#1: NCERT

All clients can borrow short

term loans from RBI @this
interest rate. cant use SLR
securities though!

Long term loan

from RBI

MSF
8.7
5

Commercial banks
can borrow from
RBI @this Interest
rate. Can even use
SLR securities

Rep
o
7.7
5

RR
6.7
5

SLR
21.
5

CR
R
4%

NDTL

Ban
k
Rat
e
8.7
5
Only for Sch.

Have to set
aside this much
cash in reserve
=no income

What RBI pays to

its clients for
Banks have to keep this
short term loans
much in cash, gold, G-sec &
other RBI approved
securities

Monetary Policy

Quant.
Tool

Inflation Deflation
fight
fight
Tight/Dea Easy/Chea
r
p

CRR,
SLR
OMO

Increase Decreas
e
Sell
Buy

Qualitative /selective/ direct Tools

Evolution & financial inclusion

Rs.10 lakh

Equity:
Shareholders
Proprietors
20%
80%

1 lakh

4 lakh

Creditors

5 lakh

Short term

Financial Market

Money Market

Long term

Capital Market

l
l
i
T-B
c
e
G-S

Primary
Secondar
y

Shares

Di
vi
de
d n
$$

A
NASDAQ

R
D

ETF: Exchange Traded Fund

ONGC, CIL, GAIL
10 CPSE
Rs.3000 crore

NFO
Rs.10
Rs.10

Rs.10

Portfolio
Goldman Sach

Rs
.2
0

BSE-NSE

Sadhu Yadav a.k.a

Politician, builder,
Contractor & Mafia
all in one Multiskill

Hawala operator
sends Rupees to Tax
Haven, converting
to Dollars

SEBI registered FII

FIIs portfolio

Hedge Fund
Manager or
Investment banker
in Tax Haven

P-Note
Derives value from
FIIs portfolio

SENSEX calculation: 1979

70k with
public
30k with
Mallya
12

Demat System
s

CSDL
NSDL

r
e
p
a
P
r
u
o
Y

Depository

e
r
a
h
S

Dep.
Participant

SBI
HDFC
ICICI

T
A
M
E
D
r
u
Yo
t
n
u
o
acc
You

Financial
inclusion
#PAN
#DEMAT

Customer

13

Sahara

NSEL

Saradha

Financial Scams in Recent years

1. Modus Operandi Ph.D Only Basic
idea
2. How to prevent- FSLRC.Important

#1: NCERT
Major
topics
Covered

New
topic

Balance of Payment
International Trade
1.Definition
2.Components

1. Maintained by Central bank

of each country
2. As per IMF manual BMP6
3. All amounts Expressed in
Dollar$$
4. Credit: Incoming money (+)
5. Debit: Outgoing money (-)
6. Sample Click me

BoP
System
Record

Economic Transactions

Anil to Adnan?
No because both residents.

Economic Transactions

Tom Cruise to Adnan Sami?

Yesbecause resident vs nonresident
US Fed Reserve: outgoing (-)
Indian RBI: incoming (+)

Economic Transactions
Adnan to Parents in Pakistan?
Yes
Indian RBI: outgoing (-)
Pak Central Bank: incoming
(+)
Canadian Centre Bank. (NA)

Worlds Balance
of Payment
=ZERO

Balance of Payment
International Trade
1.Definition
2.Components

BoP: Current Account (2013-14) Million USD

Compo +
nent
Credit
(Incom
ing)
Visible (Export
=>Goo )
ds
3 lakh

- Debit Net
(Outgo
ing)
(Import MINUS
)
2 lakh
- 5 lakh

 Balance of Trade
=Net difference
between Imports &
Exports

Trade Deficit

When BoT is
negative. (IM > EX)

Trade Surplus
= BoT Positive (EX
> IM)

Main Imports

Main Exports

For Ranking refer

to Ch.6 of
Economic Survey

TRADE
Deficit

Balance of Trade

Deficit
surplus

CEO/MD, Executives, Staff

Board of Directors,
Chairman
Current Account
Profit, interest
dividend (-)

Capital
Account (+)

Foreign investor: debt / Equity

CEO/MD, Executives, Staff

Capital
Board of Directors,
Account (+)
Chairman
Shares sold money
taken out
Capital (-)
Foreign investor: debt / Equity

CEO/MD, Executives, Staff

Capital
Board of Directors,
Account (+)
Chairman
Bond/Debenture
Principal repaid
Capital (-)
Foreign investor: debt / Equity

Profit-interest-Dividends

surplus

Deficit
Deficit

I
F
E

T
I
C

S
U
L
T
P
I
R
C
I
U
S
EF

S
U
L
P
R
U
Current SAccount

Remittances Billion
2013
(World
Bank)
India
China
Philippines
Mexico
Nigeria

70
60
25
22
21

1.
2.
3.
4.

Visible: -147 billion

Invisible: +115 billion
Balance: (-) 32 billion
Hence Current Account
Deficit

CAD
Visible vs
Invisible

Indias CAD: Past Present Future

How to reduce CAD?

Crude oil consumption

reduce? Not possible beyond a
point.
Gold ban? Smuggling; reduce
inflation; +ve Real interest
rate
IT boost? Alone insufficient
Agro + Mfg. + service: boost
FDI promote? Capital PLUS but
Current MINUS

Current Account Deficit

Capital Account

Capital Account
1.Difference between FDI and FPI
(FII)

By finance ministry
to bring clarity on definition of
FDI and FII
Recommendations accepted in
June 2014

FDI-FII
Arvind
Mayaram
Panel

Types of companies: Mayaram FII

One person
Companies
Act
2013

Private ltd.
2-200
Public Ltd.
7-unlimited

Any
investment
FDI

10% or more
FDI
<10: FPI (FII)
Listed
Vodafone
India.

Unlisted
Nokia India
48

FDI
Long-term
relation with
company &
its board

FII / FPI

Anonymous
Short-term

FDI

FII / FPI

Listed: 10%
or more
Any Public
Unlisted:
ltd. company:
any
below 10%
investment is
FDI

FDI
Sectoral
cap: 49%
insurance;
74% in
private banks

FII / FPI
If public
listed then
anyone can
purchase
below 10%

FDI
Only one
category
FDI

FII / FPI
Earlier subcategories:
FII, QFI
SEBI: FPI
RBI: ReFPI

FDI
NRI- further
deliberation,
said
Mayaram

FII / FPI
NRI
investment
not counted

FDI
FDI applies to
Equity finance only.
DebentureNo
Fully convertible
debentureyes
G-Sec / T-Bill: NO
(Debt instruments)

FII / FPI
Both debt and
equity
But cant buy TBill
G-Sec: 30 billion
Corporate bonds:
51 billion

FDI
RBI (FEMA)
FIPB
Companies
required to
disclose

FII / FPI
Individual:
SEBI
Aggregate:
RBI
Companies
required to
disclose

Capital Account: Foreign investment

Current Account Deficit

S
U
L
S
P
U
R
L
RP
SU
SU

S
U
L
P
R
U
S

Capital Account inflow

Most stable

1. FDI
2. External
assistance
(Soft loans)
3. ECB

Most volatile

1. FII (FPI)
2. FCNR Foreign
Currency
Non-Resident
accounts

Current Account deficit

Capital Account surplus

MCQ 2013: find components of capital account?

1. Foreign loans
2. Foreign direct
investment
3. private
remittances
4. portfolio
investment

Answer choices
A. 123
B. 124
C. 234
D.134

Short term,
Doesnt go
back

Short | Long
Goes back.

MCQ 2013: Capital account components

1. Foreign loans
2. foreign direct
investment
3. private
remittances
4. portfolio
investment

Answer choices
A. 123
B. 124
C. 234
D.134

BoP definition
Components of Current Account
and Capital Account
Next: Balance of Payment CRISIS

Current Account

Capital Account

Balance of Payment India (Mill.USD)

Balance of Payment India (Mill.USD)

Balance of Payment India (Mill.USD)

Supply Demand

1 kg = Rs.100
Supply

Demand

Inflation

Demand

Demand

Demand

Demand

1 kg =
Rs.1000
Supply

Reduce demand by money supply

Demand

Demand

Demand

Demand

1 kg =
Rs.100
Supply

If Balance of Payment is POSITIVE

$1=50Rs.
$1=40Rs.
Bad for Indian
exporters

If BoP surplus- RBI should

purchase those $$ (Mill.USD)

Balance of Payment ZERO

Why BoP crisis in 1991-92?

1991 (AprSep)
Current
Capital
Overall
Balance

Million $$ Oil Import?

-6634
4808
-1826

Gulf war,
USSR

If Balance of Payment is Negative

$1=50Rs.
$1=90Rs.
Bad for
Indian
importers

If BoP negative RBI should sell

its own $$ (Mill.USD)
1991 (AprMillion $$
Sep)
Current
-6634
Capital
4808
Overall
-1826
Balance
RBI's Forex
728
RBI doesnt have enough
$$ to
Reserve
make BoP zero

Why BoP crisis in 1991-92?

1991 (AprSep)
Current
Capital
Overall
Balance
IMF loan

Million $$
-6634
4808
-1826
+2300

GOLD pledge
65 tonnes

Moral of the story: how to face BoP crisis?

BoP crisis when capital account

surplus are insufficient to finance
current account deficit
Great depreciation of currency.
CAD should be kept low (OR Positive)
Capital surplus large (attract
investment, LPG reforms)
Central Bank must have large-FOREX
reserve

Forex Reserve
1.Components
2.Ranking (March 2014)

Indias Forex Reserve (March 2014)

Forex Reserve
Top-10
Countries
Of the World
[old data]

MCQ UPSC 2013

Indias foreign exchange reserve
includes:
A. Foreign-currency, SDRs and loans from foreign
countries
B.Foreign-currency, gold and SDRs
C. Foreign-currency, SDR, loans from the World
Bank
D.Foreign-currency, gold, loans from the World
Bank

1. Skip

2. Attempt

3.

Foreign Exchange Reserve (RBI)

1. Foreign currency assets (FCA) (US

dollar, euro, pound sterling,
Canadian dollar, Australian dollar
and Japanese yen etc.)
2. gold
3. special drawing rights (SDRs) of IMF
4. Reserve tranche position (RTP) IMF

MCQ UPSC 2013

Indias foreign exchange reserve includes:
A. Foreign-currency, SDRs and LOANS from
foreign countries
B.Foreign-currency, gold and SDRs (RIGHT)
C. Foreign-currency, SDR, LOANS from the World
Bank
D.Foreign-currency, gold, LOANS from the World
Bank

1. Skip

2. Attempt

3.

Assertion / Reasoning

A: Despite having no current account

surplus, India has sizable foreign
exchange reserves.
R: RBI Intervention in the foreign
exchange markets is the general
reason behind accumulation of large
forex reserve.
Both correct, R explains A
1. Skip

2. Attempt

3.

BoP: meaning, Components,

Crisis
FDI-FII difference
Forex reserve
Next: Exchange rate systems
and capital account convertibility