Impact of Inflation and Interest Rates on Gdp, India

Topics: Regression analysis, Inflation, Monetary policy Pages: 19 (5521 words) Published: September 9, 2013
Program & Batch:| PGDM 2013-15|
Term:| I|
Name of the faculty:| GUNJAN MALHOTRA|
Group Number:| 8|
Contact No. and email of Group Coordinator:|| Group Members:| Sl.| Roll No.| Name|
| 1| 1301-528| HIMANSHU ARORA|
| 2| 1301-058| CHITTRESH DHAWAN |
| 3| 1301-333| DEEP DAGA|
| 4| 1301-137| NIKHIL SINGHVI|
| 5| 1301-423| SWATI SINGHAL|

The Impact of Inflation Rate and Interest Rate on Real Gross Domestic Product of India

In any economy the Gross Domestic Product at fixed prices, i.e. Real GDP, is the true indicator of its growth and prosperity and can be looked upon to forecast what the future of the economy will be to be able to take policy decisions in a scientific manner. This paper aims at examining various macro economic variables and use statistical methods to find the impact of these variables on each other. For this objective secondary data has been obtained about inflation rate (CPI), bank rate and real GDP of India during the years 2004 to 2013. This data is on quarterly basis and hence contains over 30 observations. This data is obtained from the Bloomberg Terminal and the website and regression analysis is employed to obtain findings. Upon rigorous analysis it has been found out that Gross Domestic Product at fixed prices of India during the period under study is positively correlated with interest rate as well as with inflation rate trends for the said period.

Real Gross Domestic Product or Gross Domestic Product at Constant Prices, Base Year, Inflation Rate or Consumer Price Index, Bank Rate and Interest Rate.

The Indian economy comes on the 9th position in terms of GDP at market prices and on the 9th position in terms of purchasing power parity. Our country is also among the G20 major nations and also the BRICS. But our economy faces many problems too that if not catered to

today may result in the economy going in the shackles of stagnancy and even degradation in the credit ratings by the global rating agencies like Standard & Poor and the likes. The Indian economy has seen a paradigm shift in the millennium and those entire situations play a big role in the shape the economy is in today. So let us try to map the state of the economy throughout the years 2000 till date. Owing to the IT industry boom worldwide and especially in India the GDP grew exceptionally well in the early 2000’s. Another reason for it was the increasing number of cheap skilled labour force in the country and the ongoing trend of outsourcing. In 2004 the economy registered a growth rate of 8.5 percent which was largely due to strong performance in agriculture and allied sector as well as the services industry. Inflation for this period measured by the CPI for industrial workers declined significantly from the figures of the last few years to come at 3.5 percent in March 2004 which started showing an upward trend in the later part of the year due to increasing wholesale price inflation. In the next fiscal year 2005-06 the GDP at constant prices grew at 9 percent. The economy had shown growth above 8 percent in only five years, three of which were the last three years. According to experts these achievements were possible because of many factors. These were momentum in industrial investment, modest inflation, growth in exports and imports, progress in fiscal consolidation and the launch of the National Rural Employment Guarantee Scheme (NREGS) for providing job security to the employable youth. By this time the increasing growth was putting inflationary pressures on the economy and this was observed when the average inflation for the 52 weeks ending February 2007 was recorded at 5 per cent....

Third Quarter Review of Monetary Policy 2009-10, RESERVE BANK OF INDIA, January 29, 2010 Mumbai [Online] Available from: [Accessed: 1st August 2013]
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