Download Repo (Repurchase) Rate Repo rate is the rate at which banks

Repo (Repurchase) Rate
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand
they are facing for money (loans) and how much they have on hand to lend.
If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate;
similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo Rate
This is the exact opposite of repo rate.
The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the
reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking
system
If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a
lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is
absolutely risk free) instead of lending it out (this option comes with a certain amount of risk)
Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of
excess money into the economy
Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while
repo signifies the rate at which liquidity is injected.
Bank Rate
This is the rate at which RBI lends money to other banks (or financial institutions .
The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up,
long-term interest rates also tend to move up, and vice-versa.
Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest.
If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing
money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own
lending rates to ensure it continues to make a profit.
Call Rate
Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Si
nce banks need funds on a daily basis, they lend to and borrow from other banks according to their daily
or short-term requirements on a regular basis.
CRR
Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to
keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is
totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by
tying their hands in lending money
SLR
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a
part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the bank’s
leverage in pumping more money into the economy.
Category: Doubts and questions
Why does the RBI not print more money?
If the RBI simply prints more money, that will mean that the people, with extra money will demand
more goods and service,s which in turn, will increase the prices of those goods and services which will
increase the amount of inflation in the country.
Comment
Impact of Capital Inflows on Exchange Rate, Inflation and Stock Market Index
When more capital flows into the country, the currency appreciates in value and the inflation
increases.
This is because as the the supply of more dollars in the economy increases, it is bound to decrease its
price. So if one dollar used to cost 40 rupees, then if the supply of dollars will increase, the price of
dollar will go down to say 39 rupees.
Also with more dollar flowing into the market, there will be too much money chasing too few goods
and services, i.e. excess demand of goods and services, which will increase inflation.
Also, when more money flows into the country in the form if FII, that increases the investment into
the securities of companies listed on the stock exchanges. This leads to appreciation of the value of
the securities as a result of increase in their demand. And as the value of individual or important
securities increase, the stock market index as a whole will also rise accordingly.
VAT and refund issues
The meaning is explained as follows:
Refund of any tax is the refund of overpaid taxes from the government to the taxpayer. Refunds are due
when the taxpayer has been over-withholding or has overestimated income or underestimated
deductions, exemptions, and credits.
About VAT
VAT works on the principle that when raw material passes through various manufacturing stages and
manufactured product passes through various distribution stages, tax should be levied on the ‘Value
Added’ at each stage and not on the gross sales price. This ensures that same commodity does not get
taxed again and again and there is no cascading effect. In simple terms, ‘value added’ means difference
between selling price and purchase price. VAT avoids cascading effect of a tax.
Sales Tax is a State subject. Over the period, many distortions had come in taxation due to unhealthy
competition among States by giving sales tax incentives and ‘tax rate war’ started to attract more
revenue to State.
Introduction of VAT is difficult in India as sales tax is a State Subject and sales tax on sale within the State
can be levied only by respective State Government. Even in respect of Central Sales Tax (CST), though
the tax is levied under Central Act, the CST is collected in the State from which goods are sold, i.e.
originating State and CST so collected is retained by that State only. The CST amount never goes to
Union Government.
After lot of persuasion by Central Government, all States ultimately agreed to introduce State Level sales
tax VAT at the conference of Chief Ministers all States at Delhi in November, 1999. A high power
committee consisting of senior representatives of all 29 States was constituted under Chairmanship of
Dr. Asim Dasgupta, Finance Minister, West Bengal. It was decided to introduce Sales tax VAT w.e.f.
1-4-2002. It was delayed on several occasions and finally, all State Governments (except UP, Tamil Nadu
and few other States) introduced State Sales Tax VAT w.e.f. 1-4-2005.
States ruled by BJP like Gujarat, Chhattisgarh, Jharkhand, Madhya Pradesh and Rajasthan had not
introduced VAT. They have introduced Vat w.e.f. 1-4-2006. Tamilnadu has introduced Vat on 1-1-2007.
Uttar Pradesh and Uttaranchal also have not introduced VAT
In this article, it is written that the exporters are not happy about the Central government’s idea to
increase the rate of VAT, especially because they have not even received their due refunds from the
respective state governments. It highlights that apart from Andhra Pradesh, Gujarat, Tamil Nadu, Punjab
and Maharashtra, non-payment of VAT refunds to exporters remains an worry in majority of states,
especially in West Bengal and Orissa.
As shown in our article on the rise of the rupee, exporters are already under the hammer because of
currency appreciation. Now, if the VAT rate itself is increased, given that due refunds haven’t seen the
light of the day, it will prove to be very harsh on the exporter community. As suggested in the article, an
increase in the tax rate should also be accompanied by a corresponding mandatory refund requirement.
And in this the Centre should take the initiative by punishing the defaulter states by withholding plan
allocations.
Fed Cut and Impact on Indian Economy
Interest Rates and their Role
A Basis Point is 1/100th of of one percent. A Basis Point is generally used in reference to interest rates
and additions or subtractions done to interest rates. To put it simply if a central bank changes
interests rates by 75 basis points, it means that the change is of 0.75%.
Now, let us see what are interest rates. Suppose you have a certain amount of money. Now you want
to lend it to someone. To do that, u have to let go of some things you could have done with that
money. Eg – with Rs 10,000 you might have wanted to add some accessory to your PC, but now since
you will lend that money, you will have to forget it for some time. So you will demand some price of
it, won’t you? This price is the interest rate which the lender gets from the borrower. If you charge an
interest rate of 10% on Rs. 10,000 annually, you will get an additional interest payment of Rs.
1,00o(10% of Rs. 10,000).
Now think of a lender and borrower in an economy. Where does the money come from? In India, it is
the Reserve Bank of India that prints money. It gives that money to banks who further lend it to
end-consumers like you and me. That is how money simply flows in an economy. Now RBI gives the
money to banks at a certain?? – yes, interest rate. The banks in turn lend it to consumer at a higher
interest rate to earn profit.
Now a central bank has to keep in balance a lot of things. It has to keep prices in an economy under
control – i.e. inflation, It has to maintain a favourable Exchange Rate, and finally it has to to maintain
all the conditions of growth intact.
It does it through many instruments, one of which is controlling interest rates. Now, what reductions
or increases of interest rates do to an economy. Lets have a look.
If you INCREASE the interest rates, that means the money in the economy will be available at a
HIGHER cost. This means that the demand of money will be LESSER, because, as a borrower, one will
have to shell out extra money as interest. Simple rule of demand. When price of anything increases,
its demand decreases. So people will demand lesser money, (simply put, people will have lesser
money in their hands) which will in turn, reduce the demand of general goods and services in the
economy. And as an effect, the prices of these goods and services decrease because of the lower
demand.
So the cycle goes like this:
Increase Interest Rate – Money becomes costlier-Lower demand of money-Lower demand of goods
and services- Lower prices of goods and services- Lower inflation
Also, higher interest rates will attract investment in the form of capital flows into a country which will
have its effects. We will come to that later
Now, a central bank would INCREASE interest rate when a country is facing high inflation. Pretty
simple isn’t it?
On the other hand – if you DECREASE interest rates, money in an economy would become CHEAPER.
So people will demand MORE money and thus MORE goods and services, which will increase prices of
goods and services i.e. increase inflation.
This cycle goes:
Decrease Interest Rate – Higher demand of money-Higher demand of goods and services- Higher
prices of goods and services- Higher inflation
Again lower interest rates would make the investment go out of the economy in the form of capital
outflows. And again, a central bank would reduce interest rates when the economy is in the state of
deflation or lower activity in the economy. I hope it clears the concepts. Any doubts, shoot a question.
Fed Cut and its impact
Now that we have understood what interest rates are and why do central banks reduce or increase
them, we come to your specific question of Fed cuts and its implication on us.
Well, Fed is the central bank of United States (short form of Federal Reserve). A fed cut would mean
that the Federal Reserve has cut the interest rate.
Now why has fed done so? This is because the US economy is in a state of slowdown. Prices are
falling, so is dollar and the consumption demand in the economy is falling. To mend this situation, the
Federal Reserve has taken this step to reduce the interest rate. This is expected to increase the
demand for money and increase the demand for consumption of goods and services and help the
economy fight recession/slowdown.
As far as impact on us in concerned, I would bring in the discussion of capital flows that we touched
upon earlier.
Now in the global economy, there are investors who have money with them and they are looking at
investment options all around the world. So they invest where they see higher returns. Now picture
this:
In the US, interest rates are lower. In India, interest rates are higher. As an investor, if you have two
options- in the U.S you investment fetches you 4% and in India, you get 9%. Where would you invest?
Yes, of course –India
So what is happening is that a lot of dollar is flowing into India – which is doing two things – Raising
the value of the rupee in dollar terms and of course our stock market indexes are rising.
So that, in a nutshell, is the impact on us. But in the long term, the impact on India will depend upon
RBI’s response. The RBI has to keep its own things in mind- like Inflation. If it keeps the rate intact,
capital inflows will increase because the rates in the US are falling.
And of course, capital inflows have their own impact on exchange rate and inflation etc.
what is rbi and function?
1--RBI IS THE CENTRAL BANK OF INDIA
2--ESTABLISHMENT---1 APRIL 1935
3--HEAD OFFICE---MUMBAI
4--NATIONALISED IN---1949
5--CURRENT GOVERNOR--DUVVURI SUBBARAO
6--WORKS ON MINIMUM RESERVE SYSTEM---MINIMUM RESERVE OF RS 200 CRORE
WHICH INCLUDES==RS 115 CRORE GOLD RESERVE AND RS 85 CRORE GOVERNMENT SECURITIES
The functions of the Reserve Bank today can be categorised as follows:
1- Monetary policy
2- Regulation and supervision of the banking and non-banking financial
institutions, including credit information companies
3- Regulation of money, forex and government securities markets as also
certain financial derivatives
4- Debt and cash management for Central and State Governments
5- Management of foreign exchange reserves
6- Foreign exchange management—current and capital account management.
7- Banker to banks
8- Banker to the Central and State Governments
9- Oversight of the payment and settlement systems
10- Currency management
11- Developmental role
12- Research and statistics
what is bank?
BANK IS A FINANCIAL INSTITUTION WHICH ACCEPTS DEPOSITS AND PROVIDE LOANS WITH THE
FACILITY OF CHEQUES,DEMAND DRAFT,ETC
NOW BROADLY BANKS ARE OF TWO TYPES:
1--PUBLIC SECTOR BANK
2--PRIVATE SECTOR BANK
PUBLIC SECTOR BANK---
BANKS IN WHICH GOVERNMENT HOLDING IS ABOVE 51% IS CALLED PUBLIC SECTOR BANK.
PRIVATE SECTOR--IN WHICH GOVERNMENT HOLDING IS UPTO 49%.
cheque and types:
Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the
person who has deposited money with the banker, requiring him to pay on demand a certain sum of
money only to or to the order of certain person or to the bearer of instrument
TYPES OF CHEQUES----
1. Bearer Cheque
When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called
a bearer cheque. The bearer cheque is payable to the person specified therein or to any other else who
presents it to the bank for payment. However, such cheques are risky, this is because if such cheques
are lost, the finder of the cheque can collect payment from the bank.
2. Order Cheque
When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word
"or order" is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is
payable to the person specified therein as the payee, or to any one else to whom it is endorsed
(transferred).
3. Uncrossed / Open Cheque
When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque". The
payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer
cheque or an order one.
4. Crossed Cheque
Crossing of cheque means drawing two parallel lines on the face of the cheque with or without
additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque cannot be
encashed at the cash counter of a bank but it can only be credited to the payee's account.
5. Anti-Dated Cheque
If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as
"anti-dated cheque". Such a cheque is valid upto six months from the date of the cheque.
6. Post-Dated Cheque
If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A post
dated cheque cannot be honoured earlier than the date on the cheque.
7. Stale Cheque
If a cheque is presented for payment after six months from the date of the cheque it is called stale
cheque. A stale cheque is not honoured by the bank.
what are types of capital?
The following different terms are used to denote different aspects of share capital:-
1.Nominal, authorised or registered capital ---means the sum mentioned in the capital clause of
Memorandum of Association. It is the maximum amount which the company raise by issuing the
shares and on which the registration fee is paid. This limit is cannot be exceeded unless the
Memorandum of Association is altered.
2.Issued capital ---means that part of the authorised capital which has been offered for subscription to
members and includes shares alloted to members for consideration in kind also.
3.Subscribed capital ----means that part of the issued capital at nominal or face value which has been
subscribed or taken up by purchaser of shares in the company and which has been alloted.
4.Called-up capital---- means the total amount of called up capital on the shares issued and subscribed
by the shareholders on capital account. I.e if the face value of a share is Rs. 10/- but the company
requires only Rs. 2/- at present, it may call only Rs. 2/- now and the balance Rs.8/- at a later date. Rs.
2/- is the called up share capital and Rs. 8/- is the uncalled share capital.
5.Paid-up capital---- means the total amount of called up share capital which is actually paid to the
company by the members.
In India, there is the concept of par value of shares. Par value of shares means the face value of the
shares. A share under the Companies act, can either of Rs10 or Rs100 or any other value which may be
the fixed by the Memorandum of Association of the company. When the shares are issued at the price
which is higher than the par value say, for example Par value is Rs10 and it is issued at Rs15 then Rs5
is the premium amount i.e, Rs10 is the par value of the shares and Rs5 is the premium. Similarily when
a share is issued at an amount lower than the par value, say Rs8, in that case Rs2 is discount on shares
and Rs10 will be par value.