Economy Tidbits

Full-reserve banking, also known as 100% reserve banking, is a system where banks keep all customer deposits in their vaults. It differs from fractional-reserve banking, in which banks may lend funds on deposit, while fully reserved banks would be required to keep the full amount of each customer’s demand deposits in cash, available for immediate withdrawal.Currently, no country in the world requires full-reserve banking. The Cash Reserve Ratio (CRR) is applicable to time deposits (also known as term deposits) held by banks in addition to demand deposits. The CRR is the percentage of a bank’s total net demand and time liabilities that is required to be maintained as cash reserves with the central bank. On 10th August 2023, following the announcement of the monetary policy and the demonetization of Rs 2000 notes, the RBI declared that banks would be required to maintain an Incremental Cash Reserve Ratio (I-CRR) of 10% on the increase in their Net Demand and Time Liabilities (NDTL). The RBI introduced the I-CRR as a temporary measure to manage excess Liquidity in the banking system.

The money multiplier is the ratio of the money supply to the monetary base. It can also be defined as the amount of broad money that banks generate with each rupee of reserves or base money. = M3/M0 = 1/reserve ratio of bank (ref: https://medium.datadriveninvestor.com/are-we-on-the-brink-of-boom-time-the-money-multiplier-says-no-32b4c269b778)

Through standing deposit facility (SDF), the RBI sucks out excess liquidity in the banking system as part of Liquidity Adjustment Facility (LAF) corridor. Through the marginal standing facility (MSF), RBI supplies liquidity when conditions are challenging. Longwith Repo & RR rates, it forms LAF corridor.

When RBI sucks liquidity as part of OMOs, it is called MSS. When RBI releases liquidity in very large quantity as part of OMOs, it is called QE.

Opn Twist : RBI wants to lower interest rates so that corporates can borrow cheaply and help in growth of nation. So RBI decreases yield of long term bonds (10 yr Gsecs) by buying them profusely. This yield directly dictates banks’ lending rates ! Thus bond yield curve is flattened somewaht.

By borrowing short-term funds at lower interest rates and lending them out as long-term loans with higher interest rates, banks earn a profit. So banks don’t usually borrow long term (exception: LTRO) RBI earns profit in a different way called seigniorage (Ref: https://www.darashaw.com/wp-content/uploads/2018/12/Seigniorage.pdf )

The Service Area Approach (SAA) is a program introduced by the Reserve Bank of India (RBI) in 1989 to promote the orderly development of rural and semi-urban areas. The SAA assigns each branch of a scheduled commercial bank, including Regional Rural Banks (RRBs), to serve a defined area of 15–25 villages

Labeling is compulsory for certified seeds in India, but seed certification is voluntary.

Qualitative monetary policy : RBI can mandate Loan to Value (LTV) for a gold-loan, home loan, auto loan or business loan etc. so a Bank/NBFC can’t lend more than x% of the value of asset. Then , Credit Rationing is the RBI_mandated cap on loans an individual can take in a categpory.

Section 35A of the 1949 Banking Regulation Act gives the Reserve Bank of India (RBI) the power to give directions to banks. The RBI can take action to prevent a banking company’s affairs from being conducted in a way that is detrimental to the interests of the depositors or the banking company itself. It was imposed on PayTM Payments bank recently.

Non-banking financial companies (NBFCs) offer financial services and products. NBFCs perform functions similar to banks, such as lending and making investments. However, NBFCs are not banks and cannot accept deposits into savings and demand deposit accounts (only time deposits in NBFCs-D). Between NBFC & Bank, we have DFIs/AIFIs which are are specialized banks or subsidiaries that help develop the private sector in developing countries. DFIs are usually majority-owned by national governments and get their capital from national or international development funds. There are 5 DFIs in India: SIDBI, NABARD, NHB, EXIM Bank, NABFID. Each institution specializes in providing financial services tailored to the needs of specific sectors. Eg. MUDRA Bank (orig. an NBFC) (it refinances loans to other financial institutions)is fully owned by SIDBI. Eg. DHFL, a HFC nbfc, is privately owned but was regulated by NHB till 2019 (now by RBI directly). (Ref: https://edukemy.com/blog/all-india-financial-institutions-aifis-upsc-economy-notes/)

Earlier, Cooperative banks have long been under dual regulation by the state Registrar of Societies and the RBI. The changes to The Banking Regulation Act approved by Parliament in September 2020, brought cooperative banks under the direct supervision of the RBI. The amended law has given RBI the power to supersede the board of directors of cooperative banks after consultations with the concerned state government. Earlier, it could issue such directions only to multi-state cooperative banks. Also, urban cooperative banks will now be treated on a par with commercial banks. And a cooperative bank can, with prior approval of the RBI, issue equity shares to anyone. This essentially means non-members can become shareholders of the bank, and this will allow the RBI to merge failing banks quickly. It can also issue bonds with maturity of not less than 10 years.

In FY24, basmati rice exports boomed to record 50 lac ton even as export of non-basmati rice has slid below 100 lac ton. This shouldn’t surprise, as the Centre has banned exports of all white non-basmati rice. Only parboiled non-basmati shipments are being permitted now, that too while being subjected to a 20% duty. Traditional tall basmati varieties — the likes of Taraori (HBC-19), Dehraduni (Type-3), CSR-30 and Basmati-370 — were low-yielding, producing barely 10 quintals of paddy (rice with husk) per acre. Then IARI released high yielding PB series since 1989. Basmati rice is grown only in India and Pakistan. Pakistan predominantly exports Super Basmati, a high-yielding variety (similar to IARI’s PB-1). India enacted the Protection of Plant Varieties and Farmers’ Rights Act in 2001. The IARI-bred improved basmati varieties are all registered under this Act, which allows only Indian farmers to sow, save, re-sow, exchange, or share the seed/grain produced from them. However, even they cannot violate the rights of the breeder — in this case, IARI — by selling the seeds of the protected varieties in branded (packaged and labelled) form. Moreover, the IARI varieties are notified under the Seeds Act, 1996, which allows their cultivation only in the officially demarcated Geographical Indication (GI) area of basmati rice within India. This covers seven states: Punjab, Haryana, Himachal Pradesh, Delhi, Uttarakhand, Uttar Pradesh (west) and two districts of Jammu & Kashmir (Jammu and Kathua). The sale of seeds and cultivation of the above protected basmati varieties in Pakistan would arguably qualify as an intellectual property rights (IPR) violation, which India can raise in relevant bilateral forums and at the World Trade Organisation.

2 imp. money market instruments : Commercial bills/papers are short-term UNSECURED debt instruments issued by corporations to raise funds. CDs issued by banks are similar to FDs and are ideal for short-term investments because they offer a higher interest rate than savings accounts.

It is reported that RBI’s T-bills offer better returns than Bank FDs.

India signed an agreement with the four-nation European Free Trade Association (EFTA), comprising Iceland, Liechtenstein, Norway and Switzerland in March 2024, to boost FDI into India and reduce import duties of gold from switzerland. India presently has trade deficit with EFTA countries.

Hard currency is a stable and reliable currency that is issued by a government and widely accepted around the world. Soft currency is an unstable currency that is unconvertible, fluctuates erratically, and/or depreciates against other currencies.

International liquidity is the resources available to a country’s monetary authorities to finance balance of payments deficits, eg.dollars/forex.

Both SEZs and NIMZs originated under the SEZ Act of 2005. SEZs focus on promoting exports, while NIMZs focus on industrial growth and employment generation. NIMZs are larger in area than SEZs. SEZs focus on a wider range of activities, while NIMZs focus on manufacturing. SEZs are demarcated enclaves outside Customs jurisdiction. Developers can apply to the Indian Board of Approval to establish an SEZ where one currently doesn’t exist.(eg. NOIDA SEZ) (Ref: https://www.tradecommissioner.gc.ca/india-inde/special_economic_zones-zones_economiques_speciales.aspx?lang=eng)

EOUs (Export Oriented Units) are established under the provisions of the Foreign Trade (Development and Regulation) Act, 1992, and the Export Import Policy. And Regulated by the Directorate General of Foreign Trade (DGFT).

The RoDTEP scheme, was announced in January 2021, rebates various central, state, and local duties, taxes, and levies that are not refunded under other duty remission schemes. The RoDTEP scheme replaced the WTO-incompatible MEIS scheme. The RoDTEP scheme’s primary goal is to refund taxes and duties that are not rebated under any other scheme. Post 2024, RoDTEP scheme also covers SEZs, EOUs, and exporting firms who are already using the AA scheme.

CEPAs aim to lower trade barriers, while FTAs aim to eliminate them. A CEPA is more comprehensive and ambitious than an FTA because it includes services, investment, IPR, government procurement, disputes, and regulatory aspects of the trade. An FTA, in contrast, focuses only on goods.

A 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—without a service fee or economic reform conditions. Initially, member nations’ reserve tranches are 25% of their quota, but this position can change according to any lending that the IMF does with its holdings of the member’s currency. The reserve tranches that countries hold with the IMF are considered their facilities of first resort, meaning they will tap into them before seeking a formal credit tranche that charges interest.

India Club provides insurance to ships operating in Indian coasts and waterways.

Qatar is the largest exporter of LNG and India (Petronet LNG) imports 50% of its LNG from Qatar. India has heavy trade imbalance with Qatar.

Gresham’s law and Thiers’ law (Ref: https://www.thehindu.com/specials/text-and-context/greshams-law-what-happens-when-governments-fix-currency-exchange-rates/article67296093.ece.)

Demand pull inflation may be addressed through monetary tightening or fiscal measures to reduce aggregate demand. Cost push inflation may be addressed through supply-side policies to reduce production costs or improve supply.

Stagflation is an exception to Phillips curve as both inflation and unemployment coexist. So Philips curve appears to be true only in the short-term.

WPI inflation is seen in -ve territory for most of FY24 due to 2 reasons:

1. Base effect compared with FY23 & FY22.
2. Global deflation in “manufactured products” and “fuel & power” components over most of FY24 which make up ~77% of WPI. CPI however was influenced by food inflation which is 50% of CPI & hence was positive throughout (infact>5%) (Ref: https://in.investing.com/economic-calendar/indian-wpi-inflation-564 , https://www.statista.com/statistics/1361583/india-change-in-cpi-inflation-rate/)

Gross Fixed Capital Formation (almost same as investment expdt)= (machinery + equipment + building + cultivated biological resources + intellectual property) + Valuable Metals + Change in stock/inventory

Investment expdt is money spent on capital goods, or goods used in the production of capital, goods, or services, “so long as the good stays within the country” (so exports excluded, imports included). Investment expdt should not be confused with investment, which refers to the purchase of financial instruments such as stocks, bonds, and derivatives.

Sec 47 of RBI Act talks about surplus transfer to GoI