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Niveshak Interview Booklet - 2
Niveshak Interview Booklet - 2
indicates the rise in general price level of goods and services in an economy. If price of goods and
services increases then naturally the buying power of money will decrease as one can buy fewer goods
and services with each unit of currency. Let us take an example suppose one week earlier you went to
have breakfast in a nearby restaurant and you have taken a 50 rupee note with you. If the price a piece of
sandwich was Rs. 10 price then with you could buy 5 sandwich pieces. Now over the week the prices of
bread and vegetables have gone up on account of inflation and as a result the restaurant has increased
the price of a piece of sandwich to Rs.12.5. Now you can only buy 4 sandwich pieces with the same 50
Now you may be thinking as to how one can measure inflation. The answer to your question is inflation
rate, the measure of rise in price level of goods and services. It indicates the rate of rise in price level of
goods and services. Given the large number of goods and services produced in an economy it is not
feasible to calculate the average change in price level of all goods and services. Consequently a
representative basket of goods and services (also known as market basket) is used for which the change
in price is calculated to get an indicative figure of change in overall price level, which is called inflation
rate.
Mathematically inflation rate is calculated as the percentage rate of change of a certain price index.
Generally each commodity in the market basket is linked to an index and the index has a certain value
(usually 100) in a particular year known as base year which is proportional to the price of commodity. This
index value keeps changing over time in proportion to change in price of commodity. The index for market
basket is calculated as the weighted average of the individual index of commodities where each
commodity has been assigned a particular weight based on its influence in economy. The index for
market basket is used for calculation of inflation rate. If the index values for the beginning and end of year
are known then the inflation rate for year is the percentage change in index value for year.
The measurement process will become clearer with a simple example that is being provided here. Let us
consider the market basket has only one product say rice. Assume the base year for index to be 2000
and corresponding index value to be 100. Let the price of sugar in base year is Rs. 5. Now suppose we
want to calculate the inflation rate for year 2009. For this as mentioned earlier we need to calculate the
index values at beginning and end of year 2009 which can be done using the price of sugar on the
respectively. Applying unitary method the index value at the beginning and end of year 2009 is 120 and
125 respectively. Since the percentage increase in index value over the year 2009 is 4.17% so inflation
In above paragraph we illustrated the calculation of inflation rate for a year but you must have come
across newspaper articles reporting “Inflation rate for month ending December 31, 2010 was 8.43%’. So
now one needs to understand the meaning of the above mentioned statement. The statement also
mentions the inflation rate on a yearly basis only and for calculating the inflation rate the index values on
December 31, 2009 and December 31, 2010 are considered. The percentage change in index values for
the period between December 31, 2009 and December 31, 2010 gives the required inflation rate. If this
inflation rate keeps increasing over a period of time then it is said that the economy is facing inflation.
Based upon the type of price of commodity being considered for the calculation of index there are two
types of indexes – Consumer Price Index (CPI) and Wholesale Price Index (WPI). WPI accounts for price
change at the wholesaler or producer level whereas CPI measures the change in consumer price level
and retail margins. It is important to note that the composition of market basket for the two indexes is also
different. The market basket for CPI is determined and maintained by United States Bureau of Labor
Statistics. Another minor point of difference between the two indexes is that WPI is generally calculated
and reported on a weekly basis while CPI follows a monthly calculation and reporting procedure. At
present most of the countries including USA, UK, Japan and China use CPI for inflation rate calculation.
However India follows WPI method for inflation rate. The market basket of WPI consists of 435
1. Primary Articles: consist of food grains, fruits and vegetables, milk, eggs, meats and fishes,
condiments and spices, fibers, oil seeds and minerals. Their weight age is 22.02 %.
2. Fuel, Power, Light & Lubricants: consist of coal and petroleum related products, lubricants,
3. Manufactured Products: consist of dairy products, atta, biscuits, edible oils, liquors, cloth,
The base year in India for WPI is 1993-94 and base index value is 100. However there is on-going debate
on increasing the number of commodities in market basket to 980 and shifting the base year to 2004-05.
However India does not follow the normal weekly reporting period for WPI and instead reports the
inflation rate on a monthly basis. The inflation rate calculation procedure remains same for both the
indexes. However there are four types of Consumer price indexes which are mentioned below:
When inflation is accompanied by an increase in unemployment rate then the situation is called
stagflation. The term stagflation is combination of two terms stagnation and inflation. Stagnation here
refers to economic stagnation which means a slowdown in economic growth as indicated by increase in
unemployment rate.
The counterpart of inflation is disinflation which is the case of decrease in inflation rate over a period of
time. This means that rate of increase in price level of goods and services has slowed down over the time
period. If the decrease in inflation rate continues then the rate may become negative, a situation referred
as deflation. During deflation the price level of goods and services decreases and consequently the
purchasing power of money increase. This means that one can buy more amount of a given commodity
with the same amount of money. Referring to the sandwich example given above now let us suppose that
the price of a piece of sandwich has dropped to Rs. 5 and so now you can buy 10 sandwich pieces for
Rs. 50.
once in a month an article on RBI’s (Reserve Bank of India) monetary policy review in which different
rates and ratios like repo rate, cash reserve ratio, etc. are mentioned. It is important to understand the
meaning of these rates and ratios in order to appreciate the implication of change in their values.
At first let us consider two similar rates – bank rate and repo rate. Bank rate is the rate of interest that
commercial banks and other financial intermediaries have to pay on the loan that they take from country’s
central or federal bank. Repo rate is similar to bank rate except that it is applicable to short term loans
while bank rate is applicable to long term loans. In India Reserve Bank of India (RBI) is central bank.
Suppose that bank rate in India is 5% which means that if a commercial bank takes a loan of 1 million
rupees from central bank then it has pay 5% of 1 million i.e. Rs. 50,000 as the interest. Reverse repo rate
is the counterpart of repo rate. It is the rate of interest commercial banks and other financial
intermediaries receive on excess funds they deposit with the central bank. Now suppose the commercial
bank deposits 1 million rupees in central bank with reverse repo rate being 5% then the commercial bank
will receive Rs. 50, 00 as interest on their deposit. The three above mentioned rates are also referred to
as policy rates.
minimum amount of reserve that commercial banks and other financial intermediaries are required to
keep in central bank. CRR is the percentage of their total deposits that the commercial banks have to
keep in central bank in form of cash. SLR is similar to CRR except that apart from cash other liquid assets
like precious metals such as gold and approved short term securities like treasury bills may be used to
meet the reserve requirements. A better understanding of reserve ratio will be possible after going
through the example provided below. Assume that the CRR and SLR are 6% and 20% respectively and a
commercial bank has a total deposit of 10 million rupees with itself. Now the bank has to keep 0.6 million
rupees in cash as a deposit with central bank and make a net deposit of 2 million rupees in form of liquid
The RBI reviews these rates and ratios on a monthly basis with intent to keep a check on money supply
and inflation rate in economy. In order to increase the supply of money in economy RBI may decrease its
policy rates and reserve ratios. The decrease will have the combined effect of increasing the deposits
available with the commercial banks which may be offered as loans to general public thereby pumping
money into the economy. One can refer to the current value of these ratios and rates by visiting the
country in a financial year. GDP is calculated using the formula provided below:
Private Consumption here refers to the household consumption expenditure which will fall under one of
Investment here refers to business investment in buying new equipment like purchase of software, buying
of machinery, etc. and does not include exchange of assets. This should not be confused with financial
Government Spending is the expenditure of government on final goods and services. It is inclusive of
salaries of public servants and purchase of military equipment but excludes social security and
unemployment benefits.
considered to have better standard of living. When net income receipt is added to GDP then it gives
Gross National Product (GNP). Net income receipt is arrived at by summing the income from overseas
investment and subtracting from the sum the income earned by foreign nationals and companies
domestically. Let us consider an example for further clarification. Suppose the GDP and GNP of India are
to be calculated, now if an Indian company has a plant in China then the profit made by that plant will not
be included in GDP but will be included in GNP. Similarly if a Chinese firm has a plant in India then the
plant’s income will be accounted for in GDP but will be subtracted from GNP value. To summarize the
basis of production allocation is geographical location and ownership for GDP and GNP respectively.
behaviour of economy as a whole and not just individual firms but entire industries. The history of
macroeconomics has witnessed several economic theories but the two pivotal theories among them have
been Classical and Keynesian theory given the influence they had in guiding the functioning of economy.
Classical theory’s origin may be traced back to the all-time classic book, Wealth of Nations by Adam
The concept of invisible hand states that in a free market if individuals carry out their economic affairs for
their own self-interest then they will be led by the invisible hand to maximize the general welfare of the
economy. The concept should not be misinterpreted to mean that there will be no wealth inequality in a
country and that a country will be insulated from the effects of drought, war or political instability. It just
proposes that given the initial distribution of wealth in a country and the resources (natural, human and
technological) at its disposal, the existence of free markets will make country men as well of as possible.
Central to the existence of free market is the assumption of price and wage flexibility. Price and wage
flexibility assumption implies that price and wage adjust rapidly enough to maintain equilibrium where the
supply of a commodity equals its demand. For example if for a commodity say rice the quantity
demanded exceeds quantity supplied then the price rises to bring down the demand so that it equals
supply. Change in price and wage influence the action of people in an economy. As existence of free
market requires minimum regulatory requirements so followers of classical theory often advocate limited
The theory of classical economics took a severe blow in 1930 with its failure to come up with an effective
solution for Great Depression that had crippled the economy of United States. At that time a British
economist, John Maynard Keynes came up with an alternative to classical theory in his book The General
name and it rejects the assumption of wage and price flexibility which forms the basis of classical theory.
Keynes on the contrary assumed that wages and prices adjust slowly and are not able to reduce the
number of people who want to work so as to make it equal to the number of people which the firm wants
Keynes proposed increased government intervention through purchase of goods and services as a
solution to the problem of high unemployment. Purchase of goods and services by government will
increase the market demand and the producers will have to ramp up production level to meet the
increasing demand that will require hiring more people which will bring down the unemployment rate. The
newly hired people will have more disposable income to spend which will further raise demand and
consequently employment. For this reason Keynesian theory advocated increased government
should be the same as the cost of goods in another country when adjusted for the exchange rates.
However in practice such a condition does not exist and we see price differentials across many countries.
The theory states that in the long run the prices in both the countries and the exchange rates would
stabilize such that we have the same cost of goods irrespective of the country in which the purchase is
made. To illustrate how the prices would adjust, suppose a TV set costs Rs. 30,000 in India and the same
set sells in the US for $700. Thus at the exchange rate of INR = 40/US$, the same product costs $700 in
the US when in India it costs $750. Thus ignoring the transportation costs, people would prefer to buy the
TV set in the US rather than in India. More practically, a company can buy thousands of TV sets in the US
and sell them in India at a profit. Because of this two things would happen. Firstly the demand in the US
would go up and that in India would go down. Also the company would have to buy the TV sets by paying
in dollars. Thus the company would buy dollars and sell rupees increasing the exchange rate. The
exchange rates and prices would finally settle down to values where we have purchasing power parity.
However such a situation does not occur in practice due to a variety of reasons like trade barriers, central
Generally PPP is measured by the cost of a basket of goods in different countries. A famous indicator
used to measure PPP is the Big Mac Index. This index was proposed by ‘The Economist’ and it measures
type of investment is more involved with the management, technology transfer and other field expertise
and knowhow in the project. FII refers to Foreign Institutional Investors. These investors invest in the
country indirectly by purchasing stocks of the companies listed on the stock exchanges. The FII money
example when we write INR = 45.34/US$ we mean that we would receive INR 45.34 for every US$ we
possess.
The manner in which a country manages its exchange rate with other currencies in the world is called as
the exchange rate regime. There are many types of exchange rate regimes like Fixed, Floating and
Pegged float. Fixed exchange rate regime was prevalent before the 1970’s when there was a direct
convertibility between different currencies of the world that is the exchange rate is fixed in this regime.
Today most economies follow the floating exchange rate regime where the exchange rates are
determined by the market forces rather than the governments. Pegged floating rate is a type of floating
rate regime where the central bank of the country allows the exchange rate to fluctuate in a band about
the pegged value. If the rate moves outside the band, the central bank would intervene in the market by
buying or selling the currency to bring the rate back to the pegged value.
monetary policy (the central bank manages this on behalf of the government) and secondly the fiscal
policy. With the help of the monetary policy the central bank (RBI) controls the total supply of money in
the market. With the control over the money supply the central bank could control the spending by various
people and institutions thus controlling the prices and the economic output. Monetary Policy comprises of
various policy rates and reserve ratios that are explained in a section above. The other tool that
Fiscal policy: Fiscal policy refers to the government spending of its resources and taxation policies which
affect the economy of the country. The levels of taxation and expenditures are mostly decided when the
budget is presented in March. With the help of taxation, the government can change the levels of
disposable incomes which households have, thus modifying the demand levels in the country. Also with
Microeconomics
Law of Demand
It basically establishes the relationship between the demand of a product and its price. It states that
“Demand of a particular product is inversely proportional to its price keeping other factors such as
For example, if we consider the recent example we can easily see that the demand of the onion
Law of Supply
It basically establishes the relationship between the supply of a product and its price. It states that
“Supply of a particular product is directly proportional to its price keeping other factors such as supply of
substitutive products etc. constant”. The logic behind this law is actually the fact that the higher price
For example, the rise in the price of the onion will motivate the farmers to produce more so that they will
get more profit in the future. One thing that we will have to keep in mind is the fact that in the short term
its supply will remain the same but in the long term its supply will increase considerably.
Types of Industry
Monopoly
It exists when a specific individual or an enterprise has sufficient control over a particular product or
service to determine significantly the terms on which other individuals shall have access to it. Monopolies
are thus characterized by a lack of economic competition to produce the good or service and a lack of
For Example, Indian Railway has monopoly in serving passengers through train as no other player exists.
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers
.Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The
decisions of one firm influence, and are influenced by, the decisions of other firms.
and the decisions of the one influences the decision of the others.
Perfect competition
It describes markets such that no participants are large enough to have the market power to set the price
of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any
perfectly competitive markets. Still, buyers and sellers in some auction-type markets say for commodities
or some financial assets may approximate the concept. Perfect competition serves as a benchmark
Money Market: Short-term instruments maturing within a period of one year are traded in money market
such as inter-corporate deposits, certificate of deposits, treasury bonds, commercial papers, commercial
bills, etc. Money market is a wholesale market and the participants in money market are large institutional
Capital Market: capital market deals with longer maturity financial assets and claims. Capital market
includes trading in the financial instruments such as shares (equity as well as preference), public sector
bonds and units of mutual funds. In case of capital market even a small individual investor can deal by
SENSEX Calculation
The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of the
30 largest and most actively traded stocks, representative of various sectors. These companies account
for around one-fifth of the market capitalization of the BSE. The Bombay Stock Exchange (BSE)
authorities review and modify its composition to make sure it reflects current market conditions.
For Eg: Reliance Industries LTD (RIL) has 10% weightage in the index and overall growth in RIL is 5% on
a particular day, so RIL contribution will be 10*1.05, and so on so forth. All the calculation will be done by
this method and final average increase or decrease of the BSE index is done.
for trading only to the residents of that particular city/state which makes it inaccessible for other investors
In India, there are 21 regional stock Exchanges existing in cities like Ahmedabad, Bangalore,
Bhubaneshwar, Calcutta, Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Jaipur, Ludhiana, Madhya
Pradesh, Madras, Magadh, Mangalore, Meerut, OTC Exchange Of India, Pune, Saurashtra Kutch,
National Stock Exchange: The BSE and NSE are the two national stock exchanges of India – meaning
they are common to all residents of the country. Today NSE network stretches to more than 1,500
be bought when a company issues IPO or can be traded in the secondary market wherein stocks can be
bought and sold through brokers who facilitate this procedure. A particular individual can decide on which
stocks to buy or sell depending upon the company’s growth prospects and performance and various other
parameters. This information will help the investors to become more aware of the directions of the
companies where they have share of stocks on and this will also aid them in how to trade stock and
termed as market capitalization. It is indicative of the value of the Company. Depending upon the market
capitalization of a company, all the companies are divided into Large-cap, mid-cap and small-cap. Given
below are the approximate categories of Market Capitalization, but there is no sure shot definition:
Conservative investors: They prefer investing in low risk profiles. Such people mostly put all their money
in interest bearing savings accounts, fixed deposit, mutual funds, treasury bills, Certificate of deposits.
Moderate investors: They often invest in cash and bonds. They may even invest in stock market in stocks
Aggressive investors: Commonly invest in the stock market which is a higher risk. They also tend to
invest in business ventures as well as higher risk real estate. The return on investment here is not
guaranteed.
Day Traders: Those who buy and sell various types of stocks, currencies, and futures within the same
day.
Short-term Traders: They hold the stocks/ investments for a very short time. Short-term trading minimizes
risk due to the fact that the shorter they hold the stock, the less time the price has to go down. Likewise
the gains that are to be had are also minimal, so the profits grow very slowly.
Long-term Traders: They have a long-term strategy and aren't in a rush to make quick money but to make
their dividends and capital growth of their shares. They have the right to vote at meetings for company
actions such as approving /rejecting merger proposals.
Stakeholders: They have an interest in the company but do not own it. A stakeholder is any individual or
organization that is affected by the activities of a business. Shareholders are a part of stake holders. The
other stakeholders can be Employees of the company, Vendors, Customers and Suppliers, Government,
Lenders.
Promoters
An individual or a company who devises a plan for a business venture or some kind of a business activity;
one who takes the preliminary steps necessary for the formation of a corporation. Promoters help in
does not mean that the shareholder has direct control over the business's day-to-day operations, being
a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the
form of dividends. The two main types of shares are common shares and preferred shares.
Bonds: A debt investment in which an investor loans money to an entity (corporate or governmental) that
borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies,
municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.
Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes,
Derivatives: A security whose price is dependent upon or derived from one or more underlying
assets. The derivative itself is merely a contract between two or more parties. Its value is determined by
fluctuations in the underlying asset. The most common underlying assets include stocks,
bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by
high leverage.
Options: A financial derivative that represents a contract sold by one party (option writer) to another party
(option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a
security or other financial asset at an agreed-upon price (the strike price) during a certain period of time
Call options give the option to buy at certain price, so the buyer would want the stock to go up.
Put options give the option to sell at a certain price, so the buyer would want the stock to go down.
Futures: A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such
as a physical commodity or a financial instrument, at a predetermined future date and price. Futures
contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading
on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others
are settled in cash. The futures markets are characterized by the ability to use very high leverage relative
to stock markets.
The term "bull market" is most often used to refer to the stock market, but can be applied to anything that
Bull markets are characterized by optimism, investor confidence and expectations that strong results will
continue. It's difficult to predict consistently when the trends in the market will change. Part of the difficulty
is that psychological effects and speculation may sometimes play a large role in the markets.
Bear market: A market condition in which the prices of securities are falling, and widespread pessimism
causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and
A bear market should not be confused with a correction, which is a short-term trend that
has duration of less than two months. While corrections are often a great place for a value investor to find
an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do.
Long (or Long Position): The buying of a security such as a stock, commodity or currency, with the
expectation that the asset will rise in value. In the context of options, it is the buying of an options
contract.
Short (or Short Position): The sale of a borrowed security, commodity or currency with the expectation
that the asset will fall in value. In the context of options, it is the sale (also known as "writing") of an
options contract.
Short Selling: The selling of a security that the seller does not own, or any sale that is completed by the
delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock
certificates are slowly being removed and retired from circulation in exchange for electronic recording.
With the age of computers and the Depository Trust Company, securities no longer need to be in
Depositories: On the simplest level, depository is used to refer to any place where something is deposited
for storage or security purposes. More specifically, it can refer to a company, bank or an institution that
purpose of this board is to maintain stable and efficient markets by creating and enforcing regulations in
the marketplace. The SEBI is relatively new (1992) but is a vital component in improving the quality of the
financial markets in India, both by attracting foreign investors and protecting Indian investors.
Accounts Basics
The accounting equation is given by:
Let us understand the terms in the accounting equation with an example. Consider that you are the owner
Assets: The valuable resources that your business owns are called assets. Examples of assets in your
Liabilities: The resources or obligations that your business owes to outside parties are called liabilities.
Example would be a, a bank loan which you had taken to buy leather from the market, which is the raw
material for the shoes. This loan is an obligation to the business and it needs to be paid back to the bank
and so is a liability. Another example would be the tax to be paid to the Government.
Owner’s Equity: A business has owner/owners who put in money to run the business. The owner’s equity
is divided generally in two parts: Paid-in capital and Retained earnings. Taking the same example once
again. You and your friend started the shoe factory by contributing Rs. 100,000 each to the business. So
the paid-in-capital is Rs. 200,000 (i.e. the money put into the business by the owners). After a successful
year of operations, the business churns out a profit of Rs. 60,000. You and your friend decided to keep
Rs. 10,000 and put the remaining Rs. 50,000 back into the business. This sum of Rs. 50,000 is called
retained earnings which is the earnings that have been retained in the business.
There are many ways in which assets and liabilities are classified. One of the classifications is current or
non-current. The word current means that it (asset or liability) would be settled within a year. If the time
Current Assets: The cash the business has in hand to carry out day to day activities
Current Liabilities: A bank loan that the business needs to repay to the bank in the next 6 months
Non current assets (also known as long term assets): Buildings and machinery owned by the business
Non current liability (also known as long term liability): A long term loan i.e. which is to be paid back in 10
years.
personal purposes and offers services like providing accounts. Other services that these offer include
issuing Demand drafts, cheques, lockers (safe deposit boxes) credit cards and debit cards facilities etc.
Examples include State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank etc.
An Investment bank is financial investment institution that acts as an intermediary and offers the following
services:
1) Underwriting – The process by which capital is raised from investors on behalf of companies by
2) Help a company in the complete process of raising capital by arranging stock issues in market
Examples include Goldman Sachs, Morgan Stanley, HSBC, JPMorgan Chase, Deutsche bank etc.
Differences: A commercial bank provides retail banking services like loans and deposits, but an
investment bank does not. Further, both of them handle different type of transactions.
NBFCs
Non-Banking Financial companies (NBFCs) are financial institutions that provide banking services, but do
not have a banking license. Ideally, they are not allowed to take deposits from the public.
2) Wealth Management
4) Retirement Planning
5) Underwriting
Types of Accounts
1) Savings Account: This type of account is most popular and commonly used account by
individuals. This account provides cheque facility and money can be withdrawn from the account.
However, there is a limit on the amount of cash that can be withdrawn on a single day. This
account also fetches interest on the amount of money deposited. Currently, the interest rate is
3.5% p.a .
2) Current Account: This account is used mainly by business houses and is not for investment. The
purpose of this account is to provide flexible liquidity and hence there is no limit on the amount of
money that can be withdrawn on a single day or on the number of withdrawals within a certain
period of time. No interest is paid on these accounts and bank actually levies service charges on
such accounts.
3) Fixed Deposit(FD) account: Customers deposit money in a fixed deposit account for a fixed
period of time at a fixed rate of interest. Money cannot be withdrawn from such accounts before
the time period ends, though some banks allow withdrawal by paying a penalty fee
4) Demat Accounts: Also known as dematerialized accounts, these are used for selling or buying
stocks in share market. In India, such accounts are maintained by NSDL (National Securities
5) Joint Account: This account is owned by two or more individuals. Any of the owners can withdraw
money from this account, but the permission of other owners is required.
6) NRI Account: It is a bank account opened in India by a non-resident Indian for the purpose of his