List of Banking Abbreviations

ACS	Automated Clearing System
ADB	Asian Development Bank
AEPS	Aadhaar Enabled Payments Switch
AAIC	Agricultural Insurance Company
ASSOCHAM	Associated Chambers of Commerce and Industry of India
AML	Anti Money Laundering
ATM	Automated Teller Machine
BCSBI	Banking Codes and Standards Board of India
BIS	Bank for International Settlements
BOP	Balance of Payments
BR Act	Banking Regulations Act, 1949
BSCS	Basel Committee on Banking Supervision
BSE	Bombay Stock Exchange
CAR	Cash Adequacy Ratio
CAG	Controller and Auditor General of India
CIBIL	Credit Information Bureau (India) Limited
CPI	Consumer Price Index
CRAR	Capital to Risk Weighted Asset Ratio
CRR	Cash Reserve Ratio
FDI	Foreign Direct Investment
FICCI	Federation of Indian Chambers of Commerce and Industry
GDP	Gross Domestic Product
IFSC	Indian Financial System Code
IMF	International Monetary Fund
IMPS	Immediate Payment Service
KCC	Kisan Credit Card
KYC	Know Your Customer
MICR	Magnetic Ink Character Recognition
NABARD	National Bank for Agricultural and Rural Development
NAV	Net Asset Value
NBFC	Non  Banking and Finance companies
NEFT	National Electronic Funds Transfer System
NFA	No Frills Account
NFC	Non Banking Finance Companies
NHB	National Housing Bank
NPA	Non Performing Assets
NPS	National Pensions Scheme
NSE	National Stock Exchange
OMO	Open Market Operations
OTP	One Time Password
PGS	Payment Gateway System
RBI	Reserve Bank Of India
RRB	Regional Rural Bank
RTGS	Real Time Gross Settlement System
SCB	Scheduled Commercial Bank
SEBI	Security Exchange Board Of India
SIDBI	Small Industries and Development Bank of India
SLR	Statutory Liquidity Ratio
SWIFT	Society For World Wide Inter Bank Financial Telecommunication
UEBA	Universal Electronic Bank Account
UIDAI	Unique Identification Authority of India
WL ATM	White Label ATM
WPFI	World Press Freedom Index
WPI	Wholesale Price Index

Inflation and Deflation

                          

INFLATION  

 It is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every rupee you own buys a smaller percentage of a good or service. The value of a rupee does not stay constant when there is inflation. The value of a rupee is observed in terms of purchasing power, which are the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a Re1 pack of candy will cost Rs 1.02 in year. After inflation, your money can't buy the same amount of goods it could beforehand. Inflation is the percentage change in the value of the Wholesale Price Index (WPI) on a year basis.

Measurement of Inflation

Increase or decrease in general price level is measured against price level of some reference year called base year. Inflation is expressed as percentage increase in the general price level with reference to base year of the given basket of commodities.

Inflation = current prices-base year prices/base year prices * 100

Classification of Inflation

Inflation is classified on the basis of increase in price. In some countries, inflation occur even the state of peace while in some countries inflation occurs during the time of war.

Thus, inflation can be classified as follows

Creeping Inflation

This inflation is a slow inflation. In this type of inflation, price increase about at the rate of 2-4% per year, so slow increase in price is not taken as bad.

Trotting Inflation

Trotting inflation occurs when the percentage has risen from 5-10%. At this level it is a warning signal for most governments to take measures to avoid exceeding double-digit figures.

Galloping Inflation

When inflation rises to 10-20%, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can't keep up with costs and prices. Foreign investors avoid the country, depriving it of needed capital. The economy becomes unstable and government leaders lose credibility. Galloping inflation must be prevented.

Moderate Inflation

This can be differently defined around the world, given the different inflation histories. As an indication only, one could consider inflation as moderate when it ranges from 15-30%. For some countries, the higher part of this range is already 'high inflation'.

Hyperinflation

Hyperinflation is when the prices skyrocket more than 50% a month. It is fortunately very rare. Infract, most examples of hyperinflation have occurred when the government printed money recklessly to pay for war. Examples of hyperinflation include Germany in the 192s, Zimbabwe in the 2000s and during the American Civil War. It is generally considered as hyper inflation and at this stage it is almost uncontrollable because it increases more rapidly in such a little time frame.

Demand Pull Inflation

Demand-pull inflation occurs when the consumers, businesses or the government's demand for goods and services exceed the supply; therefore the cost of the item rises, unless supply is perfectly elastic. Because we do not live in a perfect market supply is somewhat inelastic and the supply of goods and services can only be increased if the factors of production are increased. It involves inflation rising as real gross domestic product rises and unemployment falls.

Main causes of demand pull inflation are

• Quick increase in consumption and investment.
• Sudden increase in exports.
• A lot of government spending
• Excessive monetary growth.

Cost Push Inflation

Cost-push inflation is caused by an increase in production costs. It is generally caused by an increase in wages or an increase in the profit margins of the entrepreneurs. When wages are increased, this causes the business owner to in turn increase the price of final goods and services which would be passed onto the consumers and the same consumers are also the employees. As a result of the increase in prices for final goods and services the employees realize that their income in insufficient to meet their standard of living because the basic cost of living has increased.

Effects of Inflation

The impact of inflation in Indian economy decreases the purchasing power of dollar and increase the value of goods and commodities, especially those that comes from other country.

The effect of inflation of different sectors are given below

Manufacturing Categories

Businessman, farmer, industrialist comes under this sector. Generally, they got benefit due to inflation because the cost of good increases in the period of inflation and opportunity of direct benefit increase.

Salaried Categories

Inflation usually hurts your buying power. That’s because rising prices means you have to pay more for the same goods and services. Inflation can help you if you are the lucky recipient of income inflation. If your income increases at a slower rate than general inflation, you’re buying power declines even if you are making more.

Consumer Categories

Inflation is not good for consumer. Because buying power decline and prices of goods increases. Consumer takes minimum good comparison to previous time.

Debtor and Creditor Categories

Benefit comes under debtor categories in the session of inflation in the compression of creditors. Reason is the value of money decreases and interest rate same like previous time.

Investor Category

An investor is a person who allocates capital with the expectation of a financial return. The types of investment include gambling and speculation, equity, debt securities, real estate, currency, commodity, derivatives such as put an call options etc. The impact of inflation on your portfolio depends on the type of securities you hold. If you invest only in stocks, worrying about inflation shouldn’t keep you up at night. Over the long-run, a company’s revenue and earnings should increase at the same pace as inflation. The combination of a bad economy with an increase in costs is bad for stocks. Also, a company is in the same situation as a normal consumer – the more cash it carries, the more its purchasing power decrease with increase in inflation.

                                                           Deflation

A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.

Money Market in India

Money Market

Money market is that segment of financial markets that deal in short-term securities and loans, gold and foreign exchange are termed as money market. Money has a time value and therefore, the use of it, is bought and sold against payment of interest. Short-term money is bought and sold in the money market and long-term money in the capital market. Neither the money market nor the capital market exists in one physical location. The money market is a key component of the financial system, as it is the function of monetary operations conducted by the central bank (RBI) in its pursuit of monetary policy with maturity ranging from overnight to one year and includes financial instruments that are deemed to be close substitutes of money. 

In our country, Money Markets are regulated by both RBI and SEBI. Indian money market is divided into organized and unorganized segments. Unorganized market is old Indigenous market mainly made of indigenous bankers, money lenders etc.  Organized market is that part which comes under the regulatory purview of RBI and SEBI. The nature of the money market transactions is such that they are large in amount and high in volume. Thus, the entire market is dominated by small number of large players.  At the same time, the money market in India is yet underdeveloped. The key players in the organized money market include Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds, Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance Companies and Financial Institutions and Non-Banking Financial Companies (NBFCs).

Structure of Indian Money Market

       Organised Sector                                                Unorganised Sector

•        Call or Notice Money                                        Indigenous Bankers
•        Treasury Bills                                                    Money Lenders
•        Certificates of Deposits
•        Commercial Papers
•        Commercial Bills
•     The Repo Market (Repurchase Agreements)

Call Money

Call or notice money is an amount borrowed or lent on demand for a very short period. If the period is greater than one day and up to 14 days it is called notice money, otherwise the amount is known as call money. No collateral security is needed to cover these transactions. The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of money. Co-operative banks, commercial banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements. This is completely inter-bank market. Interest rates are market determined. In view of the short tenure of these transactions, both borrowers and lenders are required to have current accounts with RBI.

Treasury Bills (T-Bills)

These bills are money market instruments to finance the short-term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The interest received on them is the discount. The return to the investor is the difference between the maturity value and issue price. The market that deals with treasury bills is called Treasury bill market. T-Bills are issued by the Central Government to secure short-term loans. These bills are sold by the Reserve Bank on behalf of the government. These are bought by the Reserve Bank, commercial banks, non-banking financial intermediaries. LIC, UTI and GIC. T-Bills are most liquid, because Reserve Bank is always ready to buy and discount them.

These are the lowest risk category instruments for the short term. RBI issues Treasury bills at a prefixed day and for a fixed amount. There are three types of T-Bills.

91-day T-bill:- Maturity is in 91 days, it is auctioned on every Friday of every week and the notified amount for auction is Rs 100 crores.

182-day T-bill:- Maturity is in 182 days, it is auctioned on every alternate Wednesday, which is not a reporting and notified amount for auction is Ts 100 crores.

364-day T-bill:- Maturity is 64 days, it is auctioned on every alternate Wednesday which is reporting week and the notified amount for the auction is Ts. 500 crores.

Commercial Bills

The commercial bills are issued by the seller (drawer) on the buyer (drawee) for the value of goods delivered by him. These bills are of 30 days, 60 days or 90 days maturity.

If the seller is in need of funds, he may draw a bill and send it to the buyer for seller is in need of funds, he may draw a bill and send it to the buyer for acceptance. The buyer accepts the bill and promises to make payment on the due date. He may also approach his bank to accept the bill. The bank charges a commission for the acceptance of the bill and promises to make the payment if the buyer defaults. Once this process in accomplished, the seller can sell it in the market. This way a commercial bill becomes a marketable investment. Usually, the seller will go to the bank for discounting the bill. The bank will pay him after deducting the interest for the remaining period of the bill and service charges form the face value of the bill. The interest rate is call the discount rate on the bills.

Certificate of Deposits (CDs)

CDs are issued by Commercial banks and development financial institutions. CDs are unsecured, negotiable promissory notes issued at a discount to the face value. The scheme of CDs was introduced in 1989 by RBI. The main purpose was to enable the commercial banks to raise funds from market. At present, the maturity period of CDs ranges from 3 months to 1 year. They are issued in multiples of Rs. 25 lakh subject to a minimum size of Rs. 1 crore. CDs can be issued at discount to face value. They are freely transferable but only after the lock-in-period of 45 days after the date of issue.

Commercial Papers

Commercial papers are usually known as promissory notes which are negotiable short-term unsecured and are generally issued by companies and financial institutions which have working capital of not less than Rs. 5 crores, at a discounted rate from their face value. The fixed maturity for commercial papers is between 7 days to 1 year.  The purposes with which they are issued are - for financing of inventories, accounts receivables, and settling short-term liabilities or loans. The return on commercial papers is always higher than that of T-bills. Companies which have a strong credit rating, usually issue CPs as they are not backed by collateral securities. Corporations issue CPs for raising working capital and they participate in active trade in the secondary market. It was in 1990 that Commercial papers were first issued in the Indian money market.

The Repo Market (Repurchase Agreements)

These are transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction in called Repo when viewed from the perspective of the buyer of securities that is the party acquiring fund. It is called Reverse Repo when viewed from the perspective of supplier of funds.

Unorganised Sector of Money Market

The economy on one hand performs through organised sector and on other hand in rural areas there is continuance of unorganised, informal and indigenous sector. The unorganised money market mostly finances short-term financial needs of farmers and small businessmen. The main constituents of unorganised money market are:-

Indigenous Bankers (IBs)

Indigenous bankers are individuals or private firms who receive deposits and give loans and thereby operate as banks. IBs accept deposits as well as lend money. They mostly operate in urban areas, especially in western and southern regions of the country. The volume of their credit operations is however not known. Further their lending operations are completely unsupervised and unregulated. Over the years, the significance of IBs has declined due to growing organised banking sector.

Money Lenders (MLs)

They are those whose primary business is money lending. Money lending in India is very popular both in urban and rural areas. Interest rates are generally high. Large amount of loans are given for unproductive purposes. The operations of money lenders are prompt, informal and flexible. The borrowers are mostly poor farmers, artisans, petty traders and manual workers. Over the years the role of money lenders has declined due to the growing importance of organised banking sector.