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Indian Economy

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Home/Indian Economy/Page 73

Mains Answer Writing Latest Questions

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 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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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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Dinesh Thirunavukkarasu
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Dinesh ThirunavukkarasuBegginer
Asked: July 17, 2024In:
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Comment on the ‘Insurance of Bank Balance’. What are its merits and demerits ? What is the way forward?

question
  1. Anita Dhruw
    Anita Dhruw Legend

    Insurance of bank balance means the deposits kept in the bank is insured to save the depositors' money in case the bank goes bankrupt. In India, this is done through the 'Deposit Insurance and Credit Guarantee Corporation (DICGC)' it insures deposits up to the certain limit that is now ₹ 500000 perRead more

    Insurance of bank balance means the deposits kept in the bank is insured to save the depositors’ money in case the bank goes bankrupt. In India, this is done through the ‘Deposit Insurance and Credit Guarantee Corporation (DICGC)’ it insures deposits up to the certain limit that is now ₹ 500000 per depositor per bank.

    Merits:
    1. Deposit Safety: It offers safety for the depositors, especially the one who deposits a small amount of money in their account in case the bank goes under.
    2. Confidence in banking: Deposit insurance instills more confidence within people, especially in depositing their money in the banking institutions.
    3. Financial Security: This safe depositor ensures that there are no bank runs and is always supportive of the system in place within the banking industry.

    Demerits:
    1. Moral Hazard: It can be said that deposit insurance does affect the risk-taking behavior of the banking institutions to the extent that they can rely on insurance to face loss.
    2. Insurance protecting one’s money in the bank is not always great for big corporations or individuals carrying large sums of money. Meaning, when something wrong occurs, they may not be able to recover their entire amount.
    3. When the cost of insurance rises, banks can charge a higher price for the money they lend to you.     You then get a smaller amount in interest when you borrow money or when you put your money in the bank because the bank is trying to cover up the increased cost.

    End
    In addition, to bolster the strength of bank balance insurance, the coverage could be broadened in tandem with the stringent risk criteria so as not to succumb to moral hazard. Other benefits that are related and pertinent to this include improved depositors’ literacy regarding finances because they now learn about coverage limits and therefore can make informed banking choices; hence, promoting financial stability.

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Abi
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Poll
AbiBegginer
Asked: July 18, 2024In:
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“What impact does inflation have on the economy, and how does the central bank manage it through its monetary policy?”

inflation
  1. Anita Dhruw
    Anita Dhruw Legend

    The most important negative effects of inflation arise from reduction in purchasing power. Inflation can reduce the value of our money by a huge amount, making it even more difficult to purchase the things we want and need. Knowing how inflationary prices affect our purchasing power is an aspect ofRead more

    The most important negative effects of inflation arise from reduction in purchasing power. Inflation can reduce the value of our money by a huge amount, making it even more difficult to purchase the things we want and need. Knowing how inflationary prices affect our purchasing power is an aspect of financial knowledge, and this skill will help us perform better in managing our money.
    An influx of money into the economy from the macroeconomic point of view leads to inflation. Since there will be more money, it reduces the value of each and every unit of currency. This in turn increases the prices of the commodities and services by the reduced value of the money. Therefore, the money can purchase fewer goods and services than it could in the past.

    Inflation and purchasing power-At the level of the individual, experiences vary from one person to another with the variables like income, expenses, and lifestyle.

    Here’s how inflation may affect your purchasing power:

    1. Savings: Because of time, inflation can gradually reduce the value of your savings. For example, imagine having $1,000 worth of savings, and the inflation rate is 3%. After one year, the value of your savings will have shrunk to $970.

    2. It is more expensive to maintain living standards due to higher costs of living: With rising prices of goods and services, it becomes harder to achieve the same standard of living, thus reducing the quality of life.

    3. Low returns: Inflation will also affect the return on investment. Let’s assume you invest in a bond yielding 2%, and you have a rate of inflation of 3%. This means you are losing money on your investment.

    Understanding how inflation affects the purchasing power is extremely important in financial decision-making. In other words, having an understanding of inflation will enable people to think ahead and adjust their strategies because they will be able to realize early if the cost of living will continue to rise or not.

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Anurag Yadav
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Anurag YadavBegginer
Asked: July 18, 2024In:
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question
  1. Anurag Yadav
    Anurag Yadav Begginer

    The repo rate, short for repurchase rate, is the rate at which the central bank of a country (such as the Federal Reserve in the United States or the Reserve Bank of India) lends money to commercial banks against the collateral of government securities. It is a key tool used by central banks to contRead more

    The repo rate, short for repurchase rate, is the rate at which the central bank of a country (such as the Federal Reserve in the United States or the Reserve Bank of India) lends money to commercial banks against the collateral of government securities. It is a key tool used by central banks to control monetary policy, particularly to regulate inflation, economic growth, and liquidity in the economy.

     

    Here’s how it works: When a central bank wants to tighten monetary conditions (reduce inflation or control credit growth), it raises the repo rate. This makes borrowing more expensive for commercial banks, which in turn affects the interest rates they charge customers for loans. Conversely, if the central bank wants to stimulate the economy, it lowers the repo rate, making borrowing cheaper and encouraging more spending and investment.

     

    In summary, the repo rate policy is a crucial monetary policy tool used by central banks to manage economic conditions by influencing interest rates in the economy.

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