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with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. What is Inflation? Inflation is defined as an increase in the price of bunch of Goods and services that projects the Indian economy. An increase in inflation figures occurs when there is an increase in the average level of prices in Goods and services. Inflation happens when there are less Goods and more buyers, this will result in increase in the price of Goods, since there is more demand and less supply of the goods. Relation between Inflation and Bank interest Rates Now a days, you might have heard lot of these terms and usage on inflation and the bank interest rates. We are trying to make it simple for you to understand the relation between inflation and bank interest rates in India. Bank interest rate depends on many other factors, out of that the major one is inflation. Whenever you see an increase on inflation, there will be an increase of interest rate also. Statutory Liquidity Ratio SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit. How is SLR determined? SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. . What is the Need of SLR? With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds..
SLR to Control Inflation and propel growth
SLR is used to control inflation and propel growth. Through SLR rate tuning the money supply in the system can be controlled efficiently. Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply. Capital Adequacy Ratio - CAR A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures.
Also known as "Capital to Risk Weighted Assets Ratio (CRAR)." Investopedia explains Capital Adequacy Ratio - CAR This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Prime Rate or Prime Lending Rates (PLR) Prime rate or Prime lending rates (PLR) refer to interest rates charged by commercial banks for their most credit-worthy customers. Generally credit-worthy customers consist of large corporations. The rate is a key interest rate, since loans to less-creditworthy customers are often tied to a high interest rate. For example, a “Company A ” (most credit-worthy customer) may borrow at a prime rate of 5%, but a less-well-established “Company B” may borrow from the same bank at prime plus 1, or 6%.
Bank’s good standing customers have little chance of defaulting than customer who has a higher risk of defaulting, so the bank can charge them a rate that is lower than the rate that would be charged to other customers. Non-performing Asset A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is not producing income.
Asset-liability management A risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. Takes into consideration interest rates, earning power, and degree of willingness to take on debt. also called surplus management. Repo Rate Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. Reverse Repo rate Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system. Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man. What is Inflation? Inflation is defined as an increase in the price of bunch of Goods and services that projects the Indian economy. An increase in inflation figures occurs when there is an increase in the average level of prices in Goods and services. Inflation happens when there are less Goods and more buyers, this will result in increase in the price of Goods, since there is more demand and less supply of the goods.
In economics, the inflation rate is a measure of inflation, the rate of increase of a price index (for example, a consumer price index).It is the percentage rate of change in price level over time.  The rate of decrease in the purchasing power of money is approximately equal. It's used to calculate the real interest rate, as well as real increases in wages, and official measurements of this rate act as input variables to COLA adjustments and Inflation derivatives prices. If P0 is the current average price level and P − 1 is the price level a year ago, the rate of inflation during the year might be measured as follows:
After the year the purchasing power of a unit of money is multiplied by a factor 1 / ( 1 + inflation rate ). There are other ways of defining the inflation rate, such as logP0 − logP − 1 (using the natural log), again stated as a percentage. In this case after the year the purchasing power of a unit of money is multiplied by a factor e − inflation rate.
Foreign exchange reserves Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.
GDP The gross domestic product (GDP) or gross domestic income (GDI) is a basic measure of a country's economic performance and is the market value of all final goods and services made within the borders of a nation in a year . It is a fundamental measurement of production and is very often positively correlated with the standard of living. . GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the period—that is, compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (or profits). The most common approach to measuring and quantifying GDP is the expenditure method: GDP = private consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X − M). GDP vs. GNP Gross domestic product ('GDP') is defined as the "value of all final goods and services produced in a country in 1 year". On the other hand, Gross National Product (GNP) is defined as the "value of all goods and services produced in a country in one year, plus income earned by its citizens abroad, minus income earned by foreigners in the country". The key difference between the two is that GDP is the total output of a region, e.g. France, and GNP is the total output of all nationals of a region, e.g. French. Gross National Product.
GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country. Basically, GNP measures the value of goods and services that the country's citizens produced regardless of their location. GNP is one measure of the economic condition of a country, under the assumption that a higher GNP leads to a higher quality of living, all other things being equal. In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. For example an exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 91 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day.
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