Money and Monetary Policy
Base rate and MCLR:
It is the rate below which banks can't lend to anyone except at rare cases approved by RBI.
Factors considered while calculating the base rate:
1)Average cost funds: Interest given to deposits
2)Operation Cost
3)Negative carry in CRR
4)Profit margin
Factors considered while calculating MCLR(Marginal Cost of Fund Based Lending Rate):
1)Marginal Cost of funds : Interest given to deposits, Repo rate, rate of return on capital( profit margin)
2) Operating Cost
3) Negative carry over CRR
4) Tenore premium- higher interest rate for longterm loans.
Base rate and MCLR are known as internal benchmark lending rates because most of the factors affecting Base rate and MCLR are internal features of banks.
External Bench Mark Lending Rate:
To ensure complete transparency and standardization , RBI mandated the banks to adopt an external Bench Mark within a loan category within October 1 , 2019.
4 external benchmarking mechanisms can be used by banks :
1) RBI Repo Rate
2) 91 day T-Bill yield
3) 182 day T-Bill yield
4) Any other Benchmark Interest rate developed my Financial Benchmarks India Pvt Ltd.
Negative Interest rate Policy :
Followed by Central Banks to regulate the deposits in them.
Here the banks have to pay Interest for depositing their funds in RBI. This is to discourage depositing and encourage lending during the times of recession.
Demonitisation:
It is the act of stripping a currency unit its status of a legal tender.
In 1946 and 1978, an ordinance of demonitisation was brought to combat tax evasion.
On 2016, 500 and 1000 rupee notes were demonitised as an executive decision.
Pros of Demonitisation:
1)Black money can be curbed
Economy can be formalized and digitalised
2)Tax net will widen
Helps in minimalizing cash, when it happens voluntarily.
Types of Money:
1)Commodity Money:
Intrinsic value= Extrinsic value
Eg: Barter System, metallic coins
2)Bank Money:
Eg: DD, Cheque
3)Hot money:
The Money which enters from other country for a short term speculative purpose.
4)Token Money:
Intrinsic value < Extrinsic Value
Eg: Currencies of India
5)Fiat Money:
Money for which value is given through a government order. Its value is based on Goods and Services produced in and economy. It is not backed by any physical asset.
6) E- Money
All digital payments.
7) Legal Tender Money:
Only cash can be received by other person without any obligation.
DD, Cheque, card can or cannot be accepted.
Coins- Limited Legal Tender
Cash- Unlimited Legal Tender
Credits: Leo Vishnu Varthan
