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What is Deflationary Spiral?

It is a situation when decrease in the prices leads to lower production, lower wages and
demand, which can lead to further decrease in the prices. A deflationary spiral is when
decrease in prices lead to a vicious circle (a trouble leads to another that aggravates the
first).

What is Inflation?

Inflation is defined as an increase in the price of bunch of Goods and services that
projects the Indian economy. An increase in inflation figures occurs when there is an
increase in the average level of prices in Goods and services. Inflation happens when
there are less Goods and more buyers, this will result in increase in the price of Goods,
since there is more demand and less supply of the goods.

Relation between Inflation and Bank interest Rates

Now a days, you might have heard lot of these terms and usage on inflation and the
bank interest rates. We are trying to make it simple for you to understand the relation
between inflation and bank interest rates in India.

Bank interest rate depends on many other factors, out of that the major one is
inflation. Whenever you see an increase on inflation, there will be an increase of
interest rate also.

What is Inflation?

Inflation is defined as an increase in the price of bunch of Goods and services that
projects the Indian economy. An increase in inflation figures occurs when there is an
increase in the average level of prices in Goods and services. Inflation happens when
there are less Goods and more buyers, this will result in increase in the price of
Goods, since there is more demand and less supply of the goods.

Inflation causes increase of Interest

Inflation can be recognized as a combination of 4 factors :

• The Supply of money goes up


• The Supply of Goods goes down
• Demand for money goes down
• Demand for goods goes up

Our Indian government gets involved in it to control the inflation by adjusting the
level of money in our economical system. The most noticeable way to increase the
money flow in the system is to print more currency, then the rupees will become
more relative to goods.

Inflation and Global Liquidity

Factors like rates of import and export, the production cost of farms, value of dollar,
price of oil (crude oil), market movements of other overseas markets cause global
liquidity. In India, we can also feel the effects of global liquidity. We are not isolated
from all these issues now. Due to the remarkable economic growth of India over the
recent years, increase in foreign currency inflow caused the demand in multiples for
many Merchandise and services in India. RBI (Reserve Bank of India) needs to
control this excess liquidity in our economic system. For this, RBI increases the
“Repo rates” which makes “Costly Credits” and thus increases the CRR rate (Cash
Reserve Ratio). This kind of measures by RBI can only control the inflation to a
certain extent only.

Globalisation

Due to Globalisation, no country are independent from Global Liquidities. This


causes an important factor for the inflation in a country. A political crunch or
economical downturn in a far away country can impact our money value in India

What is a CRR rate?

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with
RBI. If RBI decides to increase the percent of this, the available amount with the
banks comes down. RBI is using this method (increase of CRR rate), to drain out the
excessive money from the banks.

What is a Bank Rate?

Bank rate is the rate at which RBI gives to the commercial banks. Whenever RBI
increases its rates, the effect will be shown on the commercial banks. In this case, the
commercial banks have to increase the interest rates for their profits.

What is a Repo Rate?

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo
rate is the rate at which our 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.

What is a Reverse Repo Rate?

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money
from banks. Banks are always happy to lend money to RBI since their money are in
safe hands with a good interest. An increase in Reverse repo rate can cause the banks
to transfer more funds to RBI due to this attractive interest rates. It can cause the
money to be drawn out of the banking system.
Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and
Reverse Repo rate our banks adjust their lending or investment rates for common
man.

Statutory
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SLR (Statutory Liquidity Ratio) is the
amount a commercial bank needs to
maintain in the form of cash, or gold or
govt. approved securities (Bonds)
before providing credit to its
customers. SLR rate is determined and
maintained by the RBI (Reserve Bank
of India) in order to control the
expansion of bank credit.
How is SLR determined?

SLR is determined as the percentage of total demand and percentage of time


liabilities. Time Liabilities are the liabilities a commercial bank liable to pay
to the customers on their anytime demand. .
What is the Need of SLR?

With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a
commercial bank. It is also helpful to control the expansion of Bank Credits. By
changing the SLR rates, RBI can increase or decrease bank credit expansion. Also
through SLR, RBI compels the commercial banks to invest in government
securities like government bonds..

SLR to Control Inflation and propel growth

SLR is used to control inflation and propel growth. Through SLR rate tuning the
money supply in the system can be controlled efficiently.

Index of Industrial Production


(IIP) - Indicator for
India Inc’s growth
IIP number or IIP data (Index of
Industrial Production) is a measurement
which represents the status of production in
the industrial sector for a given period of
time compared to a reference period of
time. IIp number is one of the best
statistical data, which helps us to measure
the level of industrial activity in Indian
economy. Please note that IIP data is a
short-term indicator of our industrial
growth till the actual results from Annual
Survey of Industries (ASI) is published.
IIP data is a very important indicator to the
Government for planning purposes and is
also used by various organisations like
Industrial Associations, Research Institutes,
Financial Institues and Academicians.

IIP data and Stock Markets

When are the IIP numbers Published?

Tracking Growth using GDP & IIP data

How IIP Data is formed?

IIP data is a simple index which provides


information about the growth of different
sectors of our economy like mining,
electricity, Manufacturing & General. The IIP
index reflects the growth in India’s industrial
activity and excludes all kinds of services.
The base year for the index over the period of
the analysis is 1993-94.

Use-Based Classification

Another classification is use-based


(consumption based), where IIP is classified
on the base of use like Basic Goods, Capital
goods, Intermediate goods & consumer
goods.
Sectors in IIP Data

The weightage of Indian IIP data is broadly divided into three segments –
manufacturing (79.36%), mining & quarrying (10.47%) and electricity (10.17%)...

Manufacturing : includes items like food items, machinery, wood furniture etc
Electricity : includes generation and transmission of electricity ( from various
sources like - thermal, hydro, solar etc)
Mining : includes mining of coal, oil other metals etc
Manufacturing is the major sector, which is further divided into 17 industry groups
like
* Food Products
* Beverages,Tobacco and related Products
* Cotton Textiles
* Wool, silk and man made fibre textiles
* Jute and other vegetable fibre textiles
* Textile products including wearing apparel
* Wood and wood products (furniture & fixtures)
* Paper, paper products, printing and allied industries
* Leather and leather and fur products
* Basic Chemicals & Chemical Products (except products of Petroleum & Coal)
* Rubber, Plastic, Petroleum and Coal Products
* Non-Metallic Mineral Products
* Basic Metal and Alloy Industries
* Metal Products and Parts, except Machinery and Equipment
* Machinery and Equipment other than Transport equipment
* Transport Equipment and Parts
* Other Manufacturing Industries