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The Determinants Of The Rate Of Interest Economics Essay

Interest rates as defines by various scholars could be referred to as the price on borrowed capital. It could also be perceived as the return on financial assets or on investible funds. Further more, the rate of interest is a payment from borrowers to lenders which compensates the latter for parting with funds for a period of time and at some risk. Put into real terms, it is often said that lenders are being encouraged to forego consumption now in conditions of comparative uncertainty, in return for consumption later, in an uncertain future. In rewarding savers with parting with funds, a rate of interest is strictly speaking rewarding savers for giving up the ability to consume if they should change their mind about savings. After all, there is a perfectly rationale case to be made for people to save (forego actual consumption) at zero, or even negative, real interest rates since they will wish to provide for old age or other future periods of zero income.
Types of Interest rates:
There are basically two types of interest rates, namely; nominal interest rates and real interest rates.
Nominal interest rate is the actual interest payment by the borrower of funds or on financial assets/instrument for the use of borrowed or loaned funds. It is the rate that is actually paid in money form. It is usually denoted as i in mathematical equation.
Real interest rate on the other hand is the effective rate paid on borrowed or loaned funds over the tenure or maturity of the loan. It is the interest rate paid or received after taking account of inflation. Real interest rate is denoted as r and inflation rate written as π.
Thus i = r π.
Given the definition and explanation of interest rate as a measure of reward for savings, reward for investments and what consumers get for the consumption postponed. For instance, investment in money market securities like treasury bills, commercial paper/banker acceptances, bonds and bank deposits give investors returns expressed as yield, discounts, coupon and interest payments respectively on their investments. Capital market investments like shares, provide dividend in return to investors. All as a measure of interest rate on investment terms.
Macro Economic Objectives;
All over the world, every government and regulatory authorities pursue economic policy objectives as listed below of which interest rate is used as one of the tools to achieve any of the goals. These include:
Economic growth without environmental degradation
Full employment of resources
Income distribution
Balance of payment equilibrium
Price stability
Efficient allocation of resources… and for outside economy,
Full freedom of cross-border capital movement
A fixed exchange rate
Economic theory of interest rates
Howells and Bain 2005:183 posited that discussion on interest rates cannot be exhaustively illustrated without making reference to the relevant economic theories on same. The classical theory, Neo-Classical theory which propounded the Loanable fund Theory and as well as the Keynesian and Monetary positions on interest rates which stipulated Liquidity Preference theory on interest rate.
Classical theory – principally propounded by Fisherian. He posited that interest rate is an equilibrating factor between the demand for and supply of money. Thus, interest rate is the price at which the two are equated. Classical concluded that interest rate is a long run phenomenon and at the long run, the rates which prevails is determined exclusively by real forces of investment and savings. In this instance, classical assume that savings is the only sources of investible funds and both savings and investments are interest eligible.
In addition, savings means an increasing function of interest rate while investment is a decreasing function of interest rates. The theory based its conclusion on some underlying assumptions; like prices flexibility exists. The economy will always be at full employment. And interest rate has no relationship with monetary factors because money supply is exogenously determined.
This it denoted as follows:
S = S (r)
I = I (r)
Neo-Classical theory – Also referred to as Loanable fund Theory: This was developed by Knut Wicksell and further developed by Gurnar Myrdel, Eric Lindelle, Bent Hansen and Bert Hollids. They are all economist that belong to the Scottish school of economic thought.
Neo-classical theory of interest rate is thus a refining and an attempt to modernise as well as remove the inherent shortcomings of the classical theory of interest rates.
Knut Wicksell introduced credit money into the classical theory as well as hoarding i.e beside savings and investment, the loanable fund theory recognises the role of banks in credit creation as well as the role of the public in hoarding, which form part of money supply balancing.
The inclusion of credit money into the equation results in increase in the amount of funds available in the banks. To attract investors, the interest rates must fall Wicksell contended that the credit money has no relationship with interest rates. He identified two types of interest rates, namely;
The natural interest rates (r n)
The market interest rates (r m)
The market interest rates is below the natural interest rate.
The Wicksellian theory was refined by his colleagues such as Gurner Myrdel, Eric Lindelle, Bent Hansen

Supply chains and distribution in India

Abstract India’s FMCG industry has emerged as a distinct sector over the last few decades. Multinationals are seeking to pursue growth opportunities in emerging markets due to increased globalization and competition. India is one such emerging market that not only provides multinational companies with a large customer base but also welcomes western products. Having a presence in India means sourcing, moving and processing up to one billion or more units. In addition, the cost expectations and the larger size of the consumer market will have implications on supply chains. Excellent supply chain strategies for India will involve adopting efficient processes enabling products to smoothly change hands from the supplier to the consumer while adapting to the constraints of cost, infrastructure availability and market size of the economy. Other constraints associated with political, religious or cultural barriers may also need to be considered.
The report is divided into two major parts. One deals with the distribution chains prevalent in the urban market while the second part delves into the intricacies of the rural distribution market. We follow the same format for both the parts starting with an introduction into the current trends found in the urban or rural market, then clearing our point with a case study and finally presenting what are the challenges faced by the companies.
Supply Chain Management in Urban region- Introduction The FMCG sector is the fourth largest sector in the country and has been growing in folds in the past few decades. The sector has both organized and unorganized players and the number of players in both the segments are on increase, in addition to this there is also an increase in the number of products introduced every year. Since the sector is characterized by the fast movement of goods and services its dependence on effective supply chain is higher than that of any other sector so supply chain management is become one of the most vital functions. Supply chain management in urban sector typically refers to procurement of raw materials, processing them into finished products and distributing them in the urban region till its reaches the end consumer. Every company/ firm in the FMCG sector has its own supply chain models which are similar yet different from one another. Below are two examples of the supply chain models.
The supply chain management in urban regions is more to do with choices for instance in logistic a firm can choose to transport the product via railways, roadways, airways or in some case even waterways. An effective supply chain will enable the firm to minimize the cost, maximize returns, match the supply to the demand and ultimately satisfy the customers. An urban supply chain in most cases has clear cut distinction between the inbound supply chain (pertaining to providing raw materials and components), in house supply chain (conversion process), outbound supply chain (distribution of good and services. The profile of the urban consumers plays a crucial role in determining the supply chain because at the end without the consumer there is no point in building up the supply chain model. Strategic decisions like number of outlet the firm would have to distribute its product, the kind of outlet, method to transport the product, places from were the raw material is procured, manufacturing method (automated, semi automated or manual) etc are taken keeping the consumer and the utility of the product to the consumer in mind. This is on account that the urban consumers are well informed and there are many competitors fighting for that consumer.
The Supply Chain of Dominos Pizza (India) Dominos Pizza in India Dominos Pizza opened its first store in India in 1996. Jubilant FoodWorks Limited, a Jubilant Bhartia Group Company holds the Master Franchisee Rights for Domino’s Pizza for India, Nepal, Sri Lanka and Bangladesh. Prior to Sep 24, 2009, the company was known as Domino’s Pizza India Limited and underwent a name change, rest of the terms remaining the same. The promoters of the company are Mr. Shyam S Bhartia, Mr. Hari S Bhartia and Jubilant Enpro Private Ltd. Today Dominos has more than 300 stores in India with more than 9000 employees. According to the India Retail Report 2009, we were the largest Pizza chain in India and the fastest growing multinational fast food chain between 2006-2007 and 2008-2009 in terms of number of stores.
Over the years Dominos Pizza has focused on:-
Delivering great tasting pizzas
Superior Quality
Exceptional Customer service
‘Think global and act local’
Value for money offerings
Being a home delivery specialist capable of delivering pizzas within 30 minutes or else FREE
Revenue in India 70% of the revenue comes from home deliveries
30% of the revenue comes from OTC sales
30 minute Guarantee Dominos has its unique proposition that they deliver pizza at a customer’s doorstep within 30 mins of placing the order or they would receive the pizza free. They have positioned themselves as a brand that delivers happiness home (Khushiyon ki Home Delivery) has an emotional benefit which they offer to their customers
Dominos Supply Chain Integration Shown below is a high level flow of the supply chain followed by Dominos Pizza, India:-
Raw Material Procurement
Inventory Management
Operational Strategy
Production Process
Quality Initiatives
Customer Service
Raw Material Procurement Dominos has 4 commissaries or production kitchens-cum-warehouses (Regional Centralized Facilities) in India
Delhi Caters to 54 outlets in NCR region including 33 outlets in Delhi City itself
Bangalore Caters to 90 outlets across south zone
Kolkata Caters to 15 outlets in Kolkata
Mumbai Caters to 80 outlets in Maharashtra including 51 in Mumbai and 15 in Pune
Raw materials like Wheat is brought in from Jalandhar and sent to commissaries in refrigerated trucks. Pizza dough is prepared using a proprietary recipe in the commissaries. They are then made into dough balls and sent to retail outlets in refrigerated trucks. Vegetables like tomato, capsicum, baby corn, onion and spices are purchased locally. Cheese is brought in from Karnal, Haryana. Food which is frozen is sent in these trucks at -18 deg Celsius.
It uses a hub and spoke model with commissaries as Hub and retail outlets as spokes.
Logistics Wheat (Jalandar) Dough Vegetables (Local) Cheese (Karnal) Commissary Refrigerated Trucks Retail Outlets Inventory Management Major inventory consists of perishable items with a very small shelf life. Some of the items are tabulated below:-
3-4 days
Seasoning and Toppings
4-5 days
Onion, Capsicum , Tomato
5 days
Cheese Blend
4-5 days