MAJOR ECONOMIC FACTORS

Objective

This topic discusses details of the economic data values and their
effects. It also deals with various instruments used by the Central
bank of a country such as Repo rate, CRR etc. The participant
should also understand impact of these indicators.
Major Economic Factors

 GDP
 Unemployment
 Inflation
 CRR
 SLR
 Repo Rate
 Reverse Repo Rate
 Demand and Disposable Income
 Interest Rates
 LIBOR
GDP: Definition

• Total amount of goods and services a country produces in

specific time period is known as gross domestic product
• Real GDP: Takes inflation into account
• Nominal GDP: Reflects only changes in prices
• Drawback : Information has to be collected after a
specified time period has finished, a figure for the GDP
today would have to be an estimate
 GDP: Uses
• Stepping stone to Analysis
• Expansions (booms)
• Economic recessions (slumps)
• Can be compared across economies
• Can be used to decipher the business cycles
• Forecast the future state of the economy
• GDP collected over a period of time can be compared
• Determine which foreign countries are economically strong or
weak
• Government policy, consumer behavior or international
phenomena
GDP: Release
• Considered as benchmark for economy
• GDP numbers are issued quarterly
• Issued by government statistical agency
• Revised and estimated number are issued
• GDP Growth rate matters more than actual GDP value
• Trend matters more than the number
• But, Benchmarked against zero. (For India 8%, China 11%)
Unemployment : Definition
• Unemployment figure indicates number of people who are
unable to find work from the available pool of labor (the labor
force)
• Unemployment rate: Percentage of People unable to find work
over the total labor force of the country
• If GDP is growing over the years, Unemployment tends to be low
• Inflation and Unemployment rate have inverse relation
Unemployment : Release
• Considered as one of the benchmark for economy
• Released monthly by NCAER in India. US Department of Labor
in US
• Non Farm Payroll (NFP). 80% of the workers who produce
the entire gross domestic product of the United States
• Persons are classified as unemployed
 If they do not have a job
 Have actively looked for work in the prior 4 weeks
 And are currently available for work
Inflation: Definition
• Inflation rate, the rate at which prices rise
• Measured in two ways: through the
 Consumer Price Index(CPI) gives the current price of a selected basket of
goods and services that is updated periodically , as pertaining to end
consumer
 Wholesale Prince Index(WPI) gives the current price of a selected basket of
goods and services that is updated periodically , as pertaining to wholesale
price
• Demand-Pull Inflation - demand is growing faster than supply,
prices will increase. This usually occurs in growing economies
• Cost-Push Inflation - When companies' costs go up, they need
to increase prices to maintain their profit margins. Increased
costs can include things such as wages, taxes, or increased
costs of imports
Inflation: Release
• Released fortnightly by the government
• Wholesale Price Index
 Price comparison at wholesale level
• Consumer Price Index
 Price comparison at retail level
• Basket of goods
 Basket of goods considered – food grains, basic necessities
• Gold
 price increases similar to inflation, considered hedge against inflation
• Political sensitive
 BOE governor has to write a letter to chancellor if inflation goes above
3% per annum
Statutory Liquidity Ratio (SLR)

• It is the amount that a bank has to maintain in the form of

cash, gold, or approved securities
• The quantum is specified as some percentage of a bank’s
total demand and time liabilities i.e., the liabilities that are
payable on demand anytime, and those liabilities that are
accruing in one month’s time due to maturity
• This ratio is fixed by the RBI
• Changed during the RBI meeting
Cash Reserve Ratio (CRR)
• Cash Reserve Ratio is a central bank regulation that sets the
minimum reserves each bank must hold to customer deposits
and notes
• Normally be in the form of fiat currency stored in a bank vault
(vault cash), or with a central bank or Banks keep bonds (of
certain rating) with central banks in lieu of cash
• An increase in the CRR leads to banks parking more money with
RBI reducing the funds available with banks
• On the other hand a reduction in the CRR keeps more money
with banks boosting liquidity in the markets
• CRR is changed during RBI governors meeting
• CRR is a liquidity management tool of the RBI
Repo Rate & Reverse Repo Rate
• Repo Rate is the rate at which banks borrow rupees from RBI
• A reduction in the repo rate will help banks to get money at a cheaper rate
• When the repo rate increases borrowing from RBI becomes more
expensive
• Influencing the country's economy, borrowing, and interest rates
• Western central banks rarely alter the reserve requirements because
 It would cause immediate liquidity problems for banks with low excess
reserves
 Prefer to use open market operations to implement their monetary policy
 People's Bank of China uses changes in reserve requirements as an inflation-
fighting tool, and raised the reserve requirement nine times in 2007
• The repo rate is a rate management tool
Repo Rate & Reverse Repo Rate

• Reverse Repo Rate is the rate at which banks lend rupees

from RBI.
• An increase in the reverse repo rate will get banks to park
their money at a higher rate to RBI.
• Influencing the country's economy, borrowing, and
interest rates.
• The reverse repo rate is a rate management tool for the
broader economy.
• Changed during governors meeting.
Demand and Disposable Income
• Demand comes from
 Consumers (for investment or savings - residential and business related)
 Government (spending on goods and services of federal employees)
 Imports and exports
• Example: Factory Orders
• Real Personal Income: Personal income per capita (using
population figures), and adjusted for inflation
• Disposable Personal Income (DPI): Personal income minus tax
payments
• Personal Savings Rate: DPI minus personal outlays (and
expressed as a percentage of DPI)
• Monthly updated by Department of commerce
Interest Rates
• Interest rates are the rates levied by the banks for lending a
loan
• Changes in Interest rates are caused by:
 Economic Growth
 Providing adequate Liquidity
 Control Inflation
 Risk of Investment
 Political Consideration
• Tracked by LIBOR (London Inter Bank Offer Rate) and MIBOR
(Mumbai Inter Bank Offer Rate)
LIBOR
• The London Interbank Offered Rate (or LIBOR) is a
daily reference rate based on the interest rates at
which banks borrow unsecured funds from other banks in the
London wholesale money market (or interbank market)
• LIBOR is determined every morning at 11:00am London time. A
department of the British Bankers Association averages the
inter-bank interest rates being offered by its membership
• LIBOR is calculated for periods as short as overnight and as long
as one year
• LIBOR is calculated for various currencies Dollar, Euro, Pound