Daily Quiz: UPSC Prelims Marathon – May 1, 2018

Reserve Bank of India is apex bank of the country and was established in 1935 with a capital of Rs. 5 crore. The accounting year of RBI is from 1st July to 30th June. The objective behind the different accounting year are

1) The various banking institution may comfortable to prepare their report within time frame that is form April to March. After that RBI may visualise the performance the status of India financial Institution. And

2) The beginning of Agricultural season where Indian Meteorological Department predict the amount of rainfall. So that RBI can formulate the monetary policy to curb inflation particularly food inflations.

The Capital Account Convertibility  of the Indian rupee can be exchanged for any major currency for the purpose of trading financial assets without any restrictions.

Statutory liquidity Ratio (SLR) refers amount that the commercial banks require to maintain in the from of gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean , bond and share of different companies. Banks prefer to keep a part of prescribed ratio in the form of treasury bills, thus financing the government short terms borrowing. SLR is determined and maintained by the RBI in order to control the expansion of bank credit. It is determined as percentage of total demand and time liabilities. Time liabilities refers to the liabilities which the commercial banks are liable to pay the customers after a certain period mutually agreed upon and demand liabilities are such deposits for 6 month , through withdrawal from of a cheque. Thus we can say that it is ratio of cash and some other approved liabilities (deposits). It regulates the credit growth in India

The main objective for maintaining the SLR ratio are the following-

• To control the expansion of bank credit, by changing the level of SLR , the RBI can decrease or decrease bank credit expansion
• To ensure the solvency of commercial banks
• To compel the commercial banks to invest in govt. securities like govt. bond.

The SLR is commonly used to contain inflation and fuel growth , by increasing or recreating it respectively.

economics, deflation is a general price level of goods and service. Deflation occurs when the inflation rate falls below 0% ( a negative inflation rate ) this should not be confused with disinflation , a slow –down the inflation rate(i.e. when inflation decline to lower level) Inflation reduces the values of money over time; conversely deflation increase the real value of money – the currency of a national or regional economy. This is allows one to buy more goods with the same amount of money over time.

Special Drawing Rights (SDR) are supplementary foreign exchange reserve assets defined and maintained by international Monetary Fund (IMF). SDRs may actually represent a potential claim on IMF member countries nongold foreign exchange serves assets, which are usually held in those currencies. While they may appear to have a more important part to play or perhaps, an important future role, being the unit of account for the IMf has long been the main function of the SDR. It is formally known as paper gold.

American depository receipt (ADR) –ADR is a method of trading non –U.S. stock on U.S. exchanges. Suppose Indian Co. wants to raise money for America, by issuing shares in American stock Exchange. But then Indian company will have to maintain accounts according to American standards. To prevent this problem , Indian company gives its shares to American Bank gives that Indian company gives its share to American Bank. American Bank gives that Indian company receipts (called ADR) in return of those shares. Then Indian co. can trade those ADR receipts in American share Market , to raise money

Global Depository Receipts (GDR) – serve as same function like ADR , but on global scale, its helps the countries from third world, to raise money from the stock exchange in developed countries.

In fiscal stimulus package either taxes are reduced or government spending is increased to increase the purchasing  power of the people. Therefore an increase in public spending or a reduction in the level of taxation that might be performed by a government in order to encourage and support economic growth. Most government bailout package offered to various business types can be considered a from of fiscal stimulates

The two main objective of providing fiscal stimulus are –

1. Tax cut – by cutting taxes, the government allows people to keep more in their pockets and ultimately spends more. This increase economic activity
2. Government spending – Direct government spending infrastructure , social welfare or other such things increase the government spending and helps to boost the GDP.

Cash Reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase CRR, the available amount with the bank comes down. The RBI uses the CRR to drain out excessive money from the system. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors.