TASK 9
Effect of Macro Economic Factors on the economy
1.Relation between crude price and other indicators:
One of the most popular indicators used by oil traders is the crude inventories (stock
levels), which is the amount of oil currently stored for future use. This number, and any
changes it undergoes, gives traders an idea of the trends in production and consumption
of oil over a specific period of time.
If the economy is growing quickly, it will likely consume more oil than it would were
it in a recession, as energy is an important input for economic growth.
Oil price increases are generally thought to increase inflation and reduce economic
growth. In terms of inflation, oil prices directly affect the prices of goods made with
petroleum products.
Oil prices indirectly affect costs such as transportation, manufacturing, and heating. The
increase in these costs can in turn affect the prices of a variety of goods and services, as
producers may pass production costs on to consumers.
Oil price increases can also stifle the growth of the economy through their effect on the
supply and demand for goods other than oil. Increases in oil prices can depress the
supply of other goods because they increase the costs of producing them. In economics
terminology, high oil prices can shift up the supply curve for the goods and services for
which oil is an input.
The price of the oil is fixed by the government and it is at a subsidized rate. And then the
government compensates the companies for selling the oil at lower prices. These losses
are also called under-recoveries. Therefore, the losses incurred because of compensating
the companies losses, adds to the Fiscal deficit of India. But with the reduced oil prices,
the compensation to be paid to these companies also reduces and which in turn helps in
narrowing the fiscal deficit.
India imports nearly 84% of its domestic demand and it is one of the largest importers of
oil in the world. Indian Oil imports account for nearly 27% of its total imports.
Therefore, a fall in the prices of oil will reduce the cost of importing oil from other
countries. And this in turn has a direct impact on the current account deficit (the amount
that India owes in foreign currency).
Therefore, in the current crisis time (COVID-19 pandemic and economic slowdown),
reduced crude oil prices have been a blessing in disguise to the Indian economy. In
general, a 5 % increase in oil prices will impact the trade deficit by nearly $4 billion.
Rupee, being a free currency (value of rupee depends on the demand in the currency
market), its value depends on the current account deficit. Therefore, if the oil prices are
high, then the country will have to sell rupees and buy dollars to pay for oil bills.
Similarly, if the price of the oil is low, then the current account deficit is low and the
amount of dollars required to pay for oil bills are also low.
India, being a vast country, the goods need to be transported from one place to another.
And oil is a very important catalyst in the movement of vehicles from one place to
another. A rise in oil prices leads to a direct increase in the price of goods and services.
And it has a direct bearing on the prices of petrol and diesel. And hence it contributes to
the rise in inflation in the country.
2.Relation between inflation and other indicators:
Rising prices, known as inflation, impact the cost of living, the cost of doing business,
borrowing money, mortgages, corporate, and government bond yields, and every other
facet of the economy.
Inflation is measured by the CPI. Increase in Inflation rates leads to Therefore, there is an
imbalance between the money supply and the Gross Domestic Product (GDP).
A rise in inflation is likely to mean a rise in the cost of raw materials. Also, workers are
likely to demand higher wages to cope with the higher cost of living. This rise in prices
can also cause greater volatility and uncertainty. With firms uncertain about future costs,
they may hold back from making investment decisions. Firms generally prefer a low and
stable inflation rate.
If inflation rises above the target, they may feel the need to increase interest rates. Higher
interest rates will increase borrowing costs and slow down the rate of investment and
economic growth. Lower economic growth will lead to lower demand-pull inflation.
Inflation can be both beneficial to economic recovery and, in some cases, negative. If
inflation becomes too high, the economy can suffer; conversely, if inflation is controlled
and at reasonable levels, the economy may prosper. With controlled, lower inflation,
employment increases. Consumers have more money to buy goods and services, and the
economy benefits and grows. However, the impact of inflation on economic recovery
cannot be assessed with complete accuracy.
Low or no inflation, theoretically, may help an economy recover from a recession or a
depression. With both inflation and interest rates low, the cost of borrowing money for
investments or borrowing for the purchase of big-ticket items, such as automobiles or
securing a mortgage on a house or condo, is also low. These low rates are expected to
encourage consumption according to some economists.
Banks and other lending institutions, however, may be reluctant to lend money to
consumers when rates of return on loans are low, which decreases profit margins.
Businesses can plan their borrowing, hiring, marketing, improvement, and expansion
strategies accordingly.
Higher inflation will raise the cost of living. The impact on workers depends on what
happens to nominal wages. For example, if inflation is caused by rising demand and
falling unemployment, firms are likely to raise wages to keep attracting workers. In this
case, workers real wages will continue to rise.
The effect on economic growth is uncertain. Sometimes inflation is caused by a rapid
rate of economic growth. However, if growth is above the long-run trend rate – this may
not be sustainable – especially if interest rates rise. Therefore, higher inflation may be a
sign the economic cycle is getting close to the end of the boom period and may be
followed by a bust.
3. Relation between repo rate and other indicators:
The repo rates are changed in order to maintain the stability in the economy of the country by
keeping a check on the inflation levels, liquidity and supply of money in the market. As the
repo rates, the interest rates for the banks borrowing money also increases. Depending on
various factors, these rates are increased or decreased accordingly.
Higher the repo rate higher the cost of short-term money and vice versa. Higher repo rate
may slowdown the growth of the economy. If the repo rate is low then banks can charge
lower interest rates on the loans taken by us.
When the inflation rises in the market, attempts are made by the RBI to bring down the
monetary flow, and this is done by increasing the repo rate. Although the increase in repo rate
has a negative impact on the economy, it is vital to decrease and control the inflation rates.
This further leads to the reduction of cash flow in businesses and the market.
When there is a decrease of funds in the market, and a degradation in the economic growth,
the repo is lowered by the RBI. At such times, the businesses and investors find it suitable to
invest their money, increase the cash flow and economic growth rate of the market.
