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Banking & Monetary Policy

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Home/Indian Economy/Banking & Monetary Policy/Page 7

Mains Answer Writing Latest Questions

Aachal Vayeda
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Aachal VayedaBegginer
Asked: July 21, 2024In: ,
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impactindividualintellectual povertypoverty
  1. Sneha.s
    Sneha.s

    Intellectual poverty is the unwillingness to learn something, considering oneself to be fine. One remains in his own perceptions and thoughts, restraining the mind to grow. Economists believe that it will negatively affect both the concerned person and thereby the society. This hinders an individualRead more

    Intellectual poverty is the unwillingness to learn something, considering oneself to be fine. One remains in his own perceptions and thoughts, restraining the mind to grow. Economists believe that it will negatively affect both the concerned person and thereby the society. This hinders an individual to interpret and decipher the events taking place around him, especially in the economic and political spheres. This situation plays as an opportunity for those who rule. Consider an example of a nation where the citizens are not able to understand how the government and the nation works. Who will demand the necessities to live a quality life? Who will analyze and question the new laws and amendments passed? A situation can also arise when there are jobs but not desirable seekers. This in turn will generate unemployment and eventually derail the economy. Lack of right candidates and growing needs to cater the requirements of the nation will eventually trigger unending economic poverty in the longer run. It is a grave situation where the root cause is known and can be worked out. Nations can focus on intellectual growth and developing cognitive skills of its people to ensure prosperity.

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Atharv Gupta
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Atharv GuptaBegginer
Asked: July 21, 2024In:
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  1. Yogita Gupta
    Yogita Gupta Begginer

    To control inflation, the Reserve Bank of India (RBI) can implement several key measures: Increase Interest Rates: Repo Rate: Raising the repo rate makes borrowing more expensive for commercial banks, leading to higher interest rates for consumers and businesses. This reduces spending and investmentRead more

    To control inflation, the Reserve Bank of India (RBI) can implement several key measures:

    1. Increase Interest Rates:
      • Repo Rate: Raising the repo rate makes borrowing more expensive for commercial banks, leading to higher interest rates for consumers and businesses. This reduces spending and investment, thereby cooling demand and controlling inflation.
      • Reverse Repo Rate: Increasing the reverse repo rate encourages banks to deposit more funds with the RBI, reducing the money supply.
    2. Open Market Operations (OMO):
      • The RBI can sell government securities in the open market to reduce the money supply. When buyers purchase these securities, they pay the RBI, effectively reducing the amount of money circulating in the economy.
    3. Cash Reserve Ratio (CRR):
      • By raising the CRR, the proportion of deposits that banks must hold as reserves, the RBI reduces the funds available for banks to lend and invest, thereby decreasing the money supply.
    4. Statutory Liquidity Ratio (SLR):
      • Increasing the SLR, the minimum percentage of deposits that banks must invest in safe and liquid assets, reduces the amount of money available for lending, helping to control inflation.
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Anjali Varandani
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Anjali VarandaniBegginer
Asked: July 21, 2024In:
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  1. Anita Dhruw
    Anita Dhruw Legend

    Monetary policy and banking regulations impact the financial market stability in several ways, including: Interest rates: Monetary policy will have an impact on interest rates because it influences the cost of borrowing for people and businesses. This determines the actual amount of money that peoplRead more

    Monetary policy and banking regulations impact the financial market stability in several ways, including:

    Interest rates: Monetary policy will have an impact on interest rates because it influences the cost of borrowing for people and businesses. This determines the actual amount of money that people and businesses spend and invest.

    Bank balance sheets: This monetary policy can affect the liability side of bank balance sheets.

    Risk premiums: Monetary policy may impact the risk premiums in financial markets.

    Asset prices: Monetary policy affects the asset prices of a financial system, therefore impacting the stability of the financial system.

    Credit losses: Monetary policy impacts the rate of default by firms and therefore impacts credit losses on loans to those firms.

    Macroprudential policies: Macroprudential policies are necessary correct imbalances in credit and asset markets.

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Anjali Varandani
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Anjali VarandaniBegginer
Asked: July 21, 2024In:
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  1. Srashti
    Srashti Begginer
    This answer was edited.

    The implications of monetary policy on the risk taking behaviour of banks are: Interest Rate Influence: Lower rates reduce borrowing costs, encouraging banks to lend more, including to riskier borrowers. Higher rates increase borrowing costs, leading to more conservative lending practices. Risk andRead more

    The implications of monetary policy on the risk taking behaviour of banks are:

    Interest Rate Influence:

    Lower rates reduce borrowing costs, encouraging banks to lend more, including to riskier borrowers.

    Higher rates increase borrowing costs, leading to more conservative lending practices.

    Risk and Return Trade-Off:

    Low interest rates diminish returns on safe assets, prompting banks to seek higher yields through riskier investments.

    High interest rates make safe assets more attractive,  reducing the incentive for risk-taking.

    Credit Expansion:

    Expansionary monetary policy can lead to increased lending and borrowing, potentially inflating asset bubbles.

    Contractionary policy typically results in reduced lending and borrowing, cooling down overheated markets.

    Financial Stability:

    Prolonged low interest rates may lead to excessive risk accumulation, increasing financial instability.

    Higher rates can promote stability but may slow economic growth if applied too aggressively.

    Regulatory Impact:

    Inadequate regulatory frameworks during periods of low rates can exacerbate risky behaviour, as seen in the 2008 financial crisis.

    Effective regulation is crucial to balance risk-taking and maintain financial stability under varying monetary policies.

    In summary, monetary policy significantly affects banks’ risk-taking, with lower rates encouraging more risk and higher rates promoting prudence. Balancing these outcomes is essential for economical stability.

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Anjali Varandani
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Anjali VarandaniBegginer
Asked: July 21, 2024In:
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  1. Yogita Gupta
    Yogita Gupta Begginer

    Monetary policy can influence income inequality and wealth distribution through its effects on interest rates, asset prices, and economic activity. Interest Rates Borrowing and Saving: Lower interest rates reduce borrowing costs, benefiting those with access to credit, often higher-income individualRead more

    Monetary policy can influence income inequality and wealth distribution through its effects on interest rates, asset prices, and economic activity.

    Interest Rates

    • Borrowing and Saving: Lower interest rates reduce borrowing costs, benefiting those with access to credit, often higher-income individuals and businesses. Meanwhile, savers, who are typically middle or lower-income, earn less on their savings.
    • Debt Burden: Lower rates can reduce debt burdens, freeing up income for consumption or investment, primarily benefiting those who already have debt.

    Asset Prices

    • Stock Market and Real Estate: Expansionary monetary policy, like lowering interest rates, often boosts asset prices such as stocks and real estate. Wealthier individuals, who are more likely to own these assets, experience greater increases in wealth.

    Economic Activity

    • Employment and Wages: Lower interest rates can stimulate economic activity, potentially leading to job creation and wage increases. However, the benefits might not be evenly distributed, often favouring higher-skilled workers more.

    Overall, while monetary policy can support economic growth, it can also exacerbate income and wealth inequality by disproportionately benefiting those with greater access to financial assets and credit.

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Anonymous
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Anonymous
Asked: July 21, 2024In:
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  1. Anita Dhruw
    Anita Dhruw Legend

    Monetary policy may be quite effective in influencing income distribution and wealth distribution by a change in interest rates, asset prices and even employment rates.   If an economy is scaled by the Central Bank with the help of declining interest rates, then wealthy people benefit the most.Read more

    Monetary policy may be quite effective in influencing income distribution and wealth distribution by a change in interest rates, asset prices and even employment rates.

     

    If an economy is scaled by the Central Bank with the help of declining interest rates, then wealthy people benefit the most. This is so because, with lower rates, borrowing becomes cheaper and thus, investors invest more in things like stocks, real estate, and other assets, which, are expected to rise in value. Owners of such assets experience an upward social mobility and a widening of the social disparity. On the other hand, possibly, small investors, who have less money invested, will not immediately notice such advantages.

     

    • Also, regions of expansionary monetary policies open employment opportunities but not all the employment opportunities lower income gap. The dominant employment in high-wage-generating activities like finance or technology industries might expand more than low-wage occupation hence widening the gap in wages.

     

    While the dampening effect of expansionary monetary policy or an increase in the interest rate to tame inflation may prove particularly lethal to lower-income earners, not to mention perhaps restricted credit due to high cost of borrowing, measures put in place to control inflation may slow down job creation, especially in areas where low wage earners work.

     

    In conclusion, monetary policy works in the general economy, and it deepens income and wealth inequality since its winners are the high-income earners while its losers are the low-income earners.

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MEHNAAZ HAWA
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MEHNAAZ HAWABegginer
Asked: July 21, 2024In: , , , , , , , ,
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Elaborate on the comparison between Foreign Exchange Regulation Act and Foreign Exchange Management Act.  What are the major differences between the two Acts and suggest changes, if any, that are required.

femaferaforeign exchangeforeign lawsinternational financesmanagement of foreign exchangeregulation of foreign income
  1. Ritika Sharma.1
    Ritika Sharma.1 Begginer

    Here are some major differences between the Foreign Exchange Regulation Act and the Foreign Exchange Management Act: FERA and FEMA manage India's foreign currency and payments differently. In 1973, the Indian Parliament passed FERA, which took effect on January 1, 1974, to manage and save foreign cuRead more

    Here are some major differences between the Foreign Exchange Regulation Act and the Foreign Exchange Management Act:

    1. FERA and FEMA manage India’s foreign currency and payments differently. In 1973, the Indian Parliament passed FERA, which took effect on January 1, 1974, to manage and save foreign currency at a time of low reserves. FEMA replaced the restricted FERA framework on June 1, 2000, after Parliament authorized it in 1999 to facilitate orderly foreign currency management.
    2. FERA’s rigorous restrictions reflected the economy and focused on foreign currency management and conservation. A complex 81-section law defined “Authorized persons” carefully and based residence status on citizenship. FERA violations were criminal crimes that carried the possibility of jail and barred legal representation. In addition, infractions were non-compoundable and could not be addressed outside of court.
    3. However, FEMA’s free and flexible regulation reflected India’s 1990s liberalization ambitions. With just 49 parts, FEMA’s structure is simpler and defines “Authorized persons,” including banks. The past six months of presence in India determines FEMA resident status, not citizenship. FEMA violations are civil infractions punishable by fines, but failure to pay may lead to incarceration. In contrast to FERA, breaches may be settled and the accused can be represented. FEMA added specific directors and courts to streamline appeals compared to FERA Supreme Court appeals.
    4. FERA’s cautious approach needed RBI approval for FX transactions, limiting operational flexibility. This regulation was repealed by FEMA, making currency transactions easier. FEMA also included information technology requirements to support a modernizing economy, unlike FERA. FERA to FEMA represents India’s transformation from a controlled to a liberalized and growth-oriented economy.
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ritu sharma
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ritu sharmaBegginer
Asked: July 21, 2024In:
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question
  1. Neetika Walter
    Neetika Walter Begginer

    Monetary Policy is a macroeconomic policy decision taken by the central bank to manage interest rate and money supply with the aim to meet various macroeconomic goals. These set of actions are of two types: expansionary or contractionary. Decreasing money supply and increasing interest rates indicatRead more

    Monetary Policy is a macroeconomic policy decision taken by the central bank to manage interest rate and money supply with the aim to meet various macroeconomic goals. These set of actions are of two types: expansionary or contractionary. Decreasing money supply and increasing interest rates indicate a contractionary monetary policy. The opposite of this is an expansionary policy, which stimulates economic activity and accordingly affect employment and inflation. In India, the RBI uses a plethora of tools to implement the monetary policy. These include bank rate policy, credit control policy, open market operations, Statutory Liquidity Ratio, and Cash Reserve Ratio. The Main Liquidity Management Tool, Fine Tuning Operations, Marginal Standing Facility Rate, Liquidity Adjustment Facility, and Standing Deposit Facility Rate are other methods used by the central bank to achieve its macroeconomic goals. Each of these tools help the apex bank in bringing changes in the interest rate, or liquidity conditions in the market. For example, to spur economy, the RBI buys bonds through open market operations to boost liquidity and reduce interest rate. This is achieved through monetary policy. In India, the six-member Monetary Policy Committee, headed by the RBI Governor, meets once every quarter to decide on the policy.

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