I.
Monetary Policy & Central Banking Tools
These terms describe how the central bank (like the RBI in India) manages
the economy, especially prices and money supply.
Monetary Policy Committee (MPC): Imagine a special team at
the central bank whose main job is to decide on interest rates to
control inflation and support economic growth. That's the MPC.
Policy Repo Rate: This is the most important interest rate. It's the
rate at which banks borrow money from the central bank for a very
short period. When the central bank lowers this rate, it makes it
cheaper for banks to borrow, encouraging them to lend more money
to people and businesses.
Liquidity Adjustment Facility (LAF): This is a tool the central
bank uses daily to manage how much money (liquidity) is available
in the banking system. It involves both borrowing (repo) and
lending (reverse repo) operations.
Standing Deposit Facility (SDF) Rate: This is the interest rate
banks get when they park their extra money with the central bank
overnight. It acts as a "floor" for short-term interest rates in the
market.
Marginal Standing Facility (MSF) Rate: This is the rate at which
banks can borrow money from the central bank in emergency
situations, usually by putting up government bonds as collateral. It
acts as a "ceiling" for short-term interest rates.
Bank Rate: This is the interest rate at which the central bank lends
money to commercial banks, typically for longer periods, without
requiring any collateral.
Basis Points (BPS): A very common unit in finance. One basis
point is equal to one-hundredth of a percentage point (0.01%). So, if
you hear a rate cut of "50 basis points," it means the rate goes
down by 0.50%.
Policy Stance (Accommodative vs. Neutral):
Accommodative Stance: This means the central bank is
trying to I. Monetary Policy & Central Banking Tools
These terms describe how the central bank (like the RBI in
India) manages the economy, especially prices and money
supply.
Monetary Policy Committee (MPC): Imagine a special
team at the central bank whose main job is to decide on
interest rates to control inflation and support economic
growth. That's the MPC.
Policy Repo Rate: This is the most important interest rate.
It's the rate at which banks borrow money from the central
bank for a very short period. When the central bank lowers
this rate, it makes it cheaper for banks to borrow, encouraging
them to lend more money to people and businesses.
Liquidity Adjustment Facility (LAF): This is a tool the
central bank uses daily to manage how much money
(liquidity) is available in the banking system. It involves both
borrowing (repo) and lending (reverse repo) operations.
Standing Deposit Facility (SDF) Rate: This is the interest
rate banks get when they park their extra money with the
central bank overnight. It acts as a "floor" for short-term
interest rates in the market.
Marginal Standing Facility (MSF) Rate: This is the rate at
which banks can borrow money from the central bank in
emergency situations, usually by putting up government
bonds as collateral. It acts as a "ceiling" for short-term interest
rates.
Bank Rate: This is the interest rate at which the central bank
lends money to commercial banks, typically for longer periods,
without requiring any collateral.
Basis Points (BPS): A very common unit in finance. One
basis point is equal to one-hundredth of a percentage point
(0.01%). So, if you hear a rate cut of "50 basis points," it
means the rate goes down by 0.50%.
Policy Stance (Accommodative vs. Neutral):
Accommodative Stance: This means the central bank is
trying to boost the economy, often by lowering interest rates
and increasing the money supply. It's like putting your foot on
the accelerator.
Neutral Stance: This means the central bank is neither
trying to speed up nor slow down the economy. It's taking a
"wait and see" approach, watching for new economic
information before making big changes.
Cash Reserve Ratio (CRR): This is the percentage of a
bank's total deposits that it must keep with the central bank
as a reserve, not for lending. When the CRR is cut, banks have
more money to lend, which helps increase the money supply
in the economy.
Liquidity: In simple terms, this refers to how much cash and
easily convertible assets are available in the banking system.
High liquidity means there's plenty of money circulating.
Monetary Policy Transmission: This is the process of how
changes in the central bank's policy rates (like the repo rate)
spread through the financial system, affecting all other
interest rates (like loan rates for consumers and businesses),
and ultimately influencing economic activity.
Frontloading Rate Cuts: This means the central bank
makes a larger portion of its expected interest rate cuts
earlier in the cycle, rather than spreading them out slowly
over time. The idea is to give a bigger boost to the economy
sooner.
Terminal Rate: This is the interest rate at which the central
bank is expected to stop either cutting or raising rates in a
particular economic cycle.
II. Economic Indicators & Concepts
These terms help us understand the health and performance
of an economy.
Inflation: This is the general increase in the prices of goods
and services over time. When inflation is high, your money
buys less than it used to.
CPI (Consumer Price Index): This is a common way to
measure inflation. It tracks the average change in prices that
consumers pay for a typical basket of goods and services (like
food, clothing, housing).
Headline Inflation: This is the overall inflation figure that
includes price changes for all goods and services.
Core Inflation: This is inflation that excludes very volatile
items like food and energy prices. It gives a clearer picture of
the underlying price trends in the economy, as food and
energy prices can swing wildly.
Tolerance Band (for inflation): This is a specific range
(e.g., 2% to 6%) within which the central bank aims to keep
inflation. Going outside this band signals a need for policy
action.
Disinflation: This is when the rate of inflation slows down.
Prices are still going up, but at a slower pace than before. It's
not the same as deflation (where prices actually fall).
Real GDP Growth: This measures the actual increase in the
value of all goods and services produced in an economy over
a period, after accounting for inflation. It tells you how much
the economy is truly growing.
Balance Sheets (Strong): Think of a balance sheet as a
financial snapshot of a company, household, or even the
government. A "strong" balance sheet means they have
healthy assets and manageable debts, indicating financial
stability. The document mentions strong balance sheets for
corporations, banks, households, the government, and even
the external sector.
Domestic Demand: This refers to the total spending by
people and businesses within a country on goods and
services. It's a vital engine for economic growth, especially
when global conditions are uncertain.
Global Spillovers: These are economic effects, good or bad,
that spread from one country or region to others. For
example, a recession in a major economy could negatively
impact other countries through reduced trade or investment.
Current Account Deficit (CAD): This happens when a
country spends more on imports of goods, services, and
international transfers than it earns from exports. It means the
country is borrowing from the rest of the world to finance its
spending.
Trade Deficit: This is a part of the CAD, specifically when a
country imports more physical goods than it exports.
Foreign Portfolio Investment (FPI): This is money invested
by foreign individuals or companies into a country's financial
assets like stocks and bonds. These investments are often
short-term and can move quickly in and out of a country,
making them "hot money."
Foreign Direct Investment (FDI): This involves long-term
investments by a foreign company or individual in a business
located in another country, such as building a factory or
buying a significant stake in a company.
Net FDI: This is the total FDI flowing into a country minus the
FDI flowing out (e.g., when foreign companies sell their
assets). It shows the overall change in foreign ownership.
Gross FDI: This is just the total FDI that has flowed into a
country.
Foreign Exchange Reserves: These are foreign currencies
(like US dollars, Euros, Yen) and gold held by the central bank.
They act as a buffer to help a country manage its currency,
pay for imports, and deal with unexpected economic shocks.
Financial Stability: This means the financial system (banks,
markets, payment systems) is resilient enough to handle
shocks and continue operating smoothly without major
disruptions.
Policy Space (constrained): This refers to a situation where
a government or central bank has limited room to introduce
new economic policies (e.g., lowering interest rates further or
increasing spending) because of existing economic challenges
or high debt levels.
Rate-sensitive sectors (e.g., Auto, Realty): These are
industries whose sales and profits are heavily influenced by
interest rates. When interest rates go down, it becomes
cheaper to borrow money for big purchases like cars or
homes, which boosts these sectors.
III. Specific Economic Contexts
Emerging Market Economies (EMEs): These are countries
that are developing their economies rapidly and are becoming
more integrated with the global economy. They often face
unique challenges like managing volatile capital flows.
boost the economy, often by lowering interest rates and
increasing the money supply. It's like putting your foot on the
accelerator.
Neutral Stance: This means the central bank is neither
trying to speed up nor slow down the economy. It's taking a
"wait and see" approach, watching for new economic
information before making big changes.
Cash Reserve Ratio (CRR): This is the percentage of a bank's
total deposits that it must keep with the central bank as a reserve,
not for lending. When the CRR is cut, banks have more money to
lend, which helps increase the money supply in the economy.
Liquidity: In simple terms, this refers to how much cash and easily
convertible assets are available in the banking system. High liquidity
means there's plenty of money circulating.
Monetary Policy Transmission: This is the process of how
changes in the central bank's policy rates (like the repo rate) spread
through the financial system, affecting all other interest rates (like
loan rates for consumers and businesses), and ultimately
influencing economic activity.
Frontloading Rate Cuts: This means the central bank makes a
larger portion of its expected interest rate cuts earlier in the cycle,
rather than spreading them out slowly over time. The idea is to give
a bigger boost to the economy sooner.
Terminal Rate: This is the interest rate at which the central bank is
expected to stop either cutting or raising rates in a particular
economic cycle.
II. Economic Indicators & Concepts
These terms help us understand the health and performance of an
economy.
Inflation: This is the general increase in the prices of goods and
services over time. When inflation is high, your money buys less
than it used to.
CPI (Consumer Price Index): This is a common way to
measure inflation. It tracks the average change in prices that
consumers pay for a typical basket of goods and services (like
food, clothing, housing).
Headline Inflation: This is the overall inflation figure that
includes price changes for all goods and services.
Core Inflation: This is inflation that excludes very volatile
items like food and energy prices. It gives a clearer picture of
the underlying price trends in the economy, as food and
energy prices can swing wildly.
Tolerance Band (for inflation): This is a specific range
(e.g., 2% to 6%) within which the central bank aims to keep
inflation. Going outside this band signals a need for policy
action.
Disinflation: This is when the rate of inflation slows down. Prices
are still going up, but at a slower pace than before. It's not the same
as deflation (where prices actually fall).
Real GDP Growth: This measures the actual increase in the value
of all goods and services produced in an economy over a period,
after accounting for inflation. It tells you how much the economy is
truly growing.
Balance Sheets (Strong): Think of a balance sheet as a financial
snapshot of a company, household, or even the government. A
"strong" balance sheet means they have healthy assets and
manageable debts, indicating financial stability. The document
mentions strong balance sheets for corporations, banks,
households, the government, and even the external sector.
Domestic Demand: This refers to the total spending by people and
businesses within a country on goods and services. It's a vital
engine for economic growth, especially when global conditions are
uncertain.
Global Spillovers: These are economic effects, good or bad, that
spread from one country or region to others. For example, a
recession in a major economy could negatively impact other
countries through reduced trade or investment.
Current Account Deficit (CAD): This happens when a country
spends more on imports of goods, services, and international
transfers than it earns from exports. It means the country is
borrowing from the rest of the world to finance its spending.
Trade Deficit: This is a part of the CAD, specifically when a country
imports more physical goods than it exports.
Foreign Portfolio Investment (FPI): This is money invested by
foreign individuals or companies into a country's financial assets like
stocks and bonds. These investments are often short-term and can
move quickly in and out of a country, making them "hot money."
Foreign Direct Investment (FDI): This involves long-term
investments by a foreign company or individual in a business
located in another country, such as building a factory or buying a
significant stake in a company.
Net FDI: This is the total FDI flowing into a country minus the
FDI flowing out (e.g., when foreign companies sell their
assets). It shows the overall change in foreign ownership.
Gross FDI: This is just the total FDI that has flowed into a
country.
Foreign Exchange Reserves: These are foreign currencies (like
US dollars, Euros, Yen) and gold held by the central bank. They act
as a buffer to help a country manage its currency, pay for imports,
and deal with unexpected economic shocks.
Financial Stability: This means the financial system (banks,
markets, payment systems) is resilient enough to handle shocks and
continue operating smoothly without major disruptions.
Policy Space (constrained): This refers to a situation where a
government or central bank has limited room to introduce new
economic policies (e.g., lowering interest rates further or increasing
spending) because of existing economic challenges or high debt
levels.
Rate-sensitive sectors (e.g., Auto, Realty): These are industries
whose sales and profits are heavily influenced by interest rates.
When interest rates go down, it becomes cheaper to borrow money
for big purchases like cars or homes, which boosts these sectors.
III. Specific Economic Contexts
Emerging Market Economies (EMEs): These are countries that
are developing their economies rapidly and are becoming more
integrated with the global economy. They often face unique
challenges like managing volatile capital flows.
