L1-P1

Economy
How to kick start GS preparation?
How to prepare Economy?
Banking: Monetary policy
Mrunal.org/download
use Mediafire link for mobile/tablets
App:
UC browser
App: Quickoffice
to view powerpoints
App: ES-explorer
for file-management
between desktop vs mobile
(over wifi-LAN)
7 Pillars of Economy for UPSC
7 Pillars of Economy
After economic survey is out
Type #1: 7 Pillar focus
CSAT, CAPF, CDS
RBI Grade B Officer Mains
GPSC Mains GS-Economy; similar state service exams
Type #2: firefighting sufficient
IBPS: PO/MT, Clerk, Specialist
SBI Clerk/ PO
RBI assistant
Insurance AO, Assistants
SSC (+ theory focus)
1. Banking-finance (Theory current)
2. Budget, Schemes
3. Current: Business-GK, PIN
4. Then focus on Maths-Reasoning-DI-english
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Focus area
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
Not Essential for Economy
Economy: Dutt Sundaram, Uma Kapila
Source of preparation
Before money was invented
Birth & Evolution of money
Supply Demand
Inflation
Inflation: supply
Reduce demand by money supply
Combat Inflation
Reduce Money supply
Tight Money policy
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Dear money policy
Money supply
Easy Money policy
Cheap money policy
Deflation Combat
Monetary Policy: Instruments?
Quantitative
1. Reserve Ratios (CRR, SLR)
2. OMO: Open market operations
3. Rates (Repo, RR, Bank, MSF, LAF)
4. Margin / LTV
5. Consumer Credit control / Down payment
6. Rationing
7. Moral Suasion
8. Direct Action
Qualitative
Reserve Ratios
Cash Reserve Ratio (4%)
Statutory Liquid Ratio (21.5%)
Reserve Ratios
Liabilities of a Bank
Reserve ratio counted on NDTL
Demand Liabilities
Current Account (CA)
Savings Account (SA)
Demand Draft
~8,000 Billion Rs.
Fixed deposits (FD)
Recurring deposits (RD)
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Cash certificates
Staff security deposits
~78,000 Billon Rs.
Time liabilities
1/1/2015
Cash Reserve Ratio (CRR)
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
Statutory Liquidity Ratio
All banks
In Cash, gold, RBI approved securities
Some profit.
Right now 21.5%
Fortnight lag
Reserve Ratios
What is NDTL?
What are SLR and CRR?
How to use them against inflation & deflation
Cyclic fluctuation: Inflation
Cyclic fluctuation: Inflation
Hike in Bank Loan Interest Rates
Hike in Bank Loan Interest Rates
Inflation
RBI CRR/SLR
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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
Monetary Policy: Quantitative Tools: Reserve Ratios
Monetary Policy: Quantitative Tools: Reserve Ratios
Mock Question
Find correct statement(s)?
A. To combat inflation, RBI should pursue Cheap money policy.
B. To combat deflation, RBI should Statutory liquidity ratio (SLR)
C. Both A and B
D. Neither A nor B
Mock Question
Find correct statement(s)?
A. To combat inflation, RBI should pursue Cheap money policy. (WRONG: follow DEAR/TIGHT)
B. To combat deflation, RBI should Statutory liquidity ratio (SLR) (WRONG: should SLR)
C. Both A and B
D. Neither A nor B (Correct Answer)
Mock Question
Find incorrect statement(s)?
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A. To combat inflation, RBI should pursue Cheap money policy. (WRONG: follow DEAR/TIGHT)
B. To combat deflation, RBI should Statutory liquidity ratio (SLR) (WRONG: should SLR)
C. Both A and B (Correct Answer)
D. Neither A nor B
Mock Question UPSC 2010
When RBI s 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
When RBI announces an 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)
Reserve Ratios
Monetary Policy
Quantitative tools
Reserve Ratio (CRR, SLR)
Open Market operation (OMO)
Government securities
Inflation: Open Market Ops.
Inflation: Open Market Ops.
Why would banks bother with OMO?
Liquidity / money supply
MCQ (UPSC-2013)
In context of Indian Economy, Open Market Operation refers to
A. Borrowing by scheduled banks from RBI
B. Lending by commercial banks to industries and trade
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C. Purchase and sale of government securities by the RBI
D. None of Above
MCQ (UPSC-2013)
In context of Indian Economy, Open Market Operation refers to
1. Borrowing by scheduled banks from RBI (Repo/Bank)
2. Lending by commercial banks to industries and trade (irrelevant)
3. Purchase and sale of government securities by the RBI (RIGHT)
4. None of Above
Which of the following will Money supply in the economy?
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank.
4. Sale of government securities to the public by central bank.
CSAT-2012
Answer Choices
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4
Which of the following will Money supply in the economy?
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank.
4. Sale of government securities to the public by central bank (Bhai) ( S Money supply)
CSAT-2012
Answer Choices
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4
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Which of the following will Money supply in the economy?
1. Purchase of government securities from public by central bank (right)
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank. (Public finance)
4. Sale of government securities to the public by central bank ( S Money supply)
CSAT-2012
Answer Choices
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4
Test series A, Q77, Ans.C
Monetary Policy
Quantitative tools
Reserve Ratio (SLR, CRR)
Open Market operation
Rates: Bank Rate, Repo Rate, MSF, LAF
Bank Rate: Meaning?
Monetary Policy
Bank Rate: WHY?
Not the main tool to control money supply these days.
Bank rate is Linked with penal rates:
If CRR, SLR not maintained:
Penalty= (Bank rate + 3%); 5%
CRR, SLR Fortnight lag
LAF: Liquidity Adjustment Facility (2000)
Collateral? = Government security.
Repo Rate: Meaning?
Whats the difference?
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LAF (Repo)
Minimum 5 cr
All clients eligible
1. Central & State Government
2. All Banks
3. NBFI (LIC, UTI)
1 cr.
Only scheduled commercial banks can bid.
Paid up cap. 5l, protect interest of depositors=> RBI Act 1934, 2 nd Sch.
MSF
LAF (Repo)
Bank cannot use SLR quota securities
No limit. Borrow according to your securities.
R%
Can use
Maximum limit 0.75% NTDL.
R+1%
MSF
Reverse Repo Rate: Meaning?
Reverse Repo
Reverse repo rate = it is interest rate paid by RBI to its clients for short term loans.
Central & State Government, All Banks, NBFI
Collateral: government securities
2011: RR = Repo 1% (100 basis points).
Dec 2014: Repo = 8%.
Reverse repo =8-1=7%
During inflation
During inflation: Tight money policy

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Monetary Policy
Monetary Policy
CSAT-2014
The terms 'Marginal Standing Facility Rate' and 'Net Demand and Time Liabilities', are used in relation to
A. Banking operations
B. communication networking
C. military strategies
D. supply and demand of agricultural products
Limitation
of Monetary policy
Why it failed to contain inflation? (2013-14)
Urjit Patel Committee recommendations
How does Policy rate affects economy?
Monetary Policy: limitations (Developing-countries)
1. People dont have many investment alternatives. So, Commercial banks have high deposits.
2. Unorganized money market; Shroff; lack of financial inclusion
3. Monsoon uncertainty, cyclone, flood, draughts => Supply side constrains
Monetary Policy: limitations (Developing-countries)
1. Crude oil, gold import
2. Fiscal deficit, subsidy leakage, Black money, underground economy
3. Solution: Urjit Patel Committee
Committees by RBI
Monetary
Policy
Reforms
Expert Committee to Revise and Strengthen the Monetary Policy Framework
January 2014 report:
Three Major Recommendation:
1. RBI inflation targets (2-6%)
2. Government help RBI
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3. RBI fix accountability
Urjit Patel
Until Now
WPI
But 60% GDP comes from service sector.
Multi-targets: reduce inflation, GDP growth, employment growth.
CPI (All India Urban + Rural)
Minimum inflation: 2%
Maximum 6%
=4% (+/- 2% band)
Similar system in Mexico, S.Africa, Israel
Urjit Patel
Nominal Anchor 4% CPI: When? Timeframe
Chile:
90s CPI 25%
2000s: CPI target 3% (+/- 1% band)
Nominal Anchor 4% CPI: How? RBI?
Policy rate= LAF repo Rate
Decided by voting in MPC.
Reverse repo=-1% (100 basis point)
MSF=+1%
Spread +1/-1 should not be changed frequently
Keep Repo higher than CPI
Monetary policy under Rajan
Monetary policy under Rajan
Challenges:
60% El Nino
Geopolitical problems

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Subsidies
Monetary
Policy
1. RBI target inflation with deadline
2. Government should help RBI
3. RBIs accountability has to be fixed
Urjit Patel
Government to help RBI
MNREGA: wage yes. Productive growthno?
Subsidy leakage, corruption
Administered pricex
Fiscal consolidation
Urjit Patel
Monetary Policy: accountability in India
RBI Act.
Governor directly accountable to Government
Govt. can issue directives to RBI in public interest.
Parliaments standing Committee on finance- can summon Governor Avg. 3-4/year.
Monetary policy made by Governor alone. (sign.)
OVERALL No formal accountability mechanism.
Urjit: Monetary Policy: accountability in India
Target: 4% (2% band)= 2-6% .
Failure?? Three quarters successively.
MPC issue public statement
1. Each member will sign it
2. Reasons for failure
3. Action proposed
4. Time-frame for result.
Monetary Policy
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NCERT Class12: Macroeconomics
Chapter 3 Money and banking
Ignore complicated graphs-formula-equations
WPI, CPI, IIP, inflation=>L5/P5.pptx
Next
Qualitative tools
Banking sector evolution since British India
Financial inclusion: PM-JDY, KVP etc.

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