Description
business research report to know the impact of depreciation in Rupee on Indian Economy. This explanatory research report aims at understanding and explaining the impact of various factors determining the Gross Domestic Product (GDP) of India. GDP is considered to be a true representation of the economy of a country. The report also explains the impact and relation between various factors which determine the GDP.
Impact of Rupee Depreciation on Indian Economy
Business Research Methodology
2008
Impact of Rupee Depreciation on Indian Economy
TABLE OF CONTENTS
INTRODUCTION ............................................................................................................................................ 3 LITERATURE REVIEW .................................................................................................................................. 3 ? ? ? ? ? ? Crude Oil Prices ................................................................................................................................ 3 Gold Prices ........................................................................................................................................ 4 FDI & FPI ......................................................................................................................................... 4 Import and Export ............................................................................................................................. 4 GDP................................................................................................................................................... 5 GAP Analysis.................................................................................................................................... 5
T HEORETICAL FRAMEWORK ....................................................................................................................... 6 OBJECTIVE STATEMENT .............................................................................................................................. 6 RESEARCH METHODOLOGY ........................................................................................................................ 7 OPERATIONAL DEFINITION ......................................................................................................................... 7 HYPOTHESIS ................................................................................................................................................. 7 DATA SUMMARY .......................................................................................................................................... 8 DATA ANALYSIS .......................................................................................................................................... 9 ? ? ? Descriptive Analysis ....................................................................................................................... 10 Correlation Analysis ....................................................................................................................... 13 Regression Analysis ........................................................................................................................ 15
CONCLUSION .............................................................................................................................................. 19 REFERENCES ............................................................................................................................................... 20
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Impact of Rupee Depreciation on Indian Economy
INTRODUCTION
This explanatory research report aims at understanding and explaining the impact of various factors determining the Gross Domestic Product (GDP) of India. GDP is considered to be a true representation of the economy of a country. The report also explains the impact and relation between various factors which determine the GDP. Gross Domestic Product is the monetary value of all the final goods and services produced in the economy during a given period (Blanchard, 2006). GDP is determined by many factors which are considered to be the components like consumption, investment, government expenditure and net import and export. The report aims at capturing the impact of important factors in these components namely Crude Oil Prices, Gold Prices, Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), Import and Export on the GDP of India. The report is aimed at capturing the impact of the major factors post liberalization, privatisation and globalization (LPG). The era post LPG is one of the most important eras in Indian economy as it has seen a marvellous growth in the Indian economy and hence this report is an attempt at explaining the phenomenon. The report also tries to capture the state of the Indian Currency in the foreign exchange (forex) market and its subsequent impact on growth of the Indian economy.
LITERATURE REVIEW
? CRUDE OIL PRICES
The crude oil prices play an important role in the growth of an economy. There was a steep increase in the crude oil prices after a sharp fall in U.S. crude oil stocks was observed. Many industries such as airline, steel, manufacturing and automobile sector were greatly impacted due to the surge in the crude oil prices. The impact of changes in the crude oil prices is limited in India largely because the government subsidises crude oil products like petrol and diesel. The change in crude oil prices has a great impact on inflation of an economy. The change in crude oil prices has a huge bearing on industrial units in India. The burden in case of increase is not passed on to the final consumer in India but still owing to the major increase in the crude oil prices the consumer may need to pay higher for manufactured goods in the future (dancewithshadows.com, 2008). The crude oil price fluctuations are a result of not only demand and supply but are also owing to the fact of commodity speculation, OPEC and resource depletion (NBER, 2008).
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Impact of Rupee Depreciation on Indian Economy
? GOLD PRICES
In a paper published by IMF on "India: Asset Prices and Macro economy ", the impact of rising asset prices in India has been analysed. The fact that India is going through rapid structural changes makes it difficult to find a correlation between the country's growth rate and the rising prices of assets, namely, real-estate, equity market, and gold. As time series on gold holdings are not available, a proxy of real stock exchange index has been used. The paper says that gold prices have an insignificant impact on the Indian economy as the markets are not yet welldeveloped in India (mostlyeconomics.wordpress.com, 2008).
? FDI & FPI
Countries that have well-developed financial markets are impacted substantially from international capital flows. On demand side, the developing and the less-developed countries are eager to any kind of foreign capital inflow due to shortage of funds. Whereas, on the supply side, there are various strong inducing factors that lead to the trend. Narayan Sethi and K. Uma Shankar Patnaik, in their paper on capital flows and the Indian economy, based on data from April 1994 to December 2004 , propose that FDI has a positive impact on India's economic growth, whereas, FII has small negative impact on the growth rate. Duttaray and Mukhopadhya, in their paper published in 2003, state that the 'capital flows and growth rate' relationship is a subject of causality with a two-way relationship. Also, sometimes foreign capital inflows substitute/ crowd out domestic investments, having a negative impact on the domestic capital markets (mostlyeconomics.wordpress.com, 2008).
? IMPORT AND EXPORT
In a paper published for “A dynamic analysis of the impact of uncertainty on import and/or export led growth” the model establishes the relation between uncertainty in trade and income for the growth of the Japan and Asian Tigers in a dynamic framework. It was observed that a country dominated by export related growth like Japan and mixed growth economy like Korea are highly impacted by the volatility in the market. The paper also establishes the importance of this relationship on the policy making decisions by the governments (Mahadevan, 2008).
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Impact of Rupee Depreciation on Indian Economy
? GDP
In a paper “Now casting GDP and Inflation” the process of updating the now cast and forecast on output and inflation as per data availability has been discussed. The marginal contribution is split into the causes namely timeliness of information and economic content. Prices and quantities affect the precision of the estimates of GDP while inflation is only impacted by nominal variables and asset prices (Giannone, Reichlin, Small, 2006).
? GAP ANALYSIS
From the above literature review it can be easily observed that the various variables both dependent and independent have been used to find the impact of volatility on their relation with the economy. This paper attempts at correlating these factors at one stage and looking at the overall and individual impact of these variables on the Indian Economy. The Central Bank (Reserve Bank of India) with the help of Central Statistical Organisation (CSO) undertakes the duty to preserve and maintain the necessary data available to indicate the economic state of India. There is no evaluation done on the nature of impact as well as the degree of impact these major components have on the Indian Economy. This paper tries to understand the degree of impact; the major components have on the Indian Economy. The impact of recent rupee depreciation in lieu of global financial crisis and lowering of crude oil prices is considered to be the overall impact of these major components on the Indian Economy.
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Impact of Rupee Depreciation on Indian Economy
THEORETICAL FRAMEWORK
INDEPENDENT VARIABLE Crude Oil Prices Gold Price Export Import Foreign Investment Inflow Indian Economy (GDP) DEPENDENT VARIABLE
OBJECTIVE STATEMENT
To study the effect of Rupee Depreciation on Indian Economy Indian Economy is represented by GDP in Rs. Crore (Cr.). Rupee Depreciation is measured with the help of following five variables: ? ? ? ? ? Price of Crude Oil in Rs. Gold Price in Rs. Export in Rs. Cr. Import in Rs. Cr. Foreign Direct Investments and Foreign Portfolio Investment in Rs. Cr.
We have taken last 7 years data for all the above mentioned variables.
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Impact of Rupee Depreciation on Indian Economy
RESEARCH METHODOLOGY
This is an explanatory research aimed at understanding the trend followed by the Indian economy with respect to the changes in the major components determining the GDP. The variables used are absolute and are normally measured in metric scale. The methodology adopted is to incorporate the impact of only the major variables having a significant impact on the Indian economy rather than analyzing subsidiary variables which are determinants to the major components.
OPERATIONAL DEFINITION
The global crude oil prices impact the rupee depreciation The gold prices impacts the rupee depreciation The export import of India impacts the rupee depreciation The foreign investment inflow impacts the rupee depreciation
HYPOTHESIS
Null Hypothesis – There is no effect of crude oil prices on the Indian Economy Alternate Hypothesis – There is significant relationship between crude oil prices and Indian Economy Null Hypothesis – There is no effect of gold prices on the Indian Economy. Alternate Hypothesis – There is significant relationship between gold prices and Indian Economy Null Hypothesis – There is no effect of exports on Indian Economy Alternate Hypothesis – There is significant relationship between exports and Indian Economy Null Hypothesis – There is no effect of imports on Indian Economy
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Impact of Rupee Depreciation on Indian Economy
Alternate Hypothesis – There is significant relationship between imports and Indian Economy Null Hypothesis – There is no effect of foreign investment inflow on Indian Economy Alternate Hypothesis – There is significant relationship between foreign investment inflow and Indian Economy.
DATA SUMMARY
The data has been collected mainly from the year 2002 onwards till 2008. The data comparison and analysis is done for the month of October in order to establish a clear relationship between independent variable fluctuations on the dependent variable. The data which is considered has certain limitations inherent as follows: ? It is a specific time period data which limits the establishment of historical relationship between the dependent and Independent variables ? The Indian Economy is represented by GDP which is available from the new base year index of 1999-2000 hence the data post those years is taken into consideration (RBI, 2008) ? The foreign investment inflow calculations were updated using a new international model in 2001 hence the time period under consideration is post 2001. (RBI, 2008) ? The use of monthly data has made the data more discrete rather than continuous leading to variability in the relations. The data has been obtained from majorly secondary sources including official figures quoted by the Indian government and the Indian Central Bank (Reserve Bank of India). The scale used for measurement of all the variables has been the ratio scale as the variables can attain the value of zero theoretically.
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Impact of Rupee Depreciation on Indian Economy
Variable
Crude Price metric
Oil Gold Price
Import
Export
FDI & FPI
GDP
Data Type
metric
metric
metric
metric
metric
Table 1: Data Types of Independent and Dependent Variables
Time Period
Rs Vs $ Crude Exchange Oil Price Rate in Rs.
Gold Price in Rs.
Export in Rs. Crore
Import in FDI & Rs. Crore FPI in Rs. crore
GDP at Factor Cost in Rs. crore 469206.0 511510.0 548010.0 595771.0 655713.0 716982.0 771451.0
Oct 2002 Oct 2003 Oct 2004 Oct 2005 Oct 2006 Oct 2007 Oct 2008
48.37 45.39 45.78 44.82 45.47 39.51 48.62
1227.67 1228.63 2230.07 2470.37 2317.94 3064.5 3330.47
5210.4 5695.19 6360.83 6873.8 8694.86 9690.96 11910.0
22484.98 22170.16 27223.12 36225.04 43744.8 52560.85 632154.2
26375.22 31343.1 36217.14 50945.49 71970.75 82125.59
1605.93 1009.75 1428.17 1844.0 7718.0 2876.0
115188.16 11676.0
Table 2: Data obtained from various sources (2)
DATA ANALYSIS
The data analysis has been performed with the following considerations: 1. Data of all dependent and independent variables is assumed to be normally distributed. 2. The independent variables are linearly independent. 3. The dependent and independent variables have a linear relationship. 4. The variables are in the metric scale.
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Impact of Rupee Depreciation on Indian Economy
The data is analyzed with the following techniques 1. Descriptive Analysis – This details about the mean, minimum and maximum values of the data explaining the volatility of the variable. 2. Correlative Analysis – This analysis is used to understand the relationship between the various variables under consideration including inter relation between independent variables. 3. Regression Analysis – This analysis is used to understand the impact of independent variables on the dependent variables. Limitation - The various techniques used have an implicit limitation that the data is assumed to be meeting the basic assumptions of these techniques. Considering the limited amount of data the relationships may not exhibit ideal behaviour during the analysis.
? DESCRIPTIVE ANALYSIS
N Minimum Maximum Mean Exchange Rate Crude Oil Price Gold Price Export (Rs. crore) Import (Rs. crore) FDI (Rs. crore) 7 39.51 7 1227.67 7 5210.40 48.62 3330.47 45.4229 2267.0929 Std. Error 1.13770 307.47481 917.16532 Std. Deviation 3.01008 813.50187 2426.59136 Variance 9.061 661785.300 5888345.626 5.123E10 1.0454E9 1.666E7 1.219E10
11910.00 7776.5771
7 22170.16 632154.20 119509.0214 85547.08836 2.26336E5 7 26375.22 362171.40 59166.4928 12221.334568 32334.612 7 1009.75 11676.00 4022.5500 1542.57151 4081.26059
GDP at Factor Cost Constant 7 469206.00 771451.00 609806.1429 41738.82631 1.10431E5 Price (Rs. crore) Table 3: Descriptive Statistics
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Impact of Rupee Depreciation on Indian Economy
The following observations can be made regarding the various variables: a. The exchange rate has fluctuated almost 23% in a period of 7 years for the month of October with a mean rate of around Rs. 45.50. Inference – The Central Bank RBI followed a fixed exchange rate regime prior to LPG but post that period though it has promoted a floating exchange rate regime but the price of the Indian rupee is maintained by the Central Bank. This is done by purchasing foreign exchange and releasing domestic currency or vice versa as the situation demands. Hence the fluctuations in spite of subprime crisis and current financial turmoil have been stabilized by the central bank using interest rate cuts in Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repurchase Offer Rate (Repo Rate). b. The crude oil prices have fluctuated almost 171% in a period of 7 years with a mean price of around Rs. 2270 per barrel. Inference – The crude oil prices have been traditionally determined by the Organisation of Petroleum Exporting Countries (OPEC) but in recent times it was driven up due to heavy speculation in the market which not only created a huge problem on the oil importing countries like India but also in the global economy. The crude oil prices determine the efficiency with which an economy can mobilize its resources. c. The gold prices have fluctuated almost 128% in a period of 7 years with a mean price of around Rs.7780 per 10 grams. Inference – The gold price is widely accepted as the standard for determining the risk free rates of an economy. Gold is the last fail safe option which can be used to determine purchasing power of an economy. The gold prices fluctuate as a result of not only increasing demand and limited supply but also due to speculation in the gold trading markets. d. Exports have fluctuated almost 2751% in the 7 years with a mean revenue of around 119510 crore in traded volumes. Inference – Post LPG it has been observed that the world markets have opened up for Indian manufacturers. Also the emergence of the service sector in early 2000 has fuelled the rapid growth in exports. The huge surge in the exports may be attributed to be one of the major reasons for the rapid growth of the Indian economy.
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Impact of Rupee Depreciation on Indian Economy
e. The imports have fluctuated almost 1273% in the 7 years with a mean expense of around 59166 crore in traded volumes. Inference – Post LPG and India becoming a member of the WTO it has seen a surge in the imports as well. One of the major imports for India to fuel its growing economy has been crude oil and as earlier observed that has undergone major fluctuations in prices. The imports have majorly increased to provide a better standard of living to a growing Indian population which is more aware about the world. f. Foreign Investment Inflow have fluctuated almost 1056% in the 7 years with a mean inflow of around Rs. 4020 crore. Inference – India due to its large market and growth potential has been one of the prime markets for capturing foreign investment. The foreign investment has played a major role in creating the necessary infrastructure as well as providing impetus to the Indian economy. The recent crisis has severely dented the foreign investment inflow and its impact can be observed in the downward revision of the GDP growth rate by the former Finance Minister P.C. Chidambaram. g. GDP has fluctuated 64% in the 7 years with the mean monetary value production remaining around Rs. 609806 crore Inference – The GDP is an economic indicator to the economy of a country and the huge increase in the GDP is a clear sign of increase in the growth of the Indian economy.
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Impact of Rupee Depreciation on Indian Economy
? CORRELATION ANALYSIS
GDP at Factor Crude Cost Constant Exchange Oil Price (Rs. crore) Rate Price Pearson Correlation GDP at Factor Cost Constant 1.000 Price (Rs. crore) Exchange Rate Crude Oil Price Gold Price -.271 .941 .983 Export Gold (Rs. Price crore) Import (Rs. crore) FDI (Rs. crore)
-.271
.941
.983
.682
.979
.781
1.000 -.305 -.126 .432 -.094 .336
-.305 1.000 .901 .612 .891 .638
-.126 .901
.432 .612
-.094 .891 .997 .795 1.000 .872
.336 .638 .857 .842 .872 1.000
1.000 .783 .783 .997 .857 1.000 .795 .842
Export (Rs. crore) .682 Import (Rs. crore) .979 FDI (Rs. crore) Significance (1-tailed) .781
GDP at Factor Cost Constant . Price (Rs. crore) Exchange Rate Crude Oil Price Gold Price .279 .001 .000
.279
.001
.000
.046
.000
.019
. .253 .394 .167 .420 .230
.253 . .003 .072 .004 .062
.394 .003 . .019 .000 .007
.167 .072 .019 . .016 .009
.420 .004 .000 .016 . .005
.230 .062 .007 .009 .005 .
Export (Rs. crore) .046 Import (Rs. crore) .000 FDI (Rs. crore) .019
Table 4: Correlation Statistics
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Impact of Rupee Depreciation on Indian Economy
The following observations can be made regarding the correlation statistics with respect to the significance level: ? ? Pearson product moment correlation coefficient (PMCC) provides linear dependence between the independent and the dependent variables. All the factors like crude oil prices, gold prices, export and foreign investment inflow have a major impact on the GDP of the Indian economy which can be observed based on the fact that their significance level is much below .05. This implies that almost 90% of variance of GDP can be determined by the independent variables. It can also be observed that crude oil price, import and gold price are having the maximum relation with the GDP as per the PMCC.
?
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Impact of Rupee Depreciation on Indian Economy
?
REGRESSION ANALYSIS
The regression analysis is performed to understand the exact nature of relationship between the dependent and independent variables and to analyse the level of impact of the independent variable on the dependent variable. Model R R Adjusted R Std. Error of Square Square the Estimate Variables
a. Predictors: (Constant), Crude Oil
1
.941a .886
.863
40855.90986
Price
b. Dependent Variable: GDP at Factor
Cost Constant Price (Rs. crore) a. Predictors: (Constant), Gold Price 1 .983a .967 .960 21989.34363 b. Dependent Variable: GDP at Factor Cost Constant Price (Rs. crore) a. Predictors: (Constant), Export (Rs. crore) 1 .682a .465 .358 88459.10025 b. Dependent Variable: GDP at Factor Cost Constant Price (Rs. crore) a. Predictors: (Constant), Import (Rs. crore) 1 .979a .959 .951 24427.56596 b. Dependent Variable: GDP at Factor Cost Constant Price (Rs. crore) a. Predictors: (Constant), FDI (Rs. crore) 1 .781a .609 .531 75618.84357 b. Dependent Variable: GDP at Factor Cost Constant Price (Rs. crore)
Table 5: Model Summary
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Impact of Rupee Depreciation on Indian Economy
R square determines the percentage to which the independent variable impacts the dependent variable. The following observations can be made regarding the R square values for the different variables with respect to the dependent variable ? It can be observed that the R square value is almost equal to Adjusted R Square value for crude oil price, Import and gold price hence the relation established using this 7 year data can be applied to the entire population. Export and Foreign investment inflow cannot be taken as a true indication of the population as the value of R square is different from the value of Adjusted R square value.
?
In order to understand the exact degree of impact of the independent variable on the dependent variable it is important to calculate the value of the regression coefficient. The significance level illustrates the nature of relationship between the independent and dependent variables. Unstandardized Coefficients Standardized Coefficients B Crude Oil Price Gold Price 127.771 44.750 Std. Error 20.503 3.699 .160 .308 7.564 Beta .941 .983 .682 .979 .781 t 6.232 Sig. .002
12.096 .000 2.086 .041
Export (Rs. crore) .333 Import (Rs. crore) 3.345 FDI (Rs. crore) 21.120
10.845 .000 2.792 .038
Table 6: Regression Coefficients
The following observations can be made with respect to the above table: ? ? There exists a significant positive relationship between all the independent variables and the dependent variable. Gold Price, Import and Crude Oil Price have the highest effect on GDP compared to other variables.
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Impact of Rupee Depreciation on Indian Economy
CRUDE OIL PRICE
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the impact of crude oil prices is substantial on the GDP. Alternate Hypothesis is accepted. GOLD PRICE
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the impact of gold prices is substantial on the GDP. Hence the alternate hypothesis is accepted.
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Impact of Rupee Depreciation on Indian Economy
EXPORT
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the impact of revenues from export is substantial on the GDP. Hence the alternate hypothesis is accepted. IMPORT
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the expenses of import are substantial on the GDP. Hence the alternate hypothesis is accepted.
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Impact of Rupee Depreciation on Indian Economy
FOREIGN INVESTMENT INFLOW
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the impact of foreign investment inflow is substantial on the GDP. Hence the alternate hypothesis is accepted.
CONCLUSION
Hence from the above data analysis the following can be concluded ? ? ? ? ? Crude Oil prices significantly impact the GDP of the Indian Economy. Gold Prices significantly impact the GDP of the Indian Economy. Export significantly impacts the GDP of the Indian Economy. Foreign Investment Inflow does not impact the GDP of the Indian Economy. Import significantly impacts the GDP of the Indian Economy.
The major learning which can be drawn from the above analysis for the Indian Economy is as follows: ? Crude Oil and Gold Prices determine the amount of foreign exchange reserves maintained by the country as holding either of them decreases the foreign exchange reserves of the Central Bank. Exports have in the past decade increased tremendously but still their impact compared to import has been less relevant in the period considered for the analysis.
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?
Business Research Methodology - Group 13
Impact of Rupee Depreciation on Indian Economy
?
Foreign Investment Inflow has been one of the most important reasons for the rapid growth of the Indian Economy.
The above conclusion can be applied to the current financial crisis which is ongoing in the global market as follows: ? ? ? The increase in the Indian import bill is going to greatly impact the growth of the GDP. The decreasing crude oil prices are a positive signal towards the growth of the Indian economy The lack of foreign investment inflow due to major crisis in their home countries and troubles like liquidity crunch, insolvency and lack of funding (LIF) is a major cause for concern for the Indian economy. The recent measures by the central bank at providing more liquidity in order to fuel growth may be accurate but the decline in the exports market is one major concern for the Indian economy as well.
?
REFERENCES
? ? ? ? ? ? Blanchard, O. (2006), Macroeconomics, Pearson Education, Inc., India, 4 th Edition, Pg. 23 RBI (2008), Handbook of Statistics on the Indian Economy, Rekha Mishra, Mumbai, 1 st Edition Giannone D., Reichlin L., Small D. (2006), Nowcasting GDP and Inflation, C.E.P.R., Article 5178 Kar R., Sarkar N. (2006), Asia Pacific Financial Markets, ISICAL, Vol. 13, Issue 1, Pgs. 41-69 NBER (2008), Understanding Crude Oil Prices, NBER, Paper No. 14492 Mahadevan R., Suardi S. (2008), A dynamic analysis of the impact of uncertainty on import and/or export led growth, Elseiver, Japan, 1st Edition, Pgs. 155-174 www.mostlyeconomics.wordpress.com www.dancewithshadows.com (2) www.rbi.org; www.economictimes.com; finance.yahoo.com; www.mineweb.com; www.icai.org; http://publication.samachar.com; www.livemint.com; www.indiapost.com; http://commerce.nic.in; http://mospi.nic.in; www.dipp.nic.in; www.rediff.com/money;
? ? ?
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doc_287134412.pdf
business research report to know the impact of depreciation in Rupee on Indian Economy. This explanatory research report aims at understanding and explaining the impact of various factors determining the Gross Domestic Product (GDP) of India. GDP is considered to be a true representation of the economy of a country. The report also explains the impact and relation between various factors which determine the GDP.
Impact of Rupee Depreciation on Indian Economy
Business Research Methodology
2008
Impact of Rupee Depreciation on Indian Economy
TABLE OF CONTENTS
INTRODUCTION ............................................................................................................................................ 3 LITERATURE REVIEW .................................................................................................................................. 3 ? ? ? ? ? ? Crude Oil Prices ................................................................................................................................ 3 Gold Prices ........................................................................................................................................ 4 FDI & FPI ......................................................................................................................................... 4 Import and Export ............................................................................................................................. 4 GDP................................................................................................................................................... 5 GAP Analysis.................................................................................................................................... 5
T HEORETICAL FRAMEWORK ....................................................................................................................... 6 OBJECTIVE STATEMENT .............................................................................................................................. 6 RESEARCH METHODOLOGY ........................................................................................................................ 7 OPERATIONAL DEFINITION ......................................................................................................................... 7 HYPOTHESIS ................................................................................................................................................. 7 DATA SUMMARY .......................................................................................................................................... 8 DATA ANALYSIS .......................................................................................................................................... 9 ? ? ? Descriptive Analysis ....................................................................................................................... 10 Correlation Analysis ....................................................................................................................... 13 Regression Analysis ........................................................................................................................ 15
CONCLUSION .............................................................................................................................................. 19 REFERENCES ............................................................................................................................................... 20
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Impact of Rupee Depreciation on Indian Economy
INTRODUCTION
This explanatory research report aims at understanding and explaining the impact of various factors determining the Gross Domestic Product (GDP) of India. GDP is considered to be a true representation of the economy of a country. The report also explains the impact and relation between various factors which determine the GDP. Gross Domestic Product is the monetary value of all the final goods and services produced in the economy during a given period (Blanchard, 2006). GDP is determined by many factors which are considered to be the components like consumption, investment, government expenditure and net import and export. The report aims at capturing the impact of important factors in these components namely Crude Oil Prices, Gold Prices, Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), Import and Export on the GDP of India. The report is aimed at capturing the impact of the major factors post liberalization, privatisation and globalization (LPG). The era post LPG is one of the most important eras in Indian economy as it has seen a marvellous growth in the Indian economy and hence this report is an attempt at explaining the phenomenon. The report also tries to capture the state of the Indian Currency in the foreign exchange (forex) market and its subsequent impact on growth of the Indian economy.
LITERATURE REVIEW
? CRUDE OIL PRICES
The crude oil prices play an important role in the growth of an economy. There was a steep increase in the crude oil prices after a sharp fall in U.S. crude oil stocks was observed. Many industries such as airline, steel, manufacturing and automobile sector were greatly impacted due to the surge in the crude oil prices. The impact of changes in the crude oil prices is limited in India largely because the government subsidises crude oil products like petrol and diesel. The change in crude oil prices has a great impact on inflation of an economy. The change in crude oil prices has a huge bearing on industrial units in India. The burden in case of increase is not passed on to the final consumer in India but still owing to the major increase in the crude oil prices the consumer may need to pay higher for manufactured goods in the future (dancewithshadows.com, 2008). The crude oil price fluctuations are a result of not only demand and supply but are also owing to the fact of commodity speculation, OPEC and resource depletion (NBER, 2008).
Business Research Methodology - Group 13 Page 3
Impact of Rupee Depreciation on Indian Economy
? GOLD PRICES
In a paper published by IMF on "India: Asset Prices and Macro economy ", the impact of rising asset prices in India has been analysed. The fact that India is going through rapid structural changes makes it difficult to find a correlation between the country's growth rate and the rising prices of assets, namely, real-estate, equity market, and gold. As time series on gold holdings are not available, a proxy of real stock exchange index has been used. The paper says that gold prices have an insignificant impact on the Indian economy as the markets are not yet welldeveloped in India (mostlyeconomics.wordpress.com, 2008).
? FDI & FPI
Countries that have well-developed financial markets are impacted substantially from international capital flows. On demand side, the developing and the less-developed countries are eager to any kind of foreign capital inflow due to shortage of funds. Whereas, on the supply side, there are various strong inducing factors that lead to the trend. Narayan Sethi and K. Uma Shankar Patnaik, in their paper on capital flows and the Indian economy, based on data from April 1994 to December 2004 , propose that FDI has a positive impact on India's economic growth, whereas, FII has small negative impact on the growth rate. Duttaray and Mukhopadhya, in their paper published in 2003, state that the 'capital flows and growth rate' relationship is a subject of causality with a two-way relationship. Also, sometimes foreign capital inflows substitute/ crowd out domestic investments, having a negative impact on the domestic capital markets (mostlyeconomics.wordpress.com, 2008).
? IMPORT AND EXPORT
In a paper published for “A dynamic analysis of the impact of uncertainty on import and/or export led growth” the model establishes the relation between uncertainty in trade and income for the growth of the Japan and Asian Tigers in a dynamic framework. It was observed that a country dominated by export related growth like Japan and mixed growth economy like Korea are highly impacted by the volatility in the market. The paper also establishes the importance of this relationship on the policy making decisions by the governments (Mahadevan, 2008).
Business Research Methodology - Group 13 Page 4
Impact of Rupee Depreciation on Indian Economy
? GDP
In a paper “Now casting GDP and Inflation” the process of updating the now cast and forecast on output and inflation as per data availability has been discussed. The marginal contribution is split into the causes namely timeliness of information and economic content. Prices and quantities affect the precision of the estimates of GDP while inflation is only impacted by nominal variables and asset prices (Giannone, Reichlin, Small, 2006).
? GAP ANALYSIS
From the above literature review it can be easily observed that the various variables both dependent and independent have been used to find the impact of volatility on their relation with the economy. This paper attempts at correlating these factors at one stage and looking at the overall and individual impact of these variables on the Indian Economy. The Central Bank (Reserve Bank of India) with the help of Central Statistical Organisation (CSO) undertakes the duty to preserve and maintain the necessary data available to indicate the economic state of India. There is no evaluation done on the nature of impact as well as the degree of impact these major components have on the Indian Economy. This paper tries to understand the degree of impact; the major components have on the Indian Economy. The impact of recent rupee depreciation in lieu of global financial crisis and lowering of crude oil prices is considered to be the overall impact of these major components on the Indian Economy.
Business Research Methodology - Group 13
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Impact of Rupee Depreciation on Indian Economy
THEORETICAL FRAMEWORK
INDEPENDENT VARIABLE Crude Oil Prices Gold Price Export Import Foreign Investment Inflow Indian Economy (GDP) DEPENDENT VARIABLE
OBJECTIVE STATEMENT
To study the effect of Rupee Depreciation on Indian Economy Indian Economy is represented by GDP in Rs. Crore (Cr.). Rupee Depreciation is measured with the help of following five variables: ? ? ? ? ? Price of Crude Oil in Rs. Gold Price in Rs. Export in Rs. Cr. Import in Rs. Cr. Foreign Direct Investments and Foreign Portfolio Investment in Rs. Cr.
We have taken last 7 years data for all the above mentioned variables.
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Impact of Rupee Depreciation on Indian Economy
RESEARCH METHODOLOGY
This is an explanatory research aimed at understanding the trend followed by the Indian economy with respect to the changes in the major components determining the GDP. The variables used are absolute and are normally measured in metric scale. The methodology adopted is to incorporate the impact of only the major variables having a significant impact on the Indian economy rather than analyzing subsidiary variables which are determinants to the major components.
OPERATIONAL DEFINITION
The global crude oil prices impact the rupee depreciation The gold prices impacts the rupee depreciation The export import of India impacts the rupee depreciation The foreign investment inflow impacts the rupee depreciation
HYPOTHESIS
Null Hypothesis – There is no effect of crude oil prices on the Indian Economy Alternate Hypothesis – There is significant relationship between crude oil prices and Indian Economy Null Hypothesis – There is no effect of gold prices on the Indian Economy. Alternate Hypothesis – There is significant relationship between gold prices and Indian Economy Null Hypothesis – There is no effect of exports on Indian Economy Alternate Hypothesis – There is significant relationship between exports and Indian Economy Null Hypothesis – There is no effect of imports on Indian Economy
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Impact of Rupee Depreciation on Indian Economy
Alternate Hypothesis – There is significant relationship between imports and Indian Economy Null Hypothesis – There is no effect of foreign investment inflow on Indian Economy Alternate Hypothesis – There is significant relationship between foreign investment inflow and Indian Economy.
DATA SUMMARY
The data has been collected mainly from the year 2002 onwards till 2008. The data comparison and analysis is done for the month of October in order to establish a clear relationship between independent variable fluctuations on the dependent variable. The data which is considered has certain limitations inherent as follows: ? It is a specific time period data which limits the establishment of historical relationship between the dependent and Independent variables ? The Indian Economy is represented by GDP which is available from the new base year index of 1999-2000 hence the data post those years is taken into consideration (RBI, 2008) ? The foreign investment inflow calculations were updated using a new international model in 2001 hence the time period under consideration is post 2001. (RBI, 2008) ? The use of monthly data has made the data more discrete rather than continuous leading to variability in the relations. The data has been obtained from majorly secondary sources including official figures quoted by the Indian government and the Indian Central Bank (Reserve Bank of India). The scale used for measurement of all the variables has been the ratio scale as the variables can attain the value of zero theoretically.
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Impact of Rupee Depreciation on Indian Economy
Variable
Crude Price metric
Oil Gold Price
Import
Export
FDI & FPI
GDP
Data Type
metric
metric
metric
metric
metric
Table 1: Data Types of Independent and Dependent Variables
Time Period
Rs Vs $ Crude Exchange Oil Price Rate in Rs.
Gold Price in Rs.
Export in Rs. Crore
Import in FDI & Rs. Crore FPI in Rs. crore
GDP at Factor Cost in Rs. crore 469206.0 511510.0 548010.0 595771.0 655713.0 716982.0 771451.0
Oct 2002 Oct 2003 Oct 2004 Oct 2005 Oct 2006 Oct 2007 Oct 2008
48.37 45.39 45.78 44.82 45.47 39.51 48.62
1227.67 1228.63 2230.07 2470.37 2317.94 3064.5 3330.47
5210.4 5695.19 6360.83 6873.8 8694.86 9690.96 11910.0
22484.98 22170.16 27223.12 36225.04 43744.8 52560.85 632154.2
26375.22 31343.1 36217.14 50945.49 71970.75 82125.59
1605.93 1009.75 1428.17 1844.0 7718.0 2876.0
115188.16 11676.0
Table 2: Data obtained from various sources (2)
DATA ANALYSIS
The data analysis has been performed with the following considerations: 1. Data of all dependent and independent variables is assumed to be normally distributed. 2. The independent variables are linearly independent. 3. The dependent and independent variables have a linear relationship. 4. The variables are in the metric scale.
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Impact of Rupee Depreciation on Indian Economy
The data is analyzed with the following techniques 1. Descriptive Analysis – This details about the mean, minimum and maximum values of the data explaining the volatility of the variable. 2. Correlative Analysis – This analysis is used to understand the relationship between the various variables under consideration including inter relation between independent variables. 3. Regression Analysis – This analysis is used to understand the impact of independent variables on the dependent variables. Limitation - The various techniques used have an implicit limitation that the data is assumed to be meeting the basic assumptions of these techniques. Considering the limited amount of data the relationships may not exhibit ideal behaviour during the analysis.
? DESCRIPTIVE ANALYSIS
N Minimum Maximum Mean Exchange Rate Crude Oil Price Gold Price Export (Rs. crore) Import (Rs. crore) FDI (Rs. crore) 7 39.51 7 1227.67 7 5210.40 48.62 3330.47 45.4229 2267.0929 Std. Error 1.13770 307.47481 917.16532 Std. Deviation 3.01008 813.50187 2426.59136 Variance 9.061 661785.300 5888345.626 5.123E10 1.0454E9 1.666E7 1.219E10
11910.00 7776.5771
7 22170.16 632154.20 119509.0214 85547.08836 2.26336E5 7 26375.22 362171.40 59166.4928 12221.334568 32334.612 7 1009.75 11676.00 4022.5500 1542.57151 4081.26059
GDP at Factor Cost Constant 7 469206.00 771451.00 609806.1429 41738.82631 1.10431E5 Price (Rs. crore) Table 3: Descriptive Statistics
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Impact of Rupee Depreciation on Indian Economy
The following observations can be made regarding the various variables: a. The exchange rate has fluctuated almost 23% in a period of 7 years for the month of October with a mean rate of around Rs. 45.50. Inference – The Central Bank RBI followed a fixed exchange rate regime prior to LPG but post that period though it has promoted a floating exchange rate regime but the price of the Indian rupee is maintained by the Central Bank. This is done by purchasing foreign exchange and releasing domestic currency or vice versa as the situation demands. Hence the fluctuations in spite of subprime crisis and current financial turmoil have been stabilized by the central bank using interest rate cuts in Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repurchase Offer Rate (Repo Rate). b. The crude oil prices have fluctuated almost 171% in a period of 7 years with a mean price of around Rs. 2270 per barrel. Inference – The crude oil prices have been traditionally determined by the Organisation of Petroleum Exporting Countries (OPEC) but in recent times it was driven up due to heavy speculation in the market which not only created a huge problem on the oil importing countries like India but also in the global economy. The crude oil prices determine the efficiency with which an economy can mobilize its resources. c. The gold prices have fluctuated almost 128% in a period of 7 years with a mean price of around Rs.7780 per 10 grams. Inference – The gold price is widely accepted as the standard for determining the risk free rates of an economy. Gold is the last fail safe option which can be used to determine purchasing power of an economy. The gold prices fluctuate as a result of not only increasing demand and limited supply but also due to speculation in the gold trading markets. d. Exports have fluctuated almost 2751% in the 7 years with a mean revenue of around 119510 crore in traded volumes. Inference – Post LPG it has been observed that the world markets have opened up for Indian manufacturers. Also the emergence of the service sector in early 2000 has fuelled the rapid growth in exports. The huge surge in the exports may be attributed to be one of the major reasons for the rapid growth of the Indian economy.
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Impact of Rupee Depreciation on Indian Economy
e. The imports have fluctuated almost 1273% in the 7 years with a mean expense of around 59166 crore in traded volumes. Inference – Post LPG and India becoming a member of the WTO it has seen a surge in the imports as well. One of the major imports for India to fuel its growing economy has been crude oil and as earlier observed that has undergone major fluctuations in prices. The imports have majorly increased to provide a better standard of living to a growing Indian population which is more aware about the world. f. Foreign Investment Inflow have fluctuated almost 1056% in the 7 years with a mean inflow of around Rs. 4020 crore. Inference – India due to its large market and growth potential has been one of the prime markets for capturing foreign investment. The foreign investment has played a major role in creating the necessary infrastructure as well as providing impetus to the Indian economy. The recent crisis has severely dented the foreign investment inflow and its impact can be observed in the downward revision of the GDP growth rate by the former Finance Minister P.C. Chidambaram. g. GDP has fluctuated 64% in the 7 years with the mean monetary value production remaining around Rs. 609806 crore Inference – The GDP is an economic indicator to the economy of a country and the huge increase in the GDP is a clear sign of increase in the growth of the Indian economy.
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Impact of Rupee Depreciation on Indian Economy
? CORRELATION ANALYSIS
GDP at Factor Crude Cost Constant Exchange Oil Price (Rs. crore) Rate Price Pearson Correlation GDP at Factor Cost Constant 1.000 Price (Rs. crore) Exchange Rate Crude Oil Price Gold Price -.271 .941 .983 Export Gold (Rs. Price crore) Import (Rs. crore) FDI (Rs. crore)
-.271
.941
.983
.682
.979
.781
1.000 -.305 -.126 .432 -.094 .336
-.305 1.000 .901 .612 .891 .638
-.126 .901
.432 .612
-.094 .891 .997 .795 1.000 .872
.336 .638 .857 .842 .872 1.000
1.000 .783 .783 .997 .857 1.000 .795 .842
Export (Rs. crore) .682 Import (Rs. crore) .979 FDI (Rs. crore) Significance (1-tailed) .781
GDP at Factor Cost Constant . Price (Rs. crore) Exchange Rate Crude Oil Price Gold Price .279 .001 .000
.279
.001
.000
.046
.000
.019
. .253 .394 .167 .420 .230
.253 . .003 .072 .004 .062
.394 .003 . .019 .000 .007
.167 .072 .019 . .016 .009
.420 .004 .000 .016 . .005
.230 .062 .007 .009 .005 .
Export (Rs. crore) .046 Import (Rs. crore) .000 FDI (Rs. crore) .019
Table 4: Correlation Statistics
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Impact of Rupee Depreciation on Indian Economy
The following observations can be made regarding the correlation statistics with respect to the significance level: ? ? Pearson product moment correlation coefficient (PMCC) provides linear dependence between the independent and the dependent variables. All the factors like crude oil prices, gold prices, export and foreign investment inflow have a major impact on the GDP of the Indian economy which can be observed based on the fact that their significance level is much below .05. This implies that almost 90% of variance of GDP can be determined by the independent variables. It can also be observed that crude oil price, import and gold price are having the maximum relation with the GDP as per the PMCC.
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Impact of Rupee Depreciation on Indian Economy
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REGRESSION ANALYSIS
The regression analysis is performed to understand the exact nature of relationship between the dependent and independent variables and to analyse the level of impact of the independent variable on the dependent variable. Model R R Adjusted R Std. Error of Square Square the Estimate Variables
a. Predictors: (Constant), Crude Oil
1
.941a .886
.863
40855.90986
Price
b. Dependent Variable: GDP at Factor
Cost Constant Price (Rs. crore) a. Predictors: (Constant), Gold Price 1 .983a .967 .960 21989.34363 b. Dependent Variable: GDP at Factor Cost Constant Price (Rs. crore) a. Predictors: (Constant), Export (Rs. crore) 1 .682a .465 .358 88459.10025 b. Dependent Variable: GDP at Factor Cost Constant Price (Rs. crore) a. Predictors: (Constant), Import (Rs. crore) 1 .979a .959 .951 24427.56596 b. Dependent Variable: GDP at Factor Cost Constant Price (Rs. crore) a. Predictors: (Constant), FDI (Rs. crore) 1 .781a .609 .531 75618.84357 b. Dependent Variable: GDP at Factor Cost Constant Price (Rs. crore)
Table 5: Model Summary
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Impact of Rupee Depreciation on Indian Economy
R square determines the percentage to which the independent variable impacts the dependent variable. The following observations can be made regarding the R square values for the different variables with respect to the dependent variable ? It can be observed that the R square value is almost equal to Adjusted R Square value for crude oil price, Import and gold price hence the relation established using this 7 year data can be applied to the entire population. Export and Foreign investment inflow cannot be taken as a true indication of the population as the value of R square is different from the value of Adjusted R square value.
?
In order to understand the exact degree of impact of the independent variable on the dependent variable it is important to calculate the value of the regression coefficient. The significance level illustrates the nature of relationship between the independent and dependent variables. Unstandardized Coefficients Standardized Coefficients B Crude Oil Price Gold Price 127.771 44.750 Std. Error 20.503 3.699 .160 .308 7.564 Beta .941 .983 .682 .979 .781 t 6.232 Sig. .002
12.096 .000 2.086 .041
Export (Rs. crore) .333 Import (Rs. crore) 3.345 FDI (Rs. crore) 21.120
10.845 .000 2.792 .038
Table 6: Regression Coefficients
The following observations can be made with respect to the above table: ? ? There exists a significant positive relationship between all the independent variables and the dependent variable. Gold Price, Import and Crude Oil Price have the highest effect on GDP compared to other variables.
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Impact of Rupee Depreciation on Indian Economy
CRUDE OIL PRICE
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the impact of crude oil prices is substantial on the GDP. Alternate Hypothesis is accepted. GOLD PRICE
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the impact of gold prices is substantial on the GDP. Hence the alternate hypothesis is accepted.
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Impact of Rupee Depreciation on Indian Economy
EXPORT
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the impact of revenues from export is substantial on the GDP. Hence the alternate hypothesis is accepted. IMPORT
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the expenses of import are substantial on the GDP. Hence the alternate hypothesis is accepted.
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Impact of Rupee Depreciation on Indian Economy
FOREIGN INVESTMENT INFLOW
It can be observed from the above normal distribution and Residual Plot along with the regression coefficient that the impact of foreign investment inflow is substantial on the GDP. Hence the alternate hypothesis is accepted.
CONCLUSION
Hence from the above data analysis the following can be concluded ? ? ? ? ? Crude Oil prices significantly impact the GDP of the Indian Economy. Gold Prices significantly impact the GDP of the Indian Economy. Export significantly impacts the GDP of the Indian Economy. Foreign Investment Inflow does not impact the GDP of the Indian Economy. Import significantly impacts the GDP of the Indian Economy.
The major learning which can be drawn from the above analysis for the Indian Economy is as follows: ? Crude Oil and Gold Prices determine the amount of foreign exchange reserves maintained by the country as holding either of them decreases the foreign exchange reserves of the Central Bank. Exports have in the past decade increased tremendously but still their impact compared to import has been less relevant in the period considered for the analysis.
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Impact of Rupee Depreciation on Indian Economy
?
Foreign Investment Inflow has been one of the most important reasons for the rapid growth of the Indian Economy.
The above conclusion can be applied to the current financial crisis which is ongoing in the global market as follows: ? ? ? The increase in the Indian import bill is going to greatly impact the growth of the GDP. The decreasing crude oil prices are a positive signal towards the growth of the Indian economy The lack of foreign investment inflow due to major crisis in their home countries and troubles like liquidity crunch, insolvency and lack of funding (LIF) is a major cause for concern for the Indian economy. The recent measures by the central bank at providing more liquidity in order to fuel growth may be accurate but the decline in the exports market is one major concern for the Indian economy as well.
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REFERENCES
? ? ? ? ? ? Blanchard, O. (2006), Macroeconomics, Pearson Education, Inc., India, 4 th Edition, Pg. 23 RBI (2008), Handbook of Statistics on the Indian Economy, Rekha Mishra, Mumbai, 1 st Edition Giannone D., Reichlin L., Small D. (2006), Nowcasting GDP and Inflation, C.E.P.R., Article 5178 Kar R., Sarkar N. (2006), Asia Pacific Financial Markets, ISICAL, Vol. 13, Issue 1, Pgs. 41-69 NBER (2008), Understanding Crude Oil Prices, NBER, Paper No. 14492 Mahadevan R., Suardi S. (2008), A dynamic analysis of the impact of uncertainty on import and/or export led growth, Elseiver, Japan, 1st Edition, Pgs. 155-174 www.mostlyeconomics.wordpress.com www.dancewithshadows.com (2) www.rbi.org; www.economictimes.com; finance.yahoo.com; www.mineweb.com; www.icai.org; http://publication.samachar.com; www.livemint.com; www.indiapost.com; http://commerce.nic.in; http://mospi.nic.in; www.dipp.nic.in; www.rediff.com/money;
? ? ?
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