BASICS PART -1
GDP: It in the money value of
all the final goods and services produced within the geographical boundaries of
the country during a given period of time.
GNP: It refers to the money
value of total output or production of find goods and service produced by the
nationals of a country during a given period of time.
GDP Deflator: The ratio of
nominal to real GDP.
GDP Deflator = Nominal GDP/Real
GDP.
Producers Price Index: it is
the cost incurred by the producer in producing single unit in terms of GDP. It
does not include any indirect taxes. It is used as early warming. It is having
effect on the consumer price.
Blue Book: An annual digest
published by the UK office of National Statistics containing the national
income and expenditure statistics of the UK.
PLANNING IN INDIA
Open economy: Capitalist or
mixed/progressive capitalist economy.
Plan Holidays: It refers to a
period which is not covered in any five year plan (period between 1966 to 69
i.e. between 3rd and 4th Five Year Plan).
Inclusive Grown: Faster economic
growth is also transferring into more inclusive growth, both in terms of
employment generations and poverty reduction.
Export Pessimism: It happens
when the government in not confident of getting sufficient amount of exports to
finance its imports. India followed during the earlier days of planning era.
Investment Led Growth: It is
growth of which a major portion of demand comes from investment. India is
facing balanced growth.
Export Led Growth: When exports
are a major reason of growth. China and ASEAN tigers are facing export- led
growth.
ICOR: Incremental Capital
Output Ratio: It refers to the units of capital that have to be employed for
raising one unit of output.
Merit Goods: A commodity, the
consumption of which is regarded as socially desirable irrespective of
consumer's preferences. Governments are readily prepared to suspend consumer's
sovereignty by subsidizing the provision of certain goods and services.
White Goods: White goods are
luxury goods. After the economic reforms consumption of white goods increased
in India, it gives more tax benefit to government.
Wage Goods Strategy: It is a
strategy in which the society gives more importance the production of basic
necessity like food, shelter and health care. It is contrast with heavy
industry.
Competition Act: In 1980, the
aforesaid act was passed to withdraw all such restrictions to that retarded
competition, so as to encourage a better and effective utilization of the
sources and to lower the cost of production and to raise the quality of the
produce.
Washington Consensus: It is
given by John Williamson in 1989. It gives a prescription on various measures
on which developing countries have to take in order to grow in a faster way.
The measure includes fiscal policy reform, monitory policy reforms.
MONEY & BANKING
Credit Control: By credit
control we mean to regulate the volume of credit created by banks in India. It
is the principal function of Reserve Bank of India. The basic objective of
credit control mechanism is to realize both price stability and exchange
stability in the economy. RBI uses two types of methods to control credit: (i)
Quantitative Methods, and (ii) Qualitative Methods.
Quantitative Measures are used
to control the volume of credit or indirectly to control inflationary and
deflationary pressures caused by expansion and contraction of credit. These are
also known as general credit measures. These consist of Bank Rate, Cash Reserve
Ratio, Statutory Liquidity Ratio and Open Market Operations.
Qualitative Measures are used
to control the quantum as well as purpose for which credits are given by banks.
RBI uses measures like Publicity, Rationing of Credit, Regulation of consumer
credit, Moral suasion and Variation in margin requirement for qualitative
credit control.
Bank Rate: Bank rate is the
rate at which the RBI is prepared to buy or rediscount eligible bills of
exchange or other commercial papers. In simple words, bank rate is the rate at
which RBI extends advices (Credit) to commercial banks. A change in the bank
rate will result in a change in the prime lending rate of banks and thus act as
an independent instrument of monetary control. At present it is 6.0%.
Cash Reserve Ratio (CRR): Cash
reserve ratio is the cash parked by the banks in their specified current
account maintained with RBI. In other words, it is the percentage of deposit
(both demand and time deposit) which a bank has to keep with the RBI. RBI is
empowered to vary the CRR between 3% to 15%. The purpose of reducing CRR is to
leave large cash reserve with banks so as to enable them to expand bank credit.
Similarly increasing of CRR means squeezing the cash reserve of the banks and
limits their credit providing capacity. At present CRR is 6.0%.
Statutory liquidity Ratio
(SLR): Statutory liquidity ratio is the liquid assets commercial banks maintain
with the RBI in the form of cash (book value), gold (current market value) and
balances in unencumbered approved securities. At present SLR is 25% of the
total demand and time deposit liabilities of the bank. However, RBI can change
SLR from time to time. Both CRR and SLR reduce or increase the capacity to
expand credit to business and industry. Thus both of these are
anti-inflationary.
Open Market Operations (OMO):
The buying and selling of eligible securities in the money market by RBI for
the purpose of curtailing or expanding the volume of credit. By selling
securities the RBI can absorb funds, and buying the securities can release funds
also into the market. The purpose of OMO is to influence the volume of cash
reserves with the commercial banks and thus influence the volume of loans and
advances they can make to the industrial and commercial sector.
Selective Credit Controls:
Under the Banking Regulation Act 1949, section 21 empowers RBI to issue
directives to the banking companies regarding their advance in order to check
speculation and rising prices. The controls are selective as they are used to
control and check the rising tendency of price and hording of certain
individual commodities of common use. However, while imposing selective
control, RBI takes care that bank credit for production and transportation of
commodities and exports is not affected. These are mainly focused on credit to
traders who use such credit for financing hoarding and speculation. Since
1956-57 RBI is employing this method.
Prime Lending Rate (PLR): It is
rate of interest of which commercial banks lend to their prime high profile
blue chip corporate borrowers. (From 1990’s banks are free to determine PLR).
Repo Rate: Repurchasing option
is traded in this market for a short time periods. Repo is Repurchasing by RBI.
Priority Sector Lending: It is
lending to some particular sector at lower interest rate. RBI orders all public
sector banks to give 18% of credit to priority sector.
Market Stabilization Scheme: It
is a scheme under which RBI buys and sells Government of India securities in
order to control liquidity.
Money in Circulation: Money in
use to finance current transactions as distinct from idle money.
Investment Bank: A Bank that
provides long term fixed capital for industry, generally by taking up shares in
limited companies.
Regional Rural Bank: It was
established in 1975 under the provision of RRB Act 1976, with a view to develop
rural economy.
Lead Banking Scheme: Under this
scheme all the nationalized banks and few private sector banks were allowed
specially and were asked to play the “Lead Role”. The lead banks act as a
leader to bring about co-ordination of cooperative banks, commercial banks and
other financial institutions in their respective demises to bring about rapid
economic development.
Call Money: It is a loan that
is made for a very short period i.e. for a few days only or for duration of a week.
It carries a low rate of interest. In case of a stock exchange market, the
duration of call money may be for a fortnight.
LIBOR: London Inter- Bank
Offered Rate. An interest rate at which banks can bestow funds, in marketable
size, from other banks in London inter- bank market.
MIBOR: Mumbai Inter Banking
Operative Rate.
Capital Deepening: It occurs
when capital to LIBOR ratio increase in a country, it helps in economic
development of the country.
BASEL II: This norms assess the
need for risk capital and replaces the minimum 9% capital adequacy norm under
BASEL-I. BASEL II enables greater transparency and banks will evaluate
themselves.
CAMELS: Capital Adequacy, Asset
Quality, Management, Earnings Liquidity and Systems.
Capital Adequacy Ratio: It is
the ratio of total capital fund of a bank to its risk weighted assets. It is an
indicator of banks financial health.
Asset Reconstruction Company:
Takes over the NPA of banks or financial institutions at cheaper rate,
reconstruct it and sells it and makes profit out of it. This helps in clearing
the balance sheet of banks.
Universal Banking: It is a
banking scheme given by Khan Committee according to which conduction of all
financial activities under one roof by a bank or financial institution. In
other words, this means integration of roles of bank and other development
banks.
Service Area Approach: Under
this scheme, branches of commercial banks were allotted certain specific
semi-urban and rural areas. These branches were made more responsible for
overall development of prescribed areas. It was implemented in 1989.
Merchant Banking: It is an
activity under which a bank take up portfolio management (Banks advising their
clients about management of fund) as well as banker to the issue of the
company.
Greshem’s Law: Bed money (Black
Money) pushes good money (White Money) out of circulation.
Bank of International
Settlement: Based in Switzerland, gives the statement of international monetary
transactions. It is the one which gives CAMELS, BASEL
Demonetization: It takes place,
when the society starts using less of currency for transaction with deepening
of the financial system.
Tied Loan: A loans made on
condition that certain purchases are made from the Lender.
INFLATION
Over Heating of Economy: When
the supply is not able to keep phase with demand, it is as called over heating
of economy. It leads to inflation and shortage goods.
Cost-push Inflation: General
prices of goods and services in the economy rises due to an increase in
production cost. Such types of Inflation are caused by three factors (i) an
increase in wages, (ii) an increase in profit and (iii) imposition of heavy
tax.
Demand- pull inflation: The
most common cause of inflation is the pressure of ever-rising demand on a less
rapidly increasing supply of goods and services. The expansion in aggregate
demand may be the result of rapidly increasing private investment and/or
spending government money for war or for economic development.
Stagflation: Stagflation occurs
when inflation rises while output is either falling or at least not rising.
Structural Inflation: When
there is a short supply the commodity, prices rise rapidly. It is temporary
structure shortage in economy. It is also called bottleneck inflation.
Headline Inflation: It is an
inflation which appears in headlines. It does not reflect the core inflation.
Under Lying Inflation: Measure
of headline inflation after the removal of volatile items.
Core inflation: This
nomenclature is based on the inclusion or exclusion of the goods and services
while calculating inflation.
Hyperinflation (or) Galloping
Inflation: The main feature of Hyper-Inflation is that money looses almost all
of its value. Prices rise to fantastic levels, and the velocity of circulation
becomes enormous. Money looses value so rapidly that people are unwilling to
hold it for more a few moments.
Fiscal Drag: The effect of
inflation upon effective tax rate. In other words, fiscal drag is directly
related to inflation and tax rates.
Inflation Targeting: It is the
goal of RBI, where RBI focuses as its main goal a particular band of inflation.
This helps in expectation building by economic agents.
Administered Price Mechanism:
In which the government decides the price of scarce goods and sell them at
price less then the cost of its purchase and bears the burden.
Phillips Curve: The
relationship between the percentage change of money wage and the level of
unemployed is called as Phillips curve. The lower the unemployment, the higher
will be the rate of change of wages.
Taylor Rule: A simple rule for
setting interest rates with a view to keeping inflation stable.
CAPITAL MARKETS
Zero Coupon Bonds: Zero Coupon
Bonds (also called as pure discount bonds) are bonds that pay no periodic
interest payments or so called ‘Coupens’. Zero coupon bonds are purchased at a
discount from their value at maturity. The holder of a Zero Coupon bond is
entitled to receive a single payment, usually of a specified sum of money at a
specified time in future. Investors earn interest via difference between the
discounted price of the bond and its par (or redemption) value.
Undated Securities: Securities
not bearing a redemption date or option.
Tap Issue: An issue of treasury
bills to government departments and others at a fixed price stand, without
going through the market, as distinct from a tender issue.
Buy Back of Shares: Various
individuals, financial institutions, directors of the company, hold company
shares. This indicates the ownership of the company, when a company is allowed
to buy-back its shares. It means it is increasing its ownership.
Penny Stocks: Penny stocks are
securities or stocks which are sold by smaller new companies. They are
generally sold because companies are seeking money for expansion, basic
operations, and even for the commencement of business.
Participatory notes: These are
notes issued by FIIs and some of the Indian based foreign banks.
GDR/ADR: Global Deposit
Receipts (GDR) are popularly known as Euro issues i.e. shares of Indian
companies sold in the European market. When these shares of Indian companies
are sold in the US capital market they are called as American Deposit Receipts
(ADR).
Black-Sholes Formula: A formula
used to establish a fair price for options in financial markets.
Swap: A transaction in which
securities of a certain value are sold to a buyer in exchange for the purchase
from the buyer of securities having the same value. The purpose being to obtain
an improvement, in the eyes of either of the parties, in the quality of the
security or to anticipate a change in yield. Currency as well as securities are
swapped in this way.
Screen Based Book- where
securities are auctioned through an anonymous screen based system, and the
price of which securities are sold is discovered in screen. This eliminates the
delays, risks and implementation difficulties associated with traditional
procedures.
ESOP: Employee Stock Option.
Market Capitalisation: Total
value of the equity in the present market price is called market
capitalization.
Hedge Funds: They are basically
private investment pools for wealthy, financially sophisticated investors.
Traditionally they have been organized as partnership, with the general partner
managing the fund’s portfolio.
Mutual Funds: Funds set up on
the principal of pooled risk and pooled resources with the purpose of giving
them the benefits of share market without exposing individually to the
volatility of share market.
Venture Capital: Risk capital
is called venture capital.
Sovereign Wealth Fund: It is
state owned fund composed of financial assets such as stocks, bonds, property
or other financial investment.
Futures: Contracts made in a
future market for the purchased or sale of commodities on a specified future
data. Futures provide a convenient mechanism for holding market risk. Future
market forms an important part of many organized commodity exchange or market.
NCDEX: National Commodity
Derivatives Exchange. It is the largest commodity futures exchange.
Forward Market Commission: It
is a regulatory body for commodity futures, and forward trade in India. It was
set up under Forward Contract (Regulation) Act 1952. It’s headquarter is in
Mumbai.
CARE: Credit Analysis and
Research Ltd. It was started in November 1993. It was set up by IDBI.
ICRA: Investment Information
and Credit Rating Agents of India Limited. It was established in 1991. It
primarily rates short, medium and long debt instruments. But, since 1995 it has
been doing equity rating also.
Voting Shares: Equity shares
entitling holders to vote in the election of directors of a company. Normally
all ordinary shares are voting shares, but sometimes a company may create a
class of non-voting ordinary shares.
Tobin Tax: The tax foresighted
by James Tobin. It is a tax that should be imposed on portfolio capitals, so
that when a foreign investor wants to take out this investment he has to pay
tax, which is expected to discourage the tendency to move from one country to
another in search of quick gains.
Factoring: The business in
which, a firm takes over the collection of trade debts on behalf of others,
thereby enabling them to obtain insurance against bad debts. It is a service
primarily intended to meet the needs of small and medium-size firms. The
procedure is for the factoring company to buy up its client’s invoices and then
itself claim payment of them.
Underwriting: Underwriting is the
business of insuring against risk.
Counter Guarantee: It is given
by an economic agent, another agent will oblige the contract signed with the
3rd party.
NSDL: It is the first
registered depository in India set up in November 1996 and has been promoted by
IDBI, UTI and NSE.
CDSL: Central Depository
Services Limited.
Sub- Prime Loans: It is also
called as ‘B’ loans or second chance loans. These are loans originated to
borrowers who do not qualify for market interest rates because of problems in
their credit history.
Derivative Trading: It is
trading on claims, on claims on real producers.
Currency Future: Where in a
contract in made between two parties, in which a party agrees to buy or sell a
fixed amount of currency at fixed foreign exchange at a later date. It reduces
currency volatility rise for both the parties.
Insider Trading: When insider
(managers, directors, others) have more information of the companies
performance than the external share holders. And they use it to make a profit
is called insider trading. It is banned in India by SEBI.
Multi Commodity Exchange (MCE):
The trading happening in papers instead of commodities in physical. The largest
MCX is in Ahmedabad.
Arbitrage: The act of buying a
currency or a commodity in one market and simultaneously selling it for a
profit in another market.
Badla:
A carrying forward mechanism wherein only some margin is paid for shared, by
the delivery of share and settlement could be carried forward for up to two
weeks.
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