index 5e - club sba...* when rbi prints more notes then demand increases. * to control inflation...

A-1, Keshav Vihar, Riddhi Siddhi main chauraha, Gopalpura Bye pass, Jaipur , M-9636977490

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INDEX – 5E

Topic Introduction 2 Market Forces 3 Monetary policy Reserve bank of India 4 Money Supply Micro finance 5 Financial Inclusion 6 Capital Market SEBI 7 Inflation 8 National Income 9 Economic Development 10 Trade Policy 11 Special Economic Zone Exchange rate 12 International institutions GAAR 13 Agriculture 14 Fiscal Policy GST 17 Budget 18 Rajasthan Economy

1 2 5 8 19 21 27 32 39 43 48 53 59 67 71 76 97 100 108 116 125 133-170


1

Economy

Two forces

Socialism (समाजवादी) Capitalism(प ूंजीवादी)

State controls on resources Individual person controls on resources

सरकार द्वारा बाजार शक्ति

Collective interest of society Individual person interest

Demand = Supply

If Demand > Supply If Demand < Supply

Price increases Price decreases

Inflation Deflation

Monetary policy of RBI Fiscal policy

Buyer Seller

If price increase by Rs 2

Seller has additional profit

↓

Invest

↓

Additional employment opportunities generated

↓

Living Standard better

↓

Income increase

10

+12


2

Factors of Production:-

Factor Factor cost

1. Land Rent

2. Labour Wages

3. Capital Interest

4. Entrepreneur Profit

Factor Cost + C.G.S.T.+ S.G.S.T. = Market Price

Inflation should not be more than 6%

4+ - 2%

* When government increases its expenditure then demand increases.

Government invest 55,000 cr. on MGNREGA.

* When RBI prints more notes then Demand increases.

* To control inflation government decreases its expenditure and to control recession

government increases its expenditure.

Sectors of production:-

(1) Primary Sector (Agriculture sector) 17%

(2) Secondary sector (Industrial sector) 30%

(3) Tertiary sector (Service sector) 53%

Primary sector:- Goods which are produced from natural resources are involved in primary

sector.

Ex:- Agriculture, Animal Husbandary, Mining, Forestry, Fisheries.

The quaternary sector consists of those industries providing information services such as

computing, ICT consultancy.

Secondary Sector (Industrial Sector):- Manufacturing and constructing products are included

in this sector. Product formed by processing of primary product. Goods produced from the

industries.

Tertiary Sector (Service Sector):- All types of services are included in this sector. For ex.

Transportation, Banking, Insurance, Education.

Mining & electricity are included in secondary sector in India.

Quaternary Sector:- Intellectual services are included in this. Ex. Education, consultency

service, cultural activities, Research.


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Quinary Sector:- Higher level political and economical decision making services.

Ex.:- Ministers, bureaucrats, Members of board of directors of company ,CEO.

In Australia domestic works are included in Quinary sector.

Rule of demand & Rule of supply:-

(1) There is negative relation between price and demand.

↑

(-) P & D Demand

Price →

When price increases demand goes down.

(2) There is Positive relation between price and supply.

↑

Supply

Price →

When Price increases supply goes up.

(3) When buyer and Supplier both are satisfied then the price of goods is fixed.

Demand &

supply

Price

Exception of Rule of demand & Supply:-

(1) This rule is not applicable on basic requirements like salt , Medicines.

(2) Fashionable goods.

(3) Giffen goods (Giffen named Scientist)


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When price increases , the demand of inferior goods also increases.

Wheat Bajra

20 10

30 15

Rule of demand and supply not apply on inferior goods.

(4) Weblen Goods:- Goods which are associated with social status. On rising its price demand

also increases.

1. Monetary Policy

2. Fiscal Policy

3. Trade Policy (BOP)

4. Economic Growth (GDP)

5. Economic Development (HDR)

6. Agriculture

7. Industry

8. Poverty

9. Unemployment


5

Monetary Policy

(i) Bank of Hindustan was the first bank established in India in 1770 A.D.

(ii) 1881 A.D. Awadh commercial Bank (ACB) First Bank run by Indians.

(iii) 1894 A.D. Punjab National Bank is the first Indian Bank.

History of SBI:-

These are called Presidential banks because these were started by presidency government.

In 1921 all these three banks merged and these were named as Imperial Bank of India.

In 1955 it was partially nationalized and it was renamed as SBI (State Bank of India)

Before establishment of RBI which institution controlled the banking business ? ( Imperial Bank

Of India)

RBI was the owner of SBI

In 2008, government of India purchased SBI from RBI. (Nationalization of SBI)

In 1959, subsidiary banks of SBI were established which were earlier princely States’ banks.

In 1961, state bank of Jaipur & state bank of Bikaner merged.


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2008 → State Bank of Saurashtra was merged in SBI.

2010 → State Bank of Indore was merged.

2017 → Remaining five banks were merged.

IDBI (1976) government of Indian purchase

SBI (2008) nationalization

RBI NABARD (2010)

NHB (National Housing & Banking)

DICGSC (Deposit insurance & credit guarantee corp.)

Q. Positive & Negative impact of merger of subsidiary bank into SBI


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Nationalized Bank:-

In 1969 Indira Gandhi government nationalize 14 largest banks which have more than 50 cr.

property.

Permanent employment opportunities is the main objective of better economy.

In 1980, 6 more banks were nationalized which have capital more than 200 cr.

14+6= 20 Nationalized Bank.

In 1993, New bank of India was merged in PNB. At present, there are 19 Nationalized Bank

In 2013, Indian women Bank was established.

In 2017, it was merged into SBI.

IDBI was established in 1964 as DFI (Development Finance Institution)

IDBI

Industrial Development Bank Of India

1964 1976 2004

Established Nationalized converted to Bank

In 2004, it was converted into Bank.

New total Public sector banks are 21.

Q. Present Authorized Capital of NABARD is Rs 5000 crore. A constitutional amendment bill

was introduced in parliament in 2017 to increase it to what extent ?

Rs 30,000 crore.

Ques. Difference between commercial & cooperative bank.

Cooperative Bank Commercial Bank

(1) It is a subject of state list (1) It is a subject of Union list.

(2) Three tier structure (2) One tier structure.

State→ Apex Bank

Dist→ Central Bank

Gr. Panchayat→

Cooperative Society

(3) These are not scheduled Bank (3) These are scheduled Bank.

(4) NABARD is the Apex Bank (4) RBI is the Apex Bank.


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(5) There are fixed functioning area (5) Not fixed

Since 2005, Co-operative Bank also come under the jurisdiction of RBI.

Scheduled Bank:- Bank which are included in second scheduled of RBI act 1934 are called

scheduled Bank.

→ N.B.F.C → Non Banking Finance company. These are not Scheduled Banks.

→ Banks which have license given by RBI are scheduled bank.

→ N.B.F.C have not license given by RBI.

→ Rules and Regulations of RBI act on scheduled Bank.

→ They can get financial support from RBI.

→ They can issue chequebook.

RBI (Reserve Bank of India)

Establishment → 1 April 1935

→ It was established by RBI act 1934.

→ It was established by Young Hilton Committee Recommendation.

→ It was central bank since its establishment or from very beginning.

→ It was a private bank since its establishment.

→ It was nationalized on 1st January 1949.

When government acquires private institution and declares it governmental, this is known as

Nationalisation.

Functions of RBI:-

(i) To issue currency notes.

(ii) Rs 2 and above currency notes are issued by RBI.

(iii) Rs 1 note or coins are issued by finance Minister. But these are circulated in market

by RBI.

(iv) Rs 1 note is signed by finance secretary.

(v) 1 April 1935……………..

(vi) RBI issues notes by minimum reserve system.


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Gold reserve system

↓

Proportional Reserve System

↓

Minimum reserve system (200 cr.)

→ RBI has to control Minimum 200 cr. reserve.

115 cr. → gold

85 cr. → other assets (dollar, Euro)

200 Cr.

→ Since 1956, this facility (Minimum Reserve System) started.

→ It is the regulatory body of the Banks.

→ It makes rules and regulations for banks, implement on banks and give instructions to the

banks.

→ It takes action against those banks who doesn’t follow its instructions.

→ It maintains Forex reserve.

→ There are about 390 billion dollar Forex reserve.

→ There are four things come in Forex Reserve (GFRS)

(i) Gold

(ii) Foreign Assets

(iii) Reserve Tranche (Deposit with IMF)

(iv) SDR (Special Drawing Rights)

→ To manage the exchange rates of Rupee.

→ RBI provides clearing house facilities to bank.

→ It plays the role of government banker.

→ RBI arranges domestic borrowings for government of India.

→ Government has established Public Debt Management cell which works under Finance

Ministry which is a advisory body that provides advise.

→ Interest rate on the saving bonds in capital markets, the government securities government

recruitment, government investment.


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→ It will prepare a database.

→ It is established for the transitional phase (pubic Debt Management cell)

→ Later on PDM agency was establishment which will arrange domestic borrowings for the

government of India.

→ To control the liquidity of Market.

→ If RBI issues more notes to market.

More Rs. Means liquidity increase

i.e, Demand > Supply (Inflation)

In reserve, Demand < Supply (Deflation)

Those goods which can easily be sold or can be converted into money are known as liquid

assets. (example - Gold)

Two types of Measures:-

(i) Quantitative Measure

(ii) Qualitative Measure

Quantitative Measure:-

(i) Bank rate

(ii) CRR

(iii) SLR

(iv) Repo rate (Recommendation of narsimhan committee)

(v) Reserve Repo Rate

(vi) MSF rate

(i) Bank rate:- Interest rate at which RBI provides long term loans to the bank is called

Bank rate. It is also called Penal rate, because RBI uses this rate to Punish bank

which do not maintain CRR & SLR.

(ii) CRR:- (Cash Reserve Ratio) All banks have to deposit a certain percentage of total

liabilities to RBI. They have to keep some cash in reserve.

Presently it is 4%.

RBI

MKT

Rs.


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(iii) SLR :- (Statutory liquidity Ratio) All banks have to maintain certain percentage of their

liabilities in a liquid assets or all banks have to invest certain % of their total

liabilities in government securities.

RBI 4% 20% Govt.

(iv) LAF:- Liquidity Adjusted Facilities:- This facility was started by RBI in 2000. Repo Market

was developed.

→ Repo i.e., Repurchase option

→ Seller/ Lender of money keeps option to repurchase his money after a certain time.

→ In India short term transactions between RBI and Bank are called Repo Mkt.

→ It was started by the recommendation of Narismhan committee.

→ Government securities are kept mortgage in it. Its interest rate are known as Repo rate or

reserve repo rate.

(v) Repo Rate:- Interest rate at which RBI provide short term loans to the bank is called

repo rate.

(vi) Reserve Repo Rate:- Interest rate at which the bank deposit their surplus amount to

the RBI is called reserve repo rate.

(vii) MSF:- (Marginal standing Facility) This facility was starded in 2011 to Maintain Bank

CRR.

In this , bank borrows money from the RBI……

This facility is available in Mumbai.

Banks have to borrow minimum 1 cr. Rupees and above money should be in multiple of 1

cr.

Maximum amount can be 2% of their total amount.

Open Market Operation:-

→ To control the liquidity of Market, generally RBI uses the open Market Operation.

→ It buys or sells the securities.

→ If there is a inflation problem , then RBI sells securities.

BANK


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Inflation Problem

Deflation Problem

Repo Market Open Market Operation

1. Securities are kept mortgage for 1. Securities are sold or bought.

a certain time.

2. Short term measure. 2. Comparatively long term measure.

In case of inflation problem, then RBI uses these tools to control the proplem.

On increasing these tools, inflation can be controlled.

On decreasing these tools deflation can be controlled.

Ex:- CRR 4%

20% SLR Mkt.

Increase CRR and SLR

CRR 10% Rs.

40% SLR Demand

Inflation control

Qualitative Measures:-

1. Margin Requirement

2. Consumer credit regulation

3. Rationing of credit

RBI

MKT

Security sells

Rupees कम

Demand कम

Demand < Supply (deflation)

Inflation Control

RBI

MKT

Security buys

Rupees ज्यादा

Demand ज्यादा

Demand > Supply (inflation)

Deflation Control

100 Bank

76%

100 Bank 50%


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4. Moral suasion

5. Direct Action

Que. (Pre):- Which is qualitative & quantitative Measure.

Que. (Main):- Qualitative Measures of RBI (20 words)

1. Margin Requirement:- RBI increases Margin money to control the inflation.

RBI decreases Margin money to control deflation.

If Margin money increases we get less money. So we sell our stock in Market, Inflation control.

2. Consumer Credit Regulation:- In this, the down payment amount will increase or

decrease.

To control the inflation down payment amount increases. Bank increase the down

payment amount.

Suppose, we have to buy a car. Bank doesn’t give complete loan. We have to give 20%

down payment.

If this down payment amount increases, we are not interested in taking loans from

bank. This decrease the demand of bike in market, due to which inflation control.

3. Rationing of Credit:-

Bank

Consumers Loan Investor Loan

(we) (Investor, Ambani)

Market Invest

Demand↑ Supply increase

Inflation increase Inflation control

Consumers loan increase the demand in market.

Investor loan (Industrialist) increase the supply in Market.

Bank generally gives consumers loans & investment loans. To control the liquidity of market

bank increase or decrease these loans.

During the inflation bank reduces in consumer loan and try to give more investment loans.

During deflation it gives more consumer loans. It is called Rationing of credit.


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4. Moral Suasion :-

Bank People deposit money

House loan (20 yr)

Vehicle loan (5yr)

If rumours spread, Bank doesn’t give loans, i.e, bank doesn’t finance. So Rs. In market

decrease. This decrease the demand in market and deflation problem occurs. So finance

minimum & RBI instructs bank for giving more loans.

2008 Sub-Prime crises

Prime customer Sub Prime customer

America India

Reason of occurring deflation Reason of not occurring deflation

Because there is consumer culture Here, saving based economy.

When probability of demand decrease Already deflation exists.

Export effect No Export effect

1 April 2008

↓

NREGA(40000)

5. Direct Action:- RBI gives instruction to the Banks.

CAR → Capital Adequacy Ratio

CRR 4 ← 100 Deposit liability

SLR 20 ← Bank

↓

76

Risk Assets

Bank Capital (500 cr.)

Bank

Capital Liability

(own deposit) (public deposit)


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→ There should be bank’s own capital in certain percentage for the risk weighted assets.

→ The concept of CAR was taken from BASEL STANDARDS.

→ BIS – Bank for International Settlement.

→ Established in 1930.

→ It is an organization of central banks.

→ Headquarter → Switzerland (Basel city)

→ It encourages the research for the development of the banking sector.

→ It issues the standards for the development of banking sector.

→ In 1996, RBI its member.

→ Its standards are known as Basel standards.

→ Till now, it has issued BASEL I, BASEL II, BASEL III.

→ BASEL III Std. are being implemented in India from 2013 to 2019.

→ Basel Std. are not compulsory for central banks.

→ If RBI has adopted & it give instruction to the banks, banks have to follow them.

Call Money Market:-

During the day to day business some banks have shortage of money while at the same time

some other banks have excess/ surplus money. In this condition transactions between the

banks is called Call Money Market.

It’s a very short term market. Its maximum duration is 15 days. Generally it is for a day.

To maintain CRR ,this transaction is made. It is also called money at call.

Its interest rate is known as call rate. There is high fluctuation in call rate.

Call rate shows the liquidity of market.

Central bank takes reference of call rate to make its Monetary Policy. Therefore it is also

called reference rate.

Largest Call Money Market in the world is London.

Its call rate is known as LIBOR.

LIBOR – London Inter Bank Offer Rate.

Mumbai is call Money Market of India. Its call rate is MIBOR.

MIBOR – Mumbai Inter Bank Offer rate.


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Priority Sector Lending:-

CRR 4

SLR 20 100 76 30 18% Ag, 22% others,PSL40%

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All banks have to lend minimum 40% of their loanable amount in the priority sector.

Priority Sector:- Agriculture, Marginal farmers, Micro industries, House loans, Education

loan, slum dwellers, NBFC- NFI.

Out of 40% , 18% in agriculture sector remaining 22% in other sectors.

Priority Sector Lending Certificate:- In 2016, RBI has stated this scheme.

Bank situated in village, give loan of 60 Rs. Which is greater than 40% of 76.

60 Rs. P.s.

Bank situated in cities, can take certificate of remaining 30%.

Some banks lend in a priority sector more than their targets, while some bank can’t achieve

their target of lending in a priority sector.

In this condition, banks which lends to priority sector more than their target they can issue

priority sector lending certificate and banks which can’t achieve their targets can purchase this

PSL certificate.

There are 4 types of PSL certificate:-

(i) Agriculture

(ii) Marginal Farmers

(iii) Micro Industries

(iv) General

Narsimhan Committee – I

(i) No more nationalization.

(ii) Private Sector banks should be encouraged.

(iii) Foreign Bank should be allowed in India.

(iv) No discrimination between Foreign Bank and domestic bank.

(v) CRR and SLR should be reduced.

(vi) Credit information Bureau should be established.

CIBIL → Credit Information Bureau Of India Limited.

(vii) Special court, debt recovery tribunal should be established (DRT)

(viii) ARC – Assets Reconstruction Company should be established.

(ix) Three tier structure bank should be established.

International level

76rs.

ICICI


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National level

Regional level

(x) In public sector banks,government share holding can be reduced to 51%

Following shareholdings

26% 49% 51% 74% 75%

Back seat during management

Narsimhan Committee – II

(i) Merging of banks should be encouraged.

(ii) Poor banks shouldn’t be merged into strong banks but they should be encouraged

for narrow banking (banks which invest in only secure sector)

(iii) Computerization of banks should be encouraged.

(iv) Government share holding should be reduced from 51% to 33% in Public sector

Banks.

(v) Bessel standard should be adopted.

(vi) CAR should be adopted.

(vii) NBFC should be brought under the jurisdiction of RBI.

Banking Ombudsman:-

→ In 1995, RBI appointed 15 Banking Ombudsman in different cities.

→ Officers of RBI should be appointed as Banking Ombudsman.

→ It is for the redressal of the complaints of customers.

→ Complaints can be made against following low level banks:-

Scheduled bank

Regional Rural Bank (RRB)

Co-operative Bank

NBFC ( only in finance matters)

Types of complaints:-

(i) It should not be one year old.

(ii) If cheque or DD are not cleared

(iii) If banks apply return charge.

(iv) Banks deny in providing loans.

(v) Bank deny to open or close the accounts.

(vi) Deny to take coins.


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(vii) First we have to complain before Branch Manager.

(viii) If within a month, complain was not resolved, then a customer can approach

Banking Ombudsman.

(i) One year old complain can’t be registered.

(ii) With the amount more than 10 Lac rupees can’t complain.

(iii) If any case already been considered by DRT (Debt recovery tribunal) can’t be

registered.

(iv) General complaints like availability of water, a. c. , electricity can’t complain.

(v) Ombudsman can charge 1 Lac Rs. Fine on bank.

(vi) Online complaints can be made to Ombudsman.

(vii) In all branches, there should be an advertisement of ombudsman.

(viii) We can register complaints related to net banking.

(ix) There can be appeal against the decision of ombudsman before the deputy

governor of RBI.

(x) Terms of office of Ombudsman is 3 yrs.

Urjit Patel Committee:-

RBI Finance Minimum

Main obj. Inflation control GDP growth↑ Production ↑

Interest rate↑ emp. Opp. generated

Investment↑

Interest rate↓

1. There should be only objective of RBI to control inflation.

2. Net growth in GDP, employment opp. Generated, encouraging the exports etc are not

the objective of RBI.

3. WTI should be replaced by GPI as the major index.

WTI & CPI → Index which measure the rate of inflation.

WTI – Wholesale Trade Index

CPI – Consumer Production Index.

4. There should be a target of 4% inflation. It can be 4 + - 2%

5. In next two years it should be reduced to 4%

6. Monetary Policy should be reviewed after the gap of 60 days rather than 45 days.

7. There should be a Monetary Policy Committee. (MPC)

8. There should be 5 Member Committee 3 Members of RBI and 2 government

representatives should be in committee.

9. Decision should be taken by majority.

10. Governor should be given the right to vote.

11. There should be transparency in proceedings of government.


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12. Governor should not leave the veto right (neg. power)

13. Government shouldn’t give instruction to the public sector bank for the determination

of interest rate.

14. Government should try to achieve the target of FRBM Act 2003.

15. To achieve this, government should implement the recommendation of Kelkar Task

Force.

16. Government should reduce its expenditure on schemes like MNREGA food security

programme.

17. RBI and government of India, both affect the Inflation.

18. Most of the recommendations have been implemented.

Following recommendation are implemented:-

1. Now RBI has only an objective to control inflation.

2. Now, targeting inflation is 4% which may be 4 + -2%

3. Now Monetary Policy can be reviewed in the interval of 60 days.

4. Now monetary policy Committee has been constituted in 2016.

5. Parliament has passed an Act for it.

6. Now, there are 6 members in Monetary Policy.

3 Members from RBI (1 governor+ 1 deputy governor + 1 executive governor) and 3

members are from government representatives.

7. Terms of members of government representative 4 years.

8. Decision should be taken by majority.

9. They keep total transparency in their proceedings.

Four types of A/C:-

(i) Current deposits A/C

(ii) Saving deposit A/C

(iii) Recurring deposit A/C

(iv) Fixed deposit A/C

Banks are independent to decide interest rates on all these four A/Cs. Earlier interest

rate on saving A/C was decided by RBI.

Money Supply:-

M1 = Cash with People + Demand deposit with bank + other deposit with RBI.

M2 = M1+ Demand Deposit with P.O.

M3 = M1 + Time deposit with bank.

M4 = M3+ Total deposit with P.O.

M0 = Cash with people + CRR+ other deposits with RBI.

Demand Deposit

Time Deposit


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M0 is high powered Money.

Que. (Mains):- What is high powered Money?

New aggregates of the RBI which shows Money supply.

NM1 = Cash with people + Demand deposit with bank + other deposit with RBI

NM2 = NM1 + short term time deposit of residence C time period less than year)

NM3 = NM2+ long term time deposits of residents.

L1 = NM3 + Total deposits of P.O. (National saving bonds are excluded)

L2 = L1+ Refinance Institution

(FI) → Deposit

→ Borrowing

→ C.D. (Certificate on deposits)

L3 = L2+ Deposit of NBFC.

PLR:- Prime lending rate (PLR-2004)

Interest rate which is provided by bank to its best customers or Prime customers is called

Prime lending rate.

This concept was established in 2004.

Base Rate:-

1. In 2010, RBI replaced CRR by the base rate.

2. Minimum interest rate declared by bank is called base rate.

3. Bank can’t lend at rate less than base rate.

4. Its Objective was to bring transparency in interest rate.

5. There are four factors to decide base rate.

(i) Cost of Fund (Interest on Deposit)

(ii) Operating cost

(iii) Cost of CRR

(iv) Profit

MCLR:- Marginal cost of fund based lending rate.

1. In 2016, RBI implemented MCLR in place of base rate.

2. It is calculated by four factors.

(i) Marginal cost of fund.

(ii) Negative carry on A/C of CRR.

index 5e - club sba...* when rbi prints more notes then demand increases. * to control inflation...

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