Indian Economy

Inflation
Q With reference to demand-pull inflation can be caused/
increased by which of the following?
1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Select the correct answer using the code given below,
(a) 1, 2 and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5
Consider the following statements:
1) The weightage of food in Consumer Price Index (CPI) is higher
than that in Wholesale Price Index (WPI)
2) The WPI does not capture changes in the prices of services,
which CPI does.
3) Reserve Bank of India has now adopted WPI as its key
measure of inflation and to decide on changing the key policy
rates.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2only
(c) 3 only
(d) 1, 2 and 3
Q. Which of the following brings out the CPI number for industrial workers
(2015)
a) The RBI
b) The Department of Economic Affairs
c) The Labour Bureau
d) The Department of Personnel and Training.
Q. With reference to inflation in India, which of the following statements is
correct? (2015)
a) Controlling the inflation in India is the responsibility of the GOI
only.
b) The RBI has no role in controlling the inflation
c) Decreased money circulation helps in controlling the inflation
d) Increased money circulation helps in controlling the inflation
Consider the following statements: (2013)
1) Inflation benefits the debtors.
2) Inflation benefits the bond holders.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
A rise in general level of prices may be caused by (2013)
1) An increase in the money supply.
2) A decrease in the aggregate level of output.
3) An increase in the effective demand.
Select the correct answer using the codes given below:
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2 and 3
Which one of the following is likely to be the most inflationary in
its effect? (2013)
a) Repayment of public debt
b) Borrowing from the public to finance a budget deficit
c) Borrowings from banks to finance a budget deficit.
d) Creating new money to finance a budget deficit.
Inflation Meaning

q Inflation is defined as a situation where there is sustained,

unchecked increase in the general price level of goods and
services in an economy.
Types of Inflation
q On the Basis of Causes:
q Demand-Pull Inflation

q Cost-Push Inflation

q Built-in Inflation
Causes of Demand-Pull Inflation:
q A growing economy or increase in the supply of money – When consumers feel
confident, they spend more and take on more debt. This leads to a steady increase
in demand, which means higher prices.
q Asset inflation or Increase in Forex reserves– A sudden rise in exports forces a
depreciation of the currencies involved.
q Government spending or Deficit financing by the government – When the
government spends more freely, prices go up.
q Due to fiscal stimulus.
q Increased borrowing.
q Low unemployment rate.
Cost-Push Inflation

● Increase in price of inputs

● Hoarding and Speculation of commodities
● Defective Supply chain
● Increase in indirect taxes
● Depreciation of Currency
● Crude oil price fluctuation
● Defective food supply chain
● Low growth of Agricultural sector
● Food Inflation
● Interest rates increased by RBI
Built-in Inflation

● This type of inflation involves a high demand

for wages by the workers which the firms
address by increasing the cost of goods and
services for the customers.
Types of Inflation
q On the Basis of Causes:

q Currency inflation
q Credit inflation
q PROFIT INDUCED
q STRUCTURAL Inflation
Types of Inflation
q On the Basis of Speed or Intensity:
Types of Inflation
q Others
q Open inflation: Situation where price level rises without any
price control measures by the government.
q Headline Inflation
q Headline Inflation is the measure of total inflation
within an economy.
q It includes price rise in food, fuel and all other
commodities.
Types of Inflation
q Core Inflation (Underline Inflation or Non-food Inflation)
q Benign Inflation – It means inflation is moderate not harmful
i.e. under control. It gives room to RBI to cut key policy rates
for economic growth.
Types of Inflation
1. The headline inflation measure demonstrates
overall inflation in the economy.

2. the core inflation measure strips the prices of

highly volatile food and fuel components to
distinguish the inflation signal from transitory
noise.

3. Core CPI = Headline CPI - (food and fuel

components.)

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TERMINOLOGIES
Is India facing Stagflation?
Phillips Curve

q It shows the inverse relationship between unemployment

and inflation
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Phillips Curve
● The Phillips curve is an economic concept
developed by A. W. Phillips stating that inflation
and unemployment have a stable and inverse
relationship.
Natural Rate of Unemployment
1. Many consider a 4% to 5% unemployment rate to
be full employment and not particularly
concerning.
2. The natural rate of unemployment represents the
lowest unemployment rate whereby inflation is
stable or the unemployment rate that exists with
non-accelerating inflation

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NAIRU
1. The non-accelerating inflation rate of unemployment
(NAIRU) is the specific level of unemployment that is
evident in an economy that does not cause inflation to
increase.
2. In other words, if unemployment is at the NAIRU level,
inflation is constant.
3. NAIRU often represents the equilibrium between the state
of the economy and the labor market.
4. We may say that the NAIRU is the lowest unemployment
rate that an economy can sustain without any upward
pressure on inflation rate.

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Effects of Inflation
q Effects of Inflation on Distribution of Income and Wealth:
q Creditors and debtors
Effects of Inflation
q Effects of Inflation on Distribution of Income and Wealth:
q Salaried people and wage-earners
Effects of Inflation
q Effects of Inflation on Distribution of Income and Wealth:
q Savings
Shoe Leather Cost & Menu Cost
1. Shoe leather cost is the cost of time and effort (or
opportunity costs of time and effort) that people
expend by holding less cash in order to reduce
the inflation tax that they pay on cash holdings
when there is high inflation.

2. Menu costs refer to an economic term used to

describe the cost incurred by firms in order to
change their prices.

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Effects of Inflation
q Effects of Inflation on Distribution of Income and Wealth:
q Investment
Effects of Inflation
q Effects of Inflation on Economy
q Interest rates
Effects of Inflation

q Effects of Inflation on Economy

q Exports
q Imports
Effects of Inflation
q Effects of Inflation on Economy
q Balance of trade
q Developed Country – Positive as they export more and import
less
q Developing Country – Negative as they import more and
export less
INFLATIONARY GAP Vs DEFLATIONARY GAP

¨ Inflationary Gap: Fiscal Deficit (Demand Pull Inflation)

¨ Deflationary Gap : Fiscal Surplus (Output Gap)
¨ Inflation Tax
¨ Seigniorage (During Deficit Financing)
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Deflationary Gap
● This is the difference between the full employment level of
output and actual output.

● For example, in a recession, the deflationary gap may be quite

substantial, indicative of the high rates of unemployment and
underused resources.

● A deflationary gap is also known as a negative output gap.

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Causes of deflationary gap

● Fall in aggregate demand (AD) due to

§ Fall in exports (global recession)

§ Fall in investment (due to banking collapse and
credit crunch)
§ Fall in consumer spending (e.g. higher interest
rates, falling wages.)
● Inflation Spiral: Wage-Price Spiral

● Inflation Accounting: Nominal Profit – Real Profit

● Inflation Premium : Bonus

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Reflation
● Reflation is a policy that is enacted after a period of
economic slowdown or contraction.

● The goal is to expand output, stimulate spending and

curb the effects of deflation.

● Policies include tax cuts, infrastructure spending,

increasing the money supply and lowering interest
rates.

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Why a Persistent High inflation is bad for
economy??
q Rising inflation has an adverse impact on
Private Investment.
q External Sector

q Fiscal Imbalance
Measures to control inflation

q Fiscal Policy Measures:

q Public Expenditure: When inflation is high, the
government reduces public expenditure
q In case of deflation, Government increases
q Taxation: In case of high inflation, government may
resort to increasing personal or corporate taxes to
reduce household expenditure/ private investment.
q In case of Deflation, Government reduces
Taxation rate to spur household and private
consumption leading to increase in aggregate
demand
Measures to control inflation

q Other Measures
Is inflation always bad for the economy?
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Structural Inflation: Bottleneck Inflation

● Problem of Developing Economies

● Rising Demand but Low Supply
● Supply Side Mismatch
● Low growth, Higher Inflation

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Inflation target

q Inflation target in India is set by the Govt. in consultation with RBI,

once in every five years.
● Healthy range of Inflation 2-6%
● Every six months, the RBI to publish a document
explaining:
○ Source of inflation;
○ Forecasts of inflation (6-18 Months)

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Various Committees
● Chakrvarty Committee : 4% is normal
● GoI (1997-98): 4-6%
● Tarapore Committee: 3-5% by 2000

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Who measure Inflation in India
q Wholesale Price Index (WPI)
q The numbers are released by the Ministry
of Commerce and Industry
q Consumer Price Index (CPI) – Retail Inflation
q It is released by Central Statistics
Office (CSO) under Ministry of Statistics
and Programme implementation
q In April 2014, the RBI had adopted the CPI
as its key measure of inflation
Who measure Inflation in India
Difference WPI and CPI
PRODUCER PRICE INDEX (PPI)

q Perspective of Producer

q Will include both Goods and Services

q Excludes effects of Indirect Taxes

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How to Measure Inflation

● Most commonly used inflation indexes are

the Consumer Price Index (CPI) and the
Wholesale Price Index (WPI).

● Others are Purchasing Price Index & Base

Effect
WPI
● Since 1942
● widely used inflation indicator in India.
● Published by the Office of Economic Adviser, Ministry
of Commerce and Industry.
● All transactions at the first point of bulk sale in the
domestic market are included.
● Major criticism for this index is that the general public
does not buy products at wholesale price.
● The base year of All-India WPI has been revised from
2004-05 to 2011-12 in 2017.
● The prices used for compilation do not include indirect
taxes in order to remove impact of fiscal policy.

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WPI Components Ma nufactured
Products
Prima ry A rticle s

Fuel & Power

14.91

20.12
64.97

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Components
● Primary articles is a major component of WPI,
further subdivided into Food Articles and Non-
Food Articles.
● Food Articles include items such as Cereals,
Paddy,
Wheat, Pulses, Vegetables, Fruits, Milk, Eggs,
Meat & Fish, etc.
● Non-Food Articles include Oil Seeds, Minerals and
Crude Petroleum

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● The next major basket in WPI is Fuel & Power,
which tracks price movements in Petrol, Diesel
and LPG

● The biggest basket is Manufactured Goods. It

spans across a variety of manufactured products
such as Textiles, Apparels, Paper, Chemicals,
Plastic, Cement, Metals, and more.

● Manufactured Goods basket also includes

manufactured food products such as Sugar,
Tobacco Products, Vegetable and Animal Oils,
and Fats.
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WPI Food Index

WPI has a sub-index called WPI Food Index, which is a combination
of the Food Articles from the Primary Articles basket,

and the food products from the Manufactured Products basket.

CPI
● It measures price changes from the perspective of a
retail buyer.

● It measures changes over time in the level of retail

prices of selected goods and services on which
consumers of a defined group spend their incomes.

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Consumer Price Index

Misc (Transport, Education etc)

28%

Food and Beverages

46%

Pan Tobbaco etc

2%
Clothing and Footwear
7%

Fuel and Light

7%
Housing
10%

68 Food and Beverages Housing Fuel and Light Clothing and Footwear Pan Tobbaco etc Misc (Transport, Education etc)
● How is Consumer Price Index calculated?
● The CPI is calculated with reference to a base year, which
is used as a benchmark. The price change pertains to that
year. Remember, when you calculate the CPI, note that the
price of the basket in 1 year has to be first divided by the
price of the market basket of the base year. Then, it is
multiplied by 100.
● Consumer Price Index formula:
● CPI = (Cost of basket divided by Cost of basket in the base
year) multiplied by 100

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CPI
● Inflation at consumer level
○ CPI (IW): Used for pay revisions (The Labour Bureau)
○ CPI (UNME) Urban non manual employees-
Employees of Foreign Companies, used for capital
gains purpose (Discontinued from 2011)
○ CPI (AL) – Agri Labour : Basket majorly comprises
of Food (The Labour Bureau)
○ CPI (RL)- Rural Labour (earlier dropped then revived
again) (The Labour Bureau)

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New CPI

● CPI (Rural)
● CPI (Urban)
● CPI (R) + (U) = CPI (Combined)
● CPI(C) = Monthly Basis, tracked by RBI (Since 2015)

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GDP Deflator
● The GDP price deflator is also known as the GDP deflator or the
implicit price deflator
● It measures the changes in prices for all of the goods and services
produced in an economy.
● It helps economists compare the levels of real economic activity from
one year to another.
● The GDP deflator is a more comprehensive inflation measure than
the CPI index because it isn't based on a fixed basket of goods.

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● Since the deflator covers the entire range of goods
and services produced in the economy — as against
the limited commodity baskets for the wholesale or
consumer price indices — it is seen as a more
comprehensive measure of inflation.
● As a result, nominal GDP will most often be higher
than real GDP in an expanding economy.
● The formula to find the GDP price deflator:
● GDP price deflator = (nominal GDP ÷ real GDP) x 100

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● If GDP at Current Prices is equal to the GDP at
Constant Prices, GDP deflator will be 1, implying
no change in price level.

● If GDP deflator is found to be 2, it implies rise

in price level by a factor of 2, and if GDP
deflator is found to be 4, it implies a rise in
price level by a factor of 4.

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Why Divergence

● Different Base Years

● Different Baskets

● Base Effect
Base Effect

● The base effect relates to inflation in the corresponding period of the

previous year, if the inflation rate was too low in the corresponding
period of the previous year,

● even a smaller rise in the Price Index will arithmetically give a high
rate of inflation now.
Q With reference to demand-pull inflation can be caused/
increased by which of the following?
1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Select the correct answer using the code given below,
(a) 1, 2 and 4 only
(b) 3, 4 and 5 only
(c) 1, 2, 3 and 5 only
(d) 1, 2, 3, 4 and 5
Consider the following statements:
1) The weightage of food in Consumer Price Index (CPI) is higher
than that in Wholesale Price Index (WPI)
2) The WPI does not capture changes in the prices of services,
which CPI does.
3) Reserve Bank of India has now adopted WPI as its key
measure of inflation and to decide on changing the key policy
rates.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2only
(c) 3 only
(d) 1, 2 and 3
Q. Which of the following brings out the CPI number for industrial workers
(2015)
a) The RBI
b) The Department of Economic Affairs
c) The Labour Bureau
d) The Department of Personnel and Training.
Q. With reference to inflation in India, which of the following statements is
correct? (2015)
a) Controlling the inflation in India is the responsibility of the GOI
only.
b) The RBI has no role in controlling the inflation
c) Decreased money circulation helps in controlling the inflation
d) Increased money circulation helps in controlling the inflation
Consider the following statements: (2013)
1) Inflation benefits the debtors.
2) Inflation benefits the bond holders.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
A rise in general level of prices may be caused by (2013)
1) An increase in the money supply.
2) A decrease in the aggregate level of output.
3) An increase in the effective demand.
Select the correct answer using the codes given below:
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2 and 3
Which one of the following is likely to be the most inflationary in
its effect? (2013)
a) Repayment of public debt
b) Borrowing from the public to finance a budget deficit
c) Borrowings from banks to finance a budget deficit.
d) Creating new money to finance a budget deficit.
Indian Economy
Inflation
Indian Economy
Money & Monetary
Policy
Money and Monetary Policy
What is Money??
q Money is a medium of exchange acceptable to all parties.
q A “medium of exchange” means an instrument which can be
used to buy any goods and services.
q Acceptability – it depends upon Guarantee behind that
instrument.
q Money must have value and that value must be quantified.
q For example, in India, ‘Rupee note’ satisfies above conditions:
q It is a medium of exchange.
q Every note has a promise from the Governor of RBI.
q Every note carry a monetary value.
What is Fiat Money?
Fiat Money derives its Value from
Govt Regulation or Law.
Fiat Money Commodity Money

It has no intrinsic worth. The Money is made of.

What it’s printed on is Commodity, such as
worthless. Gold.
FIDUCIARY MONEY

q Money backed up by trust between the payer and payee.

q Example: Cheques are fiduciary money as these are

accepted as a means of payment on the basis of trust but
not on the basis of any order of the government.
COMMODITY MONEY

q Commodity money is money whose value comes from a

commodity of which it is made.

q Commodity money consists of objects having value or use in

themselves (intrinsic value) as well as their value in buying
goods.
LEGAL TENDER
q Anything recognized by law as a means to settle a public or
private debt or meet a financial obligation, including tax
payments, contracts, and legal fines or damages.

q The national currency is legal tender in practically every

country.
SOURCES OF MONEY SUPPLY
SOURCES OF
Medium of Exchange
MONEY SUPPLY
Store of Value

Measure Of Value
Standard of Deferred
Payments
Medium of Exchange
Money efficiently eliminates the double
coincidence of wants predicament by serving as
an intermediate of exchange that is
acknowledged in all transactions, regardless of
whether the parties desire each others' goods &
services
Unit of Account
A unit of account is something that can be
used to value goods and services, record
debts, and make calculations. Money is
considered a unit of account and is divisible,
fungible, and countable. With money being
countable, it can account for profits, losses,
income, expenses, debt, and wealth
Store of Value
As a store of value, money is not unique. Other
stores of value subsist such as art works, land,
stamps etc. Money perhaps is not the best store of
value as it deflates with inflation. Money is an
easily transported store of value that is accessible
in a number of expedient denominations.
Standard of Deferred Payment
A "standard of deferred payment" is a way to
resolve a debt – a part in which debts are
denominated, & the status of money as lawful
tender, in those jurisdictions which have this
impression, states that it may function for the
emancipation of debts.
Purchasing power of Money
q The value of a currency expressed in terms of the amount of goods
or services that one unit of money can buy.
q If the prices of all goods and services increases?
q it means a unit of money can now purchase less commodities. It is
called as deterioration in the purchasing power of money.
q Similarly, if a unit of currency of a country can buy less than a unit of
currency of other country? – then the first country’s currency has
less purchasing power as compared to later. For example, Indian
Rupee has less purchasing power than US Dollar.
q When a currency’s purchasing power decreases due to excessive
inflation, serious negative economic consequences arise, including
rising costs of goods and services contributing to a high cost of
living, as well as high interest rates that affect the global market
Demand for Money
The demand for money depends upon following:
q Number of Transaction – Higher the numbers, more
will be demand for money.
q Value of Transactions – Higher the values, more
requirements will be there for money.
q Number of Cashless Transactions – Higher the
number of cashless transactions, less will be
demand for money.
q Speculative Motives – Demand for money depends
upon perception of people and interest rates in the
market.
Supply of Money
q The total stock of money in circulation among the public at a particular
point of time is called money supply.
q Types/Kinds of Money –
q Currency – It includes coin and paper currency.
q The right of minting coins is the monopoly of the government.
q Except Re.1 note, all other paper currencies are printed by RBI.
q Deposit Money - Deposit money or the bank money refers to the
deposits held with the banks on the basis of which cheques could be
drawn. Such deposits can be of two types:
q Demand deposits - They are payable by the bank on demand
from the accountholder. For example, balance in savings and
current accounts.
q Time deposits – They have a fixed period to maturity and are
referred to as time deposits. For e.g. fixed deposits,
Certificate of Deposits etc.
Measures of Money Supply
q RBI: Print Currency Notes
q Section 33 of RBI Act, 1934

q Government: One Rupee Notes and Coins

q Coins are minted at the four India
Government Mints at Mumbai,
Alipore(Kolkata), Saifabad(Hyderabad),
Cherlapally (Hyderabad) and NOIDA (UP).
Measures of Money Supply
q M1 = Currency and Coins with Public(CU) + Net Demand
Deposits held by Commercial Banks (DD).
q Net Demand Deposits = It includes only deposits of the
public held by the banks and it does not include interbank
deposits, which a commercial bank holds in other
commercial banks.
q M2 = M1 + Savings deposits with Post Office savings banks.
q M3 = M1 + Net time deposits of commercial banks.
q M4 = M3 + Total deposits with Post Office savings
organizations (excluding National Savings Certificates).
Measures of Money Supply
Measures of Money Supply
q These measures are in decreasing order of liquidity.M1 is most liquid
and easiest for transactions whereas M4 is least liquid of all.
q M1 and M2 are known as “Narrow money”.Because they are more
liquid as compared to “Broad Money”.
q M3 and M4 are known as “Broad money”.
q Question – Which factor does make M1 and M2 more liquid as
compared to M3 and M4??
q Answer – “Net time deposits”. those deposits with the commercial
bank for a fixed period of time
q M3 is the most commonly used measure of money supply. It is also
known as “aggregate monetary resources”.
Money Multiplier

The multiple in which the

banking system can
expand deposits received
in the form of base
money into broad money
is called money multiplier

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Base money
q sovereign money which makes up a currency's
monetary base.

q Base money consists of both the total banknotes and

coins in circulation and sight deposits held at central
banks on behalf of commercial banks.
broad money
q M3 is a measure of broad money and includes currency with
the public and deposits. The Reserve Money factor shows
the reserve money and includes required reserve and the
excess reserves of the banking system.

q If the reserve requirement as stipulated by the RBI

increases, the Reserve Money value will increase and the
multiplier will fall.

q Similarly, if banks keep more money as excess reserves, it

will have an adverse effect on the money multiplier.
PARADOX OF THRIFT
● It states that individuals try to save more during an
economic recession, which essentially leads to a fall in
aggregate demand and hence in economic growth. Such a
situation is harmful for everybody as investments give
lower returns than normal.

● This theory was heavily criticized by non-Keynesian

economists on the ground that an increase in savings allows
banks to lend more. This will make interest rates go down
and lead to an increase in lending and, therefore, spending.

● Critics of the theory state that it ignores Say's law, which

calls for investment in capital goods before any level of
spending can be achieved, and does not take into account
inflation or deflation in prices.
Liquidity Trap ● Liquidity trap is a situation when expansionary
monetary policy (increase in money supply) does
not increase the interest rate, income and hence
does not stimulate economic growth.

● It is a situation in which the general public is

prepared to hold on to whatever amount of money
is supplied, at a given rate of interest. They do so
because of the fear of adverse events like deflation,
war.

● A monetary policy carried out through open market

operations has no effect on either the interest rate,
or the level of income. In a liquidity trap, the
monetary policy is powerless to affect the interest
rate.
Composition of RBI
q Reserve Bank of India is controlled by a central board of
directors. The directors are appointed for a 4-year term by the
Government of India in keeping with the Reserve Bank of India
Act.
q The Central Board consists of:
q Governor
q 4 Deputy Governors
q 2 Finance Ministry representatives
q 4 directors to represent local boards headquartered at Mumbai, Kolkata,
Chennai, and New Delhi
q The executive head of RBI is Governor.
q The Governor is accompanied by 4 deputy governors.
q The First Governor of RBI was Sir Osborne Smith and the First
Indian Governor of RBI was CD Deshmukh.
q The First woman Deputy Governor of RBI was KJ Udeshi.
q The only Prime Minister who was the Governor of RBI was
Manmohan Singh.
Main Functions of RBI
Types of Bank in india
Small Finance Banks
● Nachiket Mor Committee
● promoted either by individuals, corporate, trusts or
societies.
● They are governed by the provisions of Reserve Bank of
India Act, 1934, Banking Regulation Act, 1949 and other
relevant statutes.
● established as public limited companies in the private
sector under the Companies Act, 2013.
● Banks with a SFB license can provide basic banking
service of acceptance of deposits and lending.
Payments Banks
● Usha Thorat Committee

● Deposit upto 1 lac (No time deposits)

● No Lending allowed

● Can sell Mutual Funds, insurance

● Cant issue credit Cards

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Regional Rural Banks

Since 1957

Credit to Weaker Section

Mobilise savings in rural areas

Kelkar Committee -1987- Stopped New RRBs

Bhandari Committee (1994–95) and the Basu

Committee (1995–96): Concessional Loans abolished

Now Small Finance Banks

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CO-OPERATIVE BANKS
Banks classified under two heads—commercial banks and
co-operative banks.
Commercial banks are nationalised banks, private sector
banks, foreign banks and RRBs
They account for a majority share of the banking
On the other hand co-operative banks plays an important
role in local development
They provide money support to agriculture and allied
activities, rural-based industries
Also provide support to urban centres
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A three tier Structure

● Primary Credit Societies-PCSs

(agriculture or urban),

● District Central Co-Operative Banks-

DCCBs, and

● State Co-Operative Banks-SCBc (at

the apex level).
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Urban co-operative banks

● The term Urban Co-operative Banks (UCBs), though not formally

defined, refers to primary cooperative banks located in urban and
semi-urban areas

● These banks, till 1996, were allowed to lend money only for non-
agricultural purposes

● They are registered and governed under the co-operative societies

acts of the respective states and are covered by the Banking
Regulation Act, 1949
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● At present we have 29 UCBs

● DCCBs & SCBs operate at the district and state
levels.

● A district can have only one DCCB reporting to the

SCB.

● They were under supervision of the RBI—later on

this function was delegated to the NABARD.
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Priority Sector Lending

1. What are the different categories under priority sector?
Priority Sector includes the following categories:
(i) Agriculture
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy
(viii) Others
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NON-BANKING FINANCIAL INSTITUTIONS
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● It is mandatory for a NBFC to get itself registered with

the RBI as a deposit taking company.

● A company incorporated under the Companies Act,

1956

● Should have a minimum NOF (net owned fund) ₹2

crore.
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Dual Regulation
● Regulated by other financial regulators hence are exempted from the
regulatory control of the RBI:
● Venture capital fund, merchant bank, stock broking firms (SEBI
registers and regulates them);
● Insurance company (registered and regulated by the IRDA);
● Housing finance company (regulated by the National Housing Bank);
● Nidhi company (regulated by the Ministry of Corporate Affairs under
the Companies Act, 1956);
● Chit fund company (by respective state governments under Chit
Funds Act, 1982).
44

NBFCs Regulations
● They are allowed to accept and/or renew public deposits for a
minimum period of 12 months and maximum period of 60
months.
● They cannot accept demand deposits (i.e., the saving and
current accounts).
● They cannot offer interest rates higher than the ceiling rate
prescribed by the RBI.
● They cannot offer gifts, incentives or any other additional
benefit to the depositors.
45

NBFCs Regulations
● They should have minimum investment grade credit rating.

● Their deposits are not insured.

● The repayment of deposits by NBFCs is not guaranteed by RBI.

● They need to maintain Capital Adequacy Ratio (CAR) norm as

prescribed by the RBI
● Framework for Scale Based Regulation for Non-Banking Financial
Companies
● Section I
● 1. Regulatory Structure for NBFCs
● 1.1 Regulatory structure for NBFCs shall comprise of four layers
based on their size, activity, and perceived riskiness. NBFCs in the
lowest layer shall be known as NBFC - Base Layer (NBFC-BL). NBFCs
in middle layer and upper layer shall be known as NBFC - Middle
Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-UL) respectively.
The Top Layer is ideally expected to be empty and will be known as
NBFC - Top Layer (NBFC-TL).
• Move Towards 90-Day NPA Recognition

• The regulator has also introduced a glide path for a

minimum number of days before an account is
recognised as a non-performing asset.

• This is now applicable for all NBFCs, listed and unlisted.

NBFCs must move to a 150-day NPA recognition norm
by March 31, 2024 NPA recognition at 120 days of
overdue must be achieved by March 31, 2025 NBFCs
must follow 90-day NPA recognition cycle by March 31,
2026.
• NBFCs are also required to make a thorough internal
assessment of the need for capital, commensurate with
the risks in their business, along the same lines as
commercial banks.

• The methodology for internal assessment of capital shall

be proportionate to the scale and complexity of
operations as per board approved policies of the NBFC.

• NBFCs must follow a uniform exposure limit of 25% and

40% of Tier-1 capital for single borrower and group
borrowers, respectively.
52

New Developments
● New categories of the NBFC—Peer to Peer (P2P) and Account
Aggregators (AA) Introduced.

● IL&FS Commercial Paper Default

● Requirement of 15 per cent CRAR

PK Mohanty Committee
● to review present ownership guidelines and corporate structure for Indian
Private Sector Banks.
Monetary Policy
q Monetary Policy is laid down by Monetary Policy Committee which involves
management of money supply and interest rate in the country.
q Monetary policy is adopted by the monetary authority of a country that controls
either the interest rate payable on very short-term borrowing or the money supply.
The policy often targets inflation or interest rate to ensure price stability and
generate trust in the currency.
What is the main objective of the monetary
policy?
Types of Monetary Policy
Difference between Monetary Policy and Fiscal
Policy
Qualitative Tools- Margin Requirements
Qualitative Tools
● Consumer Credit Regulation:
Qualitative Tools

q Credit Rationing
Qualitative Tools

q Control Through Directives

q Moral Suasion
Qualitative Tools

q Direct Action:
UNCONVENTIONAL MONETARY POLICY TOOLS

● ZERO INTEREST RATE POLICY (ZIRP)

UNCONVENTIONAL MONETARY POLICY TOOLS

● NEGATIVE INTEREST RATE POLICY (NIRP)

UNCONVENTIONAL MONETARY POLICY TOOLS

● HELICOPTER MONEY

● Helicopter money refers to increasing a nation's money supply through more spending, tax
cuts, or boosting money supply. Some of the stimulus measures taken in response to the
Covid-19 crisis resemble the concept of helicopter drop money
FINANCIAL REPRESSION

● a term used to describe a policy environment where central banks and governments
deliberately keep interest rates below the rate of inflation.
Monetary Policy Tools (Quantitative tools)
Open Market
Reserve Ratio Policy Rates
Operation

Cash Reserve
Ratio Repo Rates

Statutory Liquidity Reverse Repo

Ratio Rate

Marginal
Standing Facility

Bank Rates
Monetary Policy Tools (Quantitative tools)

q Bank Rate:
Monetary Policy Tools (Quantitative tools)

q CRR
Monetary Policy Tools (Quantitative tools)

q SLR
Monetary Policy Tools (Quantitative tools)
Monetary Policy Tools (Quantitative tools)
Monetary Policy Tools (Quantitative tools)

q Repo rate

q The reverse repo rate

Monetary Policy Tools (Quantitative tools)
q Open Market Operations (OMOs):
76

Urijit Patel Committee Recommendations

● Term Repo & Term Reverse repo

● A term repo is a repo of more than one-day

duration.
77 ● A term repo is a repo of more than one-day duration.

● The word term denotes longer period (7, 14, 28).

● Interest rate is determined through the auction (above repo)

● the loan seeking bank should submit securities to the RBI.

● Since the loan is for more duration, the bank should give higher interest
than the repo rate.
78
Long Term Repo
● Since 2020
● RBI provides longer term (one- to three-year) loans to banks at the
prevailing repo rate.

● As banks get long-term funds at lower rates, their cost of funds falls. In
turn, they reduce interest rates for borrowers.

● LTRO helped RBI ensure that banks reduce their marginal cost of funds-
based lending rate, without reducing policy rates.
79
Marginal Standing Facility

● Under the MSF window, banks can borrow overnight by dipping

up to 2% into the statutory liquidity ratio (SLR).
● The MSF would be the last resort for banks once they exhaust all
borrowing options including the liquidity adjustment facility by
pledging government securities, where the rates are lower in
comparison with the MSF.
● The MSF would be a penal rate for banks and the banks can
borrow funds by pledging government securities within the limits
of the statutory liquidity ratio.
80

Other Tools
● Call Money Market: Important segment of the money market
where borrowing and lending of funds take place on short
term usually over night basis.
● Scheduled commercial banks (SCBs) regional rural banks,
excluding cooperative banks (other than land development
banks), insurance are borrowers in this market
● Banks are allowed to borrow based upon NDTL
81

RRBs
● Since 1957

● Credit to Weaker Section

● Mobilise savings in rural areas

● Kelkar Committee -1987- Stopped New

RRBs

● Bhandari Committee (1994–95) and the

Basu Committee (1995–96):
Concessional Loans abolished

● Now Small Finance Banks

82
Call
Money
Market?

83
Call money market (CMM) the market where
overnight (one day) loans can be availed by
banks to meet liquidity

It is market oriented mechanism to meet the

liquidity requirements of banks

84
Notice Money Market

In case bank needs funds for more days, it can avail money
through notice market.

Here, the loan is provided from two days to fourteen days.

85
86
Open Market Operations (OMOs)

● Open Market Operations (OMOs) are market operations conducted

by RBI by way of sale/purchase of government securities to/from the
market with an objective to adjust the rupee liquidity conditions in
the market on a durable basis.
● If there is excess liquidity, RBI resorts to sale of securities and sucks
out the rupee liquidity.
● Similarly, when the liquidity conditions are tight, RBI buys securities
from the market, thereby releasing liquidity into the market.
87
Open Market Operations (OMOs)

● It is one of the quantitative (to regulate or control the total volume

of money) monetary policy tools which is employed by the central
bank of a country to control the money supply in the economy.
What is
Source: HSBC Global

Bond

● Borrowing
instrument

● Can be
issued by
Government
or Corporate

88
Why Operation Twist

• Whenever there is a long-term investment deficit in the country

and the investors are hesitant to make long-term investments
in the economy,

• The government jumps in to revive growth by lowering the

interest rate for long-term investment ventures.
90
Operation Twist
● Operation Twist' is RBI's simultaneous selling of short-term
securities and buying of long term securities through open market
operations (OMO).
● Under this mechanism, the short-term securities are transitioned
into long-term securities
● Buying and selling government securities brings down long-term
interest rates and bolster short-term rates.
91
Operation Twist

● There is an inverse relationship between the bond prices and their

yields.
● As the central bank buys long-term securities (bonds), their
demand rise which in turn pushes up their prices.
Operation Twist

● However, the bond yield comes down with an increase in

prices.
● Yield is the return an investor gets on his (bond)
holding/investment.
● The interest rate in an economy is determined by yield.

● Thus, lower long-term interest rates mean people can avail

long-term loans (such as buying houses, cars or financing
projects) at lower rates.
92
93

Price Yield Relation

• A bond’s interest rate, or coupon, determines
the amount of income earned annually from
holding the bond.

• A bond’s current yield reflects that income as a

percentage of the bond’s price.
94
95

Yield Inverted Curve

• In a normal yield curve, the short-term bills
yield less than the long-term bonds.
• When a yield curve inverts, it's because
investors have little confidence in the near-
term economy.
• They demand more yield for a short-term
investment than for a long-term one.
96

Market Stabilisation Scheme (MSS):

• Market Stabilisation Scheme or MSS is a tool used
by the Reserve Bank of India to suck out excess
liquidity from the market through issue of securities
like Treasury Bills, Dated Securities etc. on behalf of
the government.
• The money raised under MSS is kept in a separate
account called MSS Account and not parked in the
government account or utilised to fund its
expenditures.
• It has features of both SLR and CRR
97
Standing Deposit Facility Scheme (SDFS)
● This concept, first recommended by the Urjit
Patel committee report in 2014
● Standing Deposit Facility allows the RBI to
absorb liquidity (deposit) from commercial
banks without giving government securities in
return to the banks (alternative to R-Repo)
98
Benchmark Prime Lending Rate
● The Benchmark Prime Lending Rate was introduced
by the Reserve Bank of India in the year 2003 with
the aim of introducing transparency and ensuring
appropriate pricing of loans, wherein the lending
rates truly reflect the actual costs.
● It was envisaged as a reference rate and was to be
computed taking into consideration
(i) cost of funds;
(ii) operational expenses; and
(iii) a minimum margin to cover regulatory
requirements of provisioning and capital
charge, and profit margin.
99
BPLR

● Banks had authority to lend below BPLR

● Hence, Bank Rate was introduced in 2010

100
BASE RATE

● Base rate is the minimum rate set by the

Reserve Bank of India below which banks are
not allowed to lend to its customers.
● Floor rate of interest
● Base rate is decided in order to enhance
transparency in the credit market and ensure
that banks pass on the lower cost of fund to
their customers.
● Loan pricing will be done by adding base rate
and a suitable spread depending on the credit
risk premium.
101

MCLR
● The marginal cost of funds-based lending rate (MCLR) is
the minimum interest rate that a bank can lend at.
● MCLR is a tenor-linked internal benchmark, which means
the rate is determined internally by the bank depending
on the period left for the repayment of a loan.
● MCLR is closely linked to the actual deposit rates and is
calculated based on four components: the marginal cost
of funds, negative carry on account of cash reserve ratio,
operating costs and tenor premium.
● It replaced the base rate structure, which had been in
place since July 2010.
102

Features of MCLR
● tenor linked internal benchmark to be reset on
annual basis.

● Actual lending rates will be fixed by adding a spread

to the MCLR.

● To be reviewed every month on a pre-announced

date.
● Existing borrowers will have the option to move to
it.

● Banks will continue to review and publish ‘Base

Rate’ without fail
103
New Initiatives

● bi-monthly monetary policy cycle

● glide path for disinflation

● term repos for three set of tenors 7, 14 and 28 days.

104

New Floating Rate Regime

● April 2019, External Benchmarks were taken into
consideration

○ Repo rate,

○ 91-day Treasury Bill yield

○ 182-day Treasury Bill yield

○ Any other benchmark produced

by the FBIL
Financial Benchmark India Private Ltd

• Its aim is to develop and administer benchmarks relating to money

market, government securities and foreign exchange in India.
• It is responsible for all the aspects relating to the benchmarks to be
issued by it, namely, collection and submission of market data and
information including polled data, formulation, adoption and periodic
review of benchmark calculation methodologies, calculation, publication
and administration of benchmarks confirming to the highest standards of
integrity, transparency and precision.
• The FBIL is committed to providing financial benchmarks that are
(i) free from bias,
(ii) backed by robust data driven research and
(iii) compliant with global best practices.
Monetary Policy Tools Transmission
Flexible Inflation Targeting Framework (FITF)

q The Flexible Inflation Targeting Framework (FITF)

was introduced in India post the amendment of the
Reserve Bank of India (RBI) Act, 1934 in 2016. In accordance
with the RBI Act, the Government of India sets the inflation
target every 5 years after consultation with the RBI.
BANKING SECTOR REFORMS

q MISSION INDRADHANUSH
Banking Regulation Amendment Bill 2020
q With this new Bill, the central government aims to
bring cooperative banks under the supervision of the
Reserve Bank of India (RBI).
q With the amendments, RBI will be able to undertake a
scheme of amalgamation of a bank without placing it
under moratorium.
q It will help the central bank to develop a scheme to
ensure the interest of the public, banking system, account
holders in the bank and banking company’s proper
management, without disrupting any banking
functionalities.
Banking Regulation Amendment Bill 2020
q The amendments also allow cooperative banks to raise
money via public issues and private placements of equity
or preference shares as well as unsecured
debentures, with the central’s bank’s nod.
q Cooperative banks are currently under the dual control of
the Registrar of Cooperative Societies and RBI. While the
role of registrar of cooperative societies includes
incorporation, registration, management, audit,
supersession of board and liquidation, RBI is responsible
for regulatory functions such as maintaining cash reserve
and capital adequacy, among others.
CRYPTO-CURRENCY IN INDIA
114
NPAs and Stressed Assets
● They are the bad loans of the banks.
● Criteria has changed from time to time
● Since 2004 RBI has standardized the process
of declaring NPAs based upon international
standards.
115
NPAs and Stressed Assets
● As per the definition a loan is considered
NPA if it has not been serviced for one term
(i.e., 90 days).
● This is known as ‘90 day’ overdue norm.
● Agricultural advances whose interest or
principal installment payments remain
overdue for two crop/harvest seasons for
short duration crops or overdue one crop
season for long duration crops
116
Classification
NPAs were classified into three types:
● Sub-standard NPA: remaining NPAs for less than or
equal to 12 months;
● Doubtful NPA: remaining NPAs for more than 12
months; and
● Loss Assets: where the loss has been identified by
the bank or internal/external auditors or the RBI
inspection, but the amount has not been written
off.
CHIT FUNDS
NIDHI,
q A nidhi company is a type of company in the Indian
non-banking finance sector, recognized under section
406 of the Companies Act, 2013.
q Their core business is borrowing and lending money
between their members.
q They are also known as Permanent Fund, Benefit
Funds, Mutual Benefit Funds and Mutual Benefit
Company.
NIDHI & CHIT FUNDS

● Chit funds in India are managed, conducted, and

regulated according to Chit Funds Act of 1982.
● They are governed through central legislation while
state governments are responsible for their
administration.
● Nidhi Companies are regulated by Ministry of
Corporate Affairs, Government of India
Ponzi Scheme
Bad Bank
● “National Asset Reconstruction Company Limited” (NARCL) has already
been incorporated under the Companies Act. It will acquire stressed
assets worth about Rs 2 lakh crore from various commercial banks in
different phases. Another entity — India Debt Resolution Company Ltd
(IDRCL), which has also been set up — will then try to sell the stressed
assets in the market. The NARCL-IDRCL structure is the new bad bank. To
make it work, the government has okayed the use of Rs 30,600 crore to
be used as a guarantee.
125
Insolvency and Bankruptcy Code, 2016

● Code has been effective till date

● It has a backing of judicial insolvency
● prescribes strict time limits for various procedures under it.
● The benches have large inflow of cases
● They have been doing Corporate Insolvency Resolution
Process efficiently
● Appellate courts, NCLAT, High Courts and the Supreme
Court have also disposed appeals quickly and decisively.
● Society for Worldwide Interbank Financial Telecommunication (SWIFT)

● trusted messaging system

● doesn’t settle any money itself

● based in Belgium

● eight-character SWIFT code UNCRITMM.

Digital Payments Infrastructure
Types of Economics

q Macro Economy
q Micro Economy
q Meso Economics
Liberal and Neo liberal Economics
DIFFERENT CONSENSUS
Washington Consensus
Washington Consensus

● Originally for the Latin American Countries

● Intended to address the real problems occurring in Latin
America
● The term coined by the US economist John Williamson
● This is a set of neoliberal economic prescriptions made by the
International Monetary Fund, the World Bank, and the U.S.
Treasury to developing countries that faced economic crises.

6
Washington Consensus

● It recommended structural reforms that increased the role of

market forces in exchange for immediate financial help.
● While some said that the Washington Consensus was used to
impose harsh conditions that were unhelpful for economic
recovery,
● others have argued that although not perfect, it was favourable to
long-term economic growth in developing economies.

7
Reforms suggested
● Low government borrowing to discourage developing economies controlling
high fiscal deficits relative to their GDP.
● Curtailing Subsidies and focus on long-term growth supporting sectors like
primary education, primary healthcare, and infrastructure.
● Tax reform policies to broaden the tax base and adopt moderate marginal tax
rates.
● Interest rate libearization i.e. Market determined. These interest rates should
be positive after taking inflation into account (real interest rate).
● Encouraging competitive exchange rates through freely-floating currency
exchange.

8
9

Reforms suggested
● Adoption of free trade policies. This would result in the
liberalization of imports, removing trade barriers such
as tariffs and quotas.
● Relaxing rules on FDIs.
● The privatization of state enterprises. Typically, in developing
countries, these industries include railway, oil, and gas.
● Deregulating the Industries and Making them competitive
● Development of property rights.
Beijing Consensus

● Idea by Joshua Cooper Remo

● Chinese Model of economic development based upon

policies of Deng Xiaoping since 1976

● An alternative to the Washington Consensus also called as

anti-Washington Consensus view for the growth of
developing countries.

10
11

Based upon 3 main pillars

1. Constant experimentation and innovation;

2. Peaceful distributive growth with gradual reforms;

3. Self-determination and inclusion of selective foreign ideas

12

● Higher attention as great recession hit the western economies

● China grew double digits.

● Became role model for world

● things which worked for China may not work for others due to heterogeneous issues.
13

● Chinese rise was declared as the ‘death of market’ and ‘rise of state-led growth’

● Till 2010 it was Chinese growth took a downturn in recent times, experts have advised
double caution in blindly following this model.

● Some experts believe that the rising protectionism across the world (especially the USA,
the UK and other places) has been caused by an inclination towards this model only.
Santiago Consensus

● alternative to the Washington Consensus.

● by the then World Bank group President James D. Wolfensohn (in Santiago)
for the developing countries. Core
● idea of this model is inclusion which should not be only economic but social
too.
● This way, this is a socio-economic development model and is bound to have
its local characteristics.
● Idea of Inclusive growth
● India Adopted it in 2002

14
The capitalist Economy
Type of Economies

q The capitalist Economy Features

q Private Property

q Freedom of enterprise

q Price Mechanism
q Free trade

q Government Interference

q Flexibility in labour markets

q Freedom of Ownership
Socialist Economy
Mixed Economy
Open economy v/s Closed economy
Green Economics
Economic Growth
ECONOMIC GROWTH VS ECONOMIC DEVELOPMENT

ECONOMIC GROWTH ECONOMIC DEVELOPMENT

Increase in the production of goods and Economic Growth leads to improvement
services in the general welfare of people →
Economic Development.
Quantitative in nature Qualitative in nature.
Uni-dimensional Multi-dimensional
Can happen without development Cannot happen without Growth.
Indicators → Real GDP, Real Per Capita Indicators → Human Development
Income etc. Index, Physical quality of life index etc.
GDP (Gross Domestic Product)
● Released by National Statistical office (nso), ministry of statistics and program
implementation
Nominal and Real GDP
Gross National Product (GNP)
DIFFERENCE BETWEEN GNP AND GDP

BASIS GDP GNP

MEANING Value of all final goods and services Value of all finished goods and
produced in the domestic territory in services owned by a country's
a residents over a period of time.
specific time period.
METHOD OF Consumer spending + Government GDP+ NR (Net receipts from
CALCULATIO spending +Investments + Net abroad or inflows from abroad)
N exports –
NP (Net payment outflow to
foreign assets)
PRODUCED produced in India → by an Only those goods and services
BY Indian or foreign national →
WHOM? produced by Indians whether
Net National Product (NNP)
Factor of Production
Market Price vs Factor Cost
Estimating GDP
Estimating GDP

GDP = private consumption + gross private investment +

government investment + government spending +
(exports – imports).
Transfer payments
● Transfer payments – is the payment by the government in grants, allowances,
pensions etc to people such as pensioners, widows, sick or unemployed people or
others with little or no income. This implies that the transfer is made without any
exchange of goods or services
PURCHASING POWER PARITY (PPP)
● The Economic size of the countries across the world can be compared either in terms
of
● Nominal GDP or Purchasing Power Parity (PPP).
● ● Comparison using Nominal GDP: The Countries across the world measure their
GDP
● size in terms of their own currencies. This makes cross country comparison difficult.
● ● Hence, in order to compare the GDP size of the countries, we need a common
currency.
● ● Therefore, the GDP size of the countries are converted into dollars using the
average
● exchange rates
GROSS CAPITAL FORMATION
● The percentage of the investment made each year out of the
total GDP is called Gross Capital Formation.
● ● High GCF → higher rate of savings in the economy. It requires
for high rate
● ● of production, capital formation, changes in production
techniques.
● ● GCF → capital formation in the public sector + private sector
+household sector.
GDP Deflator
Ø The GDP price deflator helps to measure the changes in prices when
comparing nominal to real GDP over several periods.
Ø Gross domestic product deflator shows the amount of change in GDP
due to inflation and not increase in output.
Ø GDP deflator, also known as the implicit price deflator,
GDP and its Limitation
● Underground Economy-The underground economy (or black market) refers to cash
and barter transactions that are not formally recorded in GDP
● Environmental Abuses
● Non-Market Production-produced for private consumption
● Income inequality-when a disproportionate share of a nation’s income is earned by a
small minority of households
● Depreciation of capital-GDP accounts for investment in new capital but does not
subtract the lost value of depreciated capital.
BUSINESS CYCLE
TYPES OF ECONOMIC RECOVERY
Poverty in India
q What is Poverty?
q Poverty is a state or condition in which a person or community lacks the
financial resources and essentials for a minimum standard of living..
q In India, 21.9% of the population lives below the national poverty line in
2011.
q In 2018, almost 8% of the world’s workers and their families lived on less
than US$1.90 per person per day (international poverty line)
Poverty in India
q Types of Poverty
q Absolute Poverty
q Relative Poverty
Causes of Poverty in India
Poverty Estimation in India
Committees for Poverty Estimation

q YK Alagh Committee (1979):

Committees for Poverty Estimation

q Lakdawala Formula 1993:

qThis formula included the calorific limits of Alagh committee and it also
included health and education components. basis of household per capita
consumption expenditure. Consumer Price Index-Industrial Workers (CPI-
IW) and Consumer Price Index- Agricultural Labourers (CPI-AL)
q Tendulkar Methodology 2005:
q It focused on nutritional outcomes and included health, education,
transport and electricity. It is based on spending per individual over a fixed
period for an essential basket of goods Ie., cost of living. India presently
follows this method for estimation of poverty. It set Rs 27 for rural areas
and Rs 33 in urban areas for consumer spending as the reference limit
Rangarajan committee on poverty:

q It has taken monthly consumption expenditure per person or per

household as a tool for calculating poverty lines. Based on this 972 INR (Rs
32 per day) in rural areas and 1407 INR (Rs 47 per day) in urban areas is
calculated based on 2011 to 2012 prices. According to this estimate,
poverty in India stood at 29.5% in 2011-12 which is significantly higher
than the Tendulkar model. The group went for separate rural and urban
poverty lines as there is huge complexity associated with them. There are
two components in this method
1. Food component
2. Non food component such as:
a) Education
b) Clothing
c) Conveyance
d) House rent
e) Behavior related expenditures
Sustainable Development Index
UNEMPLOYMENT

Indian
Economy
Unemployment in India

q What is Unemployment?
National Statistics Office (NSO) under MoSPI – Ministry of
Statistics and Programme Implementation defines
employment and unemployment on the following activity
statuses of an individual:
q Working (engaged in an economic activity) i.e. 'Employed'.

q Seeking or available for work i.e. 'Unemployed'.

q Neither seeking nor available for work.

q Unemployment rate = (Unemployed Workers / Total labour

force) × 100
Types OF UNEMPLOYMENT

q Frictional Unemployment
Types OF UNEMPLOYMENT

q Structural Unemployment:
Types OF UNEMPLOYMENT

q Cyclical Unemployment
Types OF UNEMPLOYMENT

q Seasonal Unemployment: It is an unemployment that occurs

during certain seasons of the year.
Types OF UNEMPLOYMENT

q Vulnerable Unemployment
q Technological Unemployment
Types OF UNEMPLOYMENT

q Occupational structure in India

Occupational structure in India Sector Share in Employment
Share in GDP

Primary Sector 50% 14%

Secondary Sector 15% 21%

Tertiary Sector 30% 65%

Unemployment Trap
q It is a situation when unemployment benefits discourage the
unemployed to go to work. People find the opportunity cost of
going to work too high when one can simply enjoy the benefits by
doing nothing.
Periodical Labour Force Survey

q It was launched in April 2017 by the Ministry of Statistics & Programme Implementation
q It was launched as a new regular employment and unemployment survey with certain
changes in survey methodology, data collection mechanism and sampling design.
q According to monthly data from the Centre for Monitoring Indian Economy,
unemployment rate in India shot up significantly from 7.87% in June 2019 to 23.48% in
May 2020.
four key pillars to fight covid-19 according to International labour
standards
INFORMAL EMPLOYMENT

q What is informal economy and why is it important?

q Informal economy broadly comprises of two parts- informal enterprises
as economic entities and informal employees (employed both in formal
and informal enterprises)
SKILL DEVELOPMENT

q According to NSSO Report 2011-12, India’s formally trained workforce stand at merely
2.3%.
q According to Periodic Labour Force Survey (PLFS) 2017-18, only 1.8% of the population
reported receiving formal vocational/technical training. 5.6% reported receiving
informal vocational training (such as hereditary, self-learning, and on the job training).
q Moreover, around 33% of the formally trained youth was unemployed in 2017-18.
Nearly a third of trained young men and more than a third of trained young women
were unemployed.
Key Findings of India Skills Report 2020

q Employability of India’s youth has remained stagnant for the past three years, lingering at
46.21% of participants who are job-ready.
q Female employability witnessed an upward trend at 47% while that of male workforce
declined from 47.39% in 2019 to 46% this year. This reflects the opportunity for the
industries to leverage female resource pool. o However, Hiring Intent Survey for 2020
reflects a likely hiring ratio of 71:29 for Male to Female candidates.
q It also indicated the rising share of gig workers in the economy at 13% share in the overall
hiring intent by employment type.
q Top 5 skills that Employers emphasize on are domain knowledge, adaptability to the
environment, learning agility and positive attitude and interpersonal skills.
q About 50% of employers acknowledge the role of government initiated programmes in
recruitments, of which almost 9 in 10 employers admit that candidates meet their
requirements.
Steps Taken by Government
Fiscal
system Indian Economy
&
Governmen
t
budgeting
Fiscal Policy

q The word fiscal has been derived from the word ‘fisk’ which means
public treasury or Govt. funds.
q Fiscal Policy deals with the revenue and expenditure policy of the Govt.
Fiscal Policy
Tools of fiscal policy
● Component of Expenses
q Maintenance (including staff salaries)
q Loan payments
q Wasteful expenses
q Subsidies
q Welfare schemes
Tools of fiscal policy
● Component of Earnings
q Tax
q Borrowing
q Proceeds from sale/lease of assets
q Profits from PSU
Mobilisation of financial resources
q Reduction in inequalities of Income and Wealth
q Increases National Income
q Price Stability and Control of Inflation
q Foreign Exchange Earning
Mobilisation of financial resources
q Employment Generation
q Development of Infrastructure
q Balanced Regional Development
Fiscal Stimulus
q
Component of Budget
Revenue Budget
q The Revenue Budget consists of the revenue receipts of the
Government and the expenditure met from these revenues
q Revenue Receipts
Revenue Receipts
q Tax Revenues
Revenue Receipts
q Non Tax Revenue
Revenue Expenditures
q Payment of salaries, wages, pensions, subsidies and interest fall in this category as
revenue expenditure examples. Also, note that revenue expenses are incurred by the
government for its operational needs.
Effective Revenue Deficit

Effective revenue deficit refers to the difference

between fiscal deficit and grants for the creation of
capital assets
Capital Receipts
q The Capital receipts are of two types viz. Debt receipt and non-
debt receipts. The debt receipts are those which government
needs to repay along with interest. Non-debt receipts are those
which come to the government by sale of some assets.
Capital Expenditure
● Acquiring fixed and intangible assets
● Upgrading an existing asset
● Repairing an existing asset
● Repayment of loan
Capital Expenditure vs Revenue Expenditure
Measures of Government Deficit
What is off –Budget Finance?
Ø.
q Off-budget financing refers to expenditure that's not funded through the budget. For
instance, the government may set up a special purpose vehicle (SPV) to borrow money
for a particular task such as to construct a bridge. Since the loan is not taken directly by
the govt, it does not reflect in the budget document
How to Bridge this Fiscal deficit
● Deficit financing means generating funds to finance the deficit which results
from excess of expenditure over revenue.

● The gap being covered by borrowing from the public by the sale of bonds or by
printing new money.
Other Important Terms
q Fiscal Consolidation

q Fiscal Drag-It has the effect of raising government tax revenue

without explicitly raising tax rates.

q Fiscal drag occurs within an economy where rising inflation and growth in earnings
force consumers into higher tax brackets.
Fiscal Neutrality

● Fiscal neutrality refers to a principle or goal of public finance that fiscal decisions
(taxing, spending, or borrowing) of a government can or should avoid distorting
economic decisions by businesses, workers, and consumers.
Zero Based Budgets

q Zero-based budgeting (ZBB) is a budgeting process that allocates funding based on

program efficiency and necessity rather than budget history.

q As opposed to traditional budgeting, no item is automatically included in the next

budget.
Other Budgets

q Gender Budgeting: Gender budgeting allows governments to

promote equality through fiscal policies by taking analyses of a
budget's differing impacts on the sexes as well as setting goals or
targets for equality and allocating funds to support those goals.
91

FRBM Act, 2003

• The Fiscal Responsibility and Budget Management Act (FRBM
Act), 2003, establishes financial discipline to reduce fiscal deficit.

• The Act’s long-term objective is for India to achieve fiscal

stability and to give the Reserve Bank of India (RBI) flexibility to
deal with inflation in India

• Govt not to borrow except through WMA route

Key features of the FRBM Act
92

• The FRBM Act made it mandatory for the government to place the
following along with the Union Budget documents in Parliament
annually:

• Medium Term Fiscal Policy Statement

• Macroeconomic Framework Statement

• Fiscal Policy Strategy Statement

93

FRBM Act, 2003

• The FRBM Act proposed that revenue deficit, fiscal deficit, tax
revenue and the total outstanding liabilities be projected as a
percentage of gross domestic product (GDP) in the medium-term
fiscal policy statement.
• The Union government’s liabilities account for a little over 46% of
the country’s GDP. However, if the public debt is calculated as
general government liabilities, which also includes the liabilities of
states then it goes up to 68% of the country’s GDP.
94

FRBM Act, 2003

• In Budget 2017, Finance Minister Arun Jaitley deferred the fiscal
deficit target of 3% of the GDP and chose a target of 3.2%, citing the
NK Singh committee report.
• The Comptroller and Auditor General of India had pulled up the
government for deferring the targets which it said should have been
done through amending the Act.
• FD and RD may exceed the targets only on the grounds such as
national security, calamity or on exceptional grounds.
• N.K. Singh Committee
95

FRBM Act, 2003

• A panel under former Revenue Secretary, N.K. Singh was constituted
by the government in May 2016 for reviewing the Fiscal Responsibility and
Budget Management (FRBM) Act, 2003.
• Recommendations
• Debt to GDP ratio of 60% should be targeted with a 40% limit for the
center and 20% limit for the states. The targeted debt to GDP ratio
should be achieved by 2023.
• It said that the 60% consolidated Central and State debt limit was
consistent with international best practices, and was an essential
parameter to attract a better rating from the credit rating agencies.
96

Fiscal Glide Path

• This provides the Government a flexibility of 0.5 per cent in
targeting the fiscal deficit (the Escape Clause)
The NK Singh committee - constituted by the Narendra
Modi government - recommended a fiscal glide path for
the government that would have gradually brought
down the fiscal deficit to 3 percent of GDP by the end of
FY20 and further reduced it to 2.8 percent by FY21 and
2.5 percent by FY23.
Performance Budgeting
Outcome budgeting
q It is a budgeting scheme that gives project-wise outlays for all central ministries,
departments and organisations listed against corresponding outcomes (measurable
physical targets) to be achieved during the year. It measures the development
outcomes of all government programmes.
Participatory Budgeting
q Participatory budgeting is the process by which citizens deliberate
and negotiate over the distribution of public resources for the
final budget.
q Improving state performance and enhancing the quality of
democracy.
Budget Transparency

q Budget transparency refers to the extent and ease with which citizens can access
information about and provide feedback on government revenues, allocations, and
expenditures.
What is Tax??
q Taxation refers to the practice of government collection money
from the citizens to pay for public services.
q 57.8 million Individuals filed the income tax return (~5% of the
population) of which only 15 million (~1.15% of the population)
actually paid taxes.
Why do we pay Taxes ??
q The prime reason for levy of taxes is that they are the basic
source of revenue to the government which can be utilized by the
government for its expenses like defence, healthcare, education
and different infrastructure facilities like roads, dams, highways
etc.
TAX
TAX TO GDP RATIO

A tax-to-GDP ratio is a gauge of a nation's tax revenue

relative to the size of its economy as measured by gross
domestic product (GDP). The ratio provides a useful
look at a country's tax revenue because it reveals
potential taxation relative to the economy.
Type of Taxes
Type OF direct tax
q Income Tax:
q Its two basic types are :
q Personal income tax: levied on incomes of individuals,
households, partnerships, and sole proprietorships, and
q Corporation income tax: levied on profits (net earnings) of

incorporated firms
Type of Direct Taxes
q Corporate Tax: .
q A domestic corporate entity with a turnover upto Rs. 250 Crore, pays a flat rate of 25%
corporate tax.
q For a particular financial year, if the total revenue earned by a company exceeds Rs. 1
crore, then a surcharge corporate tax of 5% is levied on such a corporation.
q Additional Health and Education cess at the rate of 4 % will be added to the income
tax liability in all cases.
Type of Direct Taxes
q Google Tax or Facebook Tax or Equalization Levy:.
q As per the union Budget 2016, the budget states that any individual or entity who use Non-Resident
technology services shall pay 6% of the total gross. on payment exceeding Rs 1 lakh a year
q Any payment made by non-residents in connection with an Indian user will now attract a 2% levy. The
levy would be imposed on those companies that have a turnover or sales of over Rs.2 crore in the previous
year .Also, the compliance of the levy has been shifted to the non-resident service provider
q Now, expanded scope stretches beyond goods and services supplied to Indian residents and includes
supplies to any person using an Indian Internet Protocol (IP) address.
Advantages of Direct Taxes
ü Economy
ü Equity
ü Civil Consciousness
ü Reduction in Inequality
ü Certainty
ü Elasticity
ü Educative Value
ü Easy to understand
ü Control of Inflation
ü Convenience
ü Productive
ü Ability to Pay
disadvantages of Direct Taxes
ü Inconvenience
ü Unpopular
ü Uneconomical
ü Possibility of Evasion
ü Uncertainty
ü Inequitable
ü Narrow Scope
ü Unsuitable for underdeveloped countries
ü Curtails capital Formation
ü Political Decision
ü Extravagance of Money
ü Inflation
Direct Tax Code Reforms: Major recommendations of the Akhilesh
Ranjan Committee
● Equalization Levy may be imposed on payments to non-residents for specified services
by a separate chapter in the Finance Act, 2016.
● The Equalization Levy should be chargeable on any sum that is received by a non
resident from a resident in India or a permanent establishment in India as a
consideration for the specified digital services.
● The rate of Equalization Levy may be between 6 to 8 percent of the gross sum
received.
● Equalization Levy should not be charged unless the consideration received for
specified services in a year from a person in India is more than one lakh rupees.
DIRECT TAX VIVAD SE VISHWAS ACT, 2020 Features

q ‘The Direct Tax Vivad se Vishwas, 2020’ (scheme) is intended for reducing litigation and
for settling matters that have been pending for several years.
TRANSPARENT TAXATION – ‘HONOURING THE HONEST' PLATFORM
Indirect Taxes

q Indirect Tax Indirect taxes are those taxes that are levied on goods or services. They
differ from direct taxes because they are not levied on a person who pays directly to
the government; instead, they are levied on products and are collected by the person
selling the product.
Custom Duty
q The Customs Act was formulated in 1962 to prevent illegal imports and exports of
goods. Besides , all imports are sought to be subject to a duty with a view to affording
protection to indigenous industries as well as to keep the imports to the minimum in
the interests of securing the exchange rate of Indian currency. Basic Duty : This duty is
levied on imports goods under the Customs Act, 1962.
Excise Duty

q Excise duty is a form of tax imposed on goods for their production, licensing and sale.
q It is the opposite of Customs duty in sense that it applies to goods manufactured
domestically in the country, while Customs is levied on those coming from outside of
the country.
q excise duty is levied on the manufacture of goods and at the time of removal of goods
from the factory, while GST or sales tax or VAT are levied on the supply of goods and
services.
Countervailing Duty & Anti Dumping Duty
What is a safeguard duty?
q The provision is facilitated in GATT (General Agreement on Tariffs and Trade), 1994.
q It allows a WTO member to restrict temporarily, imports of a product if its domestic
industry is affected by a surge in imports.
q In contrast to antidumping duties and countervailing duties, safeguard measures are, in
principle, applied regardless of the exporting country.
Tax Avoidance Vs. Tax evasion
Double taxation Avoidance and Agreement

q The Double Taxation Avoidance Agreement or DTAA is a tax treaty signed between
India and another country ( or any two/multiple countries) so that taxpayers can avoid
paying double taxes on their income earned from the source country as well as the
residence country.
Base Erosion and Profit Shifting (BEPS)

q Base erosion and profit shifting (BEPS) refers to tax planning strategies used by
multinational companies that exploit gaps and mismatches in tax rules to artificially
shift profits to low or no-tax locations where there is little or no economic activity.
Tobin Tax
It is a proposal of imposing a small tax on all foreign exchange transactions with
the objective to discourage destabilizing speculation and volatility in the foreign
exchange markets
Pigovian tax
Pigovian taxes are imposed on goods that have negative externalities. For example, tobacco, alcohol, diesel. If A
consumes some good that results in negative impact to others, then that good can come under pigovian tax
umbrella.
Securities Transaction tax
Securities transaction tax (STT) is a tax levied at the time of purchase and sale of securities listed on
stock exchanges in India. This tax came into effect from 1 October 2004. The rate of STT differs based
on the type of security traded
Sin Tax
Goods and Service Tax

q Applicable from July 1,2017.

q It is a destination based tax on consumption of goods and services.
q It is proposed to be levied at all stages right from manufacture up to final consumption
with credit of taxes paid at previous stages available as setoff.
q In a nutshell, only value addition will be taxed and burden of tax is to be borne by the
final consumer.
q In 2004, Dr. Vijay Kelkar committee recommended the GST.
q After the assent of the Hon’ble President on 8th September, 2016, the 101th
Constitutional Amendment Act, 2016 came into existence.
q The GST Council was constituted on 15.9.2016 as per Article 279A as a Constitutional
body.
Goods and Service Tax
Goods and Service Tax Exemptions
Goods and Service Tax Council
E-way Bill

● Electronic Way Bill (E-Way Bill) is basically a compliance mechanism wherein by

way of a digital interface the person causing the movement of goods uploads
the relevant information prior to the commencement of movement of goods
and generates e-way bill on the GST portal.
National Anti-profiteering Authority under GST
Ø Any reduction in the rate of tax on any goods or services or the benefit of input tax credit must be passed
on to the consumer by way of commensurate reduction in the prices of the respective goods or services.
ØTraders are not realizing an unfair profit by charging high price from consumers in the name of GST
HSN CODE
q HSN code stands for “Harmonized System of Nomenclature”.
Green Tax
DEPOSIT INSURANCE AND CREDIT GUARANTEE
CORPORATION
(DICGC)

provide funds up to Rs 5 lakh to an account holder within 90 days in the

event of a bank coming under the moratorium imposed by the Reserve Bank
of India (RBI).

The Rs 5-lakh deposit insurance cover was raised from Rs 1 lakh in 2020.

The Damodaran Committee on ‘Customer Services in Banks’ (2011) had recommended a five-time increa
individual bank deposits.
EXPORT CREDIT GUARANTEE CORPORATION OF INDIA

Export Credit Guarantee Corporation of India is fundamentally an export promotion organization, which
seeks to enhance the competitiveness of Indian exports by offering them credit insurance covers.
DOMESTIC SYSTEMATICALLY IMPORTANT INSURER (D-SII)

Domestic Systemically Important Insurers (D-SIIs) refer to insurers of such size, market
importance and domestic and global inter connectedness whose distress or failure would cause a
significant dislocation in the domestic financial system.
INTERNATIONAL FINANCIAL SERVICES CENTRES AUTHORITY

The central government has established International

Financial Services Centres Authority to regulate all
financial services in International Financial Services
Centres (IFSCs) with headquarters in Gandhinagar
(Gujarat).
THIRD PARTY INSURANCE
Indian
Economy
EXTERNAL SECTOR
Bretton Woods Conference
Ø The International Monetary Fund (IMF) is an organization of 189 member countries, each of which
has representation on the IMF's executive board in proportion to its financial importance, so that
the most powerful countries in the global economy have the most voting power.
Ø IMF provide loan for 7 years at 9% for Balance of Payment Problems and also provide facilities that
is general facilities or tranche faciltites and specific facilities
● Objective
Ø Foster global monetary cooperation
Ø Secure financial stability by providing short time finance when countries have balance of payment
crisis
Ø Facilitate international trade
Ø Promote high employment and sustainable economic growth
Ø And reduce poverty around the world
Bretton Woods Conference
● The United Nations Monetary and Financial Conference (1944), commonly known as Bretton Wood
conference, was held in Bretton Woods, New Hampshire, USA to regulate the international
monetary and financial order after the conclusion of World War II.
● The conference resulted in the agreements to set up the International Bank for Reconstruction and
Development (IBRD) popularly known as World Bank and the International Monetary Fund
(IMF).The IMF was set up to foster monetary stability at global level.
● The IBRD was created to speed up post-war reconstruction. The two institutions are known as the
Bretton Woods twins.
World bank
External Sector in Indian Economy
q All economic activities of an economy which take place in foreign currency fall in the
external sector such as export, import, foreign investment, external debt, current
account, capital account, balance of payment, etc.
Forex reserves
q The total foreign currencies (of different countries) an economy possesses at a point of
time is its ‘foreign currency assets/reserves’.
q The Forex Reserves (short for ‘foreign exchange reserves’) of an economy is its ‘foreign
currency assets’ added with its gold reserves, SDRs (Special Drawing Rights) and Reserve
Tranche in the IMF.
q In a sense, the Forex reserves is the upper limit upto which an economy can manage
foreign currency in normal times if need be.

q Reserve tranche
q Reserve tranche is a portion of the required quota of currency each member country
must provide to the International Monetary Fund (IMF) that can be utilized for its own
purposes.
Special Drawing Rights
q The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’
official reserves.
q It is done through Quota System weighted average of GDP(50%),Openness(30%),Economic Variability(15%)
and International Reserves (5%)
q The SDR is neither a currency nor a claim on the IMF..
q This basket Includes five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and
the British pound sterling.
Exchange Rate
q Exchange rate is the value for domestic currency with respect to foreign currency and
vice-versa. In India, exchange rates are managed by RBI to build reserves. They can be
either fixed exchange rate or market determined exchange rates.
q Foreign Exchange: It refers to money denominated in a currency other than the
domestic currency.
Factors affecting Exchange Rate
Fixed currency regime
q In this system exchange rate of a particular currency was fixed by the Government
keeping the currency in front of a basket of important world currencies (they were UK£,
US $, Japanese ¥, German Mark DM and the French Franc FFr).
q Fixed rates provide greater certainty for exporters and importers as there are no or
limited exchange rate risks.
Floating Exchange Rate System
q It is an exchange rate system in which market’s supply and demand of currencies
determines the exchange rate. There is no pre-determined exchange rate target of the
government or the Central Bank
q In the floating exchange rate system, a domestic currency is left free to float against a
number of foreign currencies in its foreign exchange market and determine its own
value.
Managed Floating Exchange Rate System

q In between the two extreme exchange rate regimes, there is the

managed floating (semifixed exchange rate) exchange rate system. It is
the mixture of fixed and floating exchange rate system.
q In this system, the exchange rate is given a specific target and a central
bank keeps the rate from deviating too far from a target band or value.
Trade balance
q The monetary difference of the total export and import of an economy
in one financial year is called trade balance. It might be positive or
negative, known to be either favorable or unfavorable, respectively to
the economy.
Depreciation and Appreciation
Impact of Depriciation and Appreciation
q Exports and Imports
q Currency Demand
q RBI action
q Profit through External Commercial Borrowing
q FDI and FII cheaper
q Inflation at early stage and long run get neutralise
q Remittances
Current Account
q It has two meanings—one is related to the banking sector and the other to the external
sector:
q In the banking industry, a business firms bank account is known as current account. The
account is in the name of a firm run by authorised person or persons in which no interest
is paid by the bank on the deposits.
q In the external sector-Current transactions of an economy in foreign currency all over the
world are—export, import, interest payments, private remittances and transfers.
Components of the current account
q Merchandise transactions or the visible trade (export and import of goods): . If the
imports are more than exports, it will lead to trade deficit; while if the exports are more
than imports, it will lead to a trade surplus. India has experienced consistent trade
deficits except for the two years in the 1970s
q Invisible trade (the export and import of services): . The export of services is shown as a
credit in the current account, while the import of services is shown as a debit to the
current account. Since the export and import of services are invisible, they are known as
invisible trade.
Components of the current account
q Unilateral or unrequited transfers (one sided transactions): the unilateral or unrequited
transfers are one way transfer which include gifts and donations, personal remittances,
foreign aid, charitable donations, withdrawal of NRI deposits locally etc. The inward transfers
are shown as a credit to the current account and the outward remittances are shown as a
debit to the current account.
q Income receipts and payments (investment income): it refers to the income from the
investments made in the foreign countries, profits from the subsidiaries of companies located
abroad, interest earned from loans and investments abroad, dividend income from the
shares in the foreign companies etc. If the income is received from foreign sources, it is
shown as a credit to the current account and if the payments are made to the residents of
foreign countries, then it is shown as a debit to the current account
Current Account Deficit
Current Account Deficit
Capital Account
q Every transaction in foreign currency (inflow or outflow) considered as capital
is shown in this account—external lending and borrowing, foreign currency
deposits of banks, external bonds issued by the Government of India, FDI, PIS
and security market investment of the QFIs (Rupee is fully convertible in this
case).
q The capital account is used for financing deficits in the current account or
absorbing any surplus of the current account..
Components of capital account
q Borrowing and Lendings from foreign countries: it includes the financial
transactions related to borrowing money from foreign countries by the
private sector companies or individuals, government etc.
q Investments to and from the foreign countries: the investments from
the foreign countries in the Indian companies, government bonds, real
estate etc in India.
Components of capital account
q Foreign direct investment (FDI)
q Foreign portfolio investment (FPI)
q Changes in the Foreign Exchange Reserves: the foreign exchange reserves are the
financial assets held by the central bank (RBI for India) of the country. These reserves
serve as financing item in the Balance of payments. Any withdrawal from the foreign
exchange reserves is shown as credit, while any addition in the reserves is shown as a
debit in the capital account. The changes in foreign exchange reserves is shown in the
BOP account and not the actual foreign exchange reserves
Balance of payments (BOP)
q The balance of payments (BOP) refers to the systematic record of all the financial and
economic transactions made by the residents of the country with the rest of the world.
It is the summary of all the financial transactions made by the individuals, corporate
firms, and the government etc. It includes all the external visible and non-visible
financial transactions of the country.
q Invisibles comprise the receipts and payments of the following items:
q Services
q Transfers
q Income
q It might be favourable or unfavourable for the economy.
q However, negativity of the BoP does not mean it is unfavourable.
q A negative BoP is unfavourable for an economy if only the economy lacks the means to
fill the gap of negativity.
Important Terms
● Hard currency
Soft currency

q Soft currency is unstable, unconvertible with other

currencies.
q It is easily available in any economy in its forex
market.
q These soft currencies are not acceptable in the
international business transactions.
q HOT CURRENCY
Soft currency
q It is the term for the Forex market and is
the temporary name for any Hard
currency. If any Hard currency is exiting
any economy at a fast pace for the
time, the Hard currency is said to be Hot
currency.
HEATED CURRENCY
q This term is used to denote the domestic
currency which is under pressure (heat)
of depreciation due to a hard currency’s
high tendency of exiting the economy.
Also known as currency under heat or
under hammering.
Cheap Currency and Dear Currency

q This term was being first used by

J.M. Keynes. When a government
starts re-purchasing its
bonds before their maturities, the
flow of money in the money will
increase, as the supply of money
will increase by this action of
government, the money will
become cheap, and hence it will be
called Cheap Money or Cheap
currency.
● Dear Currency
Cheap Currency and Dear Currency

Ø This is nothing but just opposite of

Cheap money. In this, the
government issues bonds, the flow
money increases from public to the
government, supply of money in
the market decreases, and hence
the money become dear to the
people, that’s why it is called, Dear
Money or Dear currency.
Foreign Exchange Rate Determination
Nominal effective exchange rate (NEER)
What is NEER?
Ø The nominal effective exchange rate (NEER) is an
unadjusted weighted average rate at which one
country’s currency exchanges for a basket of
multiple foreign currencies. The nominal exchange
rate is the amount of domestic currency needed to
purchase foreign currency..
Ø The NEER may be adjusted to compensate for the
inflation rate of the home country relative to the
inflation rate of its trading partners. The resulting
figure is the real effective exchange rate (REER)
bring equilibrium in value of country currency
Real Effective Exchange Rate (REER)
Ø The real effective exchange rate (REER) is
the weighted average of a country’s
currency in relation to an index or basket of
other major currencies. The weights are
determined by comparing the relative trade
balance of a country’s currency against each
country within the index.
Ø This exchange rate is used to determine an
individual country’s currency value relative
to the other major currencies in the index.
Convertibility of Rupees
q For the first time, the Union Budget for 1992-93 has
made the Indian rupee partially convertible.
q Convertibility is the ease with which a country's
currency can be converted into gold or another
currency through global exchanges. It indicates the
extent to which the regulations allow inflow and
outflow of capital to and from the country.
q Having a convertible currency allows a government
to pay for goods and services in a currency that may
not be the buyer's own. Having a nonconvertible
currency makes it harder for a government to
participate in the international market because these
transactions generally take longer to execute.
Disadvantage of Convertibility of Rupees

Ø High Volatility
Ø Foreign Debt Burden
Ø Effects on Balance of Trade
and Exports
Ø Lack of Fundamentals
Current Account Convertibility: Meaning
q Current account convertibility has been defined
as the freedom to buy or sell foreign exchange for
the following international transactions:
q All payments due in connection with foreign
trade, other current business, including
services and normal short term banking and
credit facilities;
q Payments due as interest on loans and as net
income from other investments;
q Payments of moderate amount of
amortization of loans or for depreciation of
direct investment; and
q Moderate remittances for family living
expenses.
Advantage of Current Account Convertibility

Ø Diversification

Ø Foreigners Investment

Ø Catalyst for financial market,

institutional development,
competition, technologies and
discipline macro economic policies

Ø Reduction in size of black money

Ø Induces competition against Indian

finance.
Exceptions for current Account Convertibility

Ø Not allowed for batting and gambling

Ø Travel purpose restrictions Nepal.Bhutan -
10k$ and other Countries 25k$
Ø Education or other purpose 1 lakh $
Ø Gifts 5 lakhs
Ø Liberalised Remittance Scheme –Indian
Resident may Spend 2.5lakh dollar per year
per person abroad apart from FEMA limit
Capital Account Convertibility
Ø What does capital account convertibility mean?
Ø Essentially, it means freedom to convert local
financial assets into foreign ones at market-
determined exchange rates.
Ø It can lead to free exchange of currency at lower
rates. Also, it can result in unrestricted mobility of
capital.
Ø It can trigger stepped up inflow of foreign
investment. Transactions also can become much
easier, and occur at a faster pace.
Capital Account Convertibility
Ø It could destabilise an economy especially if
there is massive capital flows in and out of the
country. Currency appreciation/depreciation
could affect the balance of trade.

Ø Restrictions
Capital Account Convertibility
Ø 1.FDI and FII limits

Ø 2.ECB limit cap of 750 million $ per financial year

for entity beyond that approval required .Min avg
maturity period of 3 years except for borrowers
who permitted for shorter period

Ø 3. For FII ceiling for overall investment for FIIs is

24% of paid up capital of Indian Company and
10% for NRI and PIO and limit is 20% of paid up
capital in case of Public Sector Bank including SBI
Tarapore Committee report 1997
Ø The CAC Committee recommended the
implementation of Capital Account Convertibility
for a 3 year period viz. 1997-98, 1998-99 and
1999-2000
Ø Gross fiscal deficit to GDP ratio has to come
down from a budgeted 4.5 per cent in 1997-98 to
3.5% in 1999-2000.
Ø A consolidated sinking fund has to be set up to
meet government’s debt repayment needs; to be
financed by increased in RBI’s profit transfer to
the govt. and disinvestment proceeds.
Ø Inflation rate should remain between an average
3-5 per cent for the 3-year period 1997-2000.
Tarapore Committee report 1997
Ø Individual allowed to investment
abroad 2 lakhs $ per year
Ø Unlimited amount of gold can be
imported
Ø Indian Corporate allowed to
Investment 500million $ in Foreign
Company
Tarapore Committee report 2006

Ø First Phase 2006-07,second phase 2007-

09,third phase 2011
Ø The ceiling for External Commercial
Borrowings (ECB) should be raised for
automatic approval.
Ø NRI should be allowed to invest in capital
markets
Ø NRI deposits should be given tax benefits.
Tarapore Committee report 2006
Ø Improvement of the Banking
regulation.
Ø FII (Foreign Institutional Investors)
should be prohibited from investing
fresh money raised to participatory
notes.
Ø Existing PN holders should be given an
exit route to phase out completely the
PN notes.
External Commercial Borrowing
Ø External commercial borrowing (ECB) is
basically a loan availed by an Indian entity
from a non resident lender.
Ø In the post reform period, ECBs have
emerged a major form of foreign capital
like FDI and FII.
External Commercial Borrowing in India
Advantages
Ø The DEA (Department of Economic Affairs),
Ministry of Finance, along with Reserve Bank of
India, monitors and regulates ECB guidelines and
policies.
Ø ECBs provide opportunity to borrow large
volume of funds.
Ø The funds are available for relatively long term.
Ø Interest rates are also lower compared to
domestic funds.
Ø It provides access to international markets for
the borrowers and gives good exposure to
opportunities globally.
External Commercial Borrowing in India
Advantages
Ø Corporate can raise ECBs from internationally
recognised sources such as banks, export credit
agencies, international capital markets etc.
Ø It is a way of raising capital without giving away
any control, as debt holders don't have voting
rights, etc.
Ø Avenues of lower cost funds can improve the
profitability of the companies and can aid
economic growth.
Ø Due to rising NPAs there is low credit offtake from
banks. So ECBs serve the financial needs of the
companies.
External Commercial Borrowing in India
Disadvantages
Ø Availability of funds at a cheaper rate may
bring in lax attitude on the company’s
side resulting in excessive borrowing.
Ø This eventually results in higher debt on
the balance sheet which may affect many
financial ratios adversely.
Ø Higher debt on the company’s balance
sheet is usually viewed negatively by the
rating agencies.
External Commercial Borrowing in India
Disadvantages
Ø This may result in a possible downgrade by rating
agencies which eventually might increase the cost of
debt.
Ø Effect on earnings due to interest expense payments.
Ø Since the repayment of the principal and the interest
needs to be made in foreign currency, It exposes the
company to interest and currency fluctuations.
Ø Companies may have to incur hedging costs or assume
exchange rate risk which if goes against may end up
negative for the borrowers.
Foreign Direct Investment
Ø Foreign direct investment (FDI) is an
investment made by a company or an
individual in one country into business
interests located in another country. FDI is an
important driver of economic growth
Ø ‘FDI’ or ‘Foreign Direct Investment’ means
investment through capital instruments by a
person resident outside India –
Ø in an unlisted Indian company OR
Foreign Direct Investment

Ø in ten per cent or more of the post-issue

paid-up equity capital on a fully diluted
basis of a listed Indian company.
Ø FDI is the process whereby residents of one
country (the home couantry) acquire
ownership of assets for the purpose of
controlling the production, distribution and
other activities of a firm in another country
(the host country).
Foreign Direct Investment
FDI

Payment in Buys stake

royalities ,
fees & in a foreign
dividends company

Generates Invests in
ample productive
profits assets
Routes of Foreign Direct Investment
Foreign Investment Facilitation Portal
• Foreign Investment Facilitation Portal
Foreign Investment Facilitation Portal
(FIFP) is the online single point interface
of the Ministry of Finance to facilitate
Foreign Direct Investment (FDI) in the
country.

• This portal is administered by Department

of Industrial Policy & Promotion (DIPP).

Functions of FIFP
Foreign Investment Facilitation Portal
1. To impart greater transparency in the
approval process of the FDI.
2. To improve the communication, reduced
paperwork, speed up processing and inform the
investor through SMS/email.
3. To upload the approval letters in standard
format on the Portal itself for the benefit of the
investors.
4. To transmit the guidelines and press release
related to FDI Policy to the investors.
Automatic Route FDI
Ø In the automatic route, the foreign entity does not
require the prior approval of the government or
the RBI.
Ø Under the government route, the foreign entity
should compulsorily take the approval of the
government. It should file an application through
the Foreign Investment Facilitation Portal, which
facilitates single-window clearance. This application
is then forwarded to the respective ministry or
department, which then approves or rejects the
application after consultation with the DPIIT.
Sectors where FDI is prohibited
q Lottery Business including Government/private
lottery, online lotteries, etc."

q Chit Funds

q Trading in Transferable Development Rights

(TDR)

q Manufacturing of cigars, cheroots, cigarillos and

cigarettes, of tobacco or of tobacco substitutes
Sectors where FDI is prohibited
q Gambling and Betting including casinos

q Nidhi Company

q Real Estate Business or Construction of farm

houses**

q Sectors not open to private sector investment-

atomic energy, railway operations (other than
permitted activities mentioned under the
Consolidated FDI policy)
Benefits of FDI
Forms of FDI
S Aspect Greenfield Brownfield
No.
1. Project direction Vague Clear

2. Development effort Comparatively more Comparatively less since

since everything need basic foundation is already
to be built from built
scratch

3. Development on Comparatively more substanatial

older systems
4. Development time Compartatively Comparatively less
Higher
5. Degree of risk Comparatively Comparatively lower
HIGHER
6. Re- engineering No Likely
required
Foreign Direct Investment in India Recent
Updates
q An entity of a country, which shares a land
border with India or where the beneficial
owner of an investment into India is
situated in or is a citizen of any such
country, can invest only under the
Government route.
q The top investors who contributed to
India’s high FDI inflow in FY21 include
Singapore (29 per cent), followed by the US
(23 per cent) and Mauritius (9 per cent).
Foreign Direct Investment in India New
Changes
Ø According to the new FDI policy:
Ø An entity of a country, which shares a land
border with India or where the beneficial owner
of an investment into India is situated in or is a
citizen of any such country, can invest only
under the Government route.

Ø A transfer of ownership in an FDI deal that

benefits any country that shares a border with
India will also need government approval.
Foreign Direct Investment in India New
Changes
Ø India shares land borders with Pakistan,
Afghanistan, China, Nepal, Bhutan, Bangladesh
and Myanmar.

Ø Investors from countries not covered by the new

policy only have to inform the RBI after a
transaction rather than asking for prior
permission from the relevant government
department.
Foreign Direct Investment in India New
Changes
Ø Impact
Ø The earlier FDI policy was limited to allowing
only Bangladesh and Pakistan via the
government route in all sectors. The revised
rule has now brought companies from China
under the government route filter.
Ø China's footprint in the Indian business space
has been expanding rapidly, especially since
2014.
DIFFERENCE BETWEEN FDI AND FPI
NPCI
Ø NPCI is an umbrella organization for retail
payments and settlement systems in India.
Ø It is an initiative of the Reserve Bank of
India (RBI) and Indian Banks’ Association
(IBA) under the provisions of the Payment
and Settlement Systems Act, 2007.
Ø It has been incorporated as a “Not for Profit”
Company under the provisions of Section 25
of Companies Act 1956 (now Section 8 of
Companies Act 2013).
Payments Infrastructure Development
Fund (PIDF)
Ø RBI will make an initial contribution of Rs 250 crore
to the PIDF, covering half of the fund, while the
remaining contribution will be from card-issuing
banks and card networks operating in the country.
Ø This is in line with the measures proposed by the
vision document on payment and settlement
systems in India 2019-2021.
Infrastructure Investment Trust (InvITs)

Ø What is Infrastructure Investment Trust (InvIT)?

Ø An infrastructure investment trust, simply put, is a

pooled investment vehicle like a mutual fund.

Ø While mutual funds invest the sum received in

financial securities, an InvIT invests the same in real
infrastructure assets like roads, power plants,
transmission lines, pipelines etc.

Ø How do InvITs work?

Payments Infrastructure Development
Fund (PIDF)
Ø The Payment Infrastructure Development Fund (PIDF) has been
created to encourage acquirers to deploy Point of Sale (PoS)
infrastructure, both physical and digital, in tier-3 to tier-6
centres and north eastern states.
Ø Given the high cost of merchant acquisition and merchant
terminalisation, most of the POS terminals in the country are
concentrated in tier 1 and 2 cities and towns and other regions
have been left out.
Ø The dedicated fund for deepening digital payments
infrastructure will receive recurring contributions to cover
operational expenses from card issuing banks and card
networks and the central bank will also contribute to yearly
shortfalls, if necessary.
Infrastructure Investment Trust (InvITs)
Ø InvIT is a business trust (like REIT), registered with the
market regulator, that owns, operates, and manages
operational infrastructure assets.

§ These long-term revenue-generating infrastructure

assets, in turn generate cash flows, which are then
distributed to the unit holders periodically.
Infrastructure Investment Trust (InvITs)
§ InvITs are a hybrid between equity and debt
investment, i.e., it has features of both equity and
debt.

§ While the operating business model helps provide

stable, predictable, and relatively low-risk cash flows
like debt, there is growth potential like equity as the
returns are not fixed with a scope of change in the unit
price.
National Monetisation Pipeline
Ø NMP aims to unlock value in Brownfield projects
by engaging the private sector, transferring to
them revenue rights and not ownership in the
projects.
Ø Ownership of the Brownfield assets to remain with
the government.
Ø The generated funds will be used for infrastructure
creation across the country.
Ø NMP is indicatively valued at Rs 6.0 lakhcrore for 4
years for FY 2022-2025.
PM Gati Shakti Master Plan
Ø To ensure integrated planning and implementation of
infrastructure projects in the next four years, with
focus on expediting works on the ground, saving costs
and creating jobs.
Ø The Gati Shakti scheme will subsume the Rs 110 lakh
crore National Infrastructure Pipeline that was
launched in 2019.
Ø Besides cutting logistics costs, the scheme is also
aimed at increasing cargo handling capacity and
reducing the turnaround time at ports to boost trade.
PM Gati Shakti Master Plan
Ø It also aims to have 11 industrial corridors and two
new defence corridors - one in Tamil Nadu and other
in Uttar Pradesh. Extending 4G connectivity to all
villages is another aim. Adding 17,000 kms to the gas
pipeline network is being planned.

Ø It will help in fulfilling the ambitious targets set by the

government for 2024-25, including expanding the
length of the national highway network to 2 lakh kms,
creation of more than 200 new airports, heliports and
water aerodromes.
PM Gati Shakti Master Plan
Ø Integrated Approach: It intends to bring
together 16 infrastructure related Ministries.

Ø This will help in removing long-standing

issues such as disjointed planning, lack of
standardisation, problems with clearances,
and timely creation and utilisation of
infrastructure capacities.
PM Gati Shakti Master Plan
Ø Gati Shakti Digital Platform: It involves the
creation of a common umbrella platform through
which infrastructure projects can be planned and
implemented in an efficacious manner by way of
coordination between various
ministries/departments on a real-time basis.
Ø Expected Outcomes
Ø The scheme will help mapping the existing and
proposed connectivity projects.
PM Gati Shakti Master Plan
Ø Also, there will be immense clarity on how different
regions and industrial hubs in the country are linked,
particularly for last mile connectivity.
Ø A holistic and integrated transport connectivity
strategy will greatly support Make in India and
integrate different modes of transport.
Ø It will help India become the business capital of the
world.
Ø Need for Integrated Infrastructure Development:
PM Gati Shakti Master Plan
Ø There exists a wide gap between macro
planning and micro implementation due to the
lack of coordination and advanced information
sharing as departments think and work in
silos.
Ø According to a study, the logistical cost in India
is about 13% of GDP, which is higher than
developed countries.

Ø Due to this high logistical cost,

the competitiveness of India’s exports is
greatly reduced.
PM Gati Shakti Master Plan
Ø It is globally accepted that the creation of quality
infrastructure for Sustainable Development is a proven
way, which gives rise to many economic activities and
creates employment on a large scale.
Ø The scheme is in synergy with the National Monetisation
Pipeline (NMP).
The NMP has been announced to provide a clear
framework for monetisation and give potential investors a
ready list of assets to generate investment interest
PM Gati Shakti Master Plan
Ø Rs. 100 lakh-crore project for developing
‘holistic infrastructure’
Ø PM Gati Shakti Plan is a national
infrastructure master plan.
Ø Aim: To make a foundation for holistic
infrastructure and give an integrated
pathway to the economy.
Ø Focus area of the project:
PM Gati Shakti Master Plan
Ø Employment opportunity: To act as a source of
employment opportunities for the youth in future.
Ø Leveling up local manufacturers: To help raise the
global profile of local manufacturers and help them
compete with their counterparts worldwide.
Ø Economic zones: To raise possibilities of new future
economic zones
Ø Infrastructure development: Infrastructure
development has the ability to create a multiplier
effect with every rupee invested, yielding much
higher returns.
India to set up development finance
institution to fund infra projects
Ø India’s cabinet approved the establishment of a
development financial institution (DFI) with a fund
worth 200 billion rupees ($2.8 billion) to boost
investment in infrastructure projects.
Ø The Development Finance Institution (DFI) are
organizations that are either owned by the
government or by charitable institutions to finance
infrastructure projects that are of national
importance but may or may not meet commercial
return standards.
Ø Types of Finances by DFIs:
India to set up development finance
institution to fund infra projects
Ø " Medium(1-5 years)
Ø " Long term(>5 years)
Ø DFIs Categories:
Ø " National Development Banks such as IDBI, SIDBI,
ICICI, IFCI, IRBI, and IDFC.
Ø " Sector-specific financial institutions such as TFCI,
EXIM Bank, NABARD, HDFC, and NHB.
Ø " Investment institutions such as as LIC, GIC, and
UTI.
Ø " State-level institutions such as such as State
Finance Corporations and SIDCs.
India to set up development finance
institution to fund infra projects
Ø Significance of the initiative
Ø Fundraising: The DFI would seek to raise funds from
the global pension and insurance sectors.
Ø Long-term financing: It will help in raising funds for the
length which is a must for the infrastructure sector.
Ø Tax benefits: It will help for investment in new projects
with certain tax benefits.
Ø Boost GDP: It will help to cut logistics costs of GDP.
Ø Saving of companies cost: It will help hundreds of
companies save on transport costs and boost sales once
demand picks up.
RODTEP Scheme
Ø RoDTEP stands for Remission of Duties
and Taxes on Export Products.
Ø It is formed to replace the existing MEIS
(Merchandise Exports from India
Scheme).
Ø The scheme will ensure that the exporters
receive the refunds on the embedded
taxes and duties previously non-
recoverable.
Ø The scheme was brought about with the
intention to boost exports which were
relatively poor in volume previously
RODTEP Scheme
Ø Key Features of the scheme
Ø Refund of the previously non-refundable duties and
taxes: Mandi tax, VAT, Coal cess, Central Excise duty
on fuel etc. will now be refunded under this
particular scheme. All the items under the MEIS and
the RoSTCL (Rebate of State and Central Taxes and
Levies) are now under the purview of the RoDTEP
Scheme
Ø Automated system of credit: The refund will be
issued in the form of transferable electronic scrips.
These duty credits will be maintained and tracked
through an electronic ledger.
RODTEP Scheme
Ø Multi -sector scheme: Under RoDTEP, all sectors,
including the textiles sector, are covered, so as to
ensure uniformity across all areas.
Ø Quick verification through digitalisation: Through
the introduction of the digital platform, the
clearance happens at a much faster rate.
Verification of the records of the exporters will be
done with the help of an IT-based risk
management system to ensure speed and accuracy
of transaction processing
Ø Who all can avail benefits of the RoDTEP Scheme?
RODTEP Scheme
Ø All sectors, including the textiles sector,
may enjoy the benefits of the RoDTEP
Scheme.
Ø Labor-intensive sectors that enjoy
benefits under the MEIS Scheme will be
given a priority.
Ø Manufacturer exporters and merchant
exporters (traders) are both eligible for
the benefits of this scheme.
RODTEP Scheme

Ø There is no particular turnover

threshold to claim the RoDTEP. Re-
exported products are not eligible
under this scheme.
Ø To be eligible to avail the benefits of
this scheme, the exported products
need to have the country of origin as
India.
Ø Special Economic Zone Units and
Export Oriented Units are also eligible
New RBI initiatives
Ø Prime Minister Narendra Modi has launched
two customer-centric initiatives of the Reserve
Bank of India (RBI):
Ø 1. The RBI Retail Direct Scheme.
Ø 2. The Reserve Bank-Integrated Ombudsman
Scheme.

Ø The two schemes will expand the scope of

investment in the country and make access to
capital markets easier and more secure for
investors.
Ø What is the RBI Retail Direct Scheme?
New RBI initiatives
Ø The Scheme is aimed at enhancing
access to the government securities
market for retail investors.
Ø It offers them a new avenue for directly
investing in the securities issued by the
Centre and the state governments.
Ø Investors will be able to easily open and
maintain their government securities
account online with the RBI, free of cost.
New RBI initiatives
Ø Non-Resident retail investors eligible to
invest in Government Securities under
Foreign Exchange Management Act, 1999
are also eligible under the scheme.
Ø The scheme offers a portal avenue to
invest in central government securities,
treasury bills, state development loans
and Sovereign Gold Bonds (SGBs).
Ø The scheme places India in a list of select
few countries offering such a facility.
New RBI initiatives
Ø What is the Reserve Bank-Integrated
Ombudsman Scheme?
Ø It is aimed at further improving the
grievance redress mechanism for
resolving customer complaints against
entities regulated by the central bank.
Ø The central theme of the scheme is
based on 'One Nation-One
Ombudsman' with one portal,
Ø one email and one address for the
customers to lodge their complaints.
New RBI initiatives
Ø The RBI has decided to integrate the three
ombudsman schemes into one and also
simplified the scheme by covering all
complaints.
Ø RB-IOS will do away with the jurisdictional
limitations as well as limited grounds for
complaints. RBI will provide a single
reference point for the customers to
submit documents, track status of
complaints filed and provide feedback
New RBI initiatives
Ø Retail Investors: is a non-professional investor who
buys and sells securities or funds that contain a
basket of securities such as mutual funds and
exchange traded funds (ETFs).

Ø Primary Dealers: A primary dealer is a bank or other

financial institution that has been approved to trade
securities with a national government.

Ø Gilt Account: An account opened and maintained for

holding Government securities, by an entity or a
person including ‘a person resident outside India’.
New RBI initiatives
Ø Government securities: These are debt
instruments issued by the government to
borrow money.

Ø The two key categories are treasury bills –

short-term instruments which mature in
91 days, 182 days, or 364 days, and dated
securities – long-term instruments, which
mature anywhere between 5 years and
40 years.
Neo-banks
Ø Neo-banks are online-only financial technology (fint ech)
compan ies that operate solely digitally or via mobile
apps. Simply put, neo-banks are digital banks without any
physical branches.
Ø They leveraging technology and artificial intelligence (AI)
to offer a range of personalised services to customers.
Ø Right from customer acquisition to traditional banking
services such as remittances, money transfers, utility
payments and personal finance, neo-banks offer a wide
range of offerings to customers across retail and small-to-
medium enterprise (SME) categories.
Neo-banks
Ø They tailor their products and services in a
manner that makes banking simpler and
convenient to the end consumers.
Ø The term ‘Neo-bank’ started gaining
prominence globally in 2017 as they emerged
as a new challenger to the traditional banks
in terms of customer engagement,
connectivity and reach, and most
importantly, the user experience. That is why
neobanks are also called ‘challenger banks’.
Ø There are around a dozen neo-banks in India
including Razorpay X, EpiFi, Open, NiYo,
Jupiter among others.
On tap’ Licences

Ø What is On tap licensing?

Ø It means the RBI window for granting
banking licences will be open throughout the
year.
Ø Who can apply?
Ø According to the guidelines released by the
central bank in August 2016:
Ø Eligible entities seeking universal bank
licences must be:
On tap’ Licences
Ø 1. Individuals/entities with at least 10 years
of experience in banking and finance at a
senior level or private companies or groups
with at least 10 years of successful track
record.
Ø 2. Groups or companies applying for such
licences must have assets of Rs 5,000 crore
or above and the non-financial businesses
don’t account for 40% or more of these
assets.
Ø To be eligible to apply for a small finance
bank licence:
On tap’ Licences
Ø 1. Individuals/entities with at least 10 years
of experience in banking and finance at a
senior level or private companies or groups
with at least 10 years of successful track
record.
Ø 2. Groups or companies applying for such
licences must have assets of Rs 5,000 crore
or above and the non-financial businesses
don’t account for 40% or more of these
assets.
On tap’ Licences
Ø What is Universal banking?
Ø It is a system of banking where banks
undertake a blanket of financial
services like investment banking,
commercial banking, development
banking, insurance and other
financial services including functions
of merchant banking, mutual funds,
factoring, housing finance, insurance
etc.
On tap’ Licences
Ø Currency chest
Ø Currency chest is a place where the
Reserve Bank of India (RBI) stocks
the money meant for banks and
ATMs. These chests are usually
situated on the premises of different
banks but administrated by the RBI.
Ø The money present in the currency
chest belongs to the RBI and the
money, kept in the strong room
outside the currency chest belongs
to the bank.
On tap’ Licences
Ø How is the loss recovered in case of a crime
resulting in loss of cash?
Ø As per the set guidelines, the bank, in which
the currency chest is situated is liable to
fulfill the loss of the currency chest.
Ø The security of currency chests is the
subject of the bank in which chests are
situated. The Reserve Bank of India (RBI)
reimburses the security expenses to the
bank as per the set norms.
National Automated Clearing House
(NACH)
Ø National Automated Clearing House (NACH)
is the centralized web-based inter-bank
payment/transaction processing system by
the National Payments Corporation of India
(NPCI).
Ø In simple words, NACH allows regular direct
debit from a borrower's bank account
towards his loan repayments. This is directly
credited to the lender's bank account.
National Automated Clearing House
(NACH)
Ø Offering credit and debit service to corporates,
banks, and financial institutions, the service, aimed at
integrating all regional ECS into one National
Payment System, is claimed to be better than its
predecessor, Electronic Clearing Service
Ø NACH System can be used for making bulk
transactions towards distribution of subsidies,
dividends, interest, salary, pension etc. and also for
bulk transactions towards collection of payments
pertaining to telephone, electricity, water, loans,
investments in mutual funds, insurance premium etc
Accredited investor
Ø SEBI moots concept of ‘accredited investor’.
It said the accreditation once granted shall
be valid for a year.
Ø Also called as qualified investors or
professional investors.
Ø They are those who have an understanding
of various financial products and the risks
and returns associated with them.
Ø They can take informed decisions regarding
their investments and are recognised by
many securities and financial market
regulators globally.
Accredited investor

Ø This category of investors usually features high-net

worth individuals or entities that have access to
complex and high-risk investments.
Ø Accredited investors may be individuals, HUFs, family
trusts, sole proprietorships, partnership firms, trusts
and body corporates.
Ø Eligible subsidiaries of depositories and specified
stock exchanges, and other specified institutions will
be recognised as accreditation agencies. These
agencies will grant accreditation status and issue
Accreditation Certificate to accredited investors
News
CBI closing in on co-location and algo
scam at NSE Poornima Joshi | Updated
On: Feb 17, 2022.
Algorithmic trading
Ø Market regulator Securities and Exchange Board of
India (Sebi) proposed that all orders emanating
from application programming interface (API) of
stockbrokers should be treated as algorithmic
trading, or algo trading.
Ø In a consultation paper, Sebi said there is a need to
create a regulatory framework for algo trading.
Ø Algorithmic trading refers to orders generated at
superfast speed by the use of advanced
mathematical models that involve automated
execution of trade.
Algorithmic trading
Ø The algo runs on the broker’s systems and
not on the investors system.
Ø Whenever the algo generates a signal, an
order automatically gets fired on the
investor’s account with no human
involvement from either the broker or the
investor.
Ø The algo trading system automatically
monitors the live stock prices and initiates
an order when the given criteria are met.
Social stock exchanges (SSEs)
Ø • The proposal to set up SSEs was first
floated during the Union Budget in 2019.
Ø What is social stock exchange (SSE)?
Ø • It is a novel concept in India and such a
bourse is meant to serve private and non-
profit sector providers by channelling
greater capital to them.
Ø • As per the proposal, SSE can be housed
within the existing stock exchange such as
the BSE and/or National Stock Exchange
(NSE).
Social stock exchanges (SSEs)
Ø With this, Social welfare enterprises and non-profits
could soon get to raise so-called social capital on a
transparent electronic platform, aiding the process of
rebuilding livelihoods ravaged by the coronavirus
pandemic.
Ø These recommendations, if implemented as a
package, can result in a vibrant and supportive
ecosystem, enabling the non-profit sector to realise
its full potential for creating social impact.
Social stock exchanges (SSEs)
Ø What is a social enterprise?

Ø A social enterprise is a revenue-generating

business. Its primary objective is to achieve a
social objective, for example, providing
healthcare or clean energy
National Rail Plan
Ø Indian Railways have prepared a National Rail Plan
(NRP) for India – 2030.
Ø The Plan is to create a ‘future ready’ Railway
system by 2030. The NRP is aimed to formulate
strategies based on both operational capacities and
commercial policy initiatives to increase modal
share of the Railways in freight.
Ø The objective of the Plan is to create capacity
ahead of demand, which in turn would also cater to
future growth in demand right up to 2050 and also
increase the modal share of Railways to 45% in
freight traffic and to continue to sustain it.
National Rail Plan
Ø • Key features of the National Rail Plan are:
Ø o As part of the National Rail Plan, Vision 2024 has been
launched for accelerated implementation of certain
critical projects by 2024 such as 100% electrification,
multi-tracking of congested routes, upgradation of
speed to 160 kmph on Delhi-Howrah and Delhi-Mumbai
routes, upgradation of speed to 130kmph on all other
Golden Quadrilateral-Golden Diagonal (GQ/GD) routes
and elimination of all Level Crossings on all GQ/GD
route.
Ø o Identify new Dedicated Freight Corridors.
Ø o Identify new High-Speed Rail Corridors.
National Bank for Financing
Infrastructure and Development Act, 2021
Ø An Act to establish the National Bank for Financing
Infrastructure and Development to support the
development of long-term non-recourse
infrastructure financing in India including
development of the bonds and derivatives markets
necessary for infrastructure financing and to carry
on the business of financing infrastructure and for
matters connected therewith.
National Bank for Financing
Infrastructure and Development Act, 2021
Ø The developmental objective of the Institution shall be to
co-ordinate with the Central and State Governments,
regulators, financial institutions, institutional investors
and such other relevant stakeholders, in India or outside
India, to facilitate building and improving the relevant
institutions to support the development of long term
non-recourse infrastructure financing in India including
the domestic bonds and derivatives markets.
National Bank for Financing
Infrastructure and Development Act, 2021
Ø The financial objective of the Institution
shall be to lend or invest, directly or
indirectly, and seek to attract investment
from private sector investors and
institutional investors, in infrastructure
projects located in India, or partly in India
and partly outside India, with a view to
foster sustainable economic development in
India.
Financial inclusion index

● The Reserve Bank of India (RBI) has formed of a

composite Financial Inclusion Index (FI-Index) to
capture the extent of financial inclusion across
the country as recommended by RBI under its
National Strategy for Financial Inclusion 2019-
2024.

● The FI-Index for the period ended March 2021

stood at 53.9 compared with 43.4 for the period
ended March 2017.
● About the index:
1. The annual FI-Index will be published in July every
year.

2. The index incorporates details of banking,

investments, insurance, postal as well as the pension
sector in consultation with the government and
respective sectoral regulators.

3. The index captures information on various aspects

of financial inclusion in a single value ranging
between 0 and 100, where 0 represents complete
financial exclusion and 100 indicates full financial
inclusion.
4. The FI-Index comprises three broad
parameters, including access, usage and
quality with each of these consisting of
various dimensions computed on the basis of
on several indicators.

5. It has been constructed without any ‘base

year
Financial inclusion index

● Financial Stability Report (FSR)

○ Reserve Bank of India (RBI) released the
24th issue of Financial Stability Report
(FSR).
○ It details the state of financial stability
in the country, and it is prepared after
taking into account the contributions
from all financial sector regulators.
○ It also maps the state of credit growth
and the rate at which borrowers are
defaulting on paying back loans.
Financial inclusion index

● As part of the FSR, which is published twice each year,

the RBI also conducts a Systemic Risk Survey (SRS),
wherein it asks experts and market participants to assess
the financial system on five different types of risks —
global, financial, macroeconomic, institutional and
general.

● If the FSR reveals that the percentage of non-performing

assets (NPAs or bad loans) in the banking system is high
and also shows that the government fiscal deficit is also
high then it means that not only will the banks struggle to
function effectively (and fund future growth) but also
that if banks were to falter then the government may
find it tough to bail them out.
Human Development Index
Index Human Development

Ø Issued by United Nations Development

Programme (UNDP)

Ø Coined by The human development approach,

developed by the Pakistani economist Mahbub
Ul Haq, is anchored in the Indian Economist
Nobel laureate Amartya Sen’s work on human
capabilities.
Classification of countries
in HDI
q Countries have been divided in 4 categories
q If HDI index is:
q 0.800 or greater - Very high human

development
q 0.700 to 0.799- High human development

q 0.550 to 0.699 - Medium human

development
q Less than 0.550- Low human development
Gender Inequality Index
Ø 162 countries are ranked in
HDR’s Gender Inequality
Index.
Ø India rank 123
MPI
Ø India rank 62 from 107
Countries 2020-21
World bank Classification of
Countries
ØThe World Bank categorises the World's
economies into four income groups-- low,
lower-middle, upper-middle and high-income
countries.
ØEvery year the World Bank classifies the
countries based on GNI (Gross National
Income) per capita in the US Dollars.
ØInflation, exchange rates, and population
growth are some of the factors which influence
GNI per capita
World bank Classification of
Countries
Ø Low-Income Economies ($1,035 Or Less)

Ø List of Lower-Middle-Income Economies

($1,036 - $4,045)—India is in this category

Ø List of Upper-Middle-Income Economies

($4,046 - $12,535)

Ø List of High-Income Economies ($12,536 Or

More)
Indian Economy
MONEY MARKET
Q.1) Consider the following statements: (UPSC 2021)
Other things remaining unchanged, market demand for a good might increase if
1. price of its substitute increases
2. price of its complement increases
3. the good is an inferior good and the income of the consumer increases
4. its price falls
Which of the above statements are correct?
(a) 1 and 4 only
(b) 2, 3 and 4
(c) 1, 3 and 4
(d) 1, 2 and 3

Answer - A
MONEY MARKET
Q.2) "Gold Tranche" (Reserve Tranche) refers to (UPSC2020)

(a) a loan system of the World Bank

(b) one of the operations of a Central Bank
(c) a credit system granted by WTO to its members
(d) a credit system granted by IMF to its members

Answer - D
MONEY MARKET
Q.3) With reference to the Indian economy, consider the following statements:
(UPSC2020)
1. 'Commercial Paper' is a short-term unsecured promissory note.
2. 'Certificate of Deposit' is a long-term instrument issued by the Reserve Bank of India to
a corporation.
3. 'Call Money' is a short term finance used for interbank transactions.
4. 'Zero-Coupon Bonds are the interest-bearing short term bonds issued by the Scheduled
Commercial Banks to corporations.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 4 only
(c) 1 and 3 only
(d) 2, 3 and 4 only

Answer - C
MONEY MARKET
Q.4) With reference to ‘Bitcoins’, sometimes seen in the news, which of the
following statements is/are correct? (UPSC2016)
1. Bitcoins are tracked by the Central Banks of the countries.
2. Anyone with a Bitcoin address can send and receive Bitcoins from anyone else
with a Bitcoin address.
3. Online payments can be sent without either side knowing the identity of the
other.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3
Answer - B
MONEY MARKET
Q.5)What is/are the purpose/purposes of the Government's ‘Sovereign Gold
Bond Scheme’ and ‘Gold Monetization Scheme’? (2016)
1. To bring the idle gold lying with Indian households into the economy.
2. To promote FDI in the gold and jewellery sector
3. To reduce India’s dependence on gold imports
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer - C
MONEY MARKET
Q.6 What does venture capital mean ? (UPSC 2014)
(a) A short-term capital provided to industries
(b) A long-term start-up capital provided to new entrepreneurs
(c) Funds provided to industries at times of incurring losses.
(d) Funds provided for replacement and renovation of industries

Answer - B
MONEY MARKET
Q.7) A rise in the general level of prices may be caused by _______ (UPSC2013)
1. An increase in the money supply
2. A decrease in the aggregate level of output
3. An increase in the effective demand
Select the correct answer using the codes given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer - D
MONEY MARKET
Q.8) Which of the following measures would result in an increase in the money
supply in the economy? (UPSC2012)
1. Purchase of government securities from the public by the Central Bank.
2. Deposit of currency in commercial banks by the public.
3. Borrowing by the government from the Central Bank.
4. Sale of government securities to the public by the Central Bank.
Select the correct answer using the codes given below:
(a) 1 only
(b) 2 and 4 only
(c) 1 and 3
(d) 2, 3 and 4

Answer - C
MONEY MARKET
Q.9) Why is the Government of India disinvesting its equity in the Central Public
Sector Enterprises (CPSEs)? (UPSC 2011)
1. The Government intends to use the revenue earned from the disinvestment
mainly to pay back the external debt.
2. The Government no longer intends to retain the management control of the
CPSEs.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - D
BANKING SECTOR IN INDIA
Q.1) Consider the following statements: (UPSC 2021)
1. The Governor of the Reserve bank of India (RBI) is appointed by the Central
Government.
2. Certain provisions in the Constitution of India give the Central Government the
right to issue directions to the RBI in public interest.
3. The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer - C
BANKING SECTOR IN INDIA
Q.2) With reference to 'Urban Cooperative banks' in India consider the following
statements: (UPSE 2021)
1. They are supervised and regulated by local boards set up by the State
Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949
through an Amendment in 1966.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer - B
BANKING SECTOR IN INDIA
Q.3) In India, the central bank's function as the 'lender of last resort' usually
refers to which of the following? (UPSC 2021)
1. Lending to trade and industry bodies when they fail to borrow from other
sources
2. Providing liquidity to the banks having a temporary crisis
3. Lending to governments to finance budgetary deficits
Select the correct answer using the code given below.
(a) 1 and 2
(b) 2 only
(c) 2 and 3
(d) 3 only

Answer - B
BANKING SECTOR IN INDIA
Q.4) If another global financial crisis happens in the near future, which of the
following actions/policies are most likely to give some immunity to India? (UPSE
2020)
1. Not depending on short-term foreign borrowings
2. Opening up to more foreign banks
3. Maintaining full capital account convertibility
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3

Answer - A
BANKING SECTOR IN INDIA
Q.5) If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at
your bank, the immediate effect on aggregate money supply in the economy will
be _________ (UPSE2020)
(a) to reduce it by Rs. 1,00,000
(b) to increase it by Rs. 1,00,000
(c) to increase it by more than Rs. 1,00,000
(d) to leave it unchanged

Answer - D
BANKING SECTOR IN INDIA
Q.6) What is the importance of the term "Interest Coverage Ratio" of a firm in
India? (UPSC 2020)
1. It helps in understanding the present risk of a firm that a bank is going to give
a loan to.
2. It helps in evaluating the emerging risk of a firm that a bank is going to give a
loan to.
3. The higher a borrowing firm's level of Interest Coverage Ratio, the worse is its
ability to service its debt.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer - A
BANKING SECTOR IN INDIA
Q.7) If the RBI decides to adopt an expansionist monetary policy, which of the
following would it not do? (UPSE 2020)
1. Cut and optimise the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer - B
BANKING SECTOR IN INDIA
Q.8) Consider the following statements: (UPSE 2020)
1. In terms of short-term credit delivery to the agriculture sector, District Central
Cooperative Banks (DCCBs) deliver more credit in comparison to Scheduled
Commercial Banks and Regional Rural Banks.
2. One of the most important functions of DCCBs is to provide funds to the
Primary Agriculture Credit Societies.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - B
BANKING SECTOR IN INDIA
Q.9) The Chairman of public sector banks are selected by the __________ (UPSE
2019)
(a) Banks Board Bureau
(b) Reserve Bank of India
(c) Union Ministry of Finance
(d) Management of concerned ban

Answer - A
BANKING SECTOR IN INDIA
Q.10) Which of the following is not included in the assets of a commercial bank in
India? (UPSC 2019)
(a) Advances
(b) Deposits
(c) Investments
(d) Money at call and short notice

Answer - B
BANKING SECTOR IN INDIA
Q.11) Which of the following is issued by registered foreign portfolio investors to
overseas investors who want to be part of the Indian stock market without
registering themselves directly? (UPSC 2019)
(a) Certificate of Deposits
(b) Commercial Paper
(c) Promissory Note
(d) Participatory Note

Answer - D
BANKING SECTOR IN INDIA
Q.12) Which one of the following is not the most likely measure the
Government/ RBI takes to stop the slide of the Indian rupee? (UPSC 2019)
(a) Curbing imports of nonessential goods-and promoting exports
(b) Encouraging Indian borrowers to issue rupee denominated Masala Bonds
(c) Easing conditions relating to external commercial borrowing
(d) Following an expansionary monetary policy

Answer - D
BANKING SECTOR IN INDIA
Q.13) Consider the following statements: (UPSE 2018)
1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the
form of their own funds to offset any loss that banks incur if the account-holders
fail to repay dues.
2. CAR is decided by each individual bank.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - A
BANKING SECTOR IN INDIA
Q.14) Which one of the following statements correctly describes the meaning of
legal tender money? (UPSC 2018)
(a) The money which is tendered in courts of law to defray the fee of legal cases
(b) The money which a creditor is under compulsion to accept in settlement of
his claims
(c) The bank money in the form of cheques, drafts, bills of exchange etc.
(d) The metallic money in circulation in a country

Answer - B
BANKING SECTOR IN INDIA
Q.15) Consider the following statements: (UPSC 2018)
1. The Reserve Bank of India manages and services Government of India
Securities but not any State Government Securities.
2. Treasury bills are issued by the Government of India and there are no treasury
bills issued by the state Governments.
3. Treasury bills are issued at a discount from the par value.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer - C
BANKING SECTOR IN INDIA
Q.16) With reference to the governance of public sector banking in India,
consider the following statements: (UPSC 2018)
1. Capital infusion into public sector banks by the Government of India has
steadily increased in the last decade.
2. To put the public sector banks in order, the merger of associate banks with the
parent State Bank of India has been affected.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - B
BANKING SECTOR IN INDIA
Q.17) Which of the following statements is/are correct regarding the ‘Monetary
Policy Committee (MPC)? (UPSC 2017)
1. It decides the RBI’s benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted
every year.
3. It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only

Answer - A
BANKING SECTOR IN INDIA
Q.18) The establishment of ‘Payment Banks’ is being allowed in India to promote
financial inclusion. Which of the following statements is/are correct in this
context? (UPSC 2016)
1. Mobile telephone companies and supermarket chains that are owned and
controlled by residents are eligible to be promoters of Payment Banks.
2. Payment Banks can issue both credit cards and debit cards.
3. Payment Banks cannot undertake lending activities.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3
Answer - B
BANKING SECTOR IN INDIA
Q.19)The term ‘Core Banking Solution’ is sometimes seen in the news. Which of
the following statements best describes/describe this term? (UPSC 2016)
1. It is a network of a bank’s branches which enables customers to operate their
accounts from any branch of the bank on its network regardless of where they
open their accounts.
2. It is an effort to increase RBI’s control over commercial banks through
computerization.
3. It is a detailed procedure by which a bank with huge non-performing assets is
taken over by another bank.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer - A
BANKING SECTOR IN INDIA
Q.20) What is/are the purpose/purposes of the ‘Marginal Cost of Funds based
Lending Rate (MCLR)’ announced by RBI? (UPSC 2016)
1. These guidelines help improve the transparency in the methodology followed
by banks for determining the interest rates on advances.
2. These guidelines help ensure availability of bank credit at interest rates which
are fair to the borrowers as well as the banks.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - C
BANKING SECTOR IN INDIA
Q.21) Pradhan Mantri Jan-Dhan Yojana' has been launched for __________
(UPSC2015)
(a) providing housing loans to poor people at cheaper interest rates.
(b) promoting women's SelfHelp Groups in backward areas
(c) promoting financial inclusion in the country
(d) providing financial help to the marginalized communities.

Answer - C
BANKING SECTOR IN INDIA
Q.22) When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50
basis points, which of the following is likely to happen? (UPSC 2015)
(a) India's GDP growth rate increases drastically
(b) Foreign Institutional Investors may bring more capital into our country
(c) Scheduled Commercial Banks may cut their lending rates.
(d) It may drastically reduce the liquidity to the banking system

Answer - C
BANKING SECTOR IN INDIA
Q.23) 'Basel III Accord' or simply 'Basel III' often seen in the new, seeks to
__________ (UPSC 2015)
(a) develop national strategies for the conservation and sustainable use of
biological diversity
(b) improve banking sector's ability economic stress and improve risk
management
(c) reduce the greenhouse gas emissions but places a heavier burden on
developed countries
(d) transfer technology from developed countries to poor countries to enable
them to replace the use of chlorofluorocarbons in refrigeration with harmless
chemicals

Answer - B
BANKING SECTOR IN INDIA
Q.24) With reference to Indian economy, consider the following: (UPSC 2015)
1. Bank rate
2. Open market operations
3. Public debt
4. Public Revenue
Which of the above is/are component/components of Monetary Policy?
(a) 1 only
(b) 2, 3 and 4
(c) 1 and 2
(d) 1, 3 and 4

Answer - C
BANKING SECTOR IN INDIA
Q.25) The terms 'Marginal Standing Facility Rate' and 'Net Demand and Time
Liabilities', sometimes appearing in news, are used in relation to ______ (UPSC
2014)
(a) banking operations
(b) communications networking
(c) military strategies
(d) supply and demand of agricultural products

Answer - A
BANKING SECTOR IN INDIA
Q.26) What is/are the facility/facilities the beneficiaries can get from the services
of Business Correspondent (Bank Saathi) in branchless areas ? (UPSC 2014)
1. It enables the beneficiaries to draw their subsidies and social security benefits
in their villages.
2. It enables the beneficiaries in the rural areas to make deposits and
withdrawals.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 only
(c) Both 1 and 2 only
(d) Neither 1 nor 4

Answer - C
BANKING SECTOR IN INDIA
Q.27) In the context of the Indian economy which of the following is/are the
purpose/purposes of 'Statutory Reserve Requirements'? (UPSC2014)
1. To enable the Central Bank to control the amount of advances the banks can
create.
2. To make the people's deposits with banks safe and liquid.
3. To prevent the commercial banks from making excessive profits.
4. To force the banks to have sufficient vault cash to meet their day-to-day
requirements.
Select the correct answer using the code given below.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Answer - B
BANKING SECTOR IN INDIA
Q.28) Supply of money remaining the same when there is an increase in demand
for money, there will be ______________ (UPSC 2013)
(a) a fall in the level of prices
(b) an increase in the rate of interest
(c) a decrease in the rate of interest
(d) an increase in the level of income and employment

Answer - B
BANKING SECTOR IN INDIA
Q.29) In the context of Indian economy, ‘Open Market Operations’ refers to
______ (UPSC 2013)
(a) Borrowing by scheduled banks from the RBI
(b) Lending by commercial banks to industry and trade
(c) Purchase and sale of government securities by the RBI
(d) None of the above

Answer - C
BANKING SECTOR IN INDIA
Q.30) Priority Sector Lending by banks in Indian constitutes the lending
to__________ (UPSC 2013)
(a) Agriculture
(b) Micro and small enterprises
(c) Weaker sections
(d) All of the above

Answer - D
BANKING SECTOR IN INDIA
Q.31) Which of the following grants/grant direct credit assistance to rural
households? (UPSC 2013)
1. Regional Rural Banks
2. National Bank for Agriculture and Rural Development
3. Land Development Banks
Select the correct answer using the codes given below.
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer - C
BANKING SECTOR IN INDIA
Q.32) The Reserve Bank of India regulates the commercial banks in matters of
____________ (UPSC 2013)
1. liquidity of assets
2. branch expansion
3. merger of banks
4. winding-up of banks
Select the correct answer using the codes given below:
(a) 1 and 4 only
(b) 2, 3 and 4 only
(c) 1, 2 and 3 only
(d) 1, 2, 3 and 4

Answer - D
BANKING SECTOR IN INDIA
Q.33) Consider the following liquid assets: (UPSC 2013)
1. Demand deposits with the banks
2. Time deposits with the banks
3. Savings deposits with the banks
4. Currency
The correct sequence of these assets in the decreasing order of liquidity is
(a) 1–4–3–2
(b) 4–3–2–1
(c) 2–3–1–4
(d) 4–1–3–2

Answer - D
BANKING SECTOR IN INDIA
Q.34)The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply
which of the following? (UPSC 2012)
1. Other banks retain their deposits with the RBI.
2. The RBI lends funds to the commercial banks in times of need.
3. The RBI advises the commercial banks on monetary matters.
Select the correct answer using the codes given below:
(a) 2 and 3 only
(b) 1 and 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer - B
BANKING SECTOR IN INDIA
Q.35) The basic aid of Lead Bank Scheme is that_______ (UPSC 2012)
(a) Big banks should try to open offices in each district.
(b) There should be stiff competition among the various nationalized banks.
(c) Individual banks should adopt a particular district for intensive development.
(d) All the banks should make intensive efforts to mobilize deposits

Answer - C
BANKING SECTOR IN INDIA
Q.36) Why is the offering of “teaser loans” by commercial banks a cause of
economic concern? (UPSC 2012)
1. The teaser loans are considered to be an aspect of subprime lending and banks
may be exposed to the risk of defaulters in future.
2. In India, the teaser loans are mostly given to inexperienced entrepreneurs to
set up manufacturing or export units.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - A
BANKING SECTOR IN INDIA
Q.37) In India, which of the following have the highest share in the disbursement
of credit to agriculture and allied activities? (UPSC 2011)
(a) Commercial Banks
(b) Cooperative Banks
(c) Regional Rural Banks
(d) Microfinance Institutions

Answer - A
BANKING SECTOR IN INDIA
Q.38) Which of the following can aid in furthering the Government’s objective of
inclusive growth? (UPSC 2011)
1. Promoting Self-Help Groups
2. Promoting Micro, Small and Medium Enterprises.
3. Implementing the Right to Education Act
Select the correct answer using the codes given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer - D
BANKING SECTOR IN INDIA
Q.39) Microfinance is the provision of financial services to people of low-income
groups. This includes both the consumers and the self-employed. The
service/services rendered under microfinance is/are: (UPSC 2011)
1. Credit facilities
2. Savings facilities
3. Insurance facilities
4. Fund Transfer facilities
Select the correct answer using the codes given below the lists:
(a) 1 only
(b) 1 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4
Answer - D
EXTERNAL SECTOR OF INDIA
Q.1) Consider the following statements: (UPSC 2021)
The effect of the devaluation of a currency is that it necessarily __
1. improves the competitiveness of domestic exports in the foreign markets.
2. increases the foreign value of the domestic currency
3. improves the trade balance
Which of the above statements is/are correct?
(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3

Answer - A
EXTERNAL SECTOR OF INDIA
Q.2) Consider the following: (UPSC 2021)
1. Foreign currency convertible bonds
2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
(a) 1, 2 and 3
(b) 3 only
(c) 2 and 4
(d) 1 and 4

Answer - A
EXTERNAL SECTOR OF INDIA
Q.3) With reference to the international trade of India at present, which of the
following statements is/are correct? (UPSC 2020)
1. India's merchandise exports are less than its merchandise imports.
2. India's imports of iron and steel, chemicals, fertilisers and machinery have
decreased in recent years.
3. India's exports of services are more than its imports of services.
4. India suffers from an overall trade/current account deficit.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 4 only
(c) 3 only
(d) 1, 3 and 4 only
Answer - D
EXTERNAL SECTOR OF INDIA
Q.4) In the context of India, which of the following factors is/are contributor/
contributors to reducing the risk of a currency crisis? (UPSC 2019)
1. The foreign currency earnings of India’s IT sector
2. Increasing the government expenditure
3. Remittances from Indians abroad
Select the correct answer using the code given below.
(a) 1 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3

Answer - B
EXTERNAL SECTOR OF INDIA
Q.5) Consider the following statements: (UPSC 2019)
1. Most of India’s external debt is owed by governmental entities.
2. All of India’s external debt is denominated in US dollars.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - D
EXTERNAL SECTOR OF INDIA
Q.6) Consider the following statements: (UPSC 2019)
1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the
prices of the same basket of goods and services in different countries
2. In terms of PPP dollars, India is the sixth largest economy in the world.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - A
EXTERNAL SECTOR OF INDIA
Q.7) India enacted the Geographical Indications of Goods (Registration and
Protection) Act, 1999 in order to comply with the obligations to_______________
(UPSC 2018)
(a) ILO
(b) IMF
(c) UNCTAD
(d) WTO

Answer - D
EXTERNAL SECTOR OF INDIA
Q.8) With reference to the ‘National Intellectual Property Rights Policy’, consider
the following statements: (UPSC 2017)
1. It reiterates India’s commitment to the Doha Development Agenda and the
TRIPS Agreement.
2. Department of Industrial Policy and Promotion is the nodal agency for
regulating intellectual property rights in India.
Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - C
EXTERNAL SECTOR OF INDIA
Q.9) In the context of which of the following do you sometimes find the terms
‘amber box, blue box and green box’ in the news? (UPSC 2016)
(a) WTO affairs
(b) SAARC affairs
(c) UNFCCC affairs
(d) India-EU negotiations on FTA

Answer - A
EXTERNAL SECTOR OF INDIA
Q.10) With reference to the International Monetary and Financial Committee
(IMFC), consider the following statements: (UPSC 2016)
1. IMFC discusses matters of concern affecting the global economy, and advises
the International Monetary Fund (IMF) on the direction of its work.
2. The World Bank participates as an observer in IMFC’s meetings.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - C
EXTERNAL SECTOR OF INDIA
Q.11) With reference to Indian economy, consider the following statements:
(UPSC 2015)
1. The rate of growth of Real Gross Domestic Product has steadily increased in
the last decade.
2. The Gross Domestic Product at market prices (in rupees) has steadily increased
in the last decade.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer - B
EXTERNAL SECTOR OF INDIA
Q.12) There has been a persistent deficit budget year after year. Which of the
following actions can be taken by the government to reduce the deficit? (UPSC
2015)
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Expanding industries
Select the correct answer using the code given below.
(a) 1 and 3 only
(b) 2 and 3 only
(c) 1 only
(d) 1, 2, 3 and 4
Answer - A
EXTERNAL SECTOR OF INDIA
Q.13) Convertibility of rupee implies —-- (UPSC 2015)
(a) being able to convert rupee notes into gold
(b) allowing the value of rupee to be fixed by market forces
(c) freely permitting the conversion of rupee to other currencies and vice versa.
(d) developing an international market for currencies in India.

Answer - C
EXTERNAL SECTOR OF INDIA
Q.14) The problem of international liquidity is related to the non availability of
____________ (UPSC 2015)
(a) goods and services
(b) gold and silver
(c) dollars and other hard currencies
(d) exportable surplus

Answer - C
EXTERNAL SECTOR OF INDIA
Q.15) With reference to the Union Budget, which of the following is/are covered
under Non-Plan Expenditure ? (UPSC 2014)
1. Defence expenditure
2. Interest payments
3. Salaries and pensions
4. Subsidies
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1, 2, 3 and 4
(d) None

Answer - C
EXTERNAL SECTOR OF INDIA
Q.16) With reference to Balance of Payments, which of the following constitutes/
constitute the Current Account ? (UPSC 2014)
1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 4

Answer - C
EXTERNAL SECTOR OF INDIA

Q.17) Which of the following constitute a Capital Account? (UPSC 2013)

1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment
Select the correct answer using the codes given below:
(a) 1, 2 and 3
(b) 1, 2 and 4
(c) 2, 3 and 4
(d) 1, 3 and 4

Answer - B
EXTERNAL SECTOR OF INDIA

Q.18) Which one of the following groups of items is included in India’s foreign-
exchange reserves? (UPSC 2013)
(a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign
countries
(b) Foreign-currency assets, gold holdings of the RBI and SDRs
(c) Foreign-currency assets, loans from the World Bank and SDRs
(d) Foreign-currency assets, gold holdings of the RBI, and loans from the World
Bank

Answer - B
EXTERNAL SECTOR OF INDIA

Q.19) Which of the following would include Foreign Direct Investment in India?
(UPSC 2012)
1. Subsidiaries of foreign companies in India.
2. Majority foreign equity holding in Indian companies.
3. Companies exclusively financed by foreign companies.
4. Portfolio investment.
Select the correct answer using the codes given below:
(a) 1, 2, 3 and 4
(b) 2 and 4 only
(c) 1 and 3 only
(d) 1, 2 and 3 only
Answer - D
EXTERNAL SECTOR OF INDIA

Q.20) Consider the following statements: (UPSC 2012)

The price of any currency in international market is decided by the
1. World Bank
2. Demand for good/services provided by the country concerned
3. Stability of the government of the concerned country
4. Economic potential of the country in question.
Which of the statements given above are correct?
(a) 1, 2 3, and 4
(b) 2 and 3 only
(c) 3 and 4 only
(d) 1 and 4 only
Answer - B
EXTERNAL SECTOR OF INDIA

Q.21) In terms of economy, the visit by foreign nationals to witness the XIX
common
Wealth Games in India amounted to_______ (UPSC 2011)
(a) Export
(b) Import
(c) Production
(d) Consumption

Answer - A
EXTERNAL SECTOR OF INDIA

Q.22) Consider the following actions which the government can take: (UPSC
2011)
1. Devaluing the domestic currency.
2. Reduction in the export subsidy.
3. Adopting suitable policies which attract greater FDI and more funds from FIIs.
Which of the above action/actions can help in reducing the current account
deficit?
(a) 1 and 2
(b) 2 and 3
(c) 3 only
(d) 1 and 3
Answer - D
EXTERNAL SECTOR OF INDIA
Q.23) Regarding the International Monetary Fund, which one of the following
statements is correct? (UPSC 2011)
(a) It can grant loans to any country
(b) It can grant loans to only developed countries
(c) It grants loans to only member countries
(d) It can grant loans to the central bank of a country

Answer - C
EXTERNAL SECTOR OF INDIA
Q.24) Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII)
are
related to investment in a country. Which one of the following statements best
represents an important difference between the two? (UPSC 2011)
(a) FII helps bring better management skills and technology, while FDI only brings
in capital
(b) FII helps in increasing capital availability in general, while FDI only targets
specific sectors
(c) FDI flows only into the secondary market, while FII targets primary market
(d) FII is considered to be more stable than FDI

Answer - B