1. CASH RESERVE RATIO Cash Reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. The amount of which shall not be less than three per cent of the total of the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly basis and RBI is empowered to increase the said rate of CRR to such higher rate not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL) under the RBI Act, 1934. 2. STATUTORY LIQUIDITY RATIO In terms of Section 24 (2-A) of the B.R. Act, 1949 all Scheduled Commercial Banks, in addition to the average daily balance which they are required to maintain in Continue reading
Indian Economy
Effects of Inflation on Different Groups of Society
It is true that in times of general rise in the price level, if all groups of prices, such as agricultural prices, industrial prices, prices of minerals, wages, rent and profit rise in the same direction and by the same extent, there will be no net effect on any section of people in the community. For example, if the prices of goods and services, which a worker buys rises by 50 per cent and if the wage of the worker also rises by 50 per cent then there is no change in the real income of the worker, ie., his standard of living will remain constant. However, in practice, all prices do not move in same direction and by same percentage. Hence, some classes of people in the community are affected by inflation more favorably than others. This is explained as follows: Producing Classes: All producers, traders and speculators gain Continue reading
Evolution of Exchange Rate System in India
The rupee was historically linked i.e. pegged to the pound sterling. Earlier, during British regime and till late sixties, most of India’s trade transactions were dominated to pound sterling. Under Bretton Woods system, as a member of IMF Indian declared its par value of rupee in terms of gold. The corresponding rupee sterling rate was fixed 1 GBP = RS 18. When Bretton Woods system bore down in August 1971, the rupee was de-linked from US $ and the exchange rate was fixed at 1 US $ = Rs 7.50. Reserve bank of India, however, remained pound sterling as the currency of intervention. The US $ and rupee pegging was used to arrive at rupee-sterling parity. After Smithsonian Agreement in December 1971, the rupee was de-linked from US $ and again linked to pound sterling. This parity was maintained with a band of 2.25%. Due to poor fundamental pound got Continue reading
Capital Account Convertibility and India
According to the Tarapore Committee provided a succinct and subtle definition: Capital Account Convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world. IMF’s Role in Capital Account Convertibility Convertibility is an IMF clause that all the member countries must adhere to in order to work towards the common goals of the organization. However CONVERTIBILITY per se can be looked into from various perspectives and incorporated accordingly by the member nations. An economy can choose to be (a) partially convertible on CURRENT ACCOUNT (b) partially convertible on CAPITAL ACCOUNT (c) fully convertible on current account and (d) fully convertible on capital account. It is important to state here Continue reading
Role of Development Banks in Indian Economy
Capital Formation: The significance of Development Finance Institutions or DFIs lies in their making available the means to utilize savings generated in the economy, thus helping in capital formation. Capital formation implies the diversion of the productive capacity of the economy to the making of capital goods which increases future productive capacity. The process of Capital Formation involves three distinct but interdependent activities, viz., saving financial intermediation and investment. However, poor country/economy may be, there will be a need for institutions which allow such savings, as are currently forthcoming, to be invested conveniently and safely and which ensure that they are channeled into the most useful purposes. A well-developed financial structure will therefore aid in the collections and disbursements of investible funds and thereby contribute to the capital formation of the economy. Indian capital market although still considered to be underdeveloped has been recording impressive progress during the post-interdependence period. Continue reading
Future of Indian Banking System
The interplay between policy and regulatory interventions and management strategies will determine the performance of Indian banking over the next few years. Legislative actions will shape the regulatory stance through six key elements: industry structure and sector consolidation; freedom to deploy capital; regulatory coverage; corporate governance; labor reforms and human capital development; and support for creating industry utilities and service bureaus. Management success will be determined on three fronts: fundamentally upgrading organizational capability to stay in tune with the changing market; adopting value-creating M&A as an avenue for growth; and continually innovating to develop new business models to access untapped opportunities. Through these scenarios, we can paint a picture of the events and outcomes that will be the consequence of the actions of policy makers and bank managements. These actions will have dramatically different outcomes; the costs of inaction or insufficient action will be high. Specifically, at one extreme, the Continue reading