Economy

1.How to kick start GS preparation?

2.How to prepare Economy?
3.Banking: Monetary policy
All PowerPoint Slides available
at Mrunal.org/Download

7 Pillars of Economy for UPSC

Pillar #1: Basics of Micro & Macro & Indian
Economy

Class11

Types of
Economies
LPG
reforms

Class12- MICRO
Selected only
Mrunal.org/econo
my

Class12: MACRO
GDP, NNP
National
income
Money &

7 Pillars of Economy

2. BankingFinance

Monetary Policy
Banking Sector
Capital Market

Fiscal
Policy

3.

Budget,
Taxation
Subsidies
Fiscal Deficit

4.

International

BoP, CAD
WTO & other
Org.
Policies

After economic survey is out

5. Sectors of
Economy

Agriculture
MSME, Industries
Service sector

6.Infrastructu
re

Energy
Transport

RUR-URBAN

7. HRD
Skill
Development
Poverty line
Weaker
sections

Type #1: 7 Pillar focus

CSAT, CAPF, CDS

RBI Grade B Officer Mains
GPSC Mains GS-Economy; similar
state service exams

Type #2:
firefighting
sufficient

IBPS: PO/MT, Clerk,

Specialist
SBI Clerk/ PO
RBI assistant
Insurance AO,
Assistants
SSC (+ theory
focus)

Focus area
1. Banking-finance
(Theory current)
2. Business-GK, PIN
3. Budget, Schemes
4. Then focus on
Maths-ReasoningDI-english

Non-UPSC

UPSC

8th Pillar: Persons in

News (PIN), BusinessGK
economy focus on
Facts
Figures
Dates
Names
Numbers

PIN not asked. Hardly

2-3 MCQs in CSAT2014
Economy Focus on
Principles, Definitions
Cause-consequence
Jurisdiction, features
Pro-Anti

Not Essential for Economy

Economy: Dutt Sundaram, Uma Kapila

Budget Speech
Economic Survey
Newspaper

Deadline: by the End of March 2015

1.NCERT 11, 12
2.Lecture +
Mrunal.org
3.Budget
+Survey
(10 Questions in CSAT-14)
(10 Questions in CSAT-14)

4.Hindu/IndianExpr
ess

Todays topic:
Banking
Monetary Policy
1. Quantitative |
Qualitative tools
2. CRR, SLR, OMO
3. Repo, Reverse
Repo,
4. MSF, LAF,

Before money was invented

2 kg

Double
Coincidence
Of wants

500 gms

Birth & Evolution

Supply Demand

1 kg = Rs.100
Supply

Demand

Inflation

Demand

Demand

Demand

Demand

1 kg =
Rs.1000
Supply

Inflation: increase supply

Demand

Demand

Demand

Demand

1 kg =
Rs.100
Supply

Reduce demand by money supply

Demand

Demand

Demand

Demand

1 kg =
Rs.100
Supply

Combat Inflation

Reduce

Money

supply

Tight

Money

policy

Dear
policy

money

Deflation Combat

Increase

Money

supply

Easy Money policy

Cheap money
policy

Monetary Policy: Instruments?

1. Reserve
Ratios
Quantitative
Qualitative
(CRR, SLR)
1.
Margin
/
LTV
2. OMO: Open market
2. Consumer Credit
operations
control / Down
3. Rates (Repo, RR,
payment
Bank, MSF, LAF)
3. Rationing
4. Moral Suasion
5. Direct Action

Reserve Ratios
1.Cash Reserve Ratio (4%)
2.Statutory Liquid Ratio
(22%)

Reserve Ratios
Pay 0-4-9%

Depositors

Pay 10-15-18%

CRR: 04%
SLR: 22%
Total: 26%

Borrowers

Liabilities of a Bank
Demand
Liabilities
Time
Liabilities

Reserve ratio counted on NDTL

Demand Liabilities
Current Account
(CA)
Savings Account
(SA)
Demand Draft
~8,000 Billion Rs.

Time liabilities
Fixed deposits (FD)
Recurring deposits
(RD)
Cash certificates
Staff security
deposits
~78,000 Billon Rs.

1/1/2015
Depositors
Deposited
+120 Cr.
Took out
20 Cr.

Net Demand & Time Liability (NDTL)

120-20=100 Crores.

Time: FDRD
Demand: CASA

NDTL (100 Crore)

CRR
4%

Cant lend
No profit

SLR
22%

Cash, Gold
RBI approved
securities

Cash Reserve Ratio (CRR)

Deposit

Examples

Time
Deposit
Demand
Deposit
NDTL

FDRD

Reserve
ratio
CRR

CASA
+100 cr.

(-) 4%
[no profit]

All Banks
Penalty
No profit. Except 1999.
Right now 4%
IIM-A Prof D'Souza
report: allow goldforex investment
RBI said No, due to
volatility

Statutory Liquidity Ratio

Deposit
Time Deposit
Demand Deposit
Net Demand and
Time Liabilities
(NDTL)

Examples
FDRD
CASA
+100 cr.

Reserve

CRR
SLR
Money left
with bank

(-) 4 [no profit]

(-) 22 [some
profit]
=74 cr.

All banks
In Cash, gold, RBI
approved securities
Some profit.
Right now 22%

Fortnight lag
Fortnight
Friday
NDTL
100 Cr.

Fortnight
Friday

Friday

4 cr. CRR
22 cr. SLR

Reserve Ratios
1.What is NDTL?
2.What are SLR and CRR?
3.How to use them against inflation
& deflation

Cyclic fluctuation: Inflation

CRR, SLR: 0%
Loan: 10%
10% of 2 crore
=20 lakh rupees
To combat inflation:
REDUCE Money supply

Cyclic fluctuation: Inflation

CRR, SLR: 50%

Loan: 10%
10%
of
1
crore
20% of 1 crore
=10
lakh
rupees
=20 lakh rupees
To combat inflation:
REDUCE Money supply

Hike in Bank Loan Interest Rates

10%
20%

50,000/48,000/-

Hike in Bank Loan Interest Rates

10%
20%

Inflation
RBI CRR/SLR
Banks left with less
money to lend
interest rates to keep
Profit margin same
People borrow
demand
Prices
= Inflation controlled

Deflation
RBI CRR/SLR
Banks are left with
more money
They interest
rates to get new
clients
People borrow
Demand
= Price

Monetary Policy: Quantitative Tools: Reserve Ratios

Inflation
fight

HOW?

Tight |
Dear

CRR,
SLR

INCREA
SE

Monetary Policy: Quantitative Tools: Reserve Ratios

HOW?

CRR,
SLR

Inflation
fight

Deflation
fight

Tight |
Dear

Easy |
Cheap

INCREA DECREA
SE
SE

Mock Question
Find correct statement(s)?
A. To combat inflation, RBI should pursue
Cheap money policy.
B. To combat deflation, RBI should
increase Statutory liquidity ratio (SLR)
C. Both A and B
D. Neither A nor B
1. Skip

2. Attempt

3.

Mock Question
Find correct statement(s)?
A. To combat inflation, RBI should pursue
Cheap money policy. (WRONG: follow
DEAR/TIGHT)
B. To combat deflation, RBI should increase
Statutory liquidity ratio (SLR) (WRONG:
should Decrease SLR)
C. Both A and B
D. Neither A nor B (Correct Answer)
1. Skip
2. Attempt
3.

Mock Question
Find incorrect statement(s)?
A. To combat inflation, RBI should pursue
Cheap money policy. (WRONG: follow
DEAR/TIGHT)
B. To combat deflation, RBI should increase
Statutory liquidity ratio (SLR) (WRONG:
should Decrease SLR)
C. Both A and B (Correct Answer)
D. Neither A nor B
1. Skip
2. Attempt
3.

Mock Question UPSC 2010

When RBI increases CRR, It means ___.
A. RBI will have less money to lend
B. Government will have less money to
spend.
C. Commercial banks will have more
money to lend
D. Commercial banks will have less
money to lend
1. Skip

2. Attempt

3.

Mock Question UPSC 2010

When RBI announces an increase of Cash
reserve ratio, what does it mean?
A. RBI will have less money to lend (irrelevant)
B. Union government will have less money to
spend. (irrelevant)
C. Commercial banks will have more money to
lend (wrong. Reverse will happen)
D. Commercial banks will have less money to
lend (right)

1. Skip

2. Attempt

3.

BiBan
Rep
monthl 2014 k
MSF
o
y
Rate
first
April
second

June

third

Augus
t

Sep
fourth
Fifth
Dec
Surpriz 15/1/1

RR

SLR CRR

23
22.
5

22

22
22

4
4

22

Reserve Ratios

SLR

Promised fiscal
consolidation

RBI
Reduced SLR
To flow money in
Productive
sectors of
Economy

Both counted on
NDTL

TIME(FDRD)

Ban
k
Rat
e
8.7
5

Demand
(CASA)

MS
F
8.7
5

Rep
o
7.7
5

Have to set aside this

much cash in reserve.
Profit? NO!

RR
6.7
5

SLR
22
%

CR
R
4%

Banks have to keep this much

in cash, gold, G-sec & other
RBI approved securities.

Monetary Policy
Quantitative tools
1.Reserve Ratio (CRR, SLR)
2.Open Market operation
(OMO)

Government securities

Inflation: Open Market Ops.

To combat inflation, RBI has to reduce

money supply

Inflation: Open Market Ops.

Why would banks bother with OMO?

Pay 0-4-9%

Depositors

Pay 10-15-18%

Idle money
=LOSS MAKING
Must invest
G-Sec: 8%

Borrowers

Liquidity / money supply

decreased

Increased

Quant.
Tool

Inflation
fight
Tight/dear

CRR,
SLR
OMO

Increase
To fight inflation,
Ive to decrease money
supply from the system

Sell

Quant.
Tool

Inflation Deflation
fight
fight
Tight/dear
Easy/
Cheap

CRR,
SLR
OMO

Increase Decreas
e
Sell
Buy

MCQ (UPSC-2013)
In context of Indian Economy, Open Market
Operation refers to
A. Borrowing by scheduled banks from RBI
B. Lending by commercial banks to
industries and trade
C. Purchase and sale of government
securities by the RBI
D. None of Above
1. Skip

2. Attempt

3.

MCQ (UPSC-2013)
In context of Indian Economy, Open Market
Operation refers to
1. Borrowing by scheduled banks from RBI
(Repo/Bank)
2. Lending by commercial banks to industries
and trade (irrelevant)
3. Purchase and sale of government securities
by the RBI (RIGHT)
4. None of Above
1. Skip
2. Attempt
3.

Which of the following will increase

Money supply in the economy?
1. Purchase of government securities
from public by central bank
2. Deposit of currency in commercial
banks by the public
3. Borrowing by government from
the central bank.
4. Sale of government securities to
the public by central bank.

CSAT-2012
Answer
Choices
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and
4

Which of the following will increase

Money supply in the economy?
1. Purchase of government securities
from public by central bank
2. Deposit of currency in commercial
banks by the public
3. Borrowing by government from the
central bank.
4. Sale of government securities to the
public by central bank (Bhai)
(DECREASES Money supply)

CSAT-2012
Answer
Choices
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and
4

Which of the following will increase

Money supply in the economy?
1. Purchase of government securities
from public by central bank (right)
2. Deposit of currency in commercial
banks by the public
3. Borrowing by government from the
central bank. (Public finance)
4. Sale of government securities to the
public by central bank (DECREASES
Money supply)

CSAT-2012
Answer
Choices
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4
Test series
A, Q77,
Ans.C

1. Skip 2. Attempt 3. Mark n Review

Monetary Policy
Quantitative tools
1.Reserve Ratio (SLR, CRR)
2.Open Market operation
3.Rates: Bank Rate, Repo Rate,
MSF, LAF

Bank Rate: Meaning?

Long term
Loan
Interest
rate: 9%
BANK
RATE
Collateral:
Nothing

Bank Rate
Bank Rate
3%
36%

Loans 5%
Loans 48%
Less demand
Inflation
controlled

Monetary Policy

Quant.
Tool

CRR,
SLR
OMO
Bank
RATE

Inflation
fight

Deflation
fight

Increase Decreas
e
Sell
Buy
Increase Decreas
e

Bank Rate: WHY?

Not the main tool to control

money supply these days.
Bank rate is Linked with penal
rates:
If CRR, SLR not maintained:
Penalty= (Bank rate + 3%); 5%

CRR, SLR Fortnight lag

Fortnight
Friday
NDTL
100 Cr.

Fortnight
Friday

Friday

4 cr. CRR
22 cr. SLR
Otherwise penalty
Bank Rate + 3%
Bank Rate + 5%

Long term loan

from
RBI
Ban
without
MS
k
collateral

Rat
e
8.7
5

F
8.7
5

Rep
o
7.7
5

LAF

RR
6.7
5

Have to set aside

this much cash in
reserve.
No Profit

SLR
22
%

CR
R
4%

NDTL
Banks have to keep this
much in cash, gold, G-sec &
other RBI approved

LAF: Liquidity Adjustment Facility (2000)

Collateral? = Government security.

LAF
Repo

Short term loans.

When clients borrow
from RBI. 8%
Reverse When clients deposit
Repo money in RBI. 81=7%

Repo Rate: Meaning?

Repo Rate
8%
100 crore
SBI to
Repurchase
@108 Cr.
After 7 days

Collateral: GSec

Bank cant use

these G-sec to
borrow under
Repo

Whats the difference?

LAF (Repo)
Minimum 5 cr
All clients eligible
1. Central & State
Government
2. All Banks
3. NBFI (LIC, UTI)

MSF

1 cr.
Only scheduled
commercial banks
can bid.
Paid up cap. 5l,
protect interest of
depositors=> RBI
Act 1934, 2nd Sch.

LAF (Repo)

Bank cannot
use SLR quota
securities
No limit. Borrow
according to
your securities.
R%

MSF

Can use
Maximum
limit 0.75%
NTDL.
R+1%

Bank use these

G-sec to borrow
under MSF
0.75% of NDTL
=75 lakh
borrow

Reverse Repo Rate: Meaning?

Reverse Repo
Rate 7%

100 crore
RBI to
Repurchase
@107 Cr.
After 7 days

Collateral: GSec

Reverse Repo
Reverse repo rate = it is interest rate paid
by RBI to its clients for short term loans.
Central & State Government, All Banks,
NBFI
Collateral: government securities
2011: RR = Repo 1% (100 basis points).
Dec 2014: Repo = 8%.
Reverse repo =8-1=7%

s
r
e
o
v
p
e
R Re
e -1%

Repo
(7.75%
)

M
+ SF
1%

POLICY RATE
1%= 100 basis points
8%- decreased by 25 basis
points
8.00-0.25=7.75 (15/Jan/15)

During inflation

Repo Rate
8%

Car Loan
13%
1,00,000

During inflation: Tight money policy

Repo Rate
Repo Rate
8%
18%

Car Loan
Car Loan
13%
36% 70,000

Monetary Policy

Quant.
Tool

Inflation
fight

CRR,
SLR
OMO
Policy
Rate

Increase
Sell
Increase

Monetary Policy

Quant.
Tool

CRR,
SLR
OMO
Policy
Rate

Inflation
fight

Deflation
fight

Increase Decreas
e
Sell
Buy
Increase Decreas
e

Repo Rate

CPI

WPI

Ban
Bik
Rep
month 2014
MSF
RR SLR CRR
Rat
o
ly
e
first April 9
8
23 4
22.
secon
June 9
8
4
d
5
Augu
third
9
8
22 4
st
fourth

Sept,3

22

Ban
Bik MSF Rep RR
month 2014
SLR CRR
Rat +1 o
-1
ly
e
first April 9
9
8
7 23 4
22.
secon
June 9
9
8
7
4
d
5
Augu
third
9
9
8
7 22 4
st
fourth

Sept,3

22

Long term loan

from RBI

Only for Sch.

Commercial banks
can borrow from
RBI @this Interest
rate. Can even use
SLR securities

All clients can borrow short

term loans from RBI @this
interest rate. cant use SLR
securities though!

Have to set
aside this much
cash in reserve
=no income

What RBI pays to

its clients for
Banks have to keep this
short term loans
much in cash, gold, G-sec &
other RBI approved
securities

CSAT-2014
The terms 'Marginal Standing Facility
Rate' and 'Net Demand and Time
Liabilities', are used in relation to
A. Banking operations
B. communication networking
C. military strategies
D. supply and demand of agricultural
products
1. Skip
2. Attempt
3.

Limitation
of Monetary policy
1.Why it failed to contain inflation?
(2013-14)
2.Urjit Patel Committee
recommendations

How does Policy rate affects economy?

Billion
Rs.
DEMAND
TIME

2013
8,142
77,96
3

Monetary Policy: limitations (Developing-countries)

1.People dont have many investment

alternatives. So, Commercial banks
have high deposits.
2.Unorganized money market; Shroff;
lack of financial inclusion
3.Monsoon uncertainty, cyclone, flood,
draughts => Supply side constrains

Monetary Policy: limitations (Developing-countries)

1.Crude oil, gold import

2.Fiscal deficit, subsidy leakage,
Black money, underground
economy
3.Solution: Urjit Patel Committee

Committees by RBI

Expert Committee to Revise

and Strengthen the Monetary
Policy Framework
January 2014 report:
Three Major Recommendation:
1. RBI inflation targets (2-6%)
2. Government help RBI
3. RBI fix accountability

Urjit Patel
Monetary
Policy
Reforms

Until Now
WPI
But 60% GDP
comes from service
sector.
Multi-targets:
reduce inflation,
GDP growth,
employment
growth.

Urjit Patel
CPI (All India Urban
+ Rural)
Minimum inflation:
2%
Maximum 6%
=4% (+/- 2% band)
Similar system in
Mexico, S.Africa,
Israel

Nominal Anchor 4% CPI: When? Timeframe

Chile:
90s CPI 25%
2000s: CPI target 3% (+/- 1%
band)

Urjits Target for India

12%
10%
10%
8%
6%
4%
2%
0%
0

8%
6%
4%

12

24

36

Nominal Anchor 4% CPI: How? RBI?

Policy rate= LAF repo Rate

Decided by voting in MPC.
Reverse repo=-1% (100 basis point)
MSF=+1%
Spread +1/-1 should not be changed frequently
Keep Repo higher than CPI

Monetary policy under Rajan

Bi-monthly
Policy

2014

RR
CPI
MSF Repo Rep
target
o

first

April

second

June

third

August

9
9

8
8

start
7
ed
7
7

Monetary policy under Rajan

January

CPI
Target

2015

8%

2016

6%

Challenges:
60% El Nino
Geopolitical
problems
Subsidies

Repo Rate

CPI

WPI

1. RBI target inflation with

deadline
2. Government should help RBI
3. RBIs accountability has to be
fixed

Urjit Patel
Monetary
Policy

MNREGA: wage increased

yes. Productive growthno?
Subsidy leakage, corruption
X
Administered pricex
Fiscal consolidation

Urjit Patel
Governme
nt to help
RBI

Monetary Policy: accountability in India

RBI Act.
Governor directly accountable to Government
Govt. can issue directives to RBI in public
interest.
Parliaments standing Committee on financecan summon Governor Avg. 3-4/year.
Monetary policy made by Governor alone. (sign.)
OVERALL No formal accountability
mechanism.

Urjit: Monetary Policy: accountability in India

Target: 4% (2% band)= 2-6% .

Failure?? Three quarters successively.
MPC issue public statement
1. Each member will sign it
2. Reasons for failure
3. Action proposed
4. Time-frame for result.

Each cluster
headed by COO
Dy.Gov. rank
Need Govt.
approval

Existing dept will be grouped into

FIVE clusters

NCERT Class12: Macroeconomics

Chapter 3 Money and banking
Ignore complicated graphsformula-equations
Mrunal.org/economy
1. Economic Survey=> WPI, CPI, IIP,
inflation
Mrunal.org/Banking
2. Banking=>Urjit Patel article
3. Update PPT with Monetary policy

Self Study
Monetary Policy

Next time

Qualitative tools
Banking sector evolution since British
India
Financial inclusion: PM-JDY, KVP etc.