Monday, June 18, 2012

Financial/Economic Structure Of India

Financial/Economic Structure Of India:

Reserve Bank Of India:

Every financial activity in India takes through reserve bank of India.Reserve bank responsible for currency issuing and printing.Reserve bank is a monetary and regulatory body.Reserve bank of India plays a key role for development of the nation.Reserve bank of India is banker's bank.If we look into structure of reserve bank they lend money for bank based on rates and norms.Commercial bank in exchange to loan from reserve bank a security as to maintained in form of gold reserve.

CRR Rate in India:

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.

Relation between Inflation and Bank interest Rates:

Now a days, you might have heard lot of these terms and usage on inflation and the bank interest rates. We are trying to make it simple for you to understand the relation between inflation and bank interest rates in India.
Bank interest rate depends on many other factors, out of that the major one is inflation. Whenever you see an increase on inflation, there will be an increase of interest rate also.

What is Inflation?

Inflation is defined as an increase in the price of bunch of Goods and services that projects the Indian economy.Inflation means in common man term as price rise in essential commodity,when there is a shortage in money for goverment.An increase in inflation figures occurs when there is an increase in the average level of prices in Goods and services. Inflation happens when there are less Goods and more buyers, this will result in increase in the price of Goods, since there is more demand and less supply of the goods.

Statutory Liquidity Ratio

SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit.

How is SLR determined?

SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. .

What is the Need of SLR?

With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds..

Repo rate

Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

What is a Reverse Repo Rate?
How will it affect the Bank Loan interest rates?

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.
Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man.

Gross Domestic Product(GDP) Mean?

Gross domestic product (GDP) refers to the market value of all officially recognized final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living.

How to calculate GDP?

A common equation for GDP calculation is: GDP = Consumption + Investment + Exports - Imports. Economists (since Keynes) have preferred to split the general consumption term into two parts: private consumption and public sector spending. Therefore, the standard GDP formula is expressed as GDP = Private Consumption + Government + Investment + Net Exports (or simply GDP = C + I + G + NX) where C is private consumption or consumer expenditure, I is business investments, G is government expenditure, NX is gross exports - gross imports. For calculation of GDP, net interest expenses in financial sector are added to GDP.

Gross National Product(GNP) Mean?

Gross National Product (GNP) is the market value of all products and services produced in one year by labour and property supplied by the residents of a country.
Difference Between GDP and GNP:

ex;-TCS has a branch in U.S mean,the branch add to GDP of U.S but not to GNP of U.S.Since TCS an Indian Company but U.S. branch not contribute to GDP of India but Makes to GNP of India.

Gross National Income(GNI) Mean?

The GNI consists of: the personal consumption expenditures, the gross private investment, the government consumption expenditures, the net income from assets abroad (net income receipts), and the gross exports of goods and services, after deducting two components: the gross imports of goods and services, and the indirect business taxes. The GNI is similar to the gross national product (GNP), except that in measuring the GNP one does not deduct the indirect business taxes.

Net National Income(NNI) Mean?

Net national income (NNI) is an economics term used in national income accounting. It can be defined as the net national product (NNP) minus indirect taxes. Net national income encompasses the income of households, businesses, and the government.

How to calculate NNI?

NNI = C + I + G + (NX) + net foreign factor income - indirect taxes - depreciation
    C = Consumption
    I = Investments
    G = Government spending
    NX = net exports (exports minus imports)

Exchange Rate or Currency Rate Mean?

Exchange rate:-between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency.Its determined based on the demand for the currency in the International market(Its based on the export product of the nation)     

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