Banking

Economy do's it's Day to Day

activities by transactions of Money for chasing Goods/Services. To see this in a Demand & supply. Scenario.
Money-Demand
Goods/services-supply
Rate at which Demand Grows Supply won't Grow

100 Rupee = 1kg onion
if too much money dumped into economy
i.e; By Printing too much/too much work /Day
Chasing few goods vendor hikes Prices →

250 Rupee = 1kg onion
means for 100 Rupee = 400g Onion

100 Rupee Note Is loosing its value Technically it lost it's Purchasing Power

Above scenario is Called Inflation
Too much inflation is not good for Indian Type
Gig Economy/middleclass Economy
we need a good Regulator to control the supply of money in the Economy to maintain good condition of Economy and it's Day-day  activities

What is that Regulator in Indian Economy?
Ans:RBI's monetary Policy →
Tools(Qualitative & Quantitative) [money supply]

' Money → Liquidity Preference Theory

Liquidity: The case of Converting an asset

into most liquid Asset (cash)

Cash>> Gold> T-Bill/G-Sec> House/car

Why do people prefer Liquidity/cash??? Transaction motive → Day-Pay expenses
Precautionary motive → Face sudden Problems
speculative motive → To buy for cheap &

sell it dear (speculation)
↳Danger For Economy (deflation)

Bank:
Financial intermediary → Resource mobilization

• [Depoist → Lend:: margin% ⇒ Spread] Bank entirely runs on service charge of lending (for Deposits i.e Interest %)

  Bank → Account ⇒ [savings I current]

  Deposits = Fixed Time Deposit /Recurring Deposit
  Current Account = Overdraft Facility limit Saving Account = interest % on Deposits

Deposits are Bank's Liability and virtual Assets when comes to lending time

FD | RD ⇒ More interest given, less Liquidity. CASA Reverse of above are
Unclaimed Deposits .

Problem of Inflation is to be solved, So we need to Measure Money Supply in the Economy

A: coins and currency with Public
B: Demand Deposits in Banks (CASA)

Measure of money supply: M1 = A + B

MO: High powered money I Reserve money
RBI: Prints currency and circulate it if Govt Prints Coins of 10 Cr the RBI Pay 10Cr to Govt and circulate Coins as an agent of Gout → RBI is Govt's Public debt manager

Money supply enter's market Only by

Issue Department of RBI

Velocity of Money is more at poor People than middle class/Rich People → Expenditure Pattern of classes of Economy of Daily Lifestyle
Ex: USA Lifestyle → more spending Lifestyle

Money multiplier effect ⇒

Money will multiplied from Mo → M3 By zig-Zag lending Pattern at some lending Rate to give Money mutiplier effect

• M3/M0

Banks are key source to money multiplier effect

Now, we have seen the levels of Money supply to Calculate the Inflation, let's Proceed to RBI Method's. RBI developed a Monetary Policy committee to Regulate money supply in the Economy.

The monetary Policy uses tools of ② Types

A)Quantitative B) Qualitative

NDTL(Net Demand & time liability) on Friday
Net left → % of Reserve Ratio's are calculated on this

Quantitative measures:

CRR: (cash Reserve Ratio)
It is an application of fractional reserve Banking & credit creation. It won't give any interest when kept at RBI

• can't Iend/Invest
• No interest paid on it by RBI

Calculated as a % of DTL

CRR = 1/money Multiplier effect

But in Real time It won't happen because of lack of Financial Inclusion with low zigzag pattern
So, when Inflation CRR will be increased to make loan's Dearer → Money multiplier effected Decreased
At Present it is 6X which is result of increasing financial Inclusion using Digital Economy tools like
Net-Banking/BHIM/Mobile wallets etc..
Incremental CRR → Demonetization

SLR: (Statutory Liquidity Ratio)
It is % of NDTL Kept in liquid form like cash, Gold, RBI approved securities (G-Sec, T-Bill,
PSU-debenture) → Some Profit by G-secs
SLR cuts for every 3 months (Urijit Patel)

NOW Bank Asset = CRR + SLR + Lonable ⇒ NDTL
[CRR + SLR] ⇒ Statutory Reserve requirements
Utility??
1.Assist in money multiplier
2.They create Buffer-Protection during a Bank Run
3.Assist in fighting Inflation
CRR & SLR effect.on Loanable stuff Interest Rates

RBI's Target is

(2- 6) % Inflation use Dear/Cheap
MoneyPolicy

Philips' curve (New Zealand 1914-75)

Inflation V/S Unemployment

Stable and moderate Inflation is good for economy

Bank Rate:
Long Term Loan given by RBI at % a Rate to scheduled Banks is called Bank Rate
*No collateral is needed
Usage:
If CRR/SLR not maintained
Penalty: Bank Rate + "x"%

G-sec Again a New term??
G-Sec mean Government Security which a
Document of certificate → The Person who holds it get Money written on it after it matures and service charge as interest @ X% of Money taken by the Government. Government is soverign So it returns in time at Reasonable interest Rate without any fluctuations like investing in stocks/Risk of Borrower Foreign securities:
G-Sec of Foreign Government
why we have learn it here?
Because here in Repo/Reverse Repo collateral is
G-Sec itself and important in SLR too

RepoRate(Policy Rate)
Let's start with the most important Quantitative Tool Repo: Re-Purchase contract → Contract??
Contract of Repurchasing G-Sec From RBI which are kept as collateral by Banks to get a short term loan at Repo Rate
Short Term: one day (overnight),7 days, 14 days
if (not Repurchased) ⇒ G-Sec → Third Party/keep it Presently REPO..: 5.75%
Who Can Borrow Using Repo Rate?
Banks, non-Banks, Govt *

Reverse REPO:

It is Reverse of Repo Rate → RBI parks G-sec
at Banks to Reduce money in the Market of Primary Party (Banks) to fight Inflation
It is tool made to fight for inflation only Reverse Repo = Repo-25 Basis points

Both Repo & Reverse Repo Rate are

Liquidity Adjustment facility (LAF)

RBI's e-Kuber platform is the window for LAF

MSF (marginal standing facility):
It is an Emergency scenario when Bank's Run out of money and short of G-Sec for Repo rate lending
It shows a path of alternative lending with SLR
[G-Sec] as collateral but only scheduled commercial and selected cooperative Banks
MSF = Repo Rate + 25 Basis points

LAF-(REPO, Reverse Repo) is a Bi-party Repo Between RBI and [Govt,Bank,Non-Bank] but
corporates are not allowed for LAF
So to Penetrate Corporate Bonds in competition to
G-Sec a tri-party agreement is Done
Tri-party → [Lender, NSE, Borrower] {SEBI}
width among Repo, Revers-Repo, LAF is called "Policy Corridor"

Inter Bank Borrowing:(overRide RBI)
To comply the CRR/SLR Requirements
①Day → Call money
2-14 Days → Notice Money
Interest Rates Based on Demands supply

Until now we have discussed all Rates of Loans which are given with G-Sec as
Collateral i. e; LAF, MSF (temporarily)

what If G- Sec is Sold Permanently???
It will happen on OMO (open Market operations) platform: E- Kuber
To Fight inflation sell G- Sec and Absorb Money in Market
Banks are interested to Buy G- Sec
OMO: sponge / Injection Type Tool