Introduction
PYQP
Cycle of Inflation and Recession
RBI Focuses on Demand Induced Inflation Only
Demand Increase - Demand Pull Inflation Taken Care by RBI
This List is NOT Exhaustive
- More Money with People
- Increased Population
- Govt Spending More
- ROI on Loans Reduced
Supply Decrease - Cost Push Inflation Taken Care by Government
This List is NOT Exhaustive
- Failure of Monsoon
- Increase in Cost of Raw Material
What can RBI do in Demand Inflation - Reduce Demand
Suck Out Excess Money → Leads to Reduced Demand
How does Inflation Affect - The Cycle
Affect to Consumer
- Things will become less affordable
- You Spend More and Savings Decrease
- Decrease in Purchasing Power of Rupee
- 2022 - Rs 20 with A - Can Buy 2 Apples
- 2023 - Rs 20 with B - Can Buy 1 Apple
- Hence, Reduction in Purchasing Power = Rate of Inflation
Affect on Manufacturer
1. There is NO Increase in Real Profits
%age change in real profit =
%age change in nominal profit - Inflation
= 100-100
= 0
- Input Cost is Increased
- Labour Wages Increased
Affect on Indian Economy
- Decrease in Investment
because no real profit
- Increase in Imports
to meet the demand
- Decrease in Exports
price higher in india, hence no market for costly material
Action of RBI
- Break the Cycle at Point of Increase in Demand
- Reducing Demand
- Sucks Out Money
- Contractionary Monetary Policy
- Policy Rates will be Increased
Cycle of Inflation and Recession is
Impact of Inflation and Recession on Indian Economy
Impact of Inflation on Various Aspects of Indian Economy
Impact of Recession on Various Aspects of Indian Economy
How RBI Controls Inflation - Taylor’s Rule
Monetary Policy Committee of RBI
Tools to Control Monetary Policy
Summary of All Qualitative and Quantitative Tools
Quantitative Tools
Conventional Tools
Reserve Requirement: CRR & SLR
Concept of NDTL
Focus on Assets and Liabilities of Banks
Difference Between Savings and Current Account
In what Time Frame is CRR calculated ?
Understanding CRR
Incremental CRR
Exemption on CRR Maintainence
SLR
Difference Between CRR & SLR
Why Do Banks buy G Secs ?
Concept of Lazy Banking
Liquidity Tool: Repo, MSF, SLF, Reverse Repo, SDF
RBI Gives Loan to Bank
Repo Rate
Transaction of 2 Legs
Here we have to take the Increment or Decrement in between the Legs of Transaction and not after the Transaction
Three Types of Tools which use 2 Leg Transactions are
- Repo Rate
- Reverse Repo Rate
- Forex Swap
Types of Repo
Repo can be used by RBI to Give which type of Loan ?
- Short Term Loans and
- Long Term Loans
Fixed Rate Repo
Facts & Details
- ROI = Prevailing Repo Rate
- Maturity Period : Ranges from 1 to 3 Years
- Introduced by RBI as a Part of Aatma Nirbhar Bharat
ROI on Short Term Loans is higher or Long Term Loan
Generally, ROI on Long Term Loans is higher
Why was fixed Rate Repo Introduced ?
To Inject Long Term Liquidity in Economy
During Covid Times, RBI wanted to Pump In Money
Normal Years, LT Loans would be 7%
When Normal Repo would be 6%
But in Covid Time, LT Loan was given at Repo Rate.
Type of Fixed Rate Repos
LTRO - Long Term Repo Operation
- ROI = Repo Rate
- Maturity : 1 to 3 Years
- No Guidelines on where to invest money
TLTRO - Targeted LTRO
- ROI = Repo Rate
- Not applicable to Small Finance Banks
- Maturity : 1 to 3 Years
- Compulsorily to be invested to a Specified Sector
- Either Give them Loan
- Or Invest in this Companies Corporate Bonds
- Commercial Paper Maturity Period: <1 Year
For Example: Aviation Company
Maturity Period: > 1 Year
SLTRO - Special LTRO
Applicable Only to Small Finance Bank
Mind Map
Variable Rate Repos
- To Pump in Money
- ROI : Decided by Auction or Bidding
- Duration : Different Durations
- Overnight Repo : for Just 1 Day
- Fortnight Repo : 14 Days
- 28 Days
- 56 Days
- Usually they are for a period less than 1 Year
- RBI Notification about Bidding
The ROI Bidding Start cannot be less than the Prevailing Repo Rate
Mind Map
MSF - Marginal Standing Facility
Difference Between Repo and MSF
Concept of BPS - 1 Basis Point (BPS)
1 BPS = 0.01 % of RoI
25 BPS = 0.25%
100 BPS = 1%
SLF - Standing Liquidity Facility
It is means of taking loans from RBi for Stand Alone Liquidity Facility
Bank Gives Loan to RBI
Reverse Repo
Introduction
- Repo > Reverse Repo → Repo will always be greater than Reverse Repo
To Prevent Banks from Giving RBI the Money as Loan, which it borrowed from RBI Itself → Phir Hera Pheri Nahin Karne Ka
- Repo → used for Injection
- It also has all types of Repo Things - Fixed and Variable Reverse Repo Rates
Concept of Reverse Repo
SDF
- Introduced Last Year - It is Part of Current Affairs
- Introduced on Recommendation of Urjit Patel Committee
- RBI Act, 1934 was Amended, SDF has been Introduced
- ROI is higher than Reverse Repo because its a Collateral Free Loan
- Difference between Reverse Repo and SDF
Summary of Repo, MSF, Rev Repo, SLF & SDF
Monetary Policy Corridor
Symmetric and Asymmetric Monetary Policy Corridor
Bank Rate
Defintion
Rate at Which RBI Rediscounts Bill of Exchange or Buys Commercial Paper
Earlier Case
Bank Rate → Defunct
Now Only as Penalty Rate of Interest for not maintaining CRR & SLR
Current Situation
Process - Not functioning right now, this is just for understanding
OMO - Open Market Operations
OMO - Think You are RBI
Suck Money - Sell G-Sec - During Inflation
Inject Money - Buy G-Sec - During Recession
Mind Map
Unconventional Tools
Concept of Rupee Appreciation & Depreciation
Remember Important Point***
Demand / Supply = Value
Demand Inc - Value Inc
Demand Dec - Value Dec
Supply Inc - Value Dec
Supply Dec - Value Inc
Market Stabilisation Scheme
Forex Swap
Forex Buy Sell Swap
Forex Sell Buy Swap
Yield Rate Management
Factors Affecting Yield Rates Are
- Government Borrowings
- ROI in USA & US Fed Bank Policies
- Rate of Interests DP to
Why increasing yield is not good for Govt
Types of Loans Given by Bank
Fixed Rate Loans
Floating Rate Loans
Ways to Control Yield Rates → OMO, Operation Twist, G SAP
Qualitative Tools
Margin Requirement & 5 Concepts
US Fed Dot Plot
Monetary Policy Stand of RBI
Accomodative - Expansioning
Neutral
Calibrated Tightening - Contractionary / Dear Money / Tight Money
Money