Presentation of Effects of Repo Rate on Indian Economy.

1. EFFECTS OF REPO RATE ON
INDIAN ECONOMY
PRESENTATION BY
ANIRUDH DAGA
ROLL NO :- 274
ST.Xavier’S College

2.  To understand RBI`s Function and role played by it in the Indian Economy
 To understand the Concept of Repo Rate and Reverse Repo.
 To elaborate the use of Repo Rate by RBI for control purpose
 To establish relationship between Repo rate and :-
 Inflation & Interest Rates
 GDP Growth
 Foreign Exchange Price
 Fiscal Deficit
 To study how effectively Repo Rate has been used in Indian Economy.

3. Method of data collection:-
Secondary sources:-
The data for study has been collected from various sources:
 Books
 Journals
 Internet sources
Statistical Tools Used:
 Simple tools like bar graphs, tabulation, line diagrams have
been used.

4. The Reserve Bank of India (RBI) is India's central banking institution, which
controls the monetary policy of the Indian rupee. It was established on 1 April
1935 during the British Raj in accordance with the provisions of the Reserve
Bank of India Act, 1934. The share capital was divided into shares of ₹100
each fully paid which was entirely owned by private shareholders in the
beginning. Following India's independence in 1947, the RBI was nationalized
in the year 1949.
1.1 FUNCTIONS OF RBI :-
 Monetary Authority
 Regulator and supervisor of the financial system
 Manager of Foreign Exchange
 Issuer of currency
 Developmental role
 Related Functions

5. CONTROLLER OF
CURRENCY
ISSUES CURRENCY
NOTES.
CHECKS FAKE
CURRENCY AND
ENSURE THAT IT IS
NOT REDISTRIBUTED.
IS THE OWNER OF
CURRENCY CHEST
1.1.2 BANKERS BANK
BANKERS BANK
REGULATES AND
ENSURES
STABILITY.
CONTROLS
VOLUMES OF
THEIR RESERVES
(SLRs and CRRs).
EXTENDS CREDIT
FACILITIES TO
BANKS.

6. LENDER OF THE LAST
RESORT
RAISE DEPOSITS AND
BORROW MONEY TO
MEET COMMITMENTS.
BORROWING AGAINST
GOVERNMENT
SECURITIES.
MERGING WEAK
BANK WITH STRONG
BANKS TO ENSURE
LONG TERM GROWTH.
1.1.4 BANKERS TO GOVERNMENT
BANKERS TO
GOVERNMENT
MANTAINS
ACCOUNTS OF
VARIOUS
MINISTRIES.
ISSUER OF
SECURITIES.
SHORT TERM
CREDIT TO
GOVERNMENT.

7. SUPERVISING
AUTHORITY/REGULATOR
AND SUPERVISOR
ADVICES
GOVERNMENT FOR
SALE AND PURCHASE
OF SECURITIES.
REGULATES THE
BANKS AND NBFCs IN
INDIA.
ADVICES GOVT. ON HOW
MUCH INTEREST IS TO BE
ALLOWED ON SHORT/LONG
TERM CREDIT.
1.2 MONETARY POLICY
A Tool used to influence Interest rates, Inflation and credit availability through changes in
supply of money available in the economy .
1.2.1 Expansionary policy
Expansionary policy increases the total supply of money in the economy used to combat
unemployment in a recession by lowering interest rates,
1.2.2 Contractionary policy
Contractionary policy decreases the total money supply involves raising interest rates in
order to combat inflation increasing interest rates slows the economy by making funds
more expensive to firms, and promotes consumer savings which decreases revenues by
firms.

8. 1.3.1 Bank Rate :-
1.3.2 Call Rate :-
1.3.3 CRR :-
1.3.4 SLR :-
1.3.5 Repo (Repurchase) Rate
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap
between the demand they are facing for money (loans) and how much they have on
hand to lend.
1.3.6 Reverse Repo Rate :-
The rate at which RBI borrows money from the banks (or banks lend money to the RBI)
is termed the reverse repo rate. The RBI uses this tool when it feels there is too much
money floating in the banking system.

9. Liquidity adjustment facility is a monetary policy tool which allows banks to borrow
money through repurchase agreements. LAF is used to aid banks in adjusting the day
to day mismatches in liquidity. LAF consists of repo and reverse repo operations. Repo
or repurchase option is a collaterised lending i.e. banks borrow money from Reserve
bank of India to meet short term needs by selling securities to RBI with an agreement to
repurchase the same at predetermined rate and date. The rate charged by RBI for this
transaction is called the repo rate. Repo operations therefore inject liquidity into the
system. Reverse repo operation is when RBI borrows money from banks by lending
securities. The interest rate paid by RBI is in this case is called the reverse repo rate.
Reverse repo operation therefore absorbs the liquidity in the system
The introduction of Liquidity adjustment facility in India was on the basis of the
recommendations of Narsimham committee on banking sector reforms. In April 1999,
an interim LAF was introduced to provide a ceiling and the fixed rate repos were
continued to provide a floor for money market rates.

10. 2.1.3 What Does Basis points means??
2.1.4 Types of repo rate:-
 Over night repos
 Term repos
 Open repos
2.1.5 Determinants of repo rate :-
 Credit quality
 Delivery
 Collateral Availability
 Current rates.
The way in which changes in the repo rate affect inflation and the rest of the economy is
known as the transmission mechanism. The transmission mechanism is actually not
one but several different mechanisms that interact. Some of these have a more or less
direct impact on inflation while others take longer to have an effect. It is generally held
that a change in the repo rate has its greatest impact on inflation after one to two years.

11. 2.2 Transmission Mechanism :-

12.  If the interest rate rises, banks choose to decrease their lending and instead buy
bonds.
 Companies find it more difficult to borrow money.
 Companies that are either unable or unwilling to borrow must cut back their
activities, postpone investment and so on, and this dampens activity in the
economy.
2.2.2 Interest Rate Channel :-
When Repo Rate increases.
 Banks lend from RBI at a higher rates of interest
 They lend it to the borrowers at a high rate of interest
 As lending interest rate increases, borrowing of money decreases.

13.  Banks unable to borrow at repo rate
 Increase in the deposit interest rate to attract depositors.
2.2.3 Exchange Rate Channel:-
 When Repo Rate increases.
 Interest Rate Increases
 Make Indian assets more attractive than investments denominated in other
currencies
 Results in a capital inflow and increased demand for Rupees Which strengthens
the Exchange Rate.
 Fall in exports & increase in imports
 Lower Import Prices & Reduction in demand
 Lower Inflation.

14. 3.1 Repo Rate Vs. Inflation :-
9.88
6.00
4.88
7.257.25
8.90
11.70
10.90
8.30
6.40
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
11 -1210-1109-1008-0907-08
Repo Rate (%) (annual Average)3
Inflation
Last 5 year comparison of Repo rate and Inflation

15. 7.75 7.25
4.88
6.00
7.90
40.2755
46.1515
47.4153
45.6157
48.1317
36
38
40
42
44
46
48
50
-
2.00
4.00
6.00
8.00
10.00
2008 2009 2010 2011 2012
Repo Rate (Annual
Average)6
Yearly Average Ex
rate5
Last 5 year comparison of Repo rate and Exchange rate.

16. 6.28
7.25
7.75
7.25
4.88
6.00
7.90
9.20
9.00
7.40
7.40
10.40
7.20
8.20
-
2.00
4.00
6.00
8.00
10.00
12.00
2006 2007 2008 2009 2010 2011 2012
Repo Rate (Annual Average)7
GDP6
Last 7 years comparison of Repo rate and GDP

17. FII stands for Foreign Institutional Investment. Here we want to show how high inflation
or inflamatory conditions are unfavourable for FII's and discourage them to invest in
such conditions.
Suppose a foreign investor wants to invest in Indian Economy. He has $100000 to
invest in Indian market. At the time of investment exchange rate was 50/$. So his gross
amount of investment in Indian currency ( INR) is 50 lakhs. During the year he earns
Rs100000 as profit which brings his gross investment at the year end to Rs 51 lakhs.
This picture is bright from the investor's point of few given the exchange rate remains
constant. But due to inflation it turns out that the exchange rate is now 55/$. Now if he
wants to withdraw his money from Indian market . Gross amount he will get is $ 92727
which means he incurred a loss of $ 7273 within a year in Indian market. Thus we see
the gain in Indian currency is outcast by loss due to foreign currency fluctuation and
discouraging FII's to invest in high inflation conditions. The same can be shown with the
help of an bar graph
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
Initial outflow final inflow
Series2
Series1
Here series 1 is his
money before and
after investment and
series 2 represents
loss suffered by him.

18.  Decrease in Repo rate
 Increase in money supply in
economy
 Increase in Demand of goods
in economy
 Increase in GDP Growth
Rate
 Increase in the Average
income of people and
corporate
 Increase in Tax Revenue of
the government
 Decrease in fiscal deficit of
the government for the
period
 Decrease in Repo rate
 Decrease in Value of
domestic currency
 Increase in Exchange Rate
 Increase in Export of goods
 Increase in inflow of foreign
currency
 Decrease in Current Account
Deficit

19. 7.25
7.75
7.25
4.88
6.00
7.90
0.50
4.90
5.20
3.80
5.10
5.70
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
2007 2008 2009 2010 2011 2012
Repo Rate (Annual Average)
Fiscal Deficit8
Last 6 years Repo rate comparison with fiscal deficits.

20. Date - 17th April 2012 , RBI reduces Repo rate by 50 bps.
6.1 Background
Indian economy affected by the downturn in growth all over the globe was suffering
from macroeconomic problems like high inflation, slow growth rate and high Current
Account Deficit. First of all the countries included in “BRICS” to face the downturn in
growth was seen as the sign of the coming slow growth period or the end of the much
talked about double digit growth expectation. Facing the high inflation problem RBI had
raised the lending rate 13 times between March’10 to October 2011 to contain the
inflation which was touching double digits. This had led to clamor by industry to cut
rates and spur industrial and economic growth that has slowed down considerably
during the past few quarters. And with CAD hovering over 4% of GDP , the economy
was facing a downgrade in investment ranking risk from many investment ranking
institutions.

21. The Reserve Bank of India (RBI) cut interest rates for the first time in three years by an
unexpectedly sharp 50 basis points to give a boost to flagging economic growth but
warned that there is limited scope for further rate cuts. The RBI cut its policy repo rate
to 8%, compared with market and expert expectations for a 25 basis point cut. It also
warned that India's current account deficit, which widened to 4.3% of GDP in the
December quarter, is "unsustainable" and will be difficult to finance given projections of
lower capital flows to emerging markets in 2012.RBI left unchanged the cash reserve
ratio (CRR), the share of deposits that banks must hold with the central bank, at
4.75%, in line with expectations, after cutting it by 125 basis points since January to
ease tight market liquidity.
Reserve Bank Governor D Subbarao said liquidity conditions are moving towards
normal after several months of acute shortage of cash in the banking system, but also
said the RBI would take "appropriate and proactive" steps if needed to restore liquidity
to comfortable levels.

22. SIDDHARTHA ROY, ECONOMIC ADVISER, TATA GROUP, MUMBAI :-
"The 50 bps point rate cut is most welcome. But going ahead, two things are crucial.
First we need more rate cuts to the tune of around 150 bps in order to make the real
interest rates realistic. Then, the fiscal side needs to be controlled to prevent crowding
out of the private sector and available liquidity is well distributed.“
NITESH RANJAN, CHIEF ECONOMIST, UNION BANK, MUMBAI :-
"A very bold step indicating RBI's change in stance. This will help in arresting growth
going below the trend level. One can expect the cost of fund and capital going
down, which will encourage consumption and investment demand.
"Given the inflationary risks, as mentioned in its (RBI's) macro report, I think the next
rate action may wait till first quarter review in July, by when more clear trend on growth
and inflation will emerge.“
GAURAV KAPUR, SENIOR ECONOMIST, ROYAL BANK OF SCOTLAND
NV, MUMBAI :
"I think perhaps another 25 basis points in the first half of this year is likely. I think
the room for further cuts is limited. The actual action is to support growth without
taking eyes off inflation.
"One comfort factor for the RBI is core inflation, which has fallen below 5
percent, which shows the demand side pressures are easing."

23. The summary of the analysis and situation case study can be drawn as follows:-
 Repo Rate and inflation are inversely related. That is a decease in Repo Rate leads to
increase inflation. Both the economic factor are closely related to each other and Repo
rate has a great influence over the inflation rate.
 Repo Rate and foreign exchange rate also share a inverse relationship between them. As
increase in Repo rate leads to strengthening of domestic currency and thus leading to fall
in exchange rate due to strengthening of domestic currency.
 Repo Rate and GDP of a country are inversely related. That is if repo rate decreases the
GDP of an country increases. This is because of increase in money supply in economy
leading to increase in demand of goods in economy. Thus resulting in increase in GDP.
 Repo Rate has a positive Relationship with Fiscal Deficit. Though both are not related
directly by the relationship is based on two factors which are affected by Repo rate as
shown earlier in the analysis part.
 Reserve Bank of India (RBI) being the apex bank of the country plays an important role
in the economy. As depicted in earlier section it has many functions in the economy
ranging from being the banker to the banks to taking decisions regarding monetary
policies. RBI uses Repo rate as a tool for controlling money supply in the economy and
also to bring the inflation and other factors under control. And the situation case study
shows the effectiveness of the policies relating the repo rate and its utilization as a
monetary tool for controlling the money supply.

24. Repo Rate which is a very well-known term in our economy plays a vital role in it. From
affecting the inflation directly to influencing the foreign exchange rate, repo rate plays a
central role in the money supply of an economy. The findings of the analysis done earlier are
a proof of how important repo rate is for the economy and how effectively it is used by RBI in
the context of Indian economy. The same is also shown with the help of the views of some of
the experts of Indian financial market. Thus we can conclude that Repo rate being a small
term has a multiplying effect on the economy.
Limitations of the study:-
 Though inflation is directly affected by Repo rate but repo rate is not the only factor
affecting inflation. Other factors like oil and petroleum prices also have an impact on
inflation. While doing the analysis the same has been ignored and thus this assumption
may not hold good in reality.
 GDP of a country is affected by several factors and not only repo rate. So to establish a
relationship between the two we have to assume that Repo rate is the only factor
affecting GDP.
 In the case of foreign exchange rates and fiscal deficit also we have assume that all
other factors affecting these two terms doesn’t exist. Thus the assumption may not hold
good in reality
 For the purpose of analysis, data used are real and not imaginary hence while showing
the relationship it may happen that the relationship may not hold good. This is due to the
assumptions as said earlier points.
 All data used in the project are secondary data as the project mainly deals with
macroeconomic factor and collection of primary data is not possible at the moment and
also due to the constraint of time collection of secondary data is not possible

25.  http://www.global-rates.com
 http://www.hindustantimes.com
 http://www.indexmundi.com
 http://data.worldbank.org
 http://currentaffairs-businessnews.com
 http://trak.in
 http://www.inflation.eu
 http://www.tradingeconomics.com
 http://qna.rediff.com
 http://en.wikipedia.org
 http://www.simpletaxindia.net
 http://www.riksbank.se
 http://www.oanda.com
 http://in.reuters.com
 http://www.business-standard.com