Define balance of payments. Explain its components.
The Reserve Bank of India (RBI) plays the role of a "lender of last resort" in several ways: Emergency Lending: In times of crisis, the RBI provides emergency loans to commercial banks and other financial institutions to help them meet their liquidity requirements and prevent a liquidity crisis fromRead more
The Reserve Bank of India (RBI) plays the role of a “lender of last resort” in several ways:
- Emergency Lending: In times of crisis, the RBI provides emergency loans to commercial banks and other financial institutions to help them meet their liquidity requirements and prevent a liquidity crisis from turning into a credit crisis.
- Marginal Funding: The RBI provides marginal funding to commercial banks to meet their short-term liquidity needs, thereby enabling them to continue lending to the real sector and maintaining economic activity.
- Repo Operations: The RBI conducts repo operations, where it sells securities to commercial banks at a fixed rate, injecting liquidity into the system. This helps to reduce interest rates and increase money supply.
- Reverse Repo Operations: The RBI conducts reverse repo operations, where it absorbs excess liquidity from commercial banks by buying back securities at a fixed rate. This helps to reduce money supply and manage inflationary pressures.
- Overdraft Facility: The RBI provides an overdraft facility to commercial banks, allowing them to borrow more funds from the central bank in times of need.
- Discounting Bills: The RBI discounts bills of exchange, i.e., accepts bills of exchange at a discount, which helps commercial banks to raise funds and maintain their liquidity.
- Liquidity Support: The RBI provides liquidity support to financial institutions, such as non-banking finance companies (NBFCs) and housing finance companies (HFCs), by providing emergency loans or rediscounting their bills.
- Market Intervention: In times of crisis, the RBI intervenes in the foreign exchange market to stabilize the rupee’s value and prevent a sharp depreciation.
- Financial Stability Measures: The RBI takes measures to maintain financial stability, such as increasing cash reserve ratio (CRR) or statutory liquidity ratio (SLR) requirements for commercial banks, to reduce their lending capacity and prevent excessive credit creation.
By playing the role of a lender of last resort, the RBI aims to:
- Maintain financial stability
- Support economic growth
- Prevent systemic risk
- Maintain confidence in the financial system
Balance of Payments: The balance of payments is an indication to a country's economic development, recording financial exchanges with the world across its borders. This complex ledger typically spans a year and records every economic exchange, from the goods that cross borders to the investments thaRead more
Balance of Payments:
The balance of payments is an indication to a country’s economic development, recording financial exchanges with the world across its borders. This complex ledger typically spans a year and records every economic exchange, from the goods that cross borders to the investments that shape our future.
A balance of payments has two important components:
1. Current Account: A current account shows a nation’s everyday economic operations. It tracks activities such as the buying and selling of goods and services, the earnings of its citizens working in other countries, and financial assistance given for development.
A country with a positive current account balance has more revenue than expenses. A nation has a deficit and must borrow money if, on the other hand, its total spending exceeds its income.
2. Capital Account: This section of the balance of payments narrates the extended tale of a nation’s wealth. It oversees the flow of capital and credit, which is critical to the health of economic expansion and progress.
An excess indicates that there’s a greater inflow of foreign capital compared to outflow. A deficit indicates the opposite. This balance sheet shows whether a country is attractive for foreign investment or whether the country is making foreign investments.
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