for the food security bill. Historically, from 2000 until 2013, India
Interest Rate averaged 6.6 Percent reaching an all-time high of 14.5 Percent in August of
2000 and a record low of 4.3 Percent in April of 2009. Due to tight cash conditions in the
system, banks have been borrowing an average Rs.8o,000 crore daily from RBI. Due to
worsening liquidity conditions, bank borrowing shot up to Rs.1.2 trillion from the central
bank in December 2012.
Empirical estimates for India indicate that RBI’s monetary policy response to inflation has not
been aggressive, and as a result the Fisher effect –i.e. one for one response of interest rate
to inflation that could leave the real rate constant – does not hold. Thus, even when a high
nominal interest rate may often signal that monetary policy stance is tight, because of higher
inflation and absence of Fisher effect, lower real interest rate may actually be growth
supportive. In India, real lending rates in recent years have been generally lower than the
23. levels seen during the high growth phase before the global crisis. But lower real rates in the
post-crisis period have coincided with sluggish investment and GDP growth. This is due to
the fact that while real rates are lower, marginal productivity of capital, or expected return
on new investment has also declined, which has dampened the expected positive impact of
lower real rates on investment. In such a scenario, one policy option could be to lower real
rates even more, by raising inflation tolerance, i.e. lowering nominal policy interest rate even
when high inflation persists or inflation expectations remain high.
7. Conclusion
Interest Rates are very important tool for an economy. It determines country's growth,
its inflation, value of its currency, indirectly the level of employment and investments
prospects in the country(in the form of DII, FII, FDI). To achieve an open economy, India
should be open to investments thereby reducing prevailing interest rates taking into
consideration the inflation. Also if we see the trend, even though Central Bank reduced
its repo rate, the same has not been transferred to the consumer by banks. The lending
rates have not decreased by the same percentage as expected by RBI. Thus there has
been not much investment on the growth front. This leads to a question as to whether
further reduction in interest rate by Central Bank would provide a helping hand to
growth of the country or will merely increase the money supply(causing inflation) and
providing high profit making opportunities to banks.
The money supply in the economy by RBI has been increasing year on year although
the growth rate of money supply has been decreasing.
However inflation of Indian economy has been fluctuating over the years and is also
dependent on the world economy. After doing the regression analysis of Inflation and
Money supply we found the value of R-Square to be 0.26 or we can say that the about 26%
of variation in the inflation is explained by the money supply rest 74% is dependent on
other factors.
In case of interest rate and money supply the value or R-square is .41 hence 41% variation
in interest rate is explained by the money supply.
24. Macroeconomics for Business
Decision Making – Project Report
8. References
1) Rituparna Das (2010). “Definitions and Measures of Money Supply in India”. [ONLINE]
Available at: http://mpra.ub.uni-muenchen.de/21391/. [Last Accessed 26 November
2013].
2) RBI (01 Jun 1998). “New Monetary Aggregates: an Introduction”. [ONLINE] Available at:
http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?FromDate=06/01/98&SECI
D=21&SUBSECID=0. [Last Accessed 26 November 2013].
3) RBI (1999). “Repurchase Agreements (Repos): Concept, Mechanics and Uses”.
[ONLINE] Available at:
ttp://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=34.
Last Accessed 26 November 2013].
4) IIFL (2013). “India Money Supply”. [ONLINE] Available at:
http://portal.indiainfoline.com/datamonitor/Others/Inflation-of-India/India-
Money-Supply-M3.aspx. [Last Accessed 26 November 2013].
5) RBI (2013). “Cash reserve ratio and interest rates”. [ONLINE] Available at:
http://rbi.org.in/Scripts/WSSView.aspx?Id=18684. [Last Accessed 29 November 2013].
6) Money control (2013). “Factors affecting interest rates”. [ONLINE] Available
at: http://www.moneycontrol.com/glossary/fixed-income/what-affects-
interest-rates_4090.html. [Last Accessed 29 November 2013]
7) Karvy.com (2013).” Interest rates”. [ONLINE] Available at:
http://www.karvy.com/economy/Interestrates.htm. [Last Accessed 29 November 2013].
8) RBI (2013). “Structure of Interest Rates”. [ONLINE] Available at:
http://rbi.org.in/Scripts/PublicationsView.aspx?Id=15195. [Last Accessed 29
November 2013].
9) Pratima Singh (2011). “Inflation in India: An Empirical Analysis.” [ONLINE] Available at:
http://www.isas.nus.edu.sg/Attachments/PublisherAttachment/ISAS_Working_Paper_1
28_-_Email-_Inflation_in_India_-_An_Empiral_Analysis_13052011162359.pdf [Last
Accessed 25/11/2013].
Page 22 of 24
25. Macroeconomics for Business
Decision Making – Project Report
10) D.N.Dwivedi, (2005). “Macroeconomics Theory and Policy”. 2nd ed. New Delhi: Tata
McGraw-Hill Education.
11) RBI (2008). “Annual Report 2008-2009”. [ONLINE] Available at:
http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=21266. [Last Accessed
28 November 2013].
12) Vikram K. Joshi, (2012). “Impact of monetary policy of India with special reference to
CRR, repo & reverse repo rate in curbing inflation an econometric study”. Management
Insight, SMS Varanasi. 8 (2), pp.1-12.
13) Ashima Goyal (2011). “History of Monetary Policy in India since Independence”.
[ONLINE] Available at: http://www.igidr.ac.in/pdf/publication/WP-2011-018.pdf. [Last
Accessed 29 November 2013].
Page 23 of 24
26. Macroeconomics for Business
Decision Making – Project Report
9. Annexure
M3 Average
M3
GDP at
GDP Savings Average
Money Constant Inflation Income Bank Repo
Growth Growth Interest Lending
Year Supply Prices (%) Velocity Rate Rate
Rate Rate Rate Rates
(in Billion (Billion (WPI) (%) (%) (%)
(%) (%) (%) (%)
INR) INR)
2005-06 24589.25 21.10 35432.44 9.28 4.50 1.50 3.50 11.50 6.00 6.15
2006-07 29505.57 21.72 38714.89 9.26 6.60 1.46 3.50 13.50 6.00 7.02
2007-08 36034.44 21.38 42509.47 9.80 4.70 1.38 3.50 14.00 6.00 7.75
2008-09 43436.64 19.34 44163.50 3.89 8.10 1.30 3.50 14.13 6.00 7.44
2009-10 51778.82 16.85 47908.47 8.48 3.80 1.25 3.50 13.38 6.00 4.77
2010-11 60091.48 16.09 52961.08 10.55 9.55 1.30 3.50 8.88 6.00 5.88
2011-12 69578.71 13.23 56313.79 6.33 8.79 1.29 4.00 10.38 6.45 7.99
2012-13 80305.94 13.81 58136.64 3.20 7.00 1.27 4.00 9.98 8.97 7.97
Data Source : RBI Annual Reports
Figure 7.1 : Year wise data of Money Supply, GDP, Inflation & Interest Rate
Page 24 of 24