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Student/s Name: Dipika Patel Batch: B Module Name: Capital Markets Marks Allocation: 25 Assignment No: MBAFM/CM/001 Assignment

Scope: Individual

Roll No/s:11100

Assignment Duration (in hrs): 8

Interest rate vs unemployment. Analyse the effect of interest rate and unemployment rate for the last 5 years.
ASSIGNMENT DESCRIPTION AND PROSPECTS:
Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which RBI lends short term money to the banks. When RBI wants to make it more expensive for the bank to borrow money it increase the repo rate, similarly if it wants to make it cheaper for banks to borrow money it will reduce the repo rate. Higher inflation is the rising concern Indian economy. If the inflation is not controlled by the government it would derailed the growth of Indian economy. The main reason why inflation is high, the products in the market is on high demand because the liquidity (cash available in the market) is more. Customers can easily get the loans and purchase the goods. In order to control inflation, RBI would increase the repo rates to reduce the liquidity in the market. When money available in the market is reduced and cost of borrowing the money is expensive, demand will be reduced and the seller will be forced to reduce the prices. This could reduce the inflation. But it has resulted in unemployment in the economy.

Types of unemployment1. Classical unemployment-

Classical or real-wage unemployment occurs when real wages for a job are set above the marketclearing level, causing the number of job-seekers to exceed the number of vacancies. Most economists have argued that unemployment increases the more the government intervenes into the economy to try to improve the conditions of those without jobs. For example, minimum wage laws raise the cost of laborers with few skills to above the market equilibrium, resulting in people who wish to work at the going rate but cannot as wage enforced is greater than their value as workers becoming unemployed. Laws restricting layoffs made businesses less likely to hire in the first place, as hiring becomes more risky, leaving many young people unemployed and unable to find work.

2. Cyclical unemployment-

Cyclical or Keynesian unemployment, also known as deficient-demand unemployment, occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Demand for most goods and services falls, less production is needed and consequently fewer workers are needed, wages are sticky and do not fall to meet the equilibrium level, and mass unemployment results.

3. Marxist theory of unemployment-

According to Karl Marx, unemployment is inherent within the unstable capitalist system and periodic crises of mass unemployment are to be expected. The function of the proletariat within the capitalist system is to provide a "reserve army of labour" that creates downward pressure on wages. This is accomplished by dividing the proletariat into surplus labour (employees) and under-employment (unemployed).This reserve army of labour fight among themselves for scarce jobs at lower and lower wages.

4. Involuntary unemployment-

Involuntary unemployment does not exist in agrarian societies nor is it formally recognized to exist in underdeveloped but urban societies, such as the mega-cities of Africa and of India/Pakistan. In such societies, a suddenly unemployed person must meet their survival needs either by getting a new job at any price, becoming an entrepreneur, or joining the underground economy of the hustler.

5. Structural unemployment-

Structural unemployment occurs when a labour market is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs. Structural unemployment is hard to separate empirically from frictional unemployment, except to say that it lasts longer. As with frictional unemployment, simple demand-side stimulus will not work to easily abolish this type of unemployment.

6. Frictional unemployment-

Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. It is sometimes called search unemployment and can be voluntary based on the circumstances of the unemployed individual. Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment, which means that increases or decreases in unemployment are normally under-represented in the simple statistics.

7. Hidden unemployment-

Hidden, or covered, unemployment is the unemployment of potential workers that is not reflected in official unemployment statistics, due to the way the statistics are collected. In many countries only those who have no work but are actively looking for work (and/or qualifying for social security benefits) are counted as unemployed. Those who have given up looking for work (and sometimes those who are on Government "retraining" programs) are not officially counted among the unemployed, even though they are not employed.

REPORT/ANALYSISYEA R REP O RAT E 6.87 % INFLATION

200 6

5.3%

200 7 200 8 200 9 201 0 201 1

7.63 % 7.92 % 5.08 % 5.63 % 7.54 %

6.4% 8.31% 10.9% 11.7% 8.00%

UNEMPLOYMENT RATE IN INDIA YEA R 200 6 200 7 200 8 200 9 201 0 % 7.8 7.2 6.8 10.7 10.8

The main aim of is to control inflation. If RBI increases the Repo rate banks have to increase their lending rates this in turn affects the people who have raised loans from banks because they have to shell out more money in the form of

interest rates. This cripples their ability to goods on credit and hence they end up spending less and saving more. But in a bid to control inflation, the RBI raised interest rates in October for the 13th time since 2010. But it resulted in slowdown in employment. Not just retail loans, even loans taken by corporates is seeing a dip at these rates, especially in the light of demand-side issues. It is evident from the fact that industrial capex or corporate spending on new or existing projects have reduced. It is difficult to borrow at higher rates and generate enough returns to reward shareholders or generate good internal rate of returns. The projects in the infrastructure sector like power, construction and housing have already been stalled and many companies have postponed their plans. The unemployment rate in India in the year 2008 was around 7.2%, which shot up to nearly 11% in the year 2009 and 2010 as a result of the global financial crisis and contraction in economic activities across the globe. This estimate does not include unemployment in rural areas and the agricultural sector.

There was a decline of roughly 16% in recruitment in the month of October as compared to September.
The decline was witnessed across the board except telecom and to some extent, the services sector. Interest rate-sensitive sectors like construction and auto too reported a significant decline of about 20% to 25% in recruitment.

News reports suggest that several infrastructure projects have been delayed and there are very few takers for new projects, considering that high interest rates have impacted the economics of the projects. In fact, several existing projects have turned unviable at current interest rates, which can be gauged from the recent quarterly results wherein several companies reported a decline in profits.
Further, on the back of the prevailing economic scenario, corporates are adopting a cautious approach to hiring as well as hiking salaries of their employees.

INFERENCEIf consumers are not spending, corporates are not investing and government is not showing any willingness to invest in the economy as a result of fiscal imbalance and inflation, then the growth could be hit.

Overall growth in the Index of Industrial Production (IIP) was 1.6 per cent during December 2010 as compared to 18.0 per cent in December 2009. During AprilDecember 2010-11, IIP growth was 8.6 per cent as compared to 8.6 per cent during April-December 2009-10.

Table 5: Percentage change in Index of Industrial Production
Industry Group General index Mining Manufacturing Electricity Basic goods Capital goods Intermediate goods Consumer goods Durables Non-durables 200910 10.5 9.9 11.0 6.0 7.2 20.9 13.6 6.2 24.6 0.4 200910(Apr. -Dec.) 8.6 8.7 8.9 5.7 6.1 11.2 12.5 6.6 22.7 1.4 201011(Apr. -Dec.) 8.6 7.7 9.1 4.7 6.1 16.7 9.2 6.5 21.4 0.7 Decembe r 2009 18.0 11.1 19.6 5.4 8.4 42.9 23.5 10.4 41.0 3.0 Decembe r 2010 1.6 3.8 1.0 6.0 5.2 -13.7

Use-based industrial groups

6.6
3.9 18.5 -1.1

REFERENCEhttp://business.mapsofindia.com/inflation/

http://www.indexmundi.com/g/g.aspx?c=in&v=74
http://finmin.nic.in/WorkingPaper/Domestic_Wheat_Price_Formation_Food_Inflation_In dia.pdf http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=9086