Economics Flashcards
Purchasing Managers Index (PMI)
indicator of business activity - manufacturing & services
3 indices:
- Manufacturing
- Services
- Composite
if PMI > 50 –> expansion
if PMI < 50 –> contraction
released every month before other indicators
reflects the health of these sectors and help to make decisions on interest rates
Advance Pricing Agreements - types
- Unilateral APA - b/w taxpayer and tax authority
- bilateral APA - Taxpayer + Tax authority + 1 Associated Enterprise + Associated Foreign tax authority
- Multilateral APA - taxpayer + tax authority + 2 or more AEs + AE associated foreign tax authorities
APA - purpose/ under which department
- non-adversarial tax regime
- certainty w.r.t the tax outcome of the tax payer’s international transactions
under CBDT
Asia Development bank - HQs Date of establishment Purpose Membership?
HQ - Manila, Philippines
Date of establishment - 19 December 1966
Purpose - Social and Eco development in Asia
Membership - members of UNESCAP + non-regional developed countries
UPI - full form & launched by?
Unified Payments Interface - universal application for transaction; suitable for e-com and m-com transactions;
National Payments Corporation of India
e-com vs. m-com
e-com: transactions done over internet using desktops/ laptops.
m-com: transactions done over internet using mobile phones/ smartphones
advantage of m-com over e-com:
mobility, reachability, convenience (fewer taps on a smartphone), security (additional layer of security - biometric authentication - fingerprint, face ID, etc.)
National Housing Bank
it is an AIFI - All India Financial Institution
set up in 1988 under the NHB Act, 1987
promotes housing finance institutions at local & regional levels - financial support
100% stake now controlled by GoI; RBI transferred it’s stakes to the GoI in accordance with 2nd Narsimham Committee recommendations
NABARD
- full form
- establishment
- replaced which authorities
- purpose
- National Bank for Agriculture & Rural Development
- 12 July 1987; statutory body, estd. on the recommendations of RBI Committee - B. Shivaraman
- ACD - AGriculture Credit Department
- RPCC - Rural Planning & Credit Cell of RBI
- ARDC - Agriculture Refinance & Development Cooperation
- increase the credit flow for elevation of agriculture and rural non-farm sector
policy + planning + operations
GDP vs. GNP
GDP - goods & services produced within the Indian territory whether by Indians or foreigners
GNP - goods & services produced y Indians all over the world
when is GDP > GNP
FDI > outflow
Nominal GDP & Real GDP -
- relation and
- what that means
- Real GDP + Inflation
- Real GDP - calculated at constant prices, i.e considering a base year
Nominal GDP is calculated at the current prices taking into account the inflation present in the economy in the present/ ongoing year or for whichever year it is being calculated.
Factor Cost vs. Market Price
Market Price = Factor Cost + Taxes - Subsidies
GVA -
- what it means?
- formula
- Gross Value Added - is the measure of the value of goods and services produced in an area, industry, or sector of an economy.
- GVA@basic prices = CE + OS/MI + CFC + Production taxes
CE - compensation to employees (salary)
OS - Operating Surplus (profit) - OS is for formal sector
MI - Mixed Income (income for the informal sector)
CFC - consumption of fixed capital, i.e. depreciation
CFC - is only in case of business and not salaried
In the developed nations MI is absent and only OS is considered.
In the developing nations, MI and OS both are present.
relationship b/w GVA and GDP
GDP = GVA@basic prices + Product Taxes - Product subsidies
PPP
Purchasing Power Parity - the exchange rate b/w the two countries is equal to the ratio of the currency’s respective purchasing power.
PPP Conversion factor
No. of units of a country’s currency required to buy the same amount of goods and services in its own domestic market as the US dollar would buy in the US market.
ICOR
- meaning?
- what does it measures?
- Factors on which it depends
- Incremental Capital Output Ratio - the amount of capital required to produce one additional unit of output
- Capital Intensity and efficiency
- a. Choice of Industries. In the case of basic industries like steel, cement, Aluminium etc, ICOR is high.
b. Time and cost overrun increases ICOR
c. Efficient technology increases ICOR and inefficient technology decreases ICOR
d. ICOR is directly proportional to high capacity utilization.
Marginal Cost
the amount required to produce one additional unit
Harrod Domar Method for growth rate
Growth Rate = Investment Rate/ ICOR
More savings means more loans.
World Happiness Report is published by
UN
Global Hunger Index is published by
International Food Policy Research Insititute
GDP as per income method
GDP = GVA@basic prices + Product Taxes - Product susidy
Monetary policy - what?
- interest rate determination
- inflation targetting
- promotion & development in the economy
MRS - what and replaced what?
MRS - Minimum Reserve System - Rs. 200 crore - Rs. 115 crore (in gold) + Rs. 85 crore (foreign govt. security - dollars, euro etc.)
PRS - Proportional Reserve System - 3/5 sterling and 2/5 gold reserves
GDP as per the expenditure method
= C + I + G + NX
where C - private I - Corporate G - Government NX - net exports
GDP as per the output method
= [Sales + Closing Stock - Opening Stock] X price
Prices to be taken for the base year
Harrod Damor Model
more savings, more loans
RBI - controller of credit - how?
Quantitative control measures
- Bank Rate
- Cash Reserve Ratio (CRR)
- Statutory Liquidity Ratio (SLR)
- Repo & Reverse Repo rate
- Marginal Standing Facility (MSF)
Qualitative Control Measures
- Rationing of credit
- Variation in margin requirement
- Regulating loans for consumption purpose
- Moral Suasion
- Direct Action
Bank Rate
RoI @ RBI provides refinancing and rediscounting to commercial banks
the bank rate has been aligned to the MSF rate, i.e.
bank rate = MSF
MSF = Repo rate + 0.25% - can change
this loan can be raised by the banks without pledging the securities
bps
basis points - it is 1/100th of a percentage, i.e. 75 basis points = 0.75%
CRR
- what is it?
- how does the RBI control monetary policy through the CRR?
the ratio of the average daily balance of the NDTL (Net Demand and Time Liabilities) to be kept in cash with the RBI.
RBI increases CRR - tight monetary policy - to control inflation
RBI - decreases - CRR - liberal monetary or credit policy
NDTL
- full form
- what
- Net Demand and Time Liabilities
2. CASA + FD
SLR
the ratio of NDTL to keep with itself in the form of liquid assets - government securities, cash, or gold.
Repo
- what?
- feature?
- loans for how long?
- how are the repo and reverse repo rates used to control the monetary policy?
- Repurchase Option - interest rate @ RBI provides a loan to the banks
- presently the repo rate is the policy rate, which determines the monetary policy of RBI.
- loans at this interest rate are provided for 7, 14, 28 and 56 days
- a. RBI buys government bonds at the repo rate to inject liquidity and increase investment. Also used during the slowdown.
b. RBI sells the government bonds at the reverse repo rate in the case of inflation to squeeze and absorb liquidity.
OMOs
Open Marketing Operations - RBI using the repo and reverse repo maintains the liquidity in the economy by buying and selling the government bonds.
performed through the auction route, not binding on the banks
LAF
- what?
- falls under which scheme?
- tools used?
Liquidity Adjustment Facility - managing liquidity in case of foreign currencies;
it’s a part of the Market Stabilization Scheme (MSS);
the tools used in this case are repo and reverse repo
MSF
- what is it?
- what is the exception provided to the banks in this case?
- why is it used?
- what are the conditions with MSF?
Marginal Standing Facility -
- an additional amount of overnight money
- banks are allowed to take a dip in their SLR portfolio
- to tackle sudden liquidity shocks
- 2 conditions:
1. MSF rate = Repo rate + 25 bps (can change)
2. max. amount allowed under MSF = 1% of NDTL
Repo vs. OMO vs. CRR - the difference in them in terms of liquidity?
Repo - short term liquidity
OMO - medium-term liquidity
CRR - long term liquidity
Interest rate corridor
= [Reverse Repo - Repo - MSF]
- banks can borrow from anyone else other than RBI within an interest rate falling into this corridor
SDF
Standing Deposit Facility
- RBI w/o providing any security absorbs extra cash; though the interest rate is still applicable, it is lower than the reverse repo rate.
Rationing of Credit
- what?
- RBI guidelines
- Distribution as per RBI guidelines
credit to be given by the banks in accordance with the priorities in the sector.
RBI has directed the banks to direct 40% of its total credits at any given point of time to the priority sector
40% priority sector distribution:
- 18% to agriculture
- 10% weaker sections
- 7.5% micro enterprises
Priority Sectors in India
- Agriculture
- Education
- MSMEs
- Housing
- Export Credit etc.
Variation in margin requirements
raise margin on loans for essential commodities so as to prevent hoarding, speculation and black marketing
Regulating loans for consumption purpose
less credit for consumption purpose
more credit for productive purpose
- Moral Suasion
2. Direct Action
- combination of persuasion and pressure - letters, discussions, etc.
- punitive action against errant banks - refusing to refinance, cancellation of license, etc.
Scheduled Commercial Banks
Commercial banks mentioned in the 2nd schedule of RBI Act, 1934
Conditions to be Scheduled Commercial Bank
- paid-up capital >= Rs. 5 lacs
2. must work in the interest of depositors
Small Bank
- Eligibility
- Conditions to be met after being designated as a small bank
- a. paid-up capital >= Rs. 100 crore
b. experience of 10 years in finance - It’s like a regular bank, but 25% of its branches have to be in the rural sector and 50 % of the loans should go to the MSMEs
Payment bank
- Limitations/ Features
- Which type of cards can they issue?
- Purpose?
- The main source of revenue?
- only CASA available; no FD option available
- can issue debit and ATM cards, but not credit cards
- cannot provide loans; the main focus is to improve financial inclusion
- main sources of revenue - government securities, mutual funds
Base Rate
rate of interest below which the bank is not allowed to provide loans - as directed by the RBI. It varies from bank to bank according to their cost of operation.
people eligible for loans below the base rate
- own employees
- bank’s depositors against their own deposits
- Differential Rate of Interest (DRI) Advances - poorest of the poor gets loan @ 4%
SARFAESI Act, 2002
Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- CIBIL - Credit Information Bureau Ltd.
- The bank is allowed to seize the security if the loan has defaulted.
NA in the following cases:
1. unsecured loan, eg. education loan w/o security
2. loan amount < 1 Lac
3. 80 % or more already paid
ARC
Asset Reconstruction Companies
BASEL norms - the main focus
- Minimum capital Requirement
- Market Discipline
- Supervisory Review of Capital Adequacy
Ratios proposed by BASEL norms
- Capital Adequacy Ratio (CAR)
- Leverage Ratio
- Liquidity Coverage Ratio
NVA
= Value of Output - Intermediate Consumption - CFC
Problems with the GDP concept
- does not measure the standard of living or well being of people
- does not guarantee an equitable distribution of wealth
- does not provide any information about the environmental degradation and resource depletion
- does not tell anything about sustainability
Functions of RBI
- Handling the borrowing program of the GoI
- Issues currency of Rs. 2 notes and above. Coins and rupee 1 note are minted/ printed by the GoI but distributed by the RBI
- RBI is the banker to the banks, guardian of money and banking system.
- Guardian of FOREX
- Lender of last resort
- Controller of credit created by various commercial banks
- Monetary policy formulation
DMO
Debt Management Office
PDMA
Public Debt Management Agency
PDMC
Public Debt Management Cell
ICRR
what?
when?
Incremental CRR
The incremental CRR requirement will be a temporary measure and it is within RBI’s ‘liquidity management framework’. Introduced demonetization in 2016 to absorb old currency notes from the market.
Banks had to maintain 100% CRR for incremental deposits they received during that time.
Monetary Policy Committee (MPC):
- Composition
- Ex-officio Chairman
- meeting how many times?
- Voting?
- Information to be published?
- Monetary Policy Report - published when?
- Monetary Policy Report - published why?
- 6 members = 3 RBI officials + 3 government officials
- RBI Governor
- at least 4 times a year
- majority, in case of a tie, RBI Governor shall have a casting vote.
- Resolution adopted to be published after each meeting and on the 14th day after the meeting the following needs to be published:
a. Resolution adopted by MPC
b. Vote of each member on the resolution
c. statement of each member on the resolution - to be published once in every 6 months
- to explain the source of inflation and forecast of inflation for 6 to 18 months.
MCLR
- Purpose
- how many MCLR is published by the bank?
Marginal Cost based Lending Rate
- to extend the benefit of cheap borrowing and for short tenure to the customer, which was previously limited to the banks.
- banks need to publish their MCLR (Marginal Cost based Lending Rate) for 1 day, 1 month, 3 months, 6 months and a year
