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 Class12: MACRO

• Types of Class12- MICRO • GDP, NNP
Economies Selected only • National income
• LPG reforms Mrunal.org/econo • Money &
my banking
 7 Pillars of Economy

2. Banking-Finance 3. Fiscal Policy 4. International

• Monetary Policy • Budget, Taxation • BoP, CAD
• Banking Sector • Subsidies • WTO & other Org.
• Capital Market • Fiscal Deficit • Policies affecting
• GS Mains P2
 After economic survey is out

5. Sectors of Economy 6.Infrastructure 7. HRD

• Agriculture • Energy • Skill Development
• MSME, Industries • Transport • Poverty line
• Service sector • RUR-URBAN • 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
Focus area
sufficient
IBPS: PO/MT, Clerk, 1. Banking-finance
Specialist (Theory current)
SBI Clerk/ PO 2. Business-GK, PIN
RBI assistant 3. Budget, Schemes
Insurance AO, Assistants 4. Then focus on Maths-
SSC (+ theory focus) Reasoning-DI-english
 Non-UPSC UPSC

8th Pillar: Persons in News PIN not asked. Hardly 2-3

(PIN), BusinessGK MCQs in CSAT-2014
economy focus on Economy Focus on
Facts Principles, Definitions
Figures Cause-consequence
Dates Jurisdiction, features
Names Pro-Anti
Numbers
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
4. Hindu/IndianExpress
(10 Questions in CSAT-14)
Today’s topic:
Banking ► Monetary Policy
1. Quantitative |
Qualitative tools
2. CRR, SLR, OMO
3. Repo, Reverse Repo,
4. MSF, LAF,
5. Urjit Patel Committee
 Before money was invented

Double
Coincidence
Of wants
2 kg 500 gms
Birth & Evolution
 Supply Demand

1 kg = Rs.100

Supply Demand
 Inflation
Demand Demand

1 kg =
Rs.1000
Supply
Demand Demand
 Inflation: increase supply
Demand Demand

1 kg =
Rs.100
Supply
Demand Demand
 Reduce demand by ▼ money supply
Demand Demand

1 kg =
Rs.100
Supply
Demand Demand
 Combat Inflation Deflation Combat

Reduce Money supply Increase Money supply

Tight Money policy Easy Money policy
Dear money policy Cheap money policy
 Monetary Policy: Instruments?
Quantitative Qualitative

1. Reserve Ratios (CRR, 1. Margin / LTV

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

1.Cash Reserve Ratio (4%)

2.Statutory Liquid Ratio (22%)
 Reserve Ratios

Pay 0-4-9% Pay 10-15-18%

Depositors Borrowers
CRR: 04%
SLR: 22%
Total: 26%
Liabilities of a Bank

Demand
Liabilities

Time
Liabilities
 Reserve ratio counted on NDTL
Demand Liabilities Time liabilities

Current Account (CA) Fixed deposits (FD)

Savings Account (SA) Recurring deposits (RD)
Demand Draft Cash certificates
~8,000 Billion Rs. 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
NDTL (100 Crore)
Demand: CASA

CRR SLR
4% 22%

Cash, Gold
Can’t lend RBI approved
No profit securities
 Cash Reserve Ratio (CRR)
Deposit Examples • All Banks
Time Deposit FDRD • Penalty
Demand CASA • No profit. Except 1999.
Deposit • Right now 4%
NDTL +100 cr. • IIM-A Prof D'Souza
report: allow gold-forex
investment
Reserve ratio
• RBI said No, due to
CRR (-) 4% volatility
[no profit]
 Statutory Liquidity Ratio
Deposit Examples • All banks
Time Deposit FDRD • In Cash, gold, RBI
Demand Deposit CASA approved securities
Net Demand and Time +100 cr.
Liabilities (NDTL) • Some “profit”.
• Right now 22%
Reserve

CRR (-) 4 [no profit]

SLR (-) 22 [some profit]
Money left =74 cr.
with bank
 Fortnight lag

Fortnight Fortnight
Friday Friday Friday
NDTL
4 cr. CRR
100 Cr.
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 Deflation
RBI ▲ CRR/SLR RBI ▼ CRR/SLR
Banks left with less Banks are left with more
money to lend money
▲ interest rates to keep They ▼ interest rates to
Profit margin same
get new clients
People borrow ▼
People borrow ▲
demand ▼
Prices ▼ Demand ▲
= Inflation controlled = Price ▲
Monetary Policy: Quantitative Tools: Reserve Ratios

Inflation fight
HOW? Tight | Dear
CRR, SLR ▲▲▲
INCREASE
Monetary Policy: Quantitative Tools: Reserve Ratios

Inflation fight Deflation fight

HOW? Tight | Dear Easy | Cheap
CRR, SLR ▲▲▲ ▼▼▼
INCREASE DECREASE
 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. Mark n Review

 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. Mark n Review
 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. Mark n Review
 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. Mark n Review

 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. Mark n Review
 Bi- Bank
2014 MSF Repo RR SLR CRR
monthly Rate
first April 23 4
second June 22.5 4
third August 22 4
fourth Sep 22 4
Fifth Dec 22 4
Surprize 15/1/15 22 4
Sixth 3Feb,15
 Reserve Ratios

SLR
RBI
Reduced SLR
To flow money in
Productive
Promised fiscal sectors of
Economy
consolidation
 Both counted on NDTL Have to set aside this much
cash in reserve.
TIME(FDRD) Demand (CASA) Profit? NO!

Bank MSF Repo RR SLR CRR

Rate
8.75 7.75 6.75 22% 4%
8.75
Banks have to keep this much in cash,
gold, G-sec & other RBI approved
securities. Profit? YES
 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% Pay 10-15-18%

Depositors Borrowers
Idle money
=LOSS MAKING
Must invest
G-Sec: 8%
Liquidity / money supply
decreased Increased
Quant. Tool Inflation fight
Tight/dear
CRR, SLR Increase
OMO Sell
To fight inflation,
I’ve to decrease money
supply from the system
Quant. Tool Inflation fight Deflation fight
Tight/dear Easy/ Cheap
CRR, SLR Increase Decrease
OMO 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. Mark n Review

 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. Mark n Review
Which of the following will increase CSAT-2012
Money supply in the economy? Answer Choices
1. Purchase of government securities
A. Only 1
from public by central bank
2. Deposit of currency in commercial B. 2 and 4
banks by the public C. 1 and 3
3. Borrowing by government from the D. 2, 3 and 4
central bank.
4. Sale of government securities to
the public by central bank.
Which of the following will increase CSAT-2012
Money supply in the economy?
Answer Choices
1. Purchase of government securities
from public by central bank A. Only 1
2. Deposit of currency in commercial B. 2 and 4
banks by the public
C. 1 and 3
3. Borrowing by government from the
central bank. D. 2, 3 and 4
4. Sale of government securities to
the public by central bank (Bhai)
(DECREASES Money supply)
Which of the following will increase CSAT-2012
Money supply in the economy?
Answer Choices
1. Purchase of government securities
from public by central bank (right) A. Only 1
2. Deposit of currency in commercial B. 2 and 4
banks by the public
C. 1 and 3
3. Borrowing by government from the
central bank. (Public finance) D. 2, 3 and 4
4. Sale of government securities to Test series “A”,
the public by central bank Q77, Ans.C
(DECREASES Money supply)
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 3% Loans 5%
Bank Rate 36% Loans 48%
Less demand
Inflation controlled
 Monetary Policy
Quant. Tool Inflation fight Deflation fight
CRR, SLR Increase Decrease
OMO Sell Buy
Bank Increase Decrease
RATE
 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 Fortnight
Friday Friday Friday
NDTL
4 cr. CRR
100 Cr.
22 cr. SLR
Otherwise penalty
Bank Rate + 3%
Bank Rate + 5%
 Have to set aside this much
Long term loan from cash in reserve.
RBI without collateral No Profit

Bank MSF Repo RR SLR CRR

Rate
8.75 7.75 6.75 22% 4%
8.75
LAF NDTL
Banks have to keep this much in cash,
gold, G-sec & other RBI approved
securities. Some profit
 LAF: Liquidity Adjustment Facility (2000)
Collateral? = Government security.
LAF Short term loans.
Repo When clients borrow from
RBI. 8%
Reverse When clients deposit money
Repo in RBI. 8-1=7%
 Repo Rate: Meaning?
Repo Rate 8%

100 crore

SBI to Repurchase
@108 Cr.
After 7 days Collateral: G-Sec
But not from SLR
Bank can’t use these
G-sec to borrow
under Repo
 What’s the difference?
LAF (Repo) MSF

Minimum 5 cr 1 cr.
All clients eligible Only scheduled
1. Central & State commercial banks can bid.
Government Paid up cap. 5l, protect
2. All Banks interest of depositors=>
RBI Act 1934, 2nd Sch.
3. NBFI (LIC, UTI)
 LAF (Repo) MSF

Bank cannot use Can use

SLR quota
securities Maximum
No limit. Borrow limit 0.75%
according to your NTDL.
securities.
R% 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: G-Sec
But not from SLR
 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%
 Repo
(7.75%)

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 8% Car Loan 13%

Repo Rate 18% Car Loan 36%
70,000
 Monetary Policy
Quant. Tool Inflation fight
CRR, SLR Increase
OMO Sell
Policy Rate Increase
 Monetary Policy
Quant. Tool Inflation fight Deflation fight
CRR, SLR Increase Decrease
OMO Sell Buy
Policy Rate Increase Decrease
Repo Rate

CPI

WPI
 Bi- Bank
2014 MSF Repo RR SLR CRR
monthly Rate
first April 9 8 23 4
second June 9 8 22.5 4
third August 9 8 22 4
fourth Sept,30 9 8 22 4
Fifth Dec, 2 9 8 22 4
Surprise 15/1/15 8.75 7.75 22 4
Sixth 3-Feb-15
 Bi- Bank MSF RR
2014 Repo SLR CRR
monthly Rate +1 -1
first April 9 9 8 7 23 4
second June 9 9 8 7 22.5 4
third August 9 9 8 7 22 4
fourth Sept,30 9 9 8 7 22 4
Fifth Dec, 2 9 9 8 7 22 4
Surprize 15/1/15 8.75 8.75 7.75 6.75 22 4
Sixth 3-Feb-15
 All clients can borrow short term loans Have to set aside this
Long term loan from from RBI @this interest rate. can’t use SLR
securities though!
much cash in reserve
RBI =no income

Bank MSF Repo RR SLR CRR

Rate
8.75 7.75 6.75 22% 4%
8.75
Only for Sch. Commercial
banks can borrow from RBI What RBI pays to its
@this Interest rate. Can clients for short term
Banks have to keep this much in cash,
loans
even use SLR securities 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. Mark n Review
 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. 2013
DEMAND 8,142
TIME 77,963
 Monetary Policy: limitations (Developing-countries)

1.People don’t 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
Bimal Jalan
• Retired governor
• New Bank Licenses
• Feb 2014 report given

Nachiket Mor
• RBI board of directors.
• Financial products for small businessmen and low income household.
• Financial inclusion: banking, credit, investment, insurance. + consumer protection

Urjit Patel
• Dy. Governor
• Revise and Strengthen Monetary policy framework
 Urjit Patel
Expert Committee to Revise and
Strengthen the Monetary Policy Monetary
Policy
Framework
Reforms
January 2014 report:
Three Major Recommendation:
1. RBI inflation targets (2-6%)
2. Government help RBI
3. RBI fix accountability
 Until Now Urjit Patel

WPI CPI (All India Urban +

But 60% GDP comes from Rural)
service sector. Minimum inflation: 2%
Multi-targets: reduce Maximum 6%
inflation, GDP growth, =4% (+/- 2% band)
employment growth….
Similar system in Mexico,
S.Africa, Israel
 Nominal Anchor 4% CPI: When? Timeframe
Chile: URJIT’S TARGET FOR
• 90s CPI 25% INDIA
• 2000s: CPI target 3% (+/- 1% band) 12% 10%
10% 8%
8% 6%
6% 4%
4%
2%
0%
0 12 24 36
Target 10% 8% 6% 4%
 Nominal Anchor 4% CPI: How? RBI?
Repo
(R%)

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 RR
Policy
2014 MSF Repo CPI target
Repo
first April 9 8 7 started
second June 9 8 7
third August 9 8 7
fourth Sept,30 9 8 7
 Monetary policy under Rajan
Challenges:
CPI
January • 60% El Nino
Target
• Geopolitical problems
2015 8% • Subsidies
2016 6%
Repo Rate

CPI

WPI
 Urjit Patel
1. RBI target inflation with deadline
2. Government should help RBI Monetary
3. RBI’s accountability has to be Policy
fixed
 Urjit Patel
MNREGA: wage increased…yes.
Productive growth…no? Government to
Subsidy leakage, corruption…X help RBI
Administered price…x
Fiscal consolidation
 Monetary Policy: accountability in India
RBI Act.
Governor directly accountable to Government
Govt. can issue directives to RBI in public
interest.
Parliament’s standing Committee on finance-
can 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 Existing dept will be grouped into FIVE
clusters
headed by COO Monetary
Dy.Gov. rank policy
Need Govt. Services Regulatory
approval
Financial Supervision
market
NCERT Class12: Macroeconomics Self Study
Chapter 3 Money and banking
Monetary Policy
Ignore complicated graphs-
formula-equations
Mrunal.org/economy
1. Economic Survey=> WPI, CPI, IIP,
inflation
Mrunal.org/Banking
1. Banking=>Urjit Patel article
2. Update PPT with Monetary policy
 Next time
Qualitative tools
Banking sector evolution since British India
Financial inclusion: PM-JDY, KVP etc.