EASEL CLASSES

BREAKING NEWS
The Royal Swedish Academy of Sciences has decided to award the 2022 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig “for research on banks and financial crises.”
This year’s laureates in the economic sciences, Ben Bernanke, Douglas Diamond and Philip Dybvig, have significantly improved our understanding of the role of banks in the economy, particularly during financial crises. An important finding in their research is why avoiding bank collapses is vital.
Modern banking research clarifies why we have banks, how to make them less vulnerable in crises and how bank collapses exacerbate financial crises. The foundations of this research were laid by Ben Bernanke, Douglas Diamond and Philip Dybvig in the early 1980s. Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises.

For the economy to function, savings must be channelled to investments. However, there is a conflict here: savers want instant access to their money in case of unexpected outlays, while businesses and homeowners need to know they will not be forced to repay their loans prematurely. In their theory, Diamond and Dybvig show how banks offer an optimal solution to this problem. By acting as intermediaries that accept deposits from many savers, banks can allow depositors to access their money when they wish, while also offering long-term loans to borrowers.

However, their analysis also showed how the combination of these two activities makes banks vulnerable to rumours about their imminent collapse. If a large number of savers simultaneously run to the bank to withdraw their money, the rumour may become a self-fulfilling prophecy – a bank run occurs and the bank collapses. These dangerous dynamics can be prevented through the government providing deposit insurance and acting as a lender of last resort to banks.
Diamond demonstrated how banks perform another societally important function. As intermediaries between many savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.
Ben Bernanke analysed the Great Depression of the 1930s, the worst economic crisis in modern history. Among other things, he showed how bank runs were a decisive factor
in the crisis becoming so deep and prolonged. When the banks collapsed, valuable information about borrowers was lost and could not be recreated quickly. Society’s ability
to channel savings to productive investments was thus severely diminished.
“The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts,” says Tore Ellingsen, Chair of the committee for the prize in economic sciences.

Shrinkflation

In economics, shrinkflation is the practice of reducing the size or quantity of a product while the price of the product remains the same or slightly increases. In some cases, the term may indicate lowering the quality of a product or its ingredients while the price remains the same.
Shrinkflation is the practice of reducing the size of a product while the price of the product remains the same. So, this effectively increases the price per amount or per unit or per kg.
For example, recently 'Tiger' Biscuits size (quantity) was reduced slightly retaining the same price of Rs. 5.

Raising the price per given amount is a strategy employed by companies, mainly in the food and beverage industries, to stealthily boost profit margins or maintain profit margin in the face of rising input costs.

As you all know that inflation has increased in the last few months and so companies cost of production/input cost has also increased, but rather than increasing the prices companies have started reducing pack sizes just to disguise the price rise.

Economic Survey 2021-2022.
Fertility rate on decline since 2015, rural areas has more fertility rate than urban areas
The Economic Survey for 2021-22 has revealed that J&K has lowest fertility in the country and there has been a decline of 0.6 percent fertility rate in J&K since 2015-16 when the last survey was conducted.
As per the details of economic survey 2021-22 the fertility rate among uneducated and women belonging to scheduled caste is more as compared to the fertility rate in educated women and women belonging to non-scheduled groups.
It said that the fertility rate in women living in rural areas is more than that of fertility rate in women living in urban areas
"In Jammu & Kashmir, the median age at first marriage is 23.6 years among women age 25-49 years. Twenty-seven percent of women age 20-49 years have never married, compared with 35 percent of men age 20-49,” it said.
"The total fertility rate (TFR) in Jammu & Kashmir is 14 children per woman, which is below the replacement level of fertility. Fertility has decreased by 0.6 children between NFHS-4 and NFHS-5,” the report added.
"The total fertility rate in urban areas, at 1.2 children per woman, and in rural areas, at 1.5 children per woman, are: below the replacement level. Among births in the three years preceding the survey, 5 percent were of birth order four or higher, compared with 12 percent in NFHS-4.”
"The most significant differentials in fertility are by place of residence, caste/tribe, and schooling. At current fertility rates, women with no schooling will have an average of 0.7 more children than women with 12 or more years of schooling. Similarly, other backward caste women will have 0.4 more children than women who are not in scheduled caste/tribe or another backward caste.
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SDR:-
The Special Drawing Right (SDR) is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
Earlier the weight of the 5 currencies in SDR basket was:
1 SDR = 0.417 US Dollar + 0.309 Euro + 0.109 Yuan + 0.083 Yen + 0.081 Pound
Now, IMF has revised the weights of various currencies in the SDR basket based on trade and financial market developments. Basically if a country's trade volume increases and it reforms its financial markets like allowing convertibility of currency and removing other restrictions then IMF increases the weights. As per the new weights:
1 SDR = 0.434 US dollar + 0.293 Euro + 0.123 Yuan + 0.076 Yen + 0.074 Pound
So, the weight of US dollar and RMB (Yuan) increased as per the revision.
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India's Trade Figures (2021-22) [B = Billion]
GDP = Rs. 236 lakh crore = $3147 B = $3.15 Trillion

Exports (Goods+Services) = $420 B + $250 B= $670 B = 21.3% of GDP

Imports (Goods+Services) = $612 B + $145 B = $757 B = 24% of GDP

Trade Deficit = $87 B = 2.76% of GDP.

An MPC meeting was held and certain decisions were taken by RBI regarding liquidity management. Here's a look at the decisions taken and we will try to understand it.

RBI has introduced "Standing Deposit Facility" (SDF). The following are some relevant points regarding SDF.

1) Banks can deposit any amount on their own discretion/will with RBI under SDF at a rate "repo - 0.25%" i.e. 3.75% for (presently) overnight only.

2) This SDF facility has been introduced by amending the RBI act 1934 (Section 17). The amendment was done in 2018 as there was a need for this kind of facility.

3) In SDF, RBI will not provide collateral (of Govt. securities), while in reverse repo rate collateral is provided by RBI. As there is no collateral requirement under SDF, it will strengthen the operating framework of monetary policy

4) SDF role is in liquidity management but it also provides financial stability.

So, now the LAF/Policy corridor will be SDF (repo - .25%) and MSF (repo + .25%) and will be standing facilities i.e. whenever banks want. The repo, reverse repo, OMO will be done at RBI's discretion. [These things keep on changing and you may not remember]. Reverse repo will remain as MPC tool but now it has been made redundant as banks will now deposit money at SDF and not at reverse repo. There are a lot of minute details regarding these tools and you may not remember all this. So, what u need to keep in mind for SDF is:

Its without collateral, liquidity management tool, RBI Act 1934 amended and its a standing facility means when banks want they can deposit.

RBI

RBI acts as Debt manager for Central Govt. and State Govt. as per the RBI Act 1934 and as per the Monetary Policy Framework Agreement, RBI needs to keep inflation at 4% +/-2% and RBI also regulates banks. These functions (inflation control, regulation of banks) and debt manager handled by a single agency (RBI) creates conflict of interest in the following ways:

1) Acting as a debt manager RBI needs to arrange debt for the Govt. at a lesser interest rate. But when RBI keeps the interest rate (repo rate) low, it automatically creates an inflationary bias in monetary policy. Inflationary bias means even if the inflation target of 4% can deviate +2% or -2%...you will generally see it on higher side.

2) To raise debt at lesser interest rate for the Govt., RBI forces banks (as a banking regulator) to purchase Govt. securities in large volume (increasing the SLR limit). If RBI will not ask banks to keep govt. bonds then banks can purchase other securities which may give them higher return. This also leads to not letting the corporate bond market develop because of absence of a benchmark sovereign yield. (for corporate bonds, the sovereign yields act as benchmark). Forcing some particular players (banks) to purchase large volume of govt. securities does not allow better price discovery (interest/yield) on govt. bonds.

3) When banks are holding a lot of govt. bonds then RBI will be unwilling to raise interest rate (repo) to control inflation as raising the interest rate will lead to fall in bond prices thus creating losses for banks who are holding govt. securities.

When Govt. debt and borrowings are increasing (Gross fiscal deficit of Centre and States combined for next budget is more than 10% of GDP) and General Debt has crossed 90% of GDP), then separating the 'Public Debt Management' function from RBI becomes more important. Rest everything you can understand on your own, the article is very good so read it thoroughly.

# DIFFERENCE BETWEEN LOANS AND ADVANCES

The center of these two concepts is Money and Timing. Money is an integral part of any business. It is necessary for any company to have sufficient money or funds in their pockets to run the business for investment purposes. There may be situations arising when an individual or a firm may need funds to fulfill their obligations. This need is fulfilled by loans vs advances. Timing is another indispensable factor which is brought to light. For every person giving out money or “lends the money”, wants his money to grow and come back. This growth of money happens over ‘time’.

# WHAT IS A LOAN?
An amount that is in the form of debt given out by a financial organization to another firm or an individual in exchange for the future repayment of the same amount along with interest over a period.
The terms of a loan are mutually agreed by each party involved in the transaction before any exchange of funds take place. This contract typically includes the

1. The amount lent out,
2. The amount to be repaid,
3. The number of payments that shall be made,
4. The repayment period,
5. And collateral, if any.

OF LOANS:-
1. Based on Security
Secured Loan: The loan which is backed by collateral.
Unsecured Loan: The loan which has no asset/ collateral to be pledged. Comes with a greater interest rate as compared to a secured loan.
2. Based on Repayment
Time Loan: The entire amount of the loan (including interest) which is paid at a future specified data.
Installment Loan: A series of small amounts (each payment includes a part of interest and lent amount) distributed over a period. The amount can be either evenly distributed or as mentioned in the contract.
Demand Loan: The amount along with the interest is paid back to the lender upon his request or ‘demand’.
# WHAT ARE ADVANCES?
The source of financing provided by the banks to the companies, to meet their short-term requirements (less than one year). Contrasting to loans, advances are a credit facility. The terms of the advances are decided by the central bank (RBI in India), and the bank lending the amount.
are facilitated to the companies under:
1. Primary security: Hypothecation of debtors, promissory notes, etc. Here, the bank stands as a priority to be repaid the loan before any other private debt holders in the company
2. Collateral Loan: Mortgage of property (land, buildings, etc), other fixed assets like machines, etc
3. Guarantees: given by the partners, promoters, directors, etc

# Different types of bank advance:
1. Short term loan: The entire amount is given to the borrower at one time

2. Overdraft: a provision by the bank, wherein the customer can overdraw money from his/ her account until a specified cap

3. Bill Purchase: Advances granted by the bank upon pledging the bills

4. Cash credit: A provision by the bank, wherein a customer can advance money up to an asset pledged.

India's monetary policy financially inclusive by design: RBI Deputy Governor Patra.
The country's monetary policy is, by design, financially inclusive and this strategy will result in policy effectiveness and welfare maximisation going ahead, Reserve Bank of India's Deputy Governor Michael D Patra said on Friday.
Financial inclusion appears to have gone up, with the level of the RBI's financial inclusion index rising from 49.9 in March 2019 to 53.1 in March 2020 and further to 53.9 in March 2021, Patra said at an event organized at Indian Institute of Management (IIM), Ahmedabad.
“The evidence is still forming and strong conclusions from its analysis may be premature, but India's monetary policy is, by design, financially inclusive and it will reap the benefits of this strategy in the future...,” he stated.
An economy with all consumers financially included would expect to experience less output volatility due to lower consumption volatility. In an economy with financially excluded consumers, monetary policy has to assign a greater weight to stabilising output, he said.

Patra said going ahead as financial inclusion rises even further in India, consumption volatility as a source of output volatility can be expected to wane.
This will provide headroom for monetary policy to remain focused on minimising inflation volatility, which brings welfare gains for all, he added.
Central banks are integrally involved in policy drives that help in expanding financial inclusion as they have to take into account the true financial structures of the economies where they conduct monetary policy, he further mentioned.

RBI presented the monetary policy on December 8 and again they have kept the repo rate and reverse repo rate unchanged. Citing the need to support the economy, RBI governor Shaktikanta Das announced what many experts had maintained: that the central bank will leave rates unchanged, especially given the looming threat of Omicron variant of the Covid virus.

MPC has been given the mandate to maintain annual inflation at 4 per cent until March 31, 2026, with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.
Observing that economy is slowly recovery from brief hiatus, the Governor said, some of the high frequency indicators reflect recovery.