Kuznets curve graphs the hypothesis that as an economy develops, market forces

first increase and then decrease economic inequality.

Argues that inequality is a necessity for overall growth

Exceptions such as East Asian Miracle: South Korea, Hong Kong, Taiwan,
Singapore(Asian Tigers)

Laffer curve is one possible representation of the relationship between rates of

taxation and the hypothetical resulting levels of government revenue

illustrate the concept of taxable income elasticity

at zero and 100% the revenue reduces to 0

Lorenz curve is a graphical representation of the cumulative distribution function

of the empirical probability distribution of wealth or income

1% of all the world's population owns 50% of all wealth, means a wealth Gini
coefficient of at least 49%
G=f-u

Global Economic Prospects- World Bank

World Development Report- World Bank
Inflation

Continued rise in prices while the value of money declines

Rate of inflation is measured by: CPI & WPI
o Demand-pull inflation
Either demand over constant level of supply or supply over
same level of demand
Due to increase in purchasing power
Wage revision at micro level
Deficit financing at macro level
It is tackled through taxes and govt spending
o Cost-push inflation
Increase in factor input cost pushes up the prices
It is tackled through control on income & prices, reduce
monopoly of trade unions

To check rising inflation:

o Supply side measure- import of goods which are in short supply
o Cost side measure- tax breaks(short term),improving production
practices
o Tighter monetary control to squeeze out extra money
Deflation- is the general decline in prices often caused by reduction in
supply of money or credit
Disinflation- is the slowing rate of inflation
Reflation- stimulating the economy by producing inflation
GDP Deflator- ratio of GDP at current prices to constant prices
o it includes entire services and goods
o it is available only on a quarterly basis
Consumer Price Index
o CPI for agricultural labourers by Ministry of Labour & Employment
o CPI for industrial labourers by MoLE
o CPI for rural labourers by MoLE
o CPI for All India by Ministry of Statistics & Programme Implementation
o CPI for Rural areas- by MoSPI
Based on 2 villages from each district covering 1181 villages
o CPI for Urban areas-by MoSPI
Towns & cities having population more than 9 lakhs, per 2001
census, 310 towns
CPI IL covers all states while CPI AL & CPI RL cover only 20 states
CPI is the most representative price index
CPI uses a base year of 2010
It has broader consumption basket including 175 times from rural areas and
200 from urban areas
Services like education, medical care, recreation, transport & communication
are included in CPI
Weights or consumption pattern are derived from Consumer Expenditure
Survey by NSSO

Weightage of each group

Food,Beverage,tobacco
Fuel & Light
Housing
Clothing,bedding
Miscellaneous

WPI
o
o
o

49.7
9.49
9.77
4.73
26.3

Oldest price index in the country

Base year 2004-05
Published by Economic Adviser, in DIPP,Ministry of commerce &
Industry

WPI is also reported on a monthly basis

It has 676 items
Primary Articles(20.12 %),Fuel & power(14.91%),Manufactured
products(64.9)
WPI & CPI
o WPI- wholesale level, CPI-Retail level
o WPI gives weightage to Manufacturing goods(64%), CPI gives
weightage to Food items & primary goods(49+9 %)
o CPI considers services, while WPI doesnt consider services
Headline Inflation- raw inflation figure reported through CPI/WPI.it is
measure of total inflation in an economy which also includes sudden spikes
such as in food & energy
Core Inflation
o It excludes seasonal fluctuations such as food & energy costs
During Inflation : =>Repo should increase
During deflation : => Repo should decrease
o
o
o

Credit rating agency

is a company that assigns credit ratings, which rate a debtor's ability to pay
back debt
debt instruments rated by CRAs include government bonds, corporate bonds,
CDs, municipal bonds, preferred stock, and collateralized securities
Moody's, S&P, and Fitch Ratings are the biggest three
credit ratings are compiled primarily for investors about companies and
governments
Eg: CRISIL

Credit Information Agency

Credit information are compiled primarily for governments and lenders

about individual borrowers
Eg: CIBIL

RBI

Currency printing at : Dewas(MP),Nasik(MH),Salboni(WB),Mysore(Kar)

Coin Mints at : Noida(UP),Mumbai(MH),Hyderabad(Tel),Kolkata(WB)
Minimum Reserve System: requires RBI to keep minimum of Rs 200 crore
comprising foreign currencies,gold coin & bullion , out of which 115 crore
should be in gold bullion/coins
Foreign Exchange reserve: comprising gold reserves,foreign currencies are
kept at the banking department
Liquidity injection Repo, Liquidity Absorption- Reverse Repo

According to RBI Act 1934, notes in denominations greater than 10,000

cannot be issued
According to Coinage Act 1906, coins can be issued up to Rs 1000
denomination
Notes are issued by RBI , while coins are minted by Govt. Of India
NHB & DICGC are wholly owned subsidiaries of RBI and RBI has majority
stake in NABARD

SLR is calculated as a portion of NDTL(Net Demand & Time Liabilities)21.5

CRR- is calculated as a portion of
RBI sells foreign exchange during depreciation
RBI buys foreign exchange during appreciation
RBI issues Market Stabilization Bonds to absorb excess liquidity
RBI as a banker to the govt

Govt deposits cash balances with the RBI

Except J&K, RBI act as a banker to the state govts
Ways & Means Advances- short term interest bearing advance to
meet temporary mismatches in their receipts & payments
o for a period of 90 Days
o WMA limits are if exceeded, is called overdraft.
o Interests on Overdraft is 2% higher than Repo rate
o Normal WMA-no collateral, Special WMA- collateral
o Interest rate is Repo Rate itself
o
Govt is required to maintain a minimum cash balance with the RBI(10
Cr daily,100 Cr on Fridays)
Market Stabilization Scheme- to absorb excess liquidity
o The amount raised under the MSS does not get credited to the
Government Account but is maintained in a separate cash account with
the RBI and are used only for the purpose of redemption/buy back of
Treasury-Bills/Dated Securities issued under the scheme

RTGS for big transactions while NEFT is used for small transactions
Inflation Indexed Bonds- aka Capital Indexed Bonds

to protect investors from inflation, RBI introduced IIBs

it was proposed in 2013-14 budget
inflation index based on CPI

Bonds & Securities

Bond-are debts
Stocks- are equity
Face Value- amount paid to the bond holder on maturity
Coupon- periodic interest payment
Zero Coupon bonds- pays no coupons & have a coupon rate of 0%, hence
price of such bonds will be less than the face value
Usually bond prices are provided in terms of % of par/face value
If interest rates are higher than when the bonds were issued, the prices of
existing bonds may fall , as the new bonds issued would be more profitable
If interest rates fall the bond prices would soar
fair value of a bond is the present value of stream of cash flow it is expected
to generate
Bond valuation-by discounting the bonds expected cash flow
High rated bonds by creditworthy issuers would fetch low interests ,
while low creditworthy bond issuers would have to offer higher interest
rates to entice investors
Yield- annual percentage return earned on a security
Higher the bond price lower the return or yield
Junk Bonds- high-yielding bonds(non-investment gradebond) that have a
higher risk of default
If short term yields are lower than long-term yield ,curve is a normal(positive)
curve
If short term yields are higher than long-term yield, curve is an
inverted(negative) curve
IRDA has permitted insurance companies to participate in Repo market &
become users of Credit Default Swap
To attract foreign investment in long term infrastructure bonds,rate of tax on
interest paid to NR-investors was reduced from 20 to 5%
Credit enhancement to infrastructure companies by ADB & India
Infrastructure Finance Corporation Ltd(IIFCL)

GOVT Securities Market in India

Govt security is a tradable instrument issued by central/state govt

They are auctioned by RBI on electronic platform called NDS(Negotiated
Dealing System) introduced in 2002
NDS membership is limited to members holding SGL and/or Current account
with RBI
In 2005 NDS-OM(order matching) was introduced

All non-NDS members have to open a gilt account-demat account maintained

by scheduled commercial bank or primary dealer for its constituent
Delivery versus Payment Settlement (DvP)is the mode of settlement of
securities, eliminates settlement risk in transactions
CCIL is the clearing agency for govt securities
o CCIL becomes buyer to the seller & seller to the buyer
o CCIL collects margins from all participants and maintains a
settlement guarantee fund,
o If a party fails to uphold its side, CCIL will use fund from SGF or use
defaulting firms collateral
Major players are primary dealers & Commercial Banks
o Insurance & provident fund, mutual funds, regional rural
banks, co-operative banks
It can be long term(govt bonds or dated securities) or short
term(Treasury Bills)
State govts only issue long term State Development Loans
o Interest is serviced at half-yearly intervals
o It qualifies for SLR
o Eligible as collateral in Repo & LAF
Govt Securities Act ,2006
Treasury Bills or T-Bills
o Money market instruments,short term debt instrument
o Issued in 3 tenors, 91 days,182 days,364 days
o They are zero coupon securities
o RBI conducts auction to issue T-Bills
o Issued only by Central Govt
o Issued at a discount price & redeemed at face value
Cash Management Bills
o Short term instrument issued by GoI,
o To meet temporary mismatches in cash flow of the govt
o Are issued for maturities less than 91 days
o They are issued at a discount price & redeemed at face value
o They are also zero coupon securities
Dated Govt Securities
o Long term securities & carry fixed or floating coupon rates
CBLO(Collateralized Borrowing & Lending Obligation) Market
o Is a money market instrument operated by CCIL
o For those entities that does not have access to inter-bank call money
market or have restricted access in terms of ceiling on borrowing
o Maturity period ranging from 1 to 90 days (upto 1 year as per RBI
guidelines)
o Discounted instrument available in book entry

Saving Instruments

They are not fully tradable and not eligible for SLR
National Saving certificates
Kisan Vikas Patra
Oil bonds
FCI bonds
Fertilizer bonds
Power bonds

Nominal GDP-expressed in current prices

Real GDP-expressed in constant prices
LIBOR Rates

is the interest rate on dollar & other foreign currency deposits at which larger
banks are prepared to borrow.
based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP),
Japanese yen (JPY) and Swiss franc (CHF)
serve as the benchmark reference rate for debt instruments
By British Bankers Association,

MIBOR/MIBID

calculated everyday by the National Stock Exchange of India (NSEIL)

interest rate that one participating bank would pay another to attract the
deposit of funds

Indian Financial Market

External Sector

Current Account
o Every current transactions of a country are shown
o Includes export, import, interest payments, foreign investments in
shares
Capital Account
o External lending/borrowing, private remittances, Issue of external
bonds
Balance of Payment(BoP)

o Net transaction of an economy with outside world

o Net outcome of current and capital account
o If BoP is negative, deficit is drawn from foreign reserves
o If BoP is positive , surplus is added to foreign reserves
Extended Fund Facility
o is a service provided by IMF
o countries facing BoP crisis are allowed to raise foreign exchange in lieu
of structural reforms
o India was asked to do the following:
Devalue rupee by 22%
Peak custom duty of 30%
Excise duty increased by 20%
Govt expenditure to be cut by 10%
GAAR is supposed to be implemented from 2017

Sector wise contribution of GDPAgriculture(13.7),Industry(21.5),Service(64.8)

35 towns of Export excellene-Vizag,Bhimavaram in Andhra latest
Under FTP 2015-20 MEIS(Merchandise Exports from India Scheme) & SEIS(Service
Export from India Scheme)
Export Promotion Capital Goods Scheme-(EPCG)

import of capital goods for pre-production, production and post-production

at 0 or 3 % Customs duty subject to an export obligation equivalent to 6
times of duty saved on capital goods imported under EPCG over 6 years
it is authorized by DGFT

Agricultural Export promotionVishesh Krishi Gram Upaj Yojana

compensates the high transport costs and offset other disadvantages to promote exports of the
following products: Agricultural Produce and their value added products;
Govt provides 5% of FOB value as Duty credit scrip
Focus Market Scheme
To offset freight charges & other externalities with regards to exports to select countries
Duty credit scrip equivalent to 3% of FOB is issued
In special FMS additional 1% of FOB duty credit scrip is available for exports to select
countries
Focus Product Scheme
Export of notified products to all countries shall be entitled to duty credit scrip of 2%
FOB

The new Foreign Trade Policy merges the earlier Focus Product Scheme (FPS), Focus
Market Scheme and Vishesh Krishi Gram Udyog Yojana into a single Merchandise
Exports from India Scheme (MEIS)
Duty scrips- can be used to pay customs duty ,excise duty, service tax
Status Holders Incentive Scrip
Status Holders of specified sectors are entitled for an extra scrip called SHIS at 1%
of the of FOB value of exports
Merchandise Export from India Scheme

Service Export from India Scheme

Applied to service providers located in India

Duty credit scrip is transferable & can be used for all type of goods & service
tax benefits