SEBI GRADE A SYLLABUS

Finance
1) Financial System - a) Role and Functions of Regulatory bodies in Financial Sector.
2) Financial Markets - a) Primary and Secondary Markets (Forex, Money, Bond, Equity, etc.),
functions, instruments, recent developments.
3) General Topics
a) Basics of Derivatives: Forward, Futures and Swap
b) Recent Developments in the Financial Sector
c) Financial Inclusion- use of technology
d) Alternate source of finance, private and social cost-benefit, Public-Private
Partnership
e) Direct and Indirect taxes; Non-tax sources of Revenue, GST, Finance
Commission, Fiscal Policy, Fiscal Responsibility and Budget Management Act
(FRBM),
f) Inflation: Definition, trends, estimates, consequences, and remedies (control): WPI,
CPI - components and trends.
 Tax Structure

Direct Tax Indirect Tax

Progressive Tax Regressive Tax

Ad Valorem Specific Tax

 Direct Tax

A direct tax is a tax that a person or organization pays directly to the entity that
imposed it. Examples include income tax, real property tax, personal property tax,
and taxes on assets, all of which are paid by an individual taxpayer directly to the
government.

Indirect Tax

An indirect tax is collected by one entity in the supply chain, such as a manufacturer or
retailer, and paid to the government; however, the tax is passed onto the consumer by
the manufacturer or retailer as part of the purchase price of a good or service. The
consumer is ultimately paying the tax by paying more for the product.
 Progressive Tax

A progressive tax is based on the taxpayer's ability to pay. It imposes a lower

tax rate on low-income earners than on those with a higher income. This is
usually achieved by creating tax brackets that group taxpayers by income
ranges.
A progressive tax system reduces the tax burden on the people who can least
afford to pay. That leaves more money in the pockets of low-wage earners,
who are likely to spend all of that money on essential goods and stimulate the
economy in the process.
A progressive tax system also tends to collect more taxes than regressive taxes,
as the highest percentage of taxes is collected from the highest amounts of
money.
Some people oppose the system as a means of income redistribution, which
they believe punishes the rich, and even the middle class, unfairly.
 Regressive Tax

In regressive system of taxation, the tax rate diminishes as the taxable amount increases. In
other words, there is an inverse relationship between the tax rate and taxable income. The
rate of taxation decreases as the income of taxpayers increases. This system of taxation
generally benefits the higher sections of the society having higher incomes as they need to
pay tax at lesser rates. On the other hand, people with lesser incomes are burdened with
higher rate of taxation.

Flat Tax Regressive Tax

While a flat tax imposes the same tax percentage on all individuals regardless of income,
many see it as a regressive tax. The tax is seen as regressive due to a more significant
portion of the total funds available to the low-income earner going to the tax
expenditure. While the upper-income payer still pays the same percentage, they have
enough income to offset this tax load.
 Flat Tax Regressive Tax

1. Sales tax (GST)

Governments apply sales tax uniformly to all consumers based on what they buy.
Even though the tax may be uniform (such as a 7 percent sales tax), lower-income
consumers are more affected.

2. User Fees

User fees levied by the government are another form of regressive tax. These fees
include admission to government-funded museums and state parks, costs for driver's
licenses and identification cards, and toll fees for roads and bridges.
 Flat Tax Regressive Tax

3. Property Tax

Property taxes are fundamentally regressive because, if two individuals in the same tax
jurisdiction live in properties with the same values, they pay the same amount of
property tax, regardless of their incomes.

4. Sin Tax
Taxes levied on products that are deemed to be harmful to society are called sin taxes.
These are added to the prices of goods like alcohol and tobacco in order to dissuade
people from using them. Many consider hese taxes to be regressive, because, once
again, they are more burdensome to low-income earners rather than their high-income
counterparts.
 Ad Valorem
The term “ad valorem” is Latin for “according to value,” which means that it is flexible
and depends on the assessed value of an asset, product, or service. An ad valorem tax is
charged by state and municipal governments and is based on the assessed value of a
product or property. The most common ad valorem tax is the property tax, which is
charged on real estate and personal property. An ad valorem tax is not limited to
property alone and may extend to other taxes such as Goods and Services Tax (GST). It is
charged at the time of the transaction, as is the case with GST, which is deducted at the
point of purchase. Ad valorem tax may also be charged as an annual fee, such as
inheritance tax. Like we need to pay property tax annually.
Specific Tax
A tax that is given as a fixed rate for each unit of a good or service, rather than based
on its value. Specific taxes are of a fixed amount by the head or number, or by some
standard of weight or measurement, and require no assessment other than a listing
or classification of the subjects to be taxed. Example of Specific tax is the excise
duty. Excise duty varies depending on product. A production of a two wheeler may
attract different excise duty than a four wheeler.
 Charge on Tax Surcharge Vs Cess Tax on Tax

Income 50 lakh Income 10 lakh

Tax 15 lakh Tax 1 lakh

Surcharge (10%) 1.5 lakh Cess 4% 4000

Cess 4% 60000 Total tax 1,04,000

Total tax 17,10,000

No Specific Purpose Specific Purpose

Consolidated Fund of India Consolidated Fund of India
Permission from Parliament No Permission
 Surcharge Vs Cess
Cess can be simply understood as a tax on the tax imposed by the Union
Government to collect revenue for specific reasons. All the collected tax is
initially directed to the consolidated funds of India, i.e., CFI. No permission
is required from the Parliament to use this fund. Eg. Health Cess, Education
Cess, Road and Infrastructure Cess, etc.
The Surcharge is levied on the payable tax and not the overall income. Only those
taxpayers who earn more than Rs 50 lakhs per annum must pay the Surcharge. The
Surcharge tax is not collected for any specific reasons. The Union Government can
use the Surcharge tax money any way it deems fit. All the Surcharge collected
initially goes to the consolidated funds of India, i.e., CFI. Permission is required from
Parliament to use this fund. Personal income tax and corporate income tax are two
of the major Surcharges collected in India. Those individuals in India who earn more
than Rs. 50 Lakh annually are required to pay a 10% Surcharge, separate from their
tax obligations. Whereas individuals earning above 1 Cr have to pay 15% surcharge.
 Direct Tax
1. Personal Income tax
The individual income tax (or personal income tax) is a tax levied on the wages,
salaries, dividends, interest, and other income a person earns throughout the
year. Personal Income tax is levied by Central government. It is levied on
Individuals and Hindu Undivided Family.

2. Corporate Income tax

A corporate tax is a tax on the profits of a corporation. The taxes are paid on a
company's taxable income, which includes revenue minus cost of goods sold (COGS),
general and administrative (G&A) expenses, selling and marketing, research and
development, depreciation, and other operating costs. A domestic corporate entity
with a turnover upto Rs. 250 Crore, pays a flat rate of 25% corporate tax and for
turnover above 250 Cr, it pays 30%. For a particular financial year, if the total revenue
earned by a company exceeds Rs. 1 crore, then a surcharge corporate tax of 5% is
levied on such a corporation. A Health and Educational Cess at 4% is also charged for a
domestic company.
 Direct Tax

3. Wealth Tax
A wealth tax (also known as a capital tax or equity tax) is a levy on total
value of personal assets including bank deposits, real estates, insurance and
pension plans, ownership of unincorporated business, financial securities
and personal trusts. Typically liabilities ( primarily mortgages and other
loans) are deducted and hence sometimes called net wealth tax. Wealth tax
is imposed on the richer section of the society. The intention of doing so is to
bring parity amongst the taxpayers. However, wealth tax was abolished in
the budget of 2015 (effective FY 2015-16) as the cost incurred for recovering
taxes was more than the benefit is derived.
 Direct Tax
4. Securities Transaction Tax (STT)
Securities transaction tax, introduces in year 2004, is a type of tax levied on
transactions of securities, despite loss or gain. This includes mainly equities and
futures and options. The rate of taxation is different for different types of securities.
STT can basically be understood as a type of tax levied on transactions done in the
domestic stock exchange. Securities transaction tax is a direct tax and is levied and
collected by the central government of India. According to the Securities Contract Act,
1956, following are the transactions covered under the same.
•Shares, bonds, debentures or any such marketable security which is traded at the
stock market
•Derivatives traded in the market
•Units issued by any collective investment scheme to customers
•Government securities that are of the nature of equity
•Rights or interests in securities
•Mutual funds that are based on equity trading
More than
1 day

Less than
1 day
Intraday

Buying and selling shares on the same day is intraday trading. And when you don't
sell your shares on the same day, your trade becomes a delivery trade.
 Indirect Tax
Goods & Services Tax
Kelkar Committee, 2004

Central Taxes
• Central Excise Duty (CENVAT)
• Additional Excise Duties
• The Excise Duty levied under the Medicinal and Toiletries Preparations
(Excise Duties) Act 1955
• Service Tax
• Additional Customs Duty, commonly known as Countervailing Duty (CVD)
• Special Additional Duty of Customs – 4% (SAD) Surcharges and Cesses
levied by Centre are also likely to be subsumed wherever they are in the
nature of taxes on goods or services. This may include cess on rubber, tea,
coffee, national calamity contingent duty etc.
• Central Sales Tax to be phased out.
 Indirect Tax
Goods & Services Tax
Exemptions for Central taxes
Alcohol used for human consumption, Natural gas, Petrol
and its products, electricity, etc. is currently outside the
purview of GST and hence the older tax structure prevails.
Excise on these products is thus not subsumed under GST

State Taxes
• VAT / Sales tax
• Entertainment tax (unless it is levied by the local bodies)
• Luxury tax Taxes on lottery, betting and gambling
• State Cesses and Surcharges in so far as they relate to supply of goods and services
• Octroi and Entry Tax
• Purchase Tax
 Indirect Tax
Goods & Services Tax
• GST may not subsume the following taxes within its ambit:
• Basic Customs Duty: These are protective duties levied at the time of Import of
goods into India.
• Exports Duty: This duty is imposed at the time of export of certain goods which
are not available in India in abundance.
• Road & Passenger Tax: These are in the nature of fees and not in the nature of
taxes on goods and services.
• Toll Tax: These are in the nature of user fees and not in the nature of taxes on
goods and services.
• Property Tax
• Stamp Duty
• Electricity Duty
 Goods and Services Tax
The Goods and Services Tax (GST) is a value-added tax levied on most goods
and services sold for domestic consumption. The GST is paid by consumers,
but it is remitted to the government by the businesses selling the goods and
services.

Goods and Services Tax was 122nd Amendment bill which got an approval in
2016 and was renumbered in the statute by Rajya Sabha as The Constitution
(101st Amendment) Act, 2016.

It is a dual GST with the Centre and the States simultaneously levying tax on
a common base. GST to be levied by the Centre is called Central GST (CGST)
and that to be levied by the States is called State GST (SGST).
Central GST will cover Excise duty, Service tax etc,
State GST will cover VAT, luxury tax etc.
 IGST
Integrated GST is to cover inter-state trade. IGST per se is not a tax but a system to
coordinate state and union taxes.

GST Council
Under Article 279A, GST Council to be formed by the President to administer &
govern GST. It's Chairman is Union Finance Minister of India with ministers
nominated by the state governments as its members. The council is devised in
such a way that the centre will have 1/3rd voting power and the states have
2/3rd. The decisions are taken by 3/4th majority.
CGST, SGST & IGST are levied at rates to be mutually agreed upon by the Centre
and the States. The rates are notified on the recommendation of the GST Council.
Initially GST was levied at four rates viz. 5%, 12%, 16% and 28%. The schedule or
list of items that would fall under these multiple slabs are worked out by the GST
council.
 Advantages of GST
Creation of common national market by amalgamating a large number of
Central and State taxes into a single tax.

GST mitigated ill effects of cascading or double taxation in a major way and
paved the way for a common national market.

From the consumers’ point of view, the biggest advantage would be in terms of
reduction in the overall tax burden on goods.

Introduction of GST is making Indian products more competitive in the domestic

and international markets owing to the full neutralization of input taxes across
the value chain of production.
 Sources of Revenue for Government

Tax Sources Non Tax Sources

Direct Tax & Indirect Tax Profits & Dividends

Major Source Fines & Penalties

Fees
Non Tax revenue is the income earned by the
government from all the sources other than taxes.
License Fee
Gifts & Grants
 Non Tax Sources

1. Profits & Dividends

Public sector is the source to earn profits for the government. It also receives
dividend by investing in other companies.
2. Fines & Penalties
Government imposes fines and penalties on people for not maintaining or following
the laws of the country. The objective of imposition of fines and penalties is not to
earn income but to maintain law and order in the nation.

3. Fees
The fee is paid in return to the services provided by the government. For eg.
Registration fee, education fee etc.
 Non Tax Sources
4. License Fee
License fee is charged by the government to grant permission. For eg. Permit to
run a pharmacy or power plant.

5. Gifts & Grants

Government also receives gifts and grants from the foreign governments &
institutions. But these sources are not fixed sources of revenue as they are
usually granted from the time of crisis.
 Finance Commission
Finance Commission is a constitutional body for the purpose of allocation of
certain revenue resources between the Union and the State Governments. It was
established under Article 280 of the Indian Constitution by the Indian President. It
was created to define the financial relations between the Centre and the states. It
was formed in 1951.

Advisory Role of Finance Commission

The recommendations made by the Finance Commission are of an advisory nature

only and therefore, not binding upon the government. It is up to the Government to
implement its recommendations on granting money to the states. To put it in other
words, ‘It is nowhere laid down in the Constitution that the recommendations of
the commission shall be binding upon the Government of India or that it would
amount to a legal right favouring the recipient states to receive the money
recommended to be provided to them by the Commission.
 Article 280 of Constitution

•President after two years of the commencement of Indian Constitution (i.e. 1951) and
thereafter every 5 years, has to constitute a Finance Commission of India
•It shall be the duty of the Commission to make recommendations to the President in
relation to the:
• the distribution between the Union and the States of the net proceeds of taxes
which are to be, or maybe, divided between them and the allocation between the
States of the respective shares of such proceeds;
• the principles which should govern the grants in aid of the revenues of the States
out of the Consolidated Fund of India;
• any other matter referred to the Commission by the President in the interests of
sound finance
• The Commission shall determine their procedure and shall have such powers in
the performance of their functions as Parliament may by law confer on them
Note: President can also constitute Finance Commission before the expiry of five years
as he considers necessary
 Chairman & Members

Chairman is the Head of the Commission and presides over the activities. He should
have had public affairs experience.
Commission has Four Members.
The 4 members should be or have been qualified as High Court judges, or be
knowledgeable in finance or experienced in financial matters and are in
administration, or possess knowledge in economics.
All the appointments are made by the President of the country.
Grounds of disqualification of members are like - found to be of unsound mind,
involved in a vile act, if there is a conflict of interest.
The tenure of the office of the Member of the Finance Commission is specified by
the President of India and in some cases, the members are also re-appointed.
The members shall give part-time or service to the Commission as scheduled by the
President.
 Fiscal Policy
Fiscal policy is the use of government revenue collection (mainly taxes but also
non-tax revenues such as divestment, loans) and expenditure (spending) to
influence the economy.

Objectives
1. Economic Growth
It helps to maintain the economy’s growth rate so that certain economic
goals can be achieved.

2. Full Employment
It aims to achieve full employment, or near full employment, as a tool to
recover from low economic activity.
 Fiscal Policy
Objectives
3. Price Stability
It controls the price level in the country so that when the inflation is too
high, prices can be regulated.

Fiscal Policy

Fiscal Contractionary Expansionary

Neutral Fiscal policy Fiscal policy
policy
Fiscal Neutral Policy is where the government brings in enough taxation to pay
for its expenditures. In other words, government spending equals taxation.
Contractionary fiscal policy is where government collects more in taxes than it
spends. In turn, this reduces aggregate demand which may seem like a bad
thing, but it helps reduces inflation.
Expansionary fiscal policy is where the government spends more than it takes in
through taxes. This may involve a reduction in taxes, an increase in spending, or a
mixture of both to ultimately boost prosperity and economic growth.
 Deficit Financing
Sometimes the government fails to mobilize adequate resources. In this situation,
the government use the option of deficit financing. If the option of deficit
financing is not utilized the government ends up compromising on growth targets.
Government does deficit financing by burrowing and minting new currency.

FRBM Act, 2003

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of
the Parliament of India to institutionalize financial discipline, reduce India’s fiscal
deficit, improve macroeconomic management and the overall management of
the public funds by moving towards a balanced budget.
 FRBM Act, 2003
Objectives
Reduction of fiscal deficit and revenue deficit

To achieve inter-generational equity in fiscal management by reducing

the debt burden of the future generation

Achieving long-term macroeconomic stability

Transparency in fiscal operations of the Government

 Major Provisions of FRBM Act, 2003

The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by
2008-09. This will be realized with an annual reduction target of 0.3% of
GDP per year by the Central government
Revenue deficit has to be reduced by 0.5% of the GDP per year with
complete elimination by 2008-09.
The government shall end its borrowing from the RBI except for temporary
advances.
The RBI was supposed to not subscribe to the primary issues of the central
government securities after 2006.
 NK Singh Committee on FRBM Act

NK Singh committee, that was set up in 2016 to review the FRBM Act,
recommended that the government must target a fiscal deficit of 3% of the
GDP in the years up to March 31, 2020, subsequently cut it to 2.8% in 2020-
21 and to 2.5% by 2023.
 Inflation

Price difference
Inflation Rate X 100
Price in Base Year
5
X 100 25%
20

1 apple = Rs.20 1 apple = Rs.25

 Inflation
In economics, inflation is a general rise in the price level of an economy over a period
of time. When the general price level rises, each unit of currency buys fewer goods
and services; consequently, inflation reflects a reduction in the purchasing power per
unit of money – a loss of real value in the medium of exchange and unit of account
within the economy.

Types of Inflation
Demand-Pull Inflation
Demand-pull inflation is the upward pressure on prices that follows a shortage in supply,
a condition that economists describe as "too many rupees chasing too few goods."
What causes Demand-Pull Inflation? A growing economy or increase in the supply of
money so consumers feel confident, they spend more and take on more debt,
government spending or fiscal stimulus and high employment rate. This leads to a steady
increase in demand, which means higher prices
 Types of Inflation
Cost-Pull Inflation
Cost-push inflation occurs when overall prices increase due to increases in the
cost of wages and raw materials thus higher costs of production decrease the
aggregate supply in the economy. This type of inflation is caused due to various
reasons such as increase in price of inputs, hoarding and speculation of
commodities, increase in indirect taxes, crude oil price fluctuation, low growth
of agricultural sector and interest rates increased by RBI.
 Measurement of Inflation
Inflation can be measured at three levels – producer, wholesaler and consumer. Prices
generally rise in each level till the commodity finally reach the hand of consumer.

Inflation at Producer Level

As of now in India, there is no index to measure inflation at producer level. A
Producer Price Index (PPI) is proposed, but so far this type of inflation
calculation has not started in India.

The index used to calculate wholesale inflation is known as Wholesale Price Index
(WPI). This inflation rate is often known as headline inflation. WPI is released by the
Office of Economic Adviser, Department for promotion of industry and internal
trade, Ministry of Commerce & Industry.
 Measurement of Inflation

Consumer often directly buys from retailer. So the inflation experienced at retail shops is
the actual reflection of the price rise in the country. It also shows the cost of living better.
In India, the index which shows the inflation rate at retail level is known as Consumer
Price Index (CPI). CPI is released by National Statistics Office (NSO), Ministry of Statistics
& Programme Implementation (MoSPI) and the Labour Bureau, Ministry of Labour.
 Wholesale Price Index
Three Major Groups
Weights
(eg- Food Articles,
Primary Articles Vegetables etc)
22.62

(eg- LPG,
Fuel and Power 13.15 Base Year – 2011-12
Petrol etc)

(eg- manufacture
Manufactured of food products, 64.23
Products sugar, textiles etc)
100
 Wholesale Price Index

Weights Price Weighted Price Weighted

Price Price
Primary Articles 22.62 180 40.72 185 41.85
X 22.62% X 22.62%

Fuel and Power 13.15 150 19.73 160 21

X 13.15% X 13.15%

Manufactured 64.23 200 210 134.89

128.46
Products
X 64.23% X 64.23%
100 188.91 197.74
 Wholesale Price Index

188.91 197.74

Weighted Price difference

Inflation Rate X 100
Weighted Price in Base Year

197.74-188.91
X 100
188.91
8.83
X 100 4.68%
188.91
 Wholesale Price Index WPI Food Index
Three Major Groups
Manufactured
Primary Articles Fuel and Power
Products
Coal Food Product
Food articles:
Fruits, vegetables Beverages
,cereals, eggs, fish
Mineral Oils: Tobacco Product
Non Food articles: Airplane Turbine
Fuel, Naptha Textiles
Flowers, rubber,
cotton, raw silk Diesel Apparels
Petroleum
Minerals: Metallic LPG Leather Products
and Non-metallic
Electricity Paper Products
Crude Petroleum
and Natural gas Chemical Products
 WPI Food Index

As a part of the revised WPI series (base year 2011-12), a separate WPI Food Index has
been launched. WPI food index measures the changes in prices of food items at the level
of producers. The WPI Food index is compiled by taking the aggregate of WPI for Food
Products under Manufacture Products and Food Articles under Primary Article using
weighted arithmetic mean.
1.Food Articles under Primary Article — 15.26
2.Food Products under Manufactured Products — 9.12
3.WPI Food Index (1 +2) – 24.38
 Consumer Price Index
Retail Price Index
CPI measures the average change in prices of fixed baskets of goods and services that
households purchase for the purpose of consumption. It is also called Retail Inflation. There
were segment specific CPIs which were compiled regularly. There were four major segment
1.Consumer Price Index for Industrial Workers CPI (IW)
2.Consumer Price Index for Agricultural labour CPI (AL)
3.Consumer Price Index for Rural Labourers CPI (RL)
4.Consumer Price Index for Urban Non Manual Employees CPI(UNME)

As earlier 4 segments of CPI do not provide a true picture of price fluctuations

of various goods and services, which were consumed by the general
population in the country over a period of time. So, the National Statistical
Commission (NSC), under Dr. C. Rangarajan, in its Report (2001)
recommended the compilation of CPI for rural and urban areas.
 Consumer Price Index

•CPI (Urban, Rural and All India) is released by National Statistics Office (NSO),
Ministry of Statistics & Programme Implementation (MoSPI)
•CPI (Industrial Workers), CPI (Agricultural Labour) and CPI (Rural Labour) are a set
of Indices released by the Labour Bureau, Ministry of Labour.

Earlier the base year was 2010. Then the base CPI was revised from 2010 to 2012.
 Consumer Price Index Weights
Food and Beverages 45.86

Components of CPI Housing 10.07

The major component in CPI (C)
are as follows (along with their
weights) Fuel and Light 6.84
1.Food and Beverages – 45.86
2.Housing – 10.07
3.Fuel and Light – 6.84 Clothing and Footwear 6.53
4.Clothing and Footwear – 6.53
5.Pan, tobacco and intoxicants –
Pan Tobacco and
2.38
intoxicants
2.38
6.Miscellaneous – 28.32

Miscellaneous 28.32
 Consumer Food Price Index
Consumer Food Price Index is a component of CPI (C) . It measures the change
in the retail prices of the food products only. The Weightage of the Consumer
Food Price Index is 39.06.

Consumer Food Price Index

Food inflation
WPI Food Index
The combined index number of WPI Food indices together with the Consumer
Food Price Index published by CSO, would help monitor the food inflation
effectively.
 Monetary Policy
Inflation Target = 4-6%
WPI or CPI?

Consumer Price Index

Rural or Urban or Combined?
CPI Combined
Since, RBI has adopted Inflation Targeting, CPI (C) is used as nominal anchor for
conduct of monetary policy in India. [Monetary Policy Committee is mandated to
keep CPI (C) in range 2% – 6%. So CPI is used for inflation targeting.
 Measures to Control Inflation

Monetary Policy Fiscal Policy

Open Market Operations
Public Distribution System
Market Stabilization Scheme
Trade Measures
Repo/ Reverse Repo
Bank Rate Essential Commodities Act
Marginal Standing Facility Minimum Support Price
Call Rate Price Stabilization Fund
 Clearing the Concepts

Liability

Saving A/c and Fixed Deposits

Cash Reserve Ratio Statutory Liquidity Ratio

Net Demand and Time Liabilities
4% 18%

4 Cr 18 Cr 100 Cr
 CRR & SLR

Net Demand and Time Liabilities

Cash Reserve Ratio Statutory Liquidity Ratio

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as
deposits with the central bank.
Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement
that the commercial banks in India require to maintain in the form of gold,
government approved securities before providing credit to the customers.
These both ratios are calculated against banks Net Demand and Time liabilities (NDTL).
 Open Market Operations
Open Market Operations (OMOs) are market operations conducted by RBI by way
of sale/purchase of government securities to/from the market with an objective
to adjust the rupee liquidity conditions in the market on a durable basis. If there is
excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity.
Similarly, when the liquidity conditions are tight, RBI buys securities from the
market, thereby releasing liquidity into the market.

Market Stabilization Scheme

Market Stabilization scheme (MSS) is a monetary policy intervention by the RBI
to withdraw excess liquidity (or money supply) by selling government securities
in the economy. The MSS was introduced in April 2004. This is mainly done when
government don’t want to burrow money from the market but still RBI uses this
mechanism just to reduce money supply in the market.
 Bank Rate
Bank rate is the rate charged by the central bank for lending funds to commercial
banks. This bank rate is a long term loan rate which is used when banks keep no
collateral against the loan. Bank rates influence lending rates of commercial banks.
Higher bank rate will translate to higher lending rates by the banks. In order to curb
liquidity, the central bank can resort to raising the bank rate and vice versa.

Repo Rate

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in
case of India) lends money to commercial banks for short term in the event of any
shortfall of funds. In the event of inflation, central banks increase repo rate as this
acts as a disincentive for banks to borrow from the central bank. This ultimately
reduces the money supply in the economy and thus helps in arresting inflation. The
central bank takes the contrary position in the event of a fall in inflationary pressures.
 Reverse Repo Rate
Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of
India in case of India) borrows money from commercial banks within the country.
It is a monetary policy instrument which can be used to control the money supply in
the country.

Repo Rate Reverse Repo Rate Liquidity Adjustment Facility

Repo and reverse repo rates form a part of the liquidity adjustment facility.
 Marginal Standing Facility
Marginal standing facility (MSF) is a window for banks to borrow from the Reserve
Bank of India in an emergency situation. Banks borrow from the central bank by
pledging government securities from SLR quota at a rate higher than the repo rate
under liquidity adjustment facility or LAF in short.

Call Rate
The call rate is the interest rate at which banks lend overnight money to each
other without collateral.
 Fiscal Policy
The two main components of fiscal policy are government receipt and government
expenditure. In fiscal policy, the government controls inflation either by reducing
private spending or by decreasing government expenditure, or by using both. It
reduces private spending by increasing taxes on private businesses and salaried
individuals. When private spending is more, the government reduces its
expenditure to control inflation.

Public Distribution System

The Public distribution system (PDS) is an Indian food Security System established under
the Ministry of Consumer Affairs, Food, and Public Distribution. PDS evolved as a system
of management of scarcity through distribution of food grains at affordable prices. At
times of high inflation, especially food inflation, PDS prove to be very effective by
distributing demand pressure on food items.
 Trade Measures
Inflation rise in economy when demand for essential items increase and the supply for
the same is in short. Government can use trade measures to control inflation effectively.
When any commodity is in short supply, government can import from other countries to
meet demand in the country. Similarly, whenever supply is excess in the economy
government can give incentive to exporters to export that item at lower price.

Essential Commodities Act

The ECA is used to curb inflation by allowing the Centre to enable control by
state governments of trade in a wide variety of commodities. The states imposed
stock limits to restrict the movement of any commodity deemed essential. It
helped to discourage hoarding of items, including food commodities, such as
pulses, edible oils and vegetables.
 Minimum Support Price
The Minimum Support Price (MSP) is the rate at which the government
purchases crops from farmers, and is based on a calculation of at least one-and-
a-half times the cost of production incurred by the farmers. MSP is a “minimum
price” for any crop that the government considers as remunerative for farmers
and hence deserving of “support”. Higher MSP has been announced so as to
incentivize production and thereby enhance availability of food items which may
help moderate prices.
 Price Stabilization Fund
Established in 2014-15, Price Stabilization Fund (PSF) is any fund created to absorb
extreme volatility in selected commodity prices. Such goods will be procured directly
from farmers or farmers' organisations at the farm gate/mandi, and made available to
consumers at a more affordable price. The sum in the fund is usually used for activities
aimed at bringing down/up the high/low prices say, for example, acquisition of certain
goods and distribution of the same as and when appropriate so that costs remain
within a range.
 Headline Inflation

Wholesale Price Index

Headline Inflation is the measure of total inflation within an economy. It

includes price rise in food, fuel and all other commodities. The inflation rate
expressed in Wholesale Price Index (WPI) usually denotes the headline
inflation. Though Consumer Price Index (CPI) values are often higher, WPI
values traditionally make headlines. But recently, RBI is using CPI as headline
inflation from 2014.
Non food Inflation Core Inflation Underline Inflation

Core inflation, which is also called Underline Inflation or Non-food Inflation,

does not consider the inflation in food and fuel. This is a concept derived from
headline inflation. There is no index for direct measurement of core inflation
and now it is measured by excluding food and fuel items from Wholesale Price
Index (WPI) or Consumer Price Index (CPI).
 Inflation Disinflation Deflation
Price level rise Price level rise Price level falls
Basket of goods Inflation rate falls Basket of goods
100 120 7% 5% 100 80
Rate is above 0% Rate is below 0%

+ve

Last Year
Inflation line

-ve
 Disinflation
Disinflation is a situation in which the rate of inflation falls over a period of
time. For example disinflation is when the inflation rate is falling from say
5% to 3%. But inflation rate will always above zero.

Deflation

Deflation is the reverse of inflation. It refers to a sustained decline in the price

level of goods and services. It occurs when the annual inflation rate falls below
zero percent (a negative inflation rate). Japan suffered from deflation for almost
a decade in 1990s.
 Creeping Inflation Galloping Inflation
Mild Moderate

Creeping Inflation is also known as mild If creeping or mild inflation is not checked and
inflation or moderate inflation. This type if it is uncontrollable, it may assume the
of inflation occurs when the price level character of galloping inflation. Inflation in
persistently rises over a period of time the double or triple digit range of 20, 100 or
at a mild rate. Here, rate of inflation is 200 percent a year is called galloping inflation
less than 10 per cent annually, or it is a . Many Latin American countries such as
single digit inflation rate. Argentina, Brazil had inflation rates of 50 to
700 percent per year in the 1970s and 1980s.
 Hyperinflation
Hyperinflation is a stage of very high rate of inflation. While economies seem to
survive under galloping inflation, a deadly strain takes hold when the cancer of
hyperinflation strikes. Nothing good can be said about a market economy in which
prices are rising a million or even a trillion percent per year . Hyperinflation occurs
when the prices go out of control and the monetary authorities are unable to impose
any check on it. Germany had witnessed hyperinflation in 1920’s.

Stagflation

Stagflation is an economic situation in which inflation and economic stagnation

or recession occur simultaneously and remain unchecked for a period of time.
Stagflation was witnessed by developed countries in 1970s, when world oil
prices rose dramatically.
 Inflation Survey by RBI

Inflation expectation RBI’s OBICUS: Order

Banking Business
survey for households Books, Inventories
Service Price by RBI
by RBI and Capacity
Utilization Survey