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Friday, 17 July 2015 06:37

GDP, NDP, GNP, NNP, CRR, SLR, REPO RATE, MSF, OMO, CPI, WPI

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Banking Basics Banking Basics

G.D.P = Monetary Value of all final goods & services produced within a country.

N.D.P = G.D.P – Depreciation

G.N.P = G.D.P  + Net Income abroad

Net Income abroad = Income of Indians abroad – Income of foreigners in India

N.N.P (@ Market Price) = G.N.P – Depreciation

 N.N.P (@ Factor Cost) = National Income =N.N.P – Indirect taxes + Subsidies

Per capita national income = National Income / Total Population

Net Disposable income = N.N.P (@M.P) + Current Transfer (From BOP)

Real G.D.P = Nominal G.D.P / G.D.P Deflator

G.D.P Deflator = G.D.P adjusted due to inflation on a base year

G.D.P is calculated at Factor cost in India for growth Purposes as net taxes + Subsidies can vary time to time.

All Operation is done By C.S.O (Central statistical organization)

REFLATION - Policy to stop the deflation without causing inflation (Good 4 Economy)

DEFLATION -  Fall in prices (Bad 4 Economy)

DISINFLATION– Slow Rate of Inflation (Good 4 Economy) /Creeping Inflation

STAGFLATION - Stagnation + Inflation (Prices rise + No new Jobs ) (Bad 4 Economy)

Galloping Inflation -  Inflation increasing in A.P or G.P

Hyper or Runaway Inflation – Inflation averaging 100%  in 3 years

Monetary policy -  Policy made by RBI to check inflation or deflation (to control money supply in system)

Financial intermediates  - Regulates flow of money  b/w households and business firms

  • Banking Institutions (Governed By RBI)
  • Non-Banking Institutions  (Governed By RBI)

Bank Rate (9% at Present)

  • When banks borrow long term funds from RBI, they’ve to pay a fixed interest rate to RBI
  • No Collateral (Bank can borrow money without pledging government securities to RBI)
  • Now a days used as penalty rate of 3 % or 5% over Bank rate for not maintaining CRR & SLR

BANK RATE INCREASED >> LESS MONEY WITH BANKS >>INFLATION REDUCED

SLR (Statutory Liquidity Ratio)

A Bank has to put 23% of total money (Demand & Time Liabilities) with RBI in form of gold, cash or government securities. (On Gov. securities Bank gets interest).

CRR (Cash Reserve ratio)

A bank has to set aside 4 % of total money (Demand & Time Liabilities) with RBI in form of cash.  (No interest to bank).

CRR / SLR INCREASED >> LESS MONEY WITH BANKS>>LESS LENDING TO BUSINESSES >> LESS INVESTMENT >> LESS DEMAND >>LESS SALES >>DECREASE IN PRICE>> INFLATION DECREASED

OMO (Open Market Operations)

When RBI starts buying/selling government securities to control money supply.

RBI SELLING SECURITIES >> LESS MONEY WITH BANKS >>INFLATION REDUCED

Liquidity Adjustment facility (LAF)

Repo Rate (8% at Present) – Policy Rate

  •  If client borrows money from RBI (for short term – Even overnight) then client has to pay a fixed interest rate to RBI.
  •  Collateral : Gov. Securities other than of CRR & SLR
  •  Inbuilt clause of automatic re-purchase after a certain period as decided.

Reverse Repo Rate (7% at Present)

  •  If client lends money to RBI (for short term – Even overnight) then RBI has to pay a fixed interest rate to client.
  •  Collateral : Gov. Securities other than of CRR & SLR
  •  Inbuilt clause of automatic re-purchase after a certain period as decided.

REPO RATE +1% = MSF   REPO RATE – 1%  = REVERSE REPO RATE

More Tools to Check Monetary Policy of RBI

Marginal Standing facility (MSF) – 9% at Present

  • Minimum 1 cr loan against 5 cr minimum in case of LAF.
  • Only scheduled commercial banks can borrow under this window (SBI, PNB, BOB, ICICI etc.)
  • Banks Can use securities from SLR quota.
  • Maximum credit of 2% of net time & demand liabilities.

Limitations of monitory policy - No quick Results

  • People don’t have many investment alternatives other than F.D, LIC, Saving Accounts & P.F
  • Banks have large deposits from main supplier i.e. Public money (RBI is not a prominent supplier of money to banks)
  • Whatever RBI does, its effect will be felt only after 6-8 months but by that time, new factors would cause another rise in inflation
  • Lack of financial inclusionà People relying on moneylenders & barter system of transaction
  • Monsoon uncertainty + Food inflation; Crude + Gold import + Weaken Rupee
  • RBI used (WPI – Food + Fuel) to formulate monitory policies instead of CPI

Qualitative tools to formulate Monetary Policy

Consumer credit regulation

RBI rule that minimum down-payment shall be x to get 1-x loan from the bank with monthly EMI minimum Y.

DOWNPAYMENT OR  EMI INCREASED >>DEMAND DECREASED >>INFLATION REDUCED

Loan to Value

LTV =  Loan/ Value of asset purchased (Collateral) >> Means if LTV is 75% & asset value is Rs.100 then one will get only 75 Rs. Against the value of purchased asset.

Margin Requirement

Minimum margin required in hand to get a loan for e.g. Margin required is 75% then one can get only 25% loan.

INCREASE M.R OR DECREASE LTV >>LESS MONEY TO BORROWER >>INFLATION REDUCED

Selective credit control

RBI  specifically instruct bankers not to give loans to traders of certain commodities e.g. sugar, edible oil etc. even if the said trader is ready to mortgage anything mainly to prevents speculations/ hoarding of commodities using money borrowed from banks

Priority Sector Lending (PSL)

RBI instruction to all domestic banks & foreign banks with more than 20 branches in India to lend at-least 40% of their NDTL to priority sectors (Foreign banks with less than 20 branches à 32%)

Priority sectors: Agriculture, Education, Housing, Export , Micro & Small Industries etc.

Tools to measure inflation: WPI, CPI, GDP DEFLATER

Until now inflation was measured on WPI-(Food + Fuel) but now from April 1, 2014 will be measured on CPI based on Urjit patel committee recommendations.

WPI - Wholesale price index : Headline inflation (WEEKLY)

  • Compiled by Office of Economic Adviser (Under Ministry of Commerce and Industry) on base year 2004  (Doesn’t cover services)

CPI - Consumer price index – Used by RBI To formulate Monitory Policy (MONTHLY)

  • Compiled by CSO under statistics Ministry (Covers services) >> Base year 2010
  • Measures inflation at final level or retail level (Average of all goods bought by consumers) consisting approx. 200 items.

 

GDP Deflator (QUATERLY)

  • Compiled by CSO under statistics Ministry: GDP @current price/ GDP @constant price
  • RBI /Government don’t use it much for policy making because GDP deflator data comes quarterly (and not weekly/monthly basis).

 

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