indian economy and steps taken by rbi
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INDIAN ECONOMY AT PRESENT &
RBI’S STEPS TOWARDS ECONOMIC GROWTH
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GROWTH
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High fiscal and current account deficit
Lack of foreign investment
Tax and manufacturing reforms
Liquidity conditions.
Rupee depreciation
Inflation
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Inflation• A continuous rise in prices when compared with last year statistics
Whole sale Price Index(WPI) Inflation.Consumer Price Index(CPI) Inflation.
• Current Account Deficit(CAD)• Statutory Liquidity Ratio(SLR)
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Wholesale Price Index(WPI)
• An index that measures and tracks the changes in price of goods in the stages before the retail level.
• It shows the average price changes of goods sold in bulk, and they are group of indicaters that follow growth in the economy.
• WPI inflation rate is 10% in Sep 2011 to 7.7% in March 2012
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Consumer Price Index(CPI)• CPI is weighted average of prices of a basket of consumer
goods and services such as transportation, food and medical care.
• CPI is calculated by taking price changes of each item in the predetermined basket of goods and averaging them.
• Used to assess price changes associated with the cost of living.• CPI rose from 8.8 per cent in February to 9.4 per cent in
March and further to 10.4 per cent in April
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Current Account Deficit(CAD)
• When a country’s total imports of goods, services and transfers is greater than the country’s total exports of goods, services and transfers.
Statutory Liquidity Ratio(SLR)
• SLR is the amount of liquid assets, such as cash, precious metals or other securities that a financial institutions must maintain as reserves other than the cash.
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Impact Of Changes In Global Economy
Global winds :
Reduced growth in South Asia
Impact of natural calamities in Japan
Modest signs of improvement in US
European debt problem.
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Rupee Depreciation
• The currency depreciation is largely due to external and internal factors. India runs high current account deficit.
• It means the country imports more goods and services than exports.
Rising oil demand. Gold consumption.
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Rupee has fallen from 45 per dollar in May 2011 to 57 level in
June 2012.
global recovery, euro zone problem resolution
commodity prices
Domestic factors
Export performance
Import restraint (especially oil and gold)
Capital flows www.dineshvns.com
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Why the Indian rupee appreciated?
• Foreign Direct Investment (FDI)
• External Commercial Borrowings (ECBs)
• Foreign portfolio inflows
• Remittances from Indians working overseas
• RBI had raised cash reserve ratio to control inflation.
• Export
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Painful Squeeze – Non IT Firms• The smaller firms, including those that rely on the U.S. market
are clearly hurting.
• Some 65% of our exports come from the SME segment. There are 15 million workers in this sector. The SMEs have profit margins of barely 5-10%. If the rupee rises, as it has, their entire profit gets wiped out
• The Confederation of Indian Industry (CII) says that the worst hit are the textile and leather sectors
• Garments exporter and auto-part suppliers are hurting even more. Many of them banked on the dollar appreciating routinely after signing a contract
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Challenges of rupee appreciation
• A one per cent rise in the rupee against the dollar will have a 75-80 basis points impact on the operating margins for IT companies.
• Exports will be badly effected.
• Salaries of people working in MNC's would come down drastically.
• If the rupee appreciation continues, we have to go out and look for people in low-cost areas
RBI’S Steps Towards Economic Growth• Government could cut the subsidies on Fuel and Fertilizers.
• Raise the borrowing limit of scheduled commercial facility(MSF) from 1% to 2% of their Net Demand and Time Liabilities(NDTL).
• Banks can continue to access the MSF even they have excess Statutory Liquidity Ratio(SLR).
• The government is planning to allow 51% Foreign Direct Investment(FDI) in multi brand retail.
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• Government is targeting to bring the fiscal deficit which
stood at 5.76% of GDP in 2011-12 down to 5.1% in current fiscal.
• External Commercial Borrowings limit has been lifted to $40bn from $ 30bn earlier. This would be to repay outstanding rupee loans of Indian businesses
• This comes as a relief to the manufacturing sector. The rupee loans are expensive while foreign currency loans are cheaper.
• The Reserve Bank of India said it would allow companies to borrow more from overseas to pay back their high cost rupee loans.
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References
Newspapers:• The Economic Times• Live Mint• The Hindu• Business Standard• Reuters.• World Wide Web
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Thank you!
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