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Banking & Monetary Policy

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Home/Indian Economy/Banking & Monetary Policy/Page 5

Mains Answer Writing Latest Questions

Sneha Kumari
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Sneha KumariBegginer
Asked: July 16, 2024In:
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  1. Tanksha Singh
    Tanksha Singh Begginer

    Above statement is adversely highlighted in the keynesian theory of demand and money. It is implicit , ' that rate of interest (i), is really the return on bonds. He assumes expected return on bonds are of two types- the internet payment the expected rate of capital gain Market value of bonds is invRead more

    Above statement is adversely highlighted in the keynesian theory of demand and money. It is implicit , ‘ that rate of interest (i), is really the return on bonds.

    He assumes expected return on bonds are of two types-

    • the internet payment
    • the expected rate of capital gain

    Market value of bonds is inversely related to rate of interest. The investors compare the current interest rate with ‘normal’ or critical predetermined rates. If rate of current is high compared to normal rate they expect a rise in bond prices and fall in interest rates .

    This leads to holding more of bonds as they can earn high returns on it and vice versa.

    Therefore, if interest rate increases in near future, bond prices fall, wealth- holder may convert their cash balances into bonds at lower price and have capital gain.

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Namrata Datta
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Namrata DattaBegginer
Asked: July 16, 2024In:
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  1. Chandani Yadav
    Chandani Yadav Begginer

    When a central bank raises interest rates, commercial banks lending practices are affected in following several ways: Cost of fund increases: The central bank's interest rate hike means that the cost for commercial banks to borrow money rises. This money can be borrowed from either central bank or fRead more

    When a central bank raises interest rates, commercial banks lending practices are affected in following several ways:

    1. Cost of fund increases: The central bank’s interest rate hike means that the cost for commercial banks to borrow money rises. This money can be borrowed from either central bank or from other sources. This increased cost of funds is often passed onto borrowers in the form of higher interest rates on loans.
    2. Higher borrowing costs for consumers and businesses: As commercial banks raise their lending rates, borrowing becomes more expensive for consumers and businesses. This can lead to decrease in loan demand for things like personal and business loans and mortgages because higher interest payments make loans less affordable.
    3. Credit tightening: With higher interest rates, the risk of default may increase because borrowers are jow facing repayment costs. Commercial banks may respond by tightening their credit standards, making it more difficult for some borrowers to qualify for this loan.
    4. Impact on bank profit margins: While higher interest rates can lead to higher interest income for banks, the spread between what banks pay on deposits and what they earn on loans might not increase proportionately. If deposit rates rise significantly, this can squeeze bank profit margins.
    5. Shift in loan portfolio composition: Banks may shift their focus toward more secure, less risky lending opportunities.
    6. Decrease in loan volume: The combined effect of higher borrowings costs and tighter credit standards generally leads to a reduction in the overall volume of loans issued by banks. This reduction can slow down economic activity since consumers and businesses may reduce spending and investment.
    7. Impact on economic growth: A central bank raises interest rates primarily to control inflation but the side effect is a slowdown in economic growth due to reduced borrowing and spending. Commercial banks in turn adjust their strategies to align with the slower economic environment, potentially focusing more on maintaining asset quality and managing risk rather than aggressive lending.

     

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Priya
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PriyaBegginer
Asked: July 16, 2024In:
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  1. Malisha Gavali
    Malisha Gavali Begginer

    In financial terms, "Primary Deposits" and "Secondary Deposits" refer to different stages in the banking system: Primary Deposits: These are deposits made directly by individuals or entities into a bank. These deposits are considered primary because they represent the initial influx of funds into thRead more

    In financial terms, “Primary Deposits” and “Secondary Deposits” refer to different stages in the banking system:

    1. Primary Deposits: These are deposits made directly by individuals or entities into a bank. These deposits are considered primary because they represent the initial influx of funds into the banking system from depositors. Primary deposits include savings accounts, current accounts, fixed deposits, and other types of accounts where customers deposit money with the bank.
    2. Secondary Deposits: Secondary deposits, also known as secondary reserves, refer to funds that banks deposit with each other or with central banks. These deposits are considered secondary because they are created by the banking system itself as part of managing liquidity and meeting regulatory requirements. Secondary deposits can include interbank deposits or deposits held by banks with central banks to meet reserve requirements or for other operational purposes.

    In summary, primary deposits originate from customers depositing money directly with banks, while secondary deposits refer to funds that banks hold with other banks or central banks as part of their overall banking operations and liquidity management.

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Priya
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PriyaBegginer
Asked: July 16, 2024In:
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  1. Anita Dhruw
    Anita Dhruw Legend

    As it was discovered, the money supply in India has been moderated by the Reserve Bank of India, the central bank. They employ a set of core monetary instruments in order to stabilize the economy, bring inflation and other factors into check, and foster growth. 1. Repo and Reverse Repo Rates: The RBRead more

    As it was discovered, the money supply in India has been moderated by the Reserve Bank of India, the central bank. They employ a set of core monetary instruments in order to stabilize the economy, bring inflation and other factors into check, and foster growth.

    1. Repo and Reverse Repo Rates: The RBI also changes the repurchasing rate at which banks can borrow from the RBI and the redeeming rate at which the RBI can borrow from the banks. Variation of these rates is employed by the RBI to control credit creation in the economy leading to impacted money availability in the economy.

    2. Cash Reserve Ratio (CRR): CRR is the proportion of the deposit, which banks are required to maintain with the RBI. CRR uplifting makes the credit available for lending to be scarce and therefore constrict money supply, while its trimming, has the reverse effect.

    3. Statutory Liquidity Ratio (SLR): Net demand and time liabilities are also specified as a minimum percentage to be reserved on approved securities. SLR change influences the banking liquidity and ability to approve loans.

    4. Open Market Operations (OMOs): To control the money supply, RBI also buys or offers government securities on the market. The sale of securities absorbs funds from the market, on the other hand, purchase returns funds into the market.

    5. Market Stabilization Scheme (MSS): This tool was introduced to remove excess in the money supply; whereby its work is done through issuing government securities available for absorption of extra money.

    Collectively, these tools help make a certain that Central bank runs a steady economy in relations to inflation, currency value and availably of credit.

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Priya
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PriyaBegginer
Asked: July 16, 2024In:
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  1. Anita Dhruw
    Anita Dhruw Legend

    As it was discovered, the money supply in India has been moderated by the Reserve Bank of India, the central bank. They employ a set of core monetary instruments in order to stabilize the economy, bring inflation and other factors into check, and foster growth. 1. Repo and Reverse Repo Rates: The RBRead more

    As it was discovered, the money supply in India has been moderated by the Reserve Bank of India, the central bank. They employ a set of core monetary instruments in order to stabilize the economy, bring inflation and other factors into check, and foster growth.

    1. Repo and Reverse Repo Rates: The RBI also changes the repurchasing rate at which banks can borrow from the RBI and the redeeming rate at which the RBI can borrow from the banks. Variation of these rates is employed by the RBI to control credit creation in the economy leading to impacted money availability in the economy.

    2. Cash Reserve Ratio (CRR): CRR is the proportion of the deposit, which banks are required to maintain with the RBI. CRR uplifting makes the credit available for lending to be scarce and therefore constrict money supply, while its trimming, has the reverse effect.

    3. Statutory Liquidity Ratio (SLR): Net demand and time liabilities are also specified as a minimum percentage to be reserved on approved securities. SLR change influences the banking liquidity and ability to approve loans.

    4. Open Market Operations (OMOs): To control the money supply, RBI also buys or offers government securities on the market. The sale of securities absorb funds from the market, on the other hand, purchase returns funds into the market.

    5. Market Stabilization Scheme (MSS): This tool was introduced to remove excess in the money supply; whereby its work is done through issuing government securities available for absorption of extra money.

    Collectively, these tools help make a certain that RBI runs a steady economy in relations to inflation, currency value and availably of credit.

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Priya
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PriyaBegginer
Asked: July 16, 2024In:
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  1. Anita Dhruw
    Anita Dhruw Legend

    The managed float exchange rate is one such system, in which the value of the currency is primarily decided by market forces but at times is interfered with by the government or the central bank in order to stabilize or reach certain economic objectives. Thus, this is a middle-of-the-road system comRead more

    The managed float exchange rate is one such system, in which the value of the currency is primarily decided by market forces but at times is interfered with by the government or the central bank in order to stabilize or reach certain economic objectives. Thus, this is a middle-of-the-road system combining both the characteristics of a free-floater as well as that of a fixed-exchanger, whereby there is the flexibility provided while, at the same time, the extreme fluctuations can be curbed.

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Priya
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PriyaBegginer
Asked: July 16, 2024In:
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  1. Tripti Jain
    Tripti Jain Begginer

    Managed Floating Managed floating is a type of exchange rate regime that combines elements of both fixed and floating exchange rates. In a managed float, the value of a country's currency is allowed to fluctuate in response to market forces, but the government or central bank intervenes in the foreiRead more

    Managed Floating

    Managed floating is a type of exchange rate regime that combines elements of both fixed and floating exchange rates. In a managed float, the value of a country’s currency is allowed to fluctuate in response to market forces, but the government or central bank intervenes in the foreign exchange market to influence the exchange rate and stabilize it within a desired range.

    Key Features:

    1. Floating exchange rate: The currency’s value is determined by supply and demand in the foreign exchange market.
    2. Government intervention: The government or central bank intervenes in the market by buying or selling its own currency to influence the exchange rate.
    3. Target range: The government sets a target range for the exchange rate and intervenes to keep it within that range.

    Goals:

    1. Stability: Managed floating aims to reduce exchange rate volatility and maintain stability.
    2. Competitiveness: It helps maintain a competitive exchange rate to support exports and economic growth.
    3. Inflation control: By influencing the exchange rate, the government can control inflation by managing the prices of imported goods.

    Example:

    The Chinese yuan (RMB) is an example of a managed float. The People’s Bank of China (PBOC) allows the yuan to fluctuate within a narrow range against the US dollar, while intervening in the market to maintain a stable exchange rate and support China’s economic growth.

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kashish binzade
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kashish binzade
Asked: July 16, 2024In:
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Monetary policy is a set of action to control a nation’s overall money supply and achieve economic growth.

  1. Anita Dhruw
    Anita Dhruw Legend

    Monetary policy can be defined as the available tools that a country's central bank uses to direct the money supply of its economy and increase economic growth and employment through such operations as altering interest rates or changing bank reserve requirements. Tools of Monetary Policy Monetary pRead more

    Monetary policy can be defined as the available tools that a country’s central bank uses to direct the money supply of its economy and increase economic growth and employment through such operations as altering interest rates or changing bank reserve requirements.

    Tools of Monetary Policy
    Monetary policy is employed by central banks in practice through various tools and devices. Some of the very common tools include:

    Open Market Operations
    The central bank buys or sells government securities, like bonds, in the open market. When the central bank purchases securities, it adds money in the economy; hence, there is more money. When it sells securities, it takes off some money in the economy, hence less money.

    Reserve Requirements
    Imagine the central banks as the headmaster of all banks. Central banks have rules for how small an amount of money each commercial bank should reserve in their vaults. A teacher might say, You should always carry at least 5 pencils in your bag. Changing such conditions influences the central bank on how much money commercial banks can lend and the quantity of money that they may produce.

    Discount Rate
    This discount rate is a special interest rate that allows commercial banks to borrow money from the central bank. It can be thought of as the special rate the central bank gives to commercial banks. If the central bank changes this discount rate, then how much it costs to borrow money for commercial banks changes. This affects how much they lend out to people and businesses, which in turn can affect the economy in general.

    Interest Rate
    Another tool that the central banks use is the interest rate to increase borrowing costs as well as curtail or boost economic activities. For example, by changing the benchmark interest rate of the central bank-overnight lending rate-the central bank can influence market interest rates that are used to calculate borrowing costs for everybody and for all businesses.

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Suhani Rana
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Suhani RanaBegginer
Asked: July 16, 2024In:
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  1. Faiyaz Sabab
    Faiyaz Sabab Begginer

    Effects a central bank increasing interest rates can have on a country's currency value and foreign investment: Currency Value: Increase in Value (Appreciation): This is the most likely scenario. When interest rates rise, investments in that country become more attractive to foreign investors seekinRead more

    Effects a central bank increasing interest rates can have on a country’s currency value and foreign investment:

    Currency Value:

    • Increase in Value (Appreciation): This is the most likely scenario. When interest rates rise, investments in that country become more attractive to foreign investors seeking higher returns. This increased demand for the currency tends to push its value up compared to other currencies.

    Foreign Investment:

    • Increase in Foreign Investment: Higher interest rates generally lead to an inflow of foreign capital. Investors are drawn to the higher returns offered by the increased interest rates, which can boost the country’s foreign exchange reserves and potentially strengthen its currency further.

    However, there are some nuances to consider:

    • Relative Interest Rates: The impact depends on the relative interest rate difference between the country raising rates and other countries. If interest rates rise globally, the effect might be muted.

    • Economic Conditions: If the interest rate hike is due to economic concerns like inflation, it might signal instability and deter foreign investors despite the higher rates.

    • Investor Confidence: Overall investor confidence in the country’s economic and political stability plays a major role. Even with high-interest rates, political uncertainty can discourage foreign investment.

    Other Potential Effects:

    • Impact on Businesses and Consumers: Higher interest rates can make borrowing more expensive for businesses and consumers, potentially slowing down economic growth. This can be a balancing act for central banks.

    • Exchange Rate Volatility: Sudden or large interest rate hikes can lead to short-term fluctuations in the currency exchange rate as markets react and adjust.

    In conclusion, raising interest rates is a tool used by central banks to influence the economy. While it often leads to a stronger currency and increased foreign investment, the overall impact depends on various factors and can have both positive and negative consequences.

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Chandani Yadav
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Chandani YadavBegginer
Asked: July 16, 2024In:
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How do credit default swaps (CDS) work?

question
  1. Tripti Jain
    Tripti Jain Begginer

    How Credit Default Swaps (CDS) Work A Credit Default Swap (CDS) is a financial derivative that allows investors to hedge against the risk of default by a borrower, typically a corporation or sovereign entity. It's a contract between two parties: the buyer and the seller. Here's how it works: Buyer:Read more

    How Credit Default Swaps (CDS) Work

    A Credit Default Swap (CDS) is a financial derivative that allows investors to hedge against the risk of default by a borrower, typically a corporation or sovereign entity. It’s a contract between two parties: the buyer and the seller.

    Here’s how it works:

    1. Buyer: An investor buys a CDS from a seller to protect against the default of a reference entity (e.g., a corporation).
    2. Seller: The seller agrees to compensate the buyer in the event of a default by the reference entity.
    3. Premium: The buyer pays a regular premium to the seller, usually quarterly, for the duration of the contract.
    4. Notional amount: The CDS contract specifies a notional amount, which is the amount of money that will be paid out in the event of a default.
    5. Credit event: If a credit event occurs (e.g., the reference entity defaults on a loan or files for bankruptcy), the buyer can trigger the CDS and receive the notional amount from the seller.
    6. Settlement: The seller pays the buyer the notional amount, and the contract is terminated.

    Example:

    Suppose an investor buys a CDS from a bank to protect against the default of XYZ Corporation. The notional amount is $1 million, and the premium is 2% per annum. If XYZ Corporation defaults, the investor can trigger the CDS and receive $1 million from the bank. The bank, in turn, assumes the risk of XYZ Corporation’s default.

    Purpose of CDS:

    CDS allows investors to:

    • Hedge against credit risk
    • Speculate on the creditworthiness of a reference entity
    • Gain exposure to credit markets without holding the underlying bonds

    However, CDS can also increase systemic risk and contribute to market instability if not used properly.

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