UPSC new examination calendar 2021

Union Public Service Commission(UPSC) has released the new examination calendar for 2021.

 UPSC CSE 2021 will be held on 27th June 2021.

for the examination calendar https://www.upsc.gov.in/sites/default/files/ExamCal-2021-Engl-170820.pdf

What is CRR or Cash Reserve Ratio?

What is the Cash Reserve Ratio?

Cash Reserve Ratio is a legal reserve requirement of the Reserve Bank of India. According to the Legal Reserve Requirements or variable reserve ratio method, commercial banks are obliged to maintain reserves. It is a very quick and direct method for controlling credit creating the power of commercial banks. Commercial banks are required to maintain reserves on two accounts.

1. Cash Reserve Ratio(CRR) 
2. Statutory Legal Reserve Ratio(SLR)

 Cash Reserve Ratio(CRR) refers to the minimum percentage of net demand and time liabilities, to be kept by commercial banks with the central banks. It is decided by the central bank. A change in CRR affects the credit creating power of the commercial banks. An increase in CRR means that the commercial banks must keep reserves with the central bank which reduces the excess reserves of commercial banks and limits their credit creating power. Banks do not get any interest on the money that is with the RBI under the CRR requirements.

Objectives of Cash Reserve Ratio

There are two primary objectives of the CRR:

• It ensures the security of the amount. It makes it readily available when required.
• It helps in keeping inflation under control. To fight against inflation RBI increases the rate of CRR and vice versa.

Statutory Liquidity Ratio(SLR) is somehow different from CRR. SLR refers to a minimum percentage of Net Demand and Time  Liabilities(NDLT) to be kept by the commercial banks with themselves. It is also determined by the central bank. 

The Net Demand and Time Liabilities or NDTL shows the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank

Open Market Operation

What is an Open Market Operation?

Open Market Operation(OMO) refers to buying and selling of government securities by the central government from or to the public and commercial banks of a country. In India, Reserve Bank of India(RBI) is authorized to sell or purchase treasury bills and government securities. It is a credit control method of RBI. As RBI has the sole monopoly in currency issues, it can control credit and supply of money. For this RBI uses this method to control the credit in the economy.

• The sale of securities by the central bank reduces the reserves of commercial banks. It adversely affects the bank's ability to create credit and therefore decreases the money supply in the economy. Selling securities removes the money from the system and making loans more expensive and increasing interest rates.
• The purchase of securities by the central bank increases the reserves of commercial banks and raises the bank's ability to give credit. The central bank is able to increase the money supply and lower the interest rate by purchasing the securities. Buying securities adds money to the system and making loans easier to obtain and simultaneously interest rates decline.

What is Repo Rate and Reverse Repo Rate

What is Helicopter Money

WHAT IS HELICOPTER MONEY?

'Helicopter Money' is an unconventional monetary tool. It involves printing large sums of money by the central bank of a country i.e. RBI in case of India, on the demand of the central government and distributing to the public free of cost. Sometimes suggested it as an alternative to the quantitive easing when the economy is in a liquidity trap(when the interest rate is near zero and the economy is in a recession). The name 'Helicopter Money' first coined by the economist Milton Friedman in 1969. Friedman used the term to signify ''unexpectedly dumping money onto a struggling economy to shock it out of a deep slump.''

It is a direct money supply into an economy through the government. The basic aim of Helicopter Money is to increase the demand for money as well as inflation. In this monetary tool, the central government doesn't have any liability on this money supply,i.e. the government does not have to pay any interest or to issue bonds to the central bank against this supply of money.

Quantitive Easing Vs Helicopter Money

As monetary policies of the central bank, Quantitive Easing and Helicopter Money involves money creation by the central bank to expand the money supply. But there is a difference between both.  Under Quantitive Easing central bank lends money to the central government in exchange for bonds or other financial assets but in Helicopter Money, the central bank lends money to the government without taking any interest or purchase bonds. The effect on the balance sheet of the central bank of Helicopter money is somehow different from the quantitive easing. In QE central bank gives money by purchasing bonds or any financial assets of the government but in Helicopter Money, the central bank gives away money without increasing the assets on their balance sheet.

Disadvantages of Helicopter Money

• Helicopter Money is not feasible in the long run to revive the economy.
• It will create over inflation. The central banks can not use any interest rate to recover any cost. It is not linked with any borrowed asset.
• Another most important demerit of  Helicopter Money is a devaluation of the currency. When the supply of money increases into the economy eventually the supply of the domestic currency also increases and as a result of its value in the international market will eventually fall. 

Operation Twist

what is RBI's Operation Twist?

'Operation Twist' is a monetary policy operation adopted by the central bank of a country to revive the growth of the economy. It is the RBI's simultaneous selling of short term securities and buying long term securities through Open Market Operation(OMO). It will purchase long term government bonds, i.e maturing in 2029 and simultaneously sell short term government bonds, i.e maturing in 2020. Reserve Bank of India(RBI) will conduct purchase and sell of government securities for Rs 10000 crore each through OMO.

Under this mechanism, short term securities transitioned into long term transition. When there is a long term investment deficit and investors are hesitant to invest in long term securities, then the government is using this tool to revive the economy by lowering the long term interest rate.

'Operation Twist'  first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.

Why Operation Twist is conducted?

If there is a shortfall in long term investment in the and the investors are reluctant to do long term investment in the economy, then the government reduces interest rates for the long term investment.
Long term investment will create jobs which would increase the demand for other products. Hence, due to this, holistic development would take place.

How does RBI's'Operation Twist' work?

There is an inverse relationship between bond prices and their yields. Yield is the return of an investor gets on his investment/holding. When RBI buys long term securities, their demand rises which in turn increases their prices. However, the bond yield comes down as price increases. The rate of interest of an economy is determined by yield. Lower the bond yield indicates a lower interest rate. Thus, lower interest Rate means people can avail long term loans i.e. buying a house, cars etc.at a low-interest rate. However, the cheaper retail loan can help to encourage consumer spending which in turn revives the economic growth of a country.

Benefits of Operation Twist

Investors will take more loans in the long term investment because of low-interest rates. Therefore the flow of money will increase in the economy and aggregate demand in all sectors will boost. As a result, more job opportunities will be created and economic growth will take place.

Thus, RBI's 'Operation Twist' is a positive sign for the growth of an economy. It will boost investment and atmosphere of job creation can be ensured in the economy.

Relationship between Bond price and Market Interest Rate

Bond is an instrument through which an investor gives loans to a company or government that pays an investor a rate of return over a specified period of time. An investor or simply an individual buys a bond from a company or government at a definite amount and the bond issuer promises to return the amount with the rate of interest to the investor at end of the time frame.
There is an inverse relationship between Bond price and market interest rate. when the rate of interest increases then the bond price falls and vice versa. Let's take an example to understand this concept, suppose you purchase a bond for Rs 100 at 5%  per annum. At the end of the year, you will get Rs105. Now suppose after 6 months(before completion of maturity) interest rate increased to 10% from 5%, you will try to sell this bond and purchase a new bond which gives you10%. But when you will go to sell the bond, no one will interest to buy the bond at 5% because they are getting 10%. So at that time, they will ask you to decrease the bond price from Rs100 through which they can compensate for the loss. So when the interest rate increases, the bond price falls.