Connecting each macro-economic indicators

Relation between crude price and other indicators

 Crude oil is a very important commodity and it is required to meet domestic fuel needs.
And in addition to that, it is a necessary raw material used in a number of industries. An
increase in the price of crude oil means that would increase the cost of producing goods.
This price rise would finally be passed on to consumers resulting in inflation. Experts
believe that an increase of $10/barrel in crude oil prices could raise inflation by 10 basis
points (0.1%). A major problem with inflation is that purchasing power is declining.
Thus, industrial production begins to decline, as does GDP.
 The rise in crude oil price has a big impact on the Indian Current Account Deficit (CAD).
CAD is a measure of India’s trade where the value of goods and services imported
exceeds the value of goods and services exported. CAD essentially indicates how much
India owes the world in foreign currency.
 India imports 1.5 billion barrels of crude oil each year. This comes up to around 86% of
its annual crude oil requirement. So, the surge in crude oil prices could increase India’s
expenditure, thus adversely affecting India’s fiscal deficit - the difference between the
government’s total revenue and total expenditure. Fiscal deficit indicates the amount of
money the government has to borrow to meet its expenses. A rise in fiscal deficit could
negatively affect the economy as well as markets.
 If crude oil prices remains at high levels, the rupee is expected to depreciate successively.
Rupee depreciation has a reverberating effect on the Indian economy and even the stock
market.
 To reduce inflation caused by rise in prices of crude oil, money needs to be withdrawn
from the economy, for which the Reserve Bank raises the capital reserve ratio and raises
corporate tax rates and personal income tax rates. This can lead to a decline in corporate
profits. This will lead to unemployment.

Relation between inflation and other indicators

 With rise in inflation prices also rise and consumers may be more inclined to try and
purchase more quickly before prices rise further. With rising prices, it can create more
 confusion over which prices are good value. It could lead to costs of consumers looking
around different shops comparing prices (this is known as shoe leather costs). However,
for moderate rises in inflation, this is unlikely to be too serious.
 Most Central Banks have an inflation target of around 2%. Therefore, 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.
 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.
 If inflation in India rises faster than our international competitors, then Indian goods will
become relatively uncompetitive, leading to lower demand for Indian goods and services.
This will cause a depreciation in the exchange rate.
 When inflation is increasing, people will spend more money because they know that it
will be less valuable in the future. This causes further increases in GDP in the short term,
bringing about further price increases. Hence, a prolonged period of high inflation leads
to economic slowdown and unemployment.

Relation between GDP and other indicators

 GDP enables policymakers and central banks to judge whether the economy is
contracting or expanding, whether it needs a boost or needs to be restrained, and if threats
such as a recession or rampant inflation loom on the horizon.
 GDP fluctuates because of the business cycle. When the economy is booming, and GDP
is rising, there comes a point when inflationary pressures build up rapidly as labor and
productive capacity near full utilization. This leads the central bank to commence a cycle
of tighter monetary policy to cool down the overheating economy and quell inflation.
 Business investment is another critical component of GDP since it increases productive
capacity and boosts employment. Government spending, too, assumes particular
importance as a component of GDP when consumer spending and business investment
both decline sharply, as, for instance, after a recession.
  . If GDP rises, IIP and PMI will rise and production will increase. There by reducing the
current deficit and trade deficit. This is a stimulus to the economy. It also reduces the
fiscal deficit. The rupee appreciates as the GDP grows.

Relation between repo rate and other indicators

 Repo rate is a powerful arm of the Indian monetary policy that can regulate the country’s
money supply, inflation levels, and liquidity. Additionally, the levels of repo have a
direct impact on the cost of borrowing for banks. Higher the repo rate, higher will be the
cost of borrowing for banks and vice-versa.
 Increase in repo rate makes borrowing a costly affair for businesses and industries, which
in turn slows down investment and money supply in the market. As a result, it negatively
impacts the growth of the economy, which helps in controlling inflation.
 When the RBI needs to pump funds into the system, it lowers the repo rate.
Consequently, businesses and industries find it cheaper to borrow money for different
investment purposes. It also increases the overall supply of money in the economy. This
ultimately boosts the growth rate of the economy.
 Increasing the repo rate lowers the PMI and leads to a decline in GDP. Decreasing the
price of products increases the interest of consumers. This adversely affects the stock
market.

Relation between CRR and other indicators

 Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy,
which is used to regulate the money supply, level of inflation and liquidity in the country.
The higher the CRR, the lower is the liquidity with the banks and vice-versa. During high
levels of inflation, attempts are made to reduce the flow of money in the economy.
 RBI increases the CRR, lowering the loanable funds available with the banks. This, in
turn, slows down investment and reduces the supply of money in the economy. As a
result, the growth of the economy is negatively impacted. However, this also helps bring
down inflation.
 When the RBI wants to pump funds into the system, it lowers the CRR, which increases
the loanable funds with the banks. The banks in turn sanction a large number of loans to
 businesses and industry for different investment purposes. It also increases the overall
supply of money in the economy. This ultimately boosts the growth rate of the economy.
 Increase in the CRR will reduce the cash flow to the market and thereby inflation. The
reduced cash flow will cause issues to companies like low production, unemployment.
The PMI index decreases and trade deficit & current deficits will increase.
 Increase in CRR rate leads to the stock price falling. GDP falls and the rupee depreciates.

Relation between Balance of Trade and other indicators

 The Balance of Trade reveals whether the country is generating extra resources beyond
its local capacity to create value. As a major indicator of economic growth potential and
an important part of the GDP, the BoT figures are carefully monitored by governments
and central banks to adjust their policies. A trade surplus usually increases the GDP,
while a trade deficit weakens it. Although most countries aim for a positive trade balance,
surplus or deficit does not necessarily indicate economic strength or weakness. The BoT
figures should be interpreted in the context of the country’s current economic conditions,
economic policies and business cycles.
 The trade deficit and current deficit are directly related. Therefore, both will have same
affect. When trade deficit decreases current deficit will also decrease and thereby reduce
unemployment.
 The PMI index puts a positive effect on the cash flow in the market. As the product price
increases, the consumer interest will decrease. The rupee inflation will not influence on
personal taxes. But when production increases the rupee will strengthen.

Relation between India Current Account and other indicators

 A country running large current account deficit is always at risk of seeing the value of the
currency fall. If there is insufficient capital flows to finance the deficit, the exchange rate
will fall to reflect the imbalance of foreign flows of funds. A depreciation in the exchange
rate will cause imported inflation for consumers and firms who rely on imports of raw
materials.
 With a floating exchange rate, a large current account deficit should cause a devaluation
which will help automatically reduce the level of the deficit.
  A current account deficit may just indicate a strong economy, which is growing rapidly.
 A persistent current account deficit may imply that you are relying on consumer
spending, and the economy is becoming unbalanced between different sectors and
between short-term consumption and long-term investment.
 As the CAD increases the corporate tax rate does not change to encourage businesses to
enter the country. The personal income tax rate does not increase as inflation rises. As
production increases, the PMI increases and so does the return on the stock market. As a
result, GDP rises and the rupee strengthens.

Relationship between PMIs and other indicators

 PMI is a leading indicator of economic conditions. The direction of the trend in the PMI
tends to precede changes in the trend in major estimates of economic activity and output,
such as the GDP, Industrial Production, and Employment. Paying attention to the value
and movements in the PMI can yield profitable foresight into developing trends in the
overall economy.
 PMI Rising means companies have access to cash. This will increase productivity and
reduce unemployment. Inflation is happening. Increases repo rate and CRR rate to reduce
inflation. Trade deficit and current deficit are declining as production and exports are
doing well. The fiscal deficit depends on government policy. Purchasing interest
decreases as the price increases. Profits are rising in the stock market. GDP will increase
and hence the rupee will appreciate.

Relationship between Customer confidence and other indicators

 An improvement in customer confidence indicates that people are happy with their jobs
and income unemployment rate is expected to be low.
 As customer confidence increases, people are willing to spend more – more cash flows
into the market and prices become inflated.
 CRR, repo rate, depending on severity of conditions can be increased or decreased to pull
money out or inject money into the economy. When customer confidence is good,
spending improves – production and profits improve.
  Exports also improve and trade and current deficits goes down. Fiscal may increase or
decrease depending on government policy, cash flow to the govt. through taxes increases
since business is thriving.
 BEI and PMIs increase since consumer spending is elevated and company profits are
high. Corporate tax rates generally will not be increases owing to the attractiveness of the
country in terms of starting new businesses.
 Personal tax rates are unlikely to go up since prices tend to increase once consumer
spending increases.
 Production is high – GDP improves. Foreign exchange improves with GDP

Relationship between Corporate tax and other indicators

 Raising the corporate income tax rate would reduce economic growth, and lead to a
smaller capital stock, lower wage growth, and reduced employment.
 Tax cuts boost demand by increasing disposable income and by encouraging businesses
to hire and invest more. Tax increases do the reverse. These demand effects can be
substantial when the economy is weak but smaller when it is operating near capacity.

Relationship between Personal tax and other indicators

 As personal taxes increase, unemployment is not directly affected. Economy deflates as

consumer spending goes down (as people have to pay elevated taxes).
 RBI may decrease repo rate to funnel cash into the economy if required. Depending on
severity, CRR may be decreased. Consumption decreases production decreases, exports,
trade deficit, current deficit are not directly affected. Fiscal deficit increases due to
increase in cash flow as taxes. BEIs, PMIs go down since production is low owing to low
consumer demand. Customer confidence goes down. GDP goes down with production.
Foreign exchange goes down with GDP.

Relation between Covid-19 and macro-economic indicators in FY 2020-21

COVID-19 has a severe impact on all the macro-economic indicators of the economy. A big
impact is seen on the GDP growth rate at least for the year 2020–2021. Same is the finding in
case of unemployment. Inflation too is increasing for the year. Base lending rate is expected to
come down further as the government would like the banks to create more credit in the market.
The industrial output is slated to take a strong beating at least in the year 2020–2021. A major
impact of COVID-19 is seen on the Indian economy for fiscal 2020–2021. The first quarter of
FY 20-21 was completely lost due to lockdown. Amid a lot of uncertainty there was a positive
view of recovery from the second quarter of 2020–2021. The recovery happened in phases and
gradually. The recovery was severely constrained by the concern of controlling the spread of
COVID-19. A global recession has been seen in the month of June/July 2020 as predicted by all
leading economic and financial expert’s .Strong leadership efforts will be required from the
government. But it will take time to get into action at all levels. Indian economy is not much
vulnerable to the global economic crisis except for a thing like oil imports. It has its own local
demand-supply network that can bring back growth levels of 7–8%. There is strong political
leadership at the center whose role is so critical at times of a crisis. The nation seems to be united
like never before and it can certainly bounce back.

It is suggested that the government should adopt a two-pronged approach to deal with the
economic crisis. It will have to gear up its machinery to ensure a quick and strong recovery.
First, these will involve major contributions from the central bank, the commercial banks, the
financial institutions and other agencies in maneuvering policies as per the demand of the
situation. Second and importantly, it will have to motivate and involve the general public and
private enterprises in responding to the situation. The mammoth nature of the problem warrants
strong support from all the stakeholders. The government should make it pretty clear that
everything should not be left to the government alone. A strong sense of responsibility will have
to be inculcated amongst the general public, private enterprises, industrialists, workers and all
other non-government stakeholders. There is a limit up to which the government alone can take
on the fight. It is important, therefore, that the government initially only prepares other
stakeholders for assuming a good amount of responsibility in taking on the recovery process.

Name: Medha Singh

Date: 07.05.2021

Designation: Finance Intern

College: Christ University