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Banking and Monetary Policy Definitions

The document provides essential definitions related to banking and monetary policy, including terms such as banking, central bank, commercial bank, and monetary policy itself. It also outlines key concepts like interest rates, liquidity measures, and financial markets, which are crucial for understanding the functioning of the economy. Additionally, it covers aspects of fiscal policy, credit creation, and financial inclusion.

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3 views3 pages

Banking and Monetary Policy Definitions

The document provides essential definitions related to banking and monetary policy, including terms such as banking, central bank, commercial bank, and monetary policy itself. It also outlines key concepts like interest rates, liquidity measures, and financial markets, which are crucial for understanding the functioning of the economy. Additionally, it covers aspects of fiscal policy, credit creation, and financial inclusion.

Uploaded by

hetvi.chhagani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Banking and Monetary Policy - Important Definitions

List of Important Definitions


Banking:
The process of accepting deposits from the public and lending money to individuals and businesses.

Central Bank:
The primary institution that regulates the money supply and oversees the banking system (e.g., RBI
in India).

Commercial Bank:
A bank that provides financial services like accepting deposits, granting loans, and offering credit.

Monetary Policy:
A strategy employed by the central bank to control inflation, liquidity, and money supply.

Bank Rate:
The interest rate at which the central bank lends money to commercial banks for long-term loans.

Repo Rate:
The rate at which the central bank lends short-term funds to commercial banks.

Reverse Repo Rate:


The rate at which the central bank borrows money from commercial banks to absorb excess
liquidity.

Cash Reserve Ratio (CRR):


The proportion of a banks total deposits that must be kept with the central bank in cash.

Statutory Liquidity Ratio (SLR):


The minimum percentage of a banks net demand and time liabilities (NDTL) that must be
maintained in the form of liquid assets.

Open Market Operations (OMO):


Buying and selling of government securities by the central bank to regulate liquidity.

Inflation:
The rise in the general price level of goods and services over time.

Deflation:
A decline in the general price level, increasing the purchasing power of money.

Liquidity Adjustment Facility (LAF):


A mechanism by which the central bank manages liquidity through repo and reverse repo
operations.

Marginal Standing Facility (MSF):


A facility that allows banks to borrow overnight funds from the central bank at a higher interest rate
than the repo rate.

Non-Performing Asset (NPA):


A loan or advance where the borrower has stopped making interest or principal payments for a
certain period.

Credit Creation:
The ability of banks to generate new loans, expanding the money supply in the economy.

Fiscal Policy:
The government's approach to taxation and public spending to influence economic activity.

Money Market:
A segment of the financial market where short-term borrowing and lending occur (typically less than
one year).

Capital Market:
A segment of the financial market that deals with long-term investments, such as stocks and bonds.

Balance of Payments (BoP):


A record of all economic transactions between a country and the rest of the world.

Current Account Deficit (CAD):


A situation where a countrys imports exceed its exports, leading to an imbalance in trade.

Treasury Bills:
Short-term debt instruments issued by the government to raise funds.

Financial Inclusion:
Providing access to affordable financial services, including banking and credit, to underserved
populations.

Monetary Base:
The total amount of a currency in circulation, including reserves held by banks in the central bank.

High-Powered Money:
Another term for the monetary base, which consists of currency in circulation and reserves.

Monetary Aggregates:
Measures of the money supply, such as M1, M2, M3, and M4, which include various forms of money
and liquidity.

Demand Deposits:
Bank deposits that can be withdrawn on demand, such as checking accounts.

Time Deposits:
Bank deposits with fixed maturity dates, such as fixed deposits (FDs).

Foreign Exchange Reserves:


The stock of foreign currency held by a country's central bank.

Base Rate:
The minimum lending rate set by the central bank below which commercial banks cannot lend.

Microfinance:
Financial services, such as small loans and savings, provided to low-income individuals who lack
access to traditional banking.

Monetary Transmission Mechanism:


The process by which changes in monetary policy affect inflation, output, and employment in an
economy.

Primary Deficit:
The difference between the governments fiscal deficit and interest payments on past borrowings.

Fiscal Deficit:
The gap between total government expenditure and total revenue, excluding borrowings.

Debt Market:
A financial market where bonds and other forms of debt are bought and sold.

Liquidity:
The ease with which an asset can be converted into cash without significant loss of value.

Moral Suasion:
A non-mandatory tool used by the central bank to persuade commercial banks to follow monetary
policy.

Statutory Liquidity:
The percentage of a banks total liabilities that must be kept in approved securities or cash.

Call Money Market:


A segment of the money market where funds are lent for very short durations, often overnight.

Government Securities (G-Secs):


Bonds or debt instruments issued by the government to finance its fiscal deficit.

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