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Indian Economics
basics
by abhishek s arackal
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7 Pillars of Economy
2. Banking-Finance• Monetary Policy
• Banking Sector
• Capital Market
3. Fiscal Policy• Budget, Taxation
• Subsidies
• Fiscal Deficit
4. International• BoP, CAD
• WTO & other Org.
• Policies affecting
• GS Mains P2
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From economic survey
5. Sectors of Economy• Agriculture
• MSME, Industries
• Service sector
6.Infrastructure• Energy
• Transport• RUR-URBAN
7. HRD• Skill Development
• Poverty line
• Weaker sections
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Type #2: fire fighting sufficient
IBPS: PO/MT, Clerk, Specialist
SBI Clerk/ PO
RBI assistant
Insurance AO, Assistants
SSC (+ theory focus)
1. Banking-finance (Theory current)
2. Business-GK, PIN
3. Budget, Schemes
4. Then focus on Maths-Reasoning-DI-english
Focus area
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Non-UPSC
8th Pillar: Persons in News (PIN), BusinessGK
economy focus on
Facts
Figures
Dates
Names
Numbers
PIN not asked. Hardly 2-3 MCQs in CSAT-2014
Economy Focus on
Principles, Definitions
Cause-consequence
Jurisdiction, features
Pro-Anti
UPSC
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Today’s topic:
Banking ► Monetary Policy
1. Quantitative | Qualitative tools
2. CRR, SLR, OMO
3. Repo, Reverse Repo,
4. MSF, LAF,
5. Urjit Patel Committee
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Before money was invented
2 kg 500 gms
Double
Coincidence
Of wants
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Birth & Evolution
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Supply Demand
1 kg = Rs.100
Supply Demand
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Inflation
Supply
Demand
Demand Demand
Demand
1 kg =
Rs.1000
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Inflation: increase supply
Supply
Demand
Demand Demand
Demand
1 kg =
Rs.100
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Reduce demand by ▼money supply
Supply
Demand
Demand Demand
Demand
1 kg =
Rs.100
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Combat Inflation
Reduce Money supply
Tight Money policy
Dear money policy
Increase Money supply
Easy Money policy
Cheap money policy
Deflation Combat
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Quantitative
1. Reserve Ratios (CRR, SLR)
2. OMO: Open market operations
3. Rates (Repo, RR, Bank, MSF,
LAF)
1. Margin / LTV
2. Consumer Credit control / Down payment
3. Rationing
4. Moral Suasion
5. Direct Action
Qualitative
Monetary Policy: Instruments?
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Reserve Ratios
1.Cash Reserve Ratio (4%)
2.Statutory Liquid Ratio (22%)
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Reserve Ratios
Depositors Borrowers
CRR: 04%
SLR: 22%
Total: 26%
Pay 0-4-9% Pay 10-15-18%
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Liabilities of a Bank
Demand
Liabilities
Time
Liabilities
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Demand Liabilities
Current Account (CA)
Savings Account (SA)
Demand Draft
~8,000 Billion Rs.
Fixed deposits (FD)
Recurring deposits (RD)
Cash certificates
Staff security deposits
~78,000 Billon Rs.
Time liabilities
Reserve ratio counted on NDTL
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1/1/2015
Deposited
+120 Cr.
Took out
20 Cr.
Depositors
Net Demand & Time Liability (NDTL)
120-20=100 Crores.
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Time: FDRD
Demand: CASA
NDTL (100 Crore)
CRR
4%
SLR
22%
Can’t lend
No profit
Cash, Gold
RBI approved
securities
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Deposit Examples
Time Deposit FDRD
Demand
Deposit
CASA
NDTL +100 cr.
Reserve ratio
CRR (-) 4%
[no profit]
•All Banks
•Penalty
•No profit. Except 1999.
•Right now 4%
• IIM-A Prof D'Souza report: allow gold-forex investment
•RBI said No, due to volatility
Cash Reserve Ratio (CRR)
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Deposit Examples
Time Deposit FDRD
Demand Deposit CASA
Net Demand and Time
Liabilities (NDTL)+100 cr.
Reserve
CRR (-) 4 [no profit]
SLR (-) 22 [some profit]
Money left
with bank=74 cr.
•All banks
• In Cash, gold, RBI approved securities
•Some “profit”.
•Right now 22%
Statutory Liquidity Ratio
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Fortnight lag
Friday
NDTL
100 Cr.
Friday Friday
Fortnight Fortnight
4 cr. CRR
22 cr. SLR
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Reserve Ratios
1.What is NDTL?
2.What are SLR and CRR?
3.How to use them against inflation & deflation
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Cyclic fluctuation: Inflation
CRR, SLR: 0%
Loan: 10%
10% of 2 crore
=20 lakh rupees
To combat inflation:
REDUCE Money supply
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Cyclic fluctuation: Inflation
CRR, SLR: 50%
Loan: 10%
10% of 1 crore
=10 lakh rupees
To combat inflation:
REDUCE Money supply
20% of 1 crore
=20 lakh rupees
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Hike in Bank Loan Interest Rates
10%20%
50,000/-48,000/-
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Hike in Bank Loan Interest Rates
10%20%
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Inflation
RBI ▲ CRR/SLR
Banks left with less money to lend
▲ interest rates to keep Profit margin same
People borrow ▼
demand▼
Prices ▼
= Inflation controlled
RBI ▼ CRR/SLR
Banks are left with more money
They ▼ interest rates to get new clients
People borrow ▲
Demand ▲
= Price ▲
Deflation
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Inflation fight
HOW? Tight | Dear
CRR, SLR ▲▲▲
INCREASE
Monetary Policy: Quantitative Tools: Reserve Ratios
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Inflation fight Deflation fight
HOW? Tight | Dear Easy | Cheap
CRR, SLR ▲▲▲
INCREASE
▼▼▼
DECREASE
Monetary Policy: Quantitative Tools: Reserve Ratios
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Find correct statement(s)?
A. To combat inflation, RBI should pursue Cheap money policy.
B. To combat deflation, RBI should increaseStatutory liquidity ratio (SLR)
C. Both A and B
D. Neither A nor B
Mock Question
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Find correct statement(s)?
A. To combat inflation, RBI should pursue Cheap money policy. (WRONG: follow DEAR/TIGHT)
B. To combat deflation, RBI should increaseStatutory liquidity ratio (SLR) (WRONG: should Decrease SLR)
C. Both A and B
D. Neither A nor B (Correct Answer)
Mock Question
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Find incorrect statement(s)?
A. To combat inflation, RBI should pursue Cheap money policy. (WRONG: follow DEAR/TIGHT)
B. To combat deflation, RBI should increaseStatutory liquidity ratio (SLR) (WRONG: should Decrease SLR)
C. Both A and B (Correct Answer)
D. Neither A nor B
Mock Question
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When RBI increases CRR, It means ___.
A. RBI will have less money to lend
B. Government will have less money to spend.
C. Commercial banks will have more money to lend
D. Commercial banks will have less money to lend
Mock Question UPSC 2010
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When RBI announces an increase of Cash reserve ratio, what does it mean?
A. RBI will have less money to lend (irrelevant)
B. Union government will have less money to spend. (irrelevant)
C. Commercial banks will have more money to lend (wrong. Reverse will happen)
D. Commercial banks will have less money to lend (right)
Mock Question UPSC 2010
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Bi-
monthly2014
Bank
RateMSF Repo RR SLR CRR
first April 23 4
second June 22.5 4
third August 22 4
fourth Sep 22 4
Fifth Dec 22 4
Surprize 15/1/15 22 4
Sixth 3Feb,15
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Reserve Ratios
SLR
RBI
Reduced SLR
To flow money in
Productive
sectors of
Economy
Promised fiscal
consolidation
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CRR 4%
SLR 21.25
RR 6.00
Repo 6.50
MSF
7.00
Bank Rate 7.00
Banks have to keep this much in cash,
gold, G-sec & other RBI approved
securities. Profit? YES
Have to set aside this much
cash in reserve.
Profit? NO!
Both counted on NDTL
TIME(FDRD) Demand (CASA)
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Monetary PolicyQuantitative tools
1.Reserve Ratio (CRR, SLR)2.Open Market operation
(OMO)