ECONOMY by VIVEK SINGH

2021-02-27 07:52:40 The above is an article from HINDU. Let us discuss some relevant points.

1) The Flexible Inflation Target Framework i.e. 4% with a tolerance band of +/-2% was decided by the Govt. of India in consultation with RBI in 2016 for five years period i.e. 2016 to 2021 which needs to be reviewed after every five years. That is why this discussion is there in the newspapers.

2) Trend inflation means long term inflation derived by removing cyclical effects from business cycles as well as other transitory distortions.

3) Before 2016 (i.e. coming of the FIT framework), long term/trend inflation used to be high in the range of 8%/9% which has now fallen to 3.8% to 4.3% in the last 5 years during FIT framework period.

4) The lower bound of the FIT is 2% and upper bound is 6% and RBI is justifying it and saying that we can keep the same band for the next five years. RBI is saying that if we increase the lower bound from 2% say to 3% then it may be possible that the the actual inflation will move out of the band (i.e. will fall below 3%) quite frequently and RBI will have to take steps. And if the lower bound is kept below 2% say to 1% then it will negatively impact growth. [you should know that certain level of inflation is good for economic growth. Explained in detail in section 2.26 in the book.].

5) When RBI reduces/changes the REPO RATE then it gets transmitted in the deposit rate and lending rates of the banks and other financial institutions through the MONEY MARKET. RBI is saying that when RBI reduced the repo rate it got transmitted to the MONEY MARKET (and then to deposit and lending rate) [section 2.17 in the book] but did not get properly transmitted in the bond markets which means when RBI reduced the repo rate the interest rate on bonds did not decrease that much. [this may be because of less people participation in the bond market and that is why now RBI has allowed individuals to directly participate in the Govt. bond markets]

6) Regarding linking of the lending rate, till 2016 we have BASE RATE mechanism then we moved to MCLR mechanism and then from 1st Oct 2019, for certain category of loans (like housing, personal, retail, MSME) banks moved to "External Benchmark mechanism". When banks moved from MCLR to External Benchmark mechanism (to link their lending rates) then there has been improvement in transmission of repo rate into deposit rate and lending rate but if banks will start linking the lending rate to all category of loans then the transmission will be much faster.

Right now banks are bound to link some category of lending rates with external benchmark rate (like repo rate) but they are not bound to link their deposit rate with external benchmark. Open / Comment

2021-02-27 07:31:17 Open / Comment

2021-02-26 18:52:59 The following is the list of updates in the 5th Edition of the Indian Economy Book over 4th edition. Open / Comment

2021-02-26 08:53:20 Source: Indian Express
Self Explanatory Open / Comment

2021-02-25 16:56:49 Will be available in the markets from 4/5th March.

This book has been specifically designed for those who are targeting exam in 2022. I have tried to release early in Feb so that those students who want updates and are writing the exam in 2021 can also benefit. Open / Comment

2021-02-25 07:36:12 The above article is from Indian Express. The following are some relevant points:

1) Earlier only few large private sector banks (and of course PSBs) were allowed to take up Government related business like collection of taxes, pension payments and small savings schemes like PPF, Kisan Vikas Patra, Sukanya Samridhi Yojana etc.

2) But as per today's news, all private sector banks are now allowed to handle the above Govt. functions. Earlier RBI used to restrict these functions only to few large private banks but now Govt. has given the authorisation to RBI to allow all private banks for its business.

3) Actually RBI acts as "Banker to Central Govt. and State Govt." So, RBI handles the banking functions of Govt. but then it DELEGATES some work to PSBs and few large private banks too and these banks act as "Agent Banks" (or "Agency banks"). [Third last line of the news]

Section 45 of the Reserve Bank of India Act, 1934, provides for appointment of scheduled commercial banks as agents at all places or at any place in India. RBI carries out the general banking business of the governments through its own offices and commercial banks, both public and private, appointed as its agents (called Agency Banks). Open / Comment

2021-02-25 07:19:30 Open / Comment

2021-02-25 07:14:14 Explanation of the PLI scheme from the Book. Open / Comment

2021-02-25 07:13:24 Source: Hindu
A very important scheme for Prelims Open / Comment

2021-02-24 19:39:10 The answer to the above question is (d) i.e. all the statements are true.
Under LTRO, RBI provides funds to the banks through auction. RBI says that I will give funds to that bank which offers maximum interest rate (above repo rate). This increases the liquidity in the economy and brings down the interest rate and yield (interest rate and yield are directly proportional). (Ofcourse if the funds are available in the market at 7% then under LTRO banks will quote a maximum interest rate below 7% because anyway they can get funds from the market @7%).

SOMETIMES/RARELY LTRO CAN BE DONE AT REPO RATE AND THAT IS CALLED FIXED TERM REPO OPERATION otherwise it is generally (variable) Term Repo Operation.

Explanation of (iii) statement.
Suppose RBI was reducing the repo rate because of which market interest rate (deposit and lending rate) was coming down. But after certain level suppose RBI does not want to reduce the repo rate BUT it wants that interest rate should come down in the economy further then RBI can pump more liquidity (through OMO/LTRO) which will ultimately result in lowering the interest rate. Open / Comment