The Banking Tutor

Advanced Bank Management

Module A – Economic Analysis

001. Father of Economics - Adam Smith

002. An Enquiry into the Nature and Causes of the Wealth of Nations
(published in 1776) is written by Adam Smith

003. According to Adam Smith Economics is the study of how Wealth is

produced and consumed.

004. Adam Smith’s definition of Economics is known as Wealth

Definition.

005. Wealth Definition gave more importance to Wealth than to Man.

006. According to Prof Alfred Marshall Economics is Science of human

welfare.

007. Marshall’s definition of Economics is known as Welfare definition.

008. According to Lionel Robbins Economics is “the science which studies

human behaviour as a relationship between ends and scarce means which
have alternative uses”.

009. Robbin’s definition of Economics is known as Scarcity Definition.

010. Analysis of Scarcity definition - Man’s wants are unlimited. Means

(resources) to satisfy human wants are limited and also have alternative
uses. So man has to decide which want he will satisfy now and which he
would postpone. Ths Economics is also called a Science of Choice.

011. Founder of Micro Economics - Adam Smith

012. Microeconomics is the study of economics at an individual, group,

or company level.

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013. Micro economics is also called as the Price theory because it takes
into account the demand and supply of individual units and thus aims to
determine the price of a product using the factors of production.

014. Slicing method refers to the method through which the

microeconomics studies the behaviour of economic units. Under
microeconomics, the economic units are divided into smaller individual
units which are then studied in detail. Thus, this method of splitting the
units into smaller ones is known as slicing method.

015. Macroeconomics is the study of a national economy as a whole.

Macroeconomics focuses on issues that affect nations and the world
economy.

016. Macro Economics study aggregated indicators such as GDP,

Unemployment Rates and Price Indices to understand how the whole
economy functions.

017. The 3 problems of an Economic Organization

What to Produce in which quantities?
How to Produce?
For whom to Produce?

018. A Market Economy (aka Capitalist Economy) is an economic

system in which production and prices are determined by unrestricted
competition between privately owned businesses. The activity in a market
economy is unplanned; it is not organized by any central authority but is
determined by the supply and demand of goods and services. The United
States, England, and Japan are all examples of market economies.

019. The terms “Capitalist Economy” and “Market Economy” are used
interchangeably. But the two are differ slightly. Basis for Capitalist and
Market systems is the law of supply and demand, which becomes the
basis to determine the price and production of goods and services. But
Capitalism is focused on the creation of wealth and ownership of capital
and factors of production, whereas a free market system is focused on the
exchange of wealth or goods and services.
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20. Socialistic Economy (also known as Command Economy), means
economic system controlled and regulated by the government so as to
ensure welfare and equal opportunity to the people in a society. In a
socialistic economy private companies or individuals are not allowed to
freely manufacture the goods and services. The production occurs
according to the needs of the society and at the command of the State or
the Planning Authorities. The market and the factors of supply and
demand will play no role here.

021. The idea of socialism is first introduced by Karl Marx and Fredric
Engles in their book, ‘The Communist Manifesto’.
022. The word socialism means ‘all things to all men’.

023. Mixed Economy is an economic system that combines elements of

a capitalist, market-based system, with a socialist, command economy
system. It mixes elements such as private property rights, free trade, and
privatization, with socialist elements such as regulation, the welfare state,
and re-distribution.

024. In 1991, India began to loosen its economic restrictions and an

increased level of liberalization led to growth in the country's private
sector. Today, India is considered a mixed economy: the Private , Public
and Joint Sectors co-exist.

025. Laissez-faire is an economic philosophy of free-market capitalism

that opposes government intervention. The theory of laissez-faire was
developed by the French Physiocrats during the 18th century and believes
that economic success is more likely the less governments are involved in
business. It is a extreme case of a Market Economy.

026. The term laissez-faire means, in French, “allow to do.”

027. Ceteris paribus is a Latin phrase that generally means "all other
things being equal." (other things held constant) In economics, it acts as
a shorthand indication of the effect one economic variable has on another,
provided all other variables remain the same.

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028. The invisible hand is a metaphor for the unseen forces that move
the free market economy. Through individual self-interest and freedom of
production and consumption, the best interest of society, as a whole, are
fulfilled. The constant interplay of individual pressures on market supply
and demand causes the natural movement of prices and the flow of trade.
Adam Smith introduced the concept in his book 1759 book "The Theory
of Moral Sentiments" and later in his 1776 book "An Inquiry into the
Nature and Causes of the Wealth of Nations."

029. Theory of Supply and Demand explains the interaction between the
sellers of a resource and the buyers for that resource. The theory defines
the relationship between the price of a given good or product and the
willingness of people to either buy or sell it. Generally, as price increases,
people are willing to supply more and demand less and vice versa when
the price falls. The theory is based on two separate "laws," the law of
demand and the law of supply. The two laws interact to determine the
actual market price and volume of goods on the market.
030. The law of demand says that, other things held constant, at higher
prices, buyers will demand less of an economic good.

031. Law of Demand says, ceteris paribus, there exists an inverse relation
between the Price of a Good and Quantity Demanded of that Good. This
relationship is called the Demand Schedule or Demand Curve.

032. A demand schedule is a table that shows the quantity demanded of

a good or service at different price levels.

033. The graphical representation of demand schedule is demand curve

on a chart where the Y-axis represents price and the X-axis represents
quantity.

034. The Demand Curve slopes downward from left to right because of
the negative relationship between the price of the commodity and its
demand and its slope is negative.
035. Demand curve is downward sloping due to following reasons :
a) Substitution effect (b) Income effect

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036. The substitution effect refers to the change in demand for a good as
a result of a change in the other substitute goods.

037. Examples of the Substitution Effect - Beef prices rise and consumers
respond by purchasing more chicken.

038. The income effect describes how the change in the price of a good
can change the quantity that consumers will demand of that good and
related goods, based on how the price change affects their real income.
For example, if a household spends one fourth of its income on rice, a 40%
decline in rice prices will increase the household’s disposable income,
which they can spend in purchasing either more rice or something else.

039. Spending more on something else is known as the substitution effect.

040. Market Demand is the sum total of all individual demands.

041. Forces behind the Market Demand - The following factors determine
market demand for a commodity.

a. Tastes and Preferences of the Consumers:

b. Income of the People:

c. Changes in Prices of the Related Goods:

d. Advertisement Expenditure:
e. Size of the Market (The Number of Consumers)

f. Special Influences. The demand for umbrellas is high in rainy Mumbai,

but low in sunny Delhi.

g. Consumers’ Expectations with Regard to Future Prices.

042. Movement along the demand curve - A change in price causes a

movement along the demand curve. It can either be contraction (less
demand) or expansion/extension (more demand). The demand changes
as a result of changes in price, other factors determining it being held
constant. Such change (increase or decrease) is called Movement on the
Demand Curve.

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043. Shifts in Demand Curve – Some more factors, other than Price, also
determine the position or level of demand curve of a commodity. When
there is a change in these non-price factors, the whole curve shifts
rightward or leftward as the case may be.

044. The law of supply says that, other things held constant, at higher
prices, sellers will supply more of an economic good. This positive (or
Direct) relationship between price and quantity supplied—that a higher
price leads to a higher quantity supplied and a lower price leads to a lower
quantity supplied—the law of supply. The law of supply assumes that all
other variables that affect supply are held constant.
045. A supply schedule is a table that shows the quantity supplied at each
price.

046. A supply curve is a graphical representation of the supply schedule.

047. Supply Curve is an up-ward sloping Curve. Reason for the Upward-
slope is the Law of Diminishing Returns.
048. Law of Diminishing Returns also called principle of Diminishing
Marginal Productivity, states that that predicts that after some optimal
level of capacity is reached, adding an additional factor of production will
actually result in smaller increases in output. For example, a worker may
produce 100 units per hour for 40 hours. In the 41st hour, the output of
the worker may drop to 90 units per hour. This is known as Diminishing
Returns because the output has started to decrease or diminish.
049. Factors affecting the supply curve
a) Cost of production (b) Prices of Related Goods (c) Government Policy

d) Special factors like weather (e) Productivity of workers. (f) Technological

improvements.

050. Movement along a supply curve represents the variation in quantity

supplied of the commodity with a change in its price and other factors
remaining unchanged. The movement in supply curve can be of two types
– extension and contraction.

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051. Shift in supply curve - The amount of commodity that the producers
or suppliers are willing to offer at the marketplace can change even in
cases when factors other than the price of the commodity change. Such
non-price factors can be the cost of factors of production, tax rate, state
of technology, natural factors, etc. When the quantity of the commodity
supplied changes due to change in non-price factors, the supply curve
does not extend or contract but shifts entirely. For an instance, the
introduction of improved technology in industries helps in reducing the
cost of production and induces production of more units of a commodity
at the same price. As a result, the quantity of commodity supplied
increases but the price of the commodity remains as it is.
052. Joint supply occurs when two goods are supplied together. Example
If we produce beef we will get leather as a by product.
053. A by-product or byproduct is a secondary product derived from a
production process, manufacturing process or chemical reaction; it is not
the primary product or service being produced.

054. Equilibrium is the state in which market supply and demand balance
each other, and as a result prices become stable. Generally, an over-supply
of goods or services causes prices to go down, which results in higher
demand—while an under-supply or shortage causes prices to go up
resulting in less demand.

055. An increase in demand causes the equilibrium price to rise. On the

other hand, a decrease in demand causes the equilibrium price to fall. An
increase in supply causes the equilibrium price to fall, while a decrease in
supply causes the equilibrium price to rise.

056. Equilibrium means a state of no change. Evidently, at the equilibrium

price, both buyers and sellers are in a state of no change. Technically, at
this price, the quantity demanded by the buyers is equal to the quantity
supplied by the sellers. Both market forces of demand and supply operate
in harmony at the equilibrium price.
057. Equilibrium Price is also known as Market Clearing Price.

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058. Normal goods experience an increase in demand when incomes
increase.

059. An inferior good is a good whose demand drops when people's

incomes rise. An inferior good is the opposite of a normal good.

060 Luxury Good is not necessary to live, but it is deemed highly desirable
within a culture or society. Demand for luxury goods increases when a
person's wealth or income increases.

061. Related Goods - There are two types of related goods in general

(a) substitute good - good(s) which can be consumed instead of the

product. Example - Sugar and Jaggery
(b) complementary good - good(s) which is consumed together with the
product. Example - Shoes and Socs.

062. Giffen Goods, named after the Scottish economist Sir Robert Griffin,
are goods whose demand increases even if prices rise, largely because
there are few substitutes or alternatives for them. A classic example of a
Giffen Good would be rice. If consumers have no choice but to purchase
the rice they will continue to do so, even if it becomes more expensive.
063. Veblon Good is a good for which demand increases as the price
increases, because of its exclusive nature and appeal as a status symbol.

064. A Veblen good has an upward-sloping demand curve, which runs

counter to the typical downward-sloping curve.

065. Veblen good is generally a high-quality, coveted product, in contrast

to a Giffen good, which is an inferior product that does not have easily
available substitutes.

066. Functions of Money -

(a) Medium of Exchange (b) Store of Value,

(c) Measure of Value (d) Standard of deferred payment.

067. Money Supply refers to the stock of money available in the economy
at a given point of time.

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068. Money Supply affects the price level, exchange rates, GDP and
businesss cycles in the economy.

069. The Ratio between Money Supply and GDP is called Velocity of
Money.

070. Common Measures of Money Supply

(a) Monetary Base or Reserve Money (M0) is the sum of Currency in

Circulation, Bankers’ Deposits with RBI, and ‘Other’ Deposits with RBI.

(b) Narrow Money (M1) is the sum of Currency with the Public, Demand
Deposits with the Banking System, and ‘Other’ Deposits with RBI.

(c) M2 = M1 + Balance in Savings Accounts with Postal Department

(d) M3 = M1 + Time Deposits of Banking System.

(e) M4 = M3 + All Deposits with Postal Department

071. Very often, the money supply in the economy is represented using a
monetary aggregate called ‘broad money’, also denoted as M3.

072. Significance of M3: M3 captures the complete balance sheet of the

banking sector.
073. Inflation is the decline of purchasing power of a given currency over
time.

074. Inflation refers to a sustained increase in the general level of prices

of goods and services in an economy over a period of time.
075. A chief measure of Price Inflation is the Inflation Rate. (i.e. the
annualised percentage change in a general price index over time).

076. There are three main causes of inflation:

(a) demand-pull inflation (b) cost-push inflation

077. Demand-pull inflation refers to situations where there are not

enough products or services being produced to keep up with demand,
causing their prices to increase.

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078. Cost-push inflation occurs when overall prices increase due to
increases in the cost of wages and raw materials. Higher costs of
production can decrease the aggregate supply (the amount of total
production) in the economy.

079. Measures of Inflation - Inflation refers to rise in the general price level.
The general price level is measured by a price index.
080. A price index is a weighted average of price relatives for a given
class of goods or services in a given region, during a given interval of time.
It is a statistic designed to help to compare how these price relatives, taken
as a whole, differ between time periods or geographical locations.

081. Most Important Price Indices are

(a) Wholesale Price Index (WPI)

(b) Consumer Price Index (CPI)

© GDP deflator.

082. A wholesale price index (WPI) measures and tracks the changes in the
price of goods before they reach consumers: goods that are sold in bulk
and traded between entities or businesses (rather than consumers).
Wholesale price indexes (WPIs) are one indicator of a country's level of
inflation.

083. The consumer price index (CPI) measures changes over time in the
general level of prices of goods and services that a reference population
acquires, uses or pays for consumption. Each summary measure is
constructed as a weighted average of a large number of elementary
aggregate indices.

[Link] GDP price deflator measures the changes in prices for all of the
goods and services produced in an economy. The GDP price deflator is a
more comprehensive inflation measure than the CPI index because it is
not based on a fixed basket of goods.

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085. Deflation is a general decline in prices for goods and services,
typically associated with a contraction in the supply of money and credit
in the economy. During deflation, the purchasing power of currency rises
over time.

086. Disinflation is a temporary slowing of the pace of price inflation and

is used to describe instances when the inflation rate has reduced
marginally over the short term.

087. Disinflation Vs Deflation

Disinflation: A situation where inflation increases at a slower rate.

Deflation: A situation where inflation is negative (i.e., a decrease in the
prices of goods and services in the economy).
088. Reflation is a fiscal or monetary policy designed to expand output,
stimulate spending, and curb the effects of deflation, which usually occurs
after a period of economic uncertainty or a recession. The term may also
be used to describe the first phase of economic recovery after a period of
contraction.

089. Stagnation is a situation that occurs within an economy when total

output is either declining, flat, or growing slowly. Persistent
unemployment is also a characteristic of a stagnant economy. Stagnation
results in flat job growth, no wage increases, and an absence of stock
market booms or highs.

090. Stagflation is a combination of the words stagnation and inflation. It

describes an economic condition characterized by slow growth and high
unemployment (economic stagnation) mixed with rising prices (inflation).

085. The interest is the amount a lender charges a borrower for use of a
sum of money for a period of time.

091. There are 4 types of Income – Rent, Wages, Profit & Interest.

092. Classical Theory of Interest – propounded by Marshall & Fisher.

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093. Classical Theory of Interest also known as Demand and Supply
Theory. As per this theory, Rate of Interest is determined by equilibrium of
demand and supply of savings. As per this Theory, Interest is a Price paid
for Supply of Savings to meet the Demand for Investment.

094. J M Keynes’ Book – “The General Theory of Employment, Interest and

Money”
095. According to Liquidity Preference Theory of J M Keynes, the rate of
interest is purely monetary phenomenon and is determined by demand
for and supply of money.

096. According to Keynes, Rate of Interest and Bond Prices are related
inversely.
097. The initials LM stands for “Liquidity Preference and Money Supply”’

098. Liquidity preference means demand for money.

099. According to Keynes ,Interest is a reward for parting with liquidity for
a specific period.

100. IS Curve is derived from Classical Theory of Interest of Marshall and

Fisher.
101. The 3 elements of Interest
a) Payment for risk involved in making the loan.

b) Payment for the trouble involved.

c) Pure interest, that is a payment for the use of the money.

102. LM Curve is derived from Keynesian Liquidity Preference Theory.

103. The two economists after Keynes, J. R. Hicks (1904-1989) and Alvin
Hansen (1887-1975), have shown that although both the classical and r
Keynesian theories of interest are indeterminate, they together may give
us a complete and determinate theory of interest. The theory of Hicks and
Hansen, made up of these two theories, is known as the Hicks-Hansen
theory of interest.

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104. The IS-LM model,( also known as Hicks – Hansen’s determinate theory
of interest) which stands for "investment-savings" (IS) and "liquidity
preference-money supply" (LM) is a Keynesian macroeconomic model that
shows how the market for economic goods (IS) interacts with the loanable
funds market (LM) or money market. It is represented as a graph in which
the IS and LM curves intersect to show the short-run equilibrium between
interest rates and output. The IS and LM curves relate to income levels and
interest rates. Taken by themselves they cannot tell us either about the
level of income or the rate of interest. It is only their intersection that
determines the rate of interest.

105. A business cycle is the periodic growth and decline of a nation's

economy, measured mainly by its GDP. Business cycles are comprised of
concerted cyclical upswings and downswings in the broad measures of
economic activity—output, employment, income, and sales.
106. Business cycles are characterized by boom in one period and collapse
in the subsequent period in the economic activities of a country.

107. These fluctuations in the economic activities are termed as phases of

business cycles.
108. The fluctuations are compared with ebb and flow. Such changes
represent different phases of business cycles.

(1) Expansion (2) Peak (Boom) (3) Recession (4) Trough (Depression) (5)
Recovery.
109. Business Cycles also known as Economic Cycles and Trade Cycles.
110. Expansion - In the expansion phase, there is an increase in various
economic factors, such as production, employment, output, wages, profits,
demand and supply of products, and sales.

In addition, in the expansion phase, the prices of factor of production and

output increases simultaneously. In this phase, debtors are generally in
good financial condition to repay their debts; therefore, creditors lend
money at higher interest rates. This leads to an increase in the flow of
money.

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In expansion phase, due to increase in investment opportunities, idle
funds of organizations or individuals are utilized for various investment
purposes. Therefore, in such a case, the cash inflow and outflow of
businesses are equal. This expansion continues till the economic
conditions are favorable.

111. Peak (Boom) - The growth in the expansion phase eventually slows
down and reaches to its peak. This phase is known as peak phase. In other
words, peak phase refers to the phase in which the increase in growth rate
of business cycle achieves its maximum limit. In peak phase, the economic
factors, such as production, profit, sales, and employment, are higher, but
do not increase further. In peak phase, there is a gradual decrease in the
demand of various products due to increase in the prices of input.
The increase in the prices of input leads to an increase in the prices of final
products, while the income of individuals remains constant. This also leads
consumers to restructure their monthly budget. As a result, the demand
for products, such as jewellery, homes, automobiles, refrigerators and
other durables, starts falling.

112. Recession - In peak phase, there is a gradual decrease in the demand

of various products due to increase in the prices of input. When the decline
in the demand of products becomes rapid and steady, the recession phase
takes place.

In recession phase, all the economic factors, such as production, prices,

saving and investment, starts decreasing. Generally, producers are
unaware of decrease in the demand of products and they continue to
produce goods and services. In such a case, the supply of products
exceeds the demand.

Over the time, producers realize the surplus of supply when the cost of
manufacturing of a product is more than profit generated. This condition
firstly experienced by few industries and slowly spread to all industries.

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This situation is firstly considered as a small fluctuation in the market, but
as the problem exists for a longer duration, producers start noticing it.
Consequently, producers avoid any type of further investment in factor of
production, such as labor, machinery, and furniture. This leads to the
reduction in the prices of factor, which results in the decline of demand of
inputs as well as output.

113. Trough (Depression) - During the trough phase, the economic

activities of a country decline below the normal level. In this phase, the
growth rate of an economy becomes negative. In addition, in trough
phase, there is a rapid decline in national income and expenditure.

In this phase, it becomes difficult for debtors to pay off their debts. As a
result, the rate of interest decreases; therefore, banks do not prefer to lend
money. Consequently, banks face the situation of increase in their cash
balances.

Apart from this, the level of economic output of a country becomes low
and unemployment becomes high. In addition, in trough phase, investors
do not invest in stock markets. In trough phase, many weak organizations
leave industries or rather dissolve. At this point, an economy reaches to
the lowest level of shrinking.

114. Recovery - In trough phase, an economy reaches to the lowest level

of shrinking. This lowest level is the limit to which an economy shrinks.
Once the economy touches the lowest level, it happens to be the end of
negativism and beginning of positivism.
This leads to reversal of the process of business cycle. As a result,
individuals and organizations start developing a positive attitude toward
the various economic factors, such as investment, employment, and
production. This process of reversal starts from the labor market.

Consequently, organizations discontinue laying off individuals and start

hiring but in limited number. At this stage, wages provided by
organizations to individuals is less as compared to their skills and abilities.
This marks the beginning of the recovery phase.
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In recovery phase, consumers increase their rate of consumption, as they
assume that there would be no further reduction in the prices of products.
As a result, the demand for consumer products increases.

In addition in recovery phase, bankers start utilizing their accumulated

cash balances by declining the lending rate and increasing investment in
various securities and bonds. Similarly, adopting a positive approach other
private investors also start investing in the stock market As a result,
security prices increase and rate of interest decreases.

Price mechanism plays a very important role in the recovery phase of

economy. During recession the rate at which the price of factor of
production falls is greater than the rate of reduction in the prices of final
products.

Therefore producers are always able to earn a certain amount of profit,

which increases at trough stage. The increase in profit also continues in
the recovery phase. Apart from this, in recovery phase, some of the
depreciated capital goods are replaced by producers and some are
maintained by them. As a result, investment and employment by
organizations increases. As this process gains momentum an economy
again enters into the phase of expansion. Thus, a business cycle gets
completed.
115. Recession stage is also known as Crisis.

116. Agriculture is known as Primary Sector in India.

117. Service Sector is also known as Tertiary Sector.
118. Definition of MSME ( with effect from 01-07-2020)

An enterprise shall be classified as a Micro, Small or Medium Enterprise on

the basis of the following Composite Criteria of Investment in Plant &
Machinery or Equipment (PME) and Turnover.

(i) a Micro Enterprise is one where the investment in PME does not exceed
Rs 1 Crore and turnover does not exceed Rs 5 Crores.

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(ii) a Small Enterprise is one in which the investment in PME does not
exceed Rs 10 Crores and turnover does not exceed Rs 50 Crores and

(iii) a Medium Enterprise is one in which the investment in PME does not
exceed Rs 50 Crores and turnover does not exceed Rs 250 Crore.

119. Significant Economic Reforms were started in India in 1991.

120. The Twin economic imbalances existed during 1990s – Fiscal Crisis
and External Payment Crisis.

121. ITES – Information Technology and Enabled Services.

122. ToT - Terms of the Trade

123. IRS - Interest Rate Swap

124. FRA – Forward Rate Agreement
125. CBLO – Collateralised Borrowings and Lending Obligation

126. WMA – Ways and Means Advance

127. CCI – Controller of Capital Issues

128. ECB – External Commercial Borrowings

129. HDI – Human Development Index

130. Monetary policy refers to central bank activities that are directed
toward influencing the quantity of money and credit in an economy.

131. Fiscal policy refers to the government's decisions about taxation and
spending. Both monetary and fiscal policies are used to regulate economic
activity over time.

132. Monetary Policy is a tool by which RBI controls (a) Money Supply (b)
Availability of Money and (c) Cost of Money.

133. RBI makes Monetary Policy statements Bi-monthly.

134. There are three common types of monetary policy. These are:

a) Expansionary Monetary Policy b) Contractionary Monetary Policy

c) Unconventional Monetary Policy

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135. Expansionary Monetary Policy increases the total supply of money
in the economy.

136. Contractionary Monetary Policy decreases the total supply of money

in the economy.

137. Unconventional monetary policy is pursued by RBI when their

traditional instruments of monetary policy cease to achieve their goals.
The one such unconventional monetary policy was employed us United
States after the financial crisis of 2007 in the form Quantitative Easing (QE).

138. Tools of Monetary Policy

Bank Rate
Repo & Reverse Repo
Cash Reserve Ration (CRR)
Statutory Liquidity Ratio (SLR)
Market Stabilisation Scheme (MSS)
Open Market Operations (OMO) - LAF; MSF, Refinance
Selective Credit Control
Moral Suasion

139. Bank Rate is the rate of interest which a Central Bank (RBI) charges
on the loans and advances to a commercial bank, without selling or
buying any security.

140. Repo rate is the discount rate at which a central bank (RBI)
repurchases government securities from the commercial banks,
depending on the level of money supply it decides to maintain in the
country's monetary system. ... Repo is short for Repossession.

141. Reverse Repo Rate is the rate at which RBI borrows money from the
commercial banks.

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142. Bank Rate & Repo Rate – Both are similar in respect of nature of
transaction involved. Both are related to Funds lent / invested by RBI to
Commercial Banks. However, Bank Rate related to Long Term Transactions
and no collateral is involved. Repo Rate is related to Short Term
transactions and it is backed by Collaterals with Repurchase Agreement.

143. Normally Bank Rate is higher than Repo Rate.

144. Liquidity Adjustment Facility (LAF) – LAF is a monetary policy tool,

primarily used by the RBI, to manage liquidity and provide economic
stability. LAF include both Repo and Reverse Repo Agreements.

LAF can manage inflation by increasing and reducing money supply.

145. MSF (Marginal Standing Facility) is a window for banks to borrow

from Reserve Bank of India in emergency situation when inter-bank
liquidity dries up completely. Banks borrow from the Central Bank by
pledging government securities at a rate higher than the Repo Rate.

Under MSF, banks can borrow funds up to one percentage of their Net
Demand and Time Liabilities (NDTL).

146. Section 42 of the RBI Act 1934, says that every scheduled bank must
have an average daily balance with the RBI. The amount of the deposit
shall be more that a certain percentage of its net time and demand
liabilities in India. This is known as CRR (Cash Reserve Ratio)

147. Statutory Liquidity Ratio or SLR is a minimum percentage of

deposits that a commercial bank has to maintain in the form of liquid cash,
gold or other securities. It is basically the reserve requirement that banks
are expected to keep before offering credit to customers.

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148. Market Stabilization Scheme (MSS) is aimed to sterilize the excess
money supply created due to foreign exchange market intervention by the
RBI. The stabilisation through withdrawal of excess money supply is done
by issuing market stabilisation bonds (MSBs) to financial institutions.

149. Open Market Operations (OMO) refers to a central bank buying or

selling short-term Treasuries and other securities in the open market in
order to influence the money supply. ... Buying securities adds money to
the system, making loans easier to obtain and interest rates decline.

150. Selective credit control is a tool in the hands of Reserve Bank of

India to restrict bank finance against sensitive commodities. These
sensitive commodities generally include: (i) Food grains i.e., cereals and
pulses. ... (i) Minimum margin for lending against security of specified
commodities is fixed.

151. Moral suasion is a qualitative method of credit control, being used

by the central bank. Under this method, the Central Bank merely uses its
moral influence on the commercial banks. It includes the advice,
suggestion request and persuasion with the commercial banks to co-
operate with the Central Bank.

152. LTRO is a tool under which the central bank provides one-year to
three-year money to banks at the prevailing repo rate, accepting
government securities with matching or higher tenure as the collateral.

153. LTRO Vs LAF & MSF

While the RBI’s current windows of liquidity adjustment facility (LAF) and
marginal standing facility (MSF) offer banks money for their immediate
needs ranging from 1-28 days, the LTRO supplies them with liquidity for
their 1- to 3-year needs. LTRO operations are intended to prevent short-
term interest rates in the market from drifting a long way away from the
policy rate, which is the repo rate.

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154. TLTRO stands for Targeted Long Term Repo Operations. It is same as
LTRO with a difference that the money borrowed by the banks under this
scheme has to be deployed in investment-grade corporate bonds,
commercial paper, and non-convertible debentures. Hence the name
Targeted LTRO.

155. Fiscal policy refers to the use of government spending and tax
policies to influence economic conditions, especially macroeconomic
conditions, including aggregate demand for goods and services,
employment, inflation, and economic growth.

156. There are three main types of fiscal policy:

Neutral: This type of policy is usually undertaken when an economy is in

equilibrium. In this instance, government spending is fully funded by tax
revenue, which has a neutral effect on the level of economic activity.

Expansionary: This type of policy is usually undertaken during recessions

to increase the level of economic activity. In this instance, the government
spends more money than it collects in taxes.

Contractionary: This type of policy is undertaken to pay down

government debt and to cap inflation. In this case, government spending
is lower than tax revenue.

157. Fiscal Policy Tools Government Spending & Taxes & Transfer
Payments

158. Transfer Payments include things like Social Security, welfare or

unemployment checks.

159. The Fiscal Responsibility and Budget Management (FRBM) Act was
enacted in 2003 which set targets for the government to reduce fiscal
deficits.

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160. Objectives of the FRBM Act are:
a) to introduce transparent fiscal management systems in the country.
b) to introduce a more equitable and manageable distribution of the
country’s debts over the years.
c) to aim for fiscal stability for India in the long run
d) Additionally, the act was expected to give the necessary flexibility to
Reserve Bank of India (RBI) for managing inflation in India.

161. FRBM Act was recommended by the Committee headed by Dr E A S

Sarma in the year 2000.

162. The FRBM has four main requirements - The Central Government
shall lay in each financial year before both Parliament the following
statements of fiscal policy along with the annual financial statement.

(a) the Medium-term Fiscal Policy Statement;

(b) the Fiscal Policy Strategy Statement
(c) the Macro-economic Framework Statement;
(d) the Medium-term Expenditure Framework Statement.
GDP Concepts

163. Gross domestic product (GDP) is the standard measure of the value
added created through the production of goods and services in a country
during a certain period. As such, it also measures the income earned from
that production, or the total amount spent on final goods and services
(less imports).

164. Gross national product (GNP), total market value of the final goods
and services produced by a nation's economy during a specific period of
time (usually a year), computed before allowance is made for the
depreciation or consumption of capital used in the process of production.

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165. Gross national income (GNI) is defined as gross domestic product,
plus net receipts from abroad of compensation of employees, property
income and net taxes less subsidies on production.

166. Differences among GNP, GDP and GNI

GNP and GDP both reflect the national output and income of an economy.
The main difference is that GNP (Gross National Product) takes into
account net income receipts from abroad.

GDP (Gross Domestic Product) is a measure of (national income = national

output = national expenditure) produced in a particular country.

GNP (Gross National Product) = GDP + net property income from abroad.
This net income from abroad includes dividends, interest and profit.

GNI (Gross National Income) = (similar to GNP) includes the value of all
goods and services produced by nationals – whether in the country or not.

167. There are three methods of measuring GDP or Gross Domestic

Product:

A) Income Approach - The GDP income approach formula starts with the
income earned from the production of goods and services. Under the
income approach method, we calculate the income earned by all the
factors of production in an economy.

Factors of production are the inputs that go into producing the final
product or service. Thus, the factors of production for a business are –
Land, Labour, Capital and Management within the domestic boundaries
of a country. Here’s the income method of GDP calculation:

GDP=Total National Income +Sales Taxes+Depreciation +Net Foreign

Factor Income

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Where,

Total National Income: The total of all wages, rents, interest, and profits
Sales taxes: Government taxes imposed on purchases of goods and
services
Depreciation: Amount attributed to an asset based on its useful life

Net Foreign Factor Income from Abroad (NFIA) The difference between
the total income that citizens and companies generate outside their
country of origin and the total income generated by foreign citizens and
companies within that country

Now if we add taxes and deduct subsidies, then it becomes Gross

Domestic Product formula at Market cost.

GDP (Market Cost) = GDP (Factor Cost)+ (Indirect Taxes – Subsidies)

B) Expenditure Approach - The second approach, known as the

expenditure approach, is the converse of Income approach as rather than
Income, it begins with money spent on goods & services. This measures
the total expenditure incurred by all entities on goods and services within
the domestic boundaries of a country. So let’s learn how to calculate GDP
using the expenditure approach.

Mathematically, GDP (as per expenditure method) = C + I + G + (EX-IM)

Where,
C: Consumption Expenditure, i.e. when consumers spend money to buy
various goods and services. For example – food, gas bill, car etc.
I: Investment Expenditure, i.e. when businesses spend money as they
invest in their business activities. For example, buying land, machinery etc.
G: Government Expenditure, i.e. when the government spends money on
various development activities and

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(EX-IM): Exports minus Imports, i.e. Net Exports. ie. We include the exports
to other countries in the calculation of GDP and subtract the imports from
other countries to our country.

The calculation of GDP from the above methods gives us the nominal GDP
of the country. We will consider the difference between the Nominal and
Real GDP in the coming article.

Mostly GDP is calculated using both these approaches and calculations

are done in such a way that the values from both approaches should come
almost equivalent.

C) Output (Production) Approach - The GDP Output Method measures

the monetary or market value of all the goods and services produced
within the borders of the country.

168. In order to avoid a distorted measure of GDP due to price level

changes, GDP at constant prices or Real GDP is computed. Using the
Output Approach, GDP is calculated by this formula:

GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes
+ Subsidies.

169. The Trend of India’s GDP & GDP Growth Rate - In India, contributions
to GDP are mainly divided into 3 broad sectors – Agriculture and allied
services, Industry (Manufacturing) sector and Service sector. In India, GDP
is measured as market prices and the base year for computation is 2016.

170. The Net Domestic Product (NDP) is defined as the net value of all
the goods and services produced within a country’s geographic borders.
It is considered a key indicator of economic growth of a country.

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The net domestic product (NDP) is calculated by subtracting the value of
depreciation of capital assets of the nation such as machinery, housing,
and vehicles from the gross domestic product (GDP).

The NDP also takes into account the other factors such as obsolescence
and complete destruction of the asset. The depreciation is also referred to
as capital consumption allowance.

If the country is unable to replace the capital stocks that are lost through
depreciation, it experiences a fall in the GDP of the country.

171. If the gap between the GDP and NDP is narrower or smaller, then it
is considered good for an economy. Also, it indicates economic balance.
However, a wider gap between the GDP and NDP shows an increase in the
value of obsolescence. Such an increase along with deterioration of the
capital stock value indicates economic stagnation. The formula for NDP
can be expressed as follows:
NDP = GDP – Depreciation

172. Net national product or NNP is the market value of all the finished
goods and services that are produced by citizens of a nation, living
domestically and internationally during a year.

Net national product is also referred to as the value that is obtained by

subtracting depreciation from the gross national product (GNP).

Net national product considers all the goods, products and services that
are manufactured by the country’s citizens, irrespective of their location,
or in other words, net national product considers products that are
produced domestically and also from overseas.

NNP is one of the important metrics for determining the actual growth of
a nation. It measures how much the country is able to consume in a given
period of time.

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173. Net domestic product at Market Prices, abbreviated as NDP MP,
is gross domestic product (GDP) minus the consumption of fixed capital
(CFC). NDP, unlike GDP, also takes into account the decrease in the value
of fixed assets (e.g. computers, buildings, transport equipment, machinery,
etc.) used in the production process.

174. Net Domestic Product at factor cost (NDP at FC) is the income earned
by the factors in the form of wages, profits, rent, interest etc.

175. Personal income is the amount of money collectively received by the

inhabitants of a country. Sources of personal income include money
earned from employment, dividends and distributions paid by
investments, rents derived from property ownership, and profit sharing
from businesses.

176. Private income is referred to as the total of all the factors incomes
and transfer earnings received by the private sector from all sources.
Private income includes incomes generated from any type of occupational
activities or any income that is received apart from salary or any type of
commission.

177. Disposable income is the money that is available to invest, save, or

spend on necessities and nonessential items after deducting income taxes.

178. Discretionary income is what a household or individual has to

invest, save, or spend after necessities are paid.

179. Personal Disposable Income (PDI) or Disposable personal income

(DPI) is how much money a person has to spend after taxes and any other
mandatory withholdings are taken from their paycheck. Disposable
personal income is the total amount someone has after taxes to spend on
necessities, like housing and food. It is calculated as DPI=gross wages-
taxes. Economists use DPI to look at how much money is actually available
to spend in a specific area.

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180. Real income, also known as real wage, is how much money an
individual or entity makes after adjusting for inflation. Real income differs
from nominal income, which has no such adjustments. Individuals often
closely track their nominal vs. real income to have the best understanding
of their purchasing power.

181. Real Income is National Income expressed in terms of general price

level.

182. Mixed Income = Labour Income + Property Income

183. Net Indirect Taxes = Indirect Taxes + Subsidies

184. Operating Surplus = Rent+ Interest + Profit +Dividend and other
similar income.

185. Operating surplus is the surplus (or deficit) on production activities

before account has been taken of the interest, rents or charges paid or
received for the use of assets.

186. Mixed income is the remuneration for the work carried out by the
owner (or by members of his family) of an unincorporated enterprise.

187. GDP is an aggregate measure. It does not speak anything about how
the GDP is distributed among the population of the country.

188. Higher GDP does not necessarily mean higher welfare.

189. Welfare is a wider concept which encompasses development in all

aspects of the society.

190. Revenue deficit is the excess of revenue expenditure over revenue

receipts.

191. Revenue Deficit: Total revenue receipts – Total revenue expenditure.

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192. Revenue Deficit deals only with the government’s revenue receipts
and revenue expenditures.

193. Fiscal Deficit is the difference between the total income of the
government (total taxes and non-debt capital receipts) and its total
expenditure.

194. Net Fiscal Deficit is the difference Gross Fiscal Deficit and net lending.

195. An Emerging Market Economy is the economy of a developing

nation that is becoming more engaged with global markets as it grows.

196. Twin Deficits hypothesis or the twin deficits phenomenon, is the

observation that theoretically, there is a strong causal link between a
nation's government budget balance and its current account balance. This
theory points out points to how a budget deficit can be a contributing
factor to a current account deficit.

197. Fiscal stimulus refers to increasing government consumption or

transfers or lowering taxes, increasing the rate of growth of public debt.
Supporters of Keynesian economics assume the stimulus will cause
sufficient economic growth to fill that gap partially or completely via the
multiplier effect.

198. The current account deficit is a measurement of a country's trade

where the value of the goods and services it imports exceeds the value of
the products it exports. ... The current account represents a country's
foreign transactions and, like the capital account, is a component of a
country's balance of payments (BOP).

199. Financial stability is a state in which the financial system, i.e. the key
financial markets and the financial institutional system is resistant to
economic shocks and is fit to smoothly fulfil its basic functions: the
intermediation of financial funds, management of risks and the
arrangement of payments.
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Points from Latest News related to Indian Economy

200. In call money market, Banks are allowed to borrow a maximum of

125% of their capital funds on any particular day.

201. RBI set up an Automated Banknote Processing Centre in which Jaipur,

Rajastan for the receipt, storage and dispatch of currency notes including
processing of banknotes received from currency chests (CCs) and bank
branches and destruction of soiled banknotes in an automated manner.

202. NITI Aayog (Hindi for Policy Commission) (Abbreviation for National
Institution for Transforming India) is a policy think tank of the Government
of India. It’s parent agency is Ministry of Planning. NITI Aayog replaced
Planning Commission.

203. Theme of the Economic Survey 2020-21 is “Saving Lives and

Livelihoods”.

[Link] payment system is developed by National Payments

Corporation of India ( NPCI ) as per RBI directives.

205. The Budget 2921-22 stands on six pillars as mentioned hereunder;

a. Health and Wellbeing
b. Physical & Financial Capital, and Infrastructure
c. Inclusive Development for Aspirational India
d. Reinvigorating Human Capital
e. Innovation and R&D
f. Minimum Government and Maximum Governance.

206. CEPD (Consumer Education and Protection Department of RBI which

was set up in the place of BCSBI) issued the Charter of Customer Rights
and considerably strengthened the Ombudsman Mechanism to enhance
consumer protection. CEPD acts as a single nodal point for receipt and
disposal of all external complaints on the deficiency of services by RBI.

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207. The name of Portal used for reporting Currency Chest transactions to
RBI is - CyM–CC portal.

208. Nobel Prize for Economics (2021) won by a) Guido Imbens b) David
Card and c) Joshua Angrist.

209. MSME Samadhaan (MSME Delayed Payment Portal) has been

launched empowering micro and small entrepreneurs across the country
to directly register their cases related to delayed payments by Central
Ministries / Departments / CPSE / State Governments and other buyers.

210. The Economic Survey 2020-21 has been dedicated to all the COVID-
19 warriors, who have really helped in upholding India.

211. The theme selected by RBI to propagate information to the general

public during the ‘Financial Literacy’ week pertains to the year 2021 is “a.
Credit Discipline and Credit from Formal Institutions”.

212. Monetise and Modernise - In the FY2021-22 Union Budget, the

Government of India announced an ambitious divestment target of
Rs.1.75 trillion through the fiscal year. For the next fiscal year, the
government has planned divestment of about 100 underutilised and
unutilised assets including the oil, gas, port, airport and power sectors.

213. From the planned Rs. 1.75 lakh crore, about Rs. 1 lakh crore is
expected to be generated from the sale of government stake in public
sector banks (PSBs) and other financial institutions, and the remaining Rs.
75,000 crore is anticipated from the Central Public Sector Enterprises
(CPSE) sale proceeds.

214. Simultaneous purchase and sale of government securities under

OMO (Open Market Operations is known as Operation Twist. OT is a way
used by the RBI (Central Bank of the Country) to manage Yield in the
market.

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215. Stand-UP India and Start-Up India.

Stand-Up India Scheme is intended to support SC/ST/Women

entrepreneurs to set up a green field projects through bank branches in
India while Start Up India Scheme aims to boost innovative and
technology led enterprises for new/existing enterprises.

216. Trainee Borrower and Ready Borrower : (Stand-Up India)

Both these terms are used in the context of Stand-Up India Loan Product
of SIDBI. The Applicants for the loan furnish details in the Portal created
for the purpose. The approach of this Stand-Up India Portal, for
handholding is based on obtaining answers to a set of relevant questions
at the initial stage. Based on the response, the applicants (prospective
borrowers) are categorised as Ready Borrower or Trainee Borrower.

The Applicant who needs handholding support he is known as Trainee

Borrower and the one who does not require handholding support is
known as Ready Borrower.

217. In October, 2020 The Labour and Employment Ministry revised the
Base Year for Consumer Price Index for Industrial Workers (CPI – IW) from
2001 to 2016 to reflect the changing consumption pattern, giving more
weightage to spending on health, education, recreation and other
miscellaneous expenses while reducing the weight of food and beverages.

218. G-Sec Acquisition Programme (G-SAP) - G-SAP is an additional

instrument introduced by RBI for liquidity management. It is a structured
Open Market Operation (OMO) with a distinct character with RBI upfront
committing to buy G-secs irrespective of the market sentiment. This
programme is to supplement the other liquidity management operations
like OMO, LAF, TLTROs etc.

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219. M Narasimham, the former Governor of Reserve Bank of India, was
regarded as the “Father of Banking Reforms” in India.

220. Public Sector Bank Vs Nationalised Bank - The difference between

a public sector bank and nationalized bank is that a public sector bank is
under the state or central government from the very beginning while the
nationalized bank is the one that started as a private sector bank but was
taken under by the government for the better good.

221. Central Bank Digital Currency (CBDC) is the legal tender issued by a
central bank in a digital form. It is the same as a fiat currency and is
exchangeable one-to-one with the fiat currency. Only its form is different.

222. National Monetisation Pipeline (NMP) (or Asset Monetisation

Pipeline) - The Indian government plans to monetise ₹6 lakh crore worth
of state-owned assets over the next four years under its Asset
Monetisation Pipeline. Asset monetisation does not involve selling of land
and it is about monetising brownfield assets. Ownership of assets will
remain with the government and there will be a mandatory hand-back.

223. EASE (Enhanced Access and Service Excellence)

Enhanced Access and Service Excellence(EASE) is a common reform

agenda for Public Sector Banks (PSBs). It is aimed at institutionalizing clean
lending, better customer service, simplified and enhanced credit and
robust governance and HR practices.

The EASE 1.0 was aimed at enabling banking from home, effective
grievance redressal and responsible banking through monitoring of large-
value stressed loans among others.

EASE 2.0 was launched in FY20 to further build on the foundation of EASE
1.0. It focussed on CLEAN and SMART banking.

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EASE 3.0 was launched in FY21. It focuses on the transformation of Public
Sector Banks(PSBs) into Digital and Data-driven Banks through smart
lending, Technology enabled ease of Banking, Credit@click, Dial-a-loan,
Prudent Banking among others.

EASE 4.0 reforms looks at four key initiatives for public sector banks to
adopt: Smart lending backed by analytics; 24x7 banking with resilient
technology and cloud based IT systems; data enabled agriculture
financing; and collaborating with the financial ecosystem.

224. "Monetization" (also spelled monetisation) refers to the process of

turning a non-revenue-generating asset into cash. Sometimes,
monetization is due to privatization (called Commodification), whereby a
previously free or public asset is turned into a profit center—such as a
public road being converted into a private toll-way.

225. Harbinger 2021 (haRBInger 2021) - The Reserve Bank of India has
launched its first global hackathon named “HARBINGER 2021 – Innovation
for Transformation”. The theme of HARBINGER 2021 is ‘Smarter Digital
Payments’. The Hackathon invites participants to identify and develop
solutions that have the potential to make digital payments accessible to
the under-served, enhance the ease of payments and user experience
while strengthening the security of digital payments and promote
customer protection.
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