There ain’t no such thing as Free Basics

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Continuing with the concept that ‘There is nothing free, some external costs are always attached to it’ we now analyze what’s been in discussion for a long time- Free Basics by Facebook. So, in February 2015 Facebook renamed its project Internet.org to ‘Free Basics’.

What is free basics ?
Free basics aims to provide a basic internet service to all the people residing in India including those living in underdeveloped regions. Sounds good ? Now, here’s the twist. This access will be limited to the websites who are/will partner with Facebook.

It might seem fair while reading about it for the first time, but if you delve a little deeper then you can see through its shortcomings. Free basics implies providing free basic internet to everyone, but Facebook is giving preference to those websites who will partner with them. This practice can become an excuse to block certain traffic streams, content or expression, to give preference to others, or to impede competition. With this policy, Facebook is encouraging everyone to partner with them so as to support this initiative.

Now what’s wrong in the fact that everybody partners with Facebook and help to increase the reach of internet ?
This will make Facebook a monopoly power in India, people will start perceiving Facebook as another name for internet. People are led to believe the fact that Mark Zuckerberg is finding a solution for their problems. Well, thanks to him for bringing this problem to our notice. But, he is not the one whom we can hand over this issue. This is something which the regulators of our country are responsible for. What he is doing is nothing but privatization of public services on a large basis. The advocates of free basics says that it will provide all services from education to health, without telling us how will they create more doctors or teachers because internet cannot produce them certainly. To paraphrase Marie Antoinette, this is like “let the people have cake instead of bread”.
As soon as Facebook will partner with organisations willing to be a part of this campaign, they will have access to all the data which these organisations are having and many of us don’t know but Facebook makes a lot of money via such databases.

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Analyzing the issue, this problem has been lingering in India for a long time. The main issue is the fact that data packs are way too expensive in India as compared to other countries which needs to be brought down. The solution is to provide data packs at a reasonable cost to everyone, if not free.

The Hindu writes “ The danger of privileging a private platform such as Free Basics over a public Internet is that it introduces a new kind of digital divide among the people. As Morozov writes, the digital divide today is “about those who can afford not to be stuck in the data clutches of Silicon Valley — counting on public money or their own capital to pay for connectivity — and those who are too poor to resist the tempting offers of Google and Facebook” . As he points out, the basic delusion Silicon Valley is nurturing is that the power divide will be bridged through Internet connectivity, no matter who provides it or in what form. This is not likely to happen through their platforms.”

Internet is the new name for trading. And like the past, Silicon Valley’s “Free Basics” campaign is a new type of colonialism we are facing. Please refrain from supporting any such campaign.

Concluding the above, free basics is actually not free. And, what’s the cost ? Our economy.

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There ain’t no such thing as a free lunch

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Free’ , nice yet a tricky word. Things which look free to us are often not free, they have some or the other opportunity cost attached to it.

What is opportunity cost?
It is the cost of the next best alternative. For eg: You have two job options with you, one paying you Rs. 15,000 and the other paying you Rs. 20,000. Obviously, you will take the latter. But, the opportunity cost of taking the latter is the cost of the former opportunity ,ie, Rs. 15,000.

There ain’t no such thing as a free lunch is a quite famous adage. History of this phrase is super-fascinating. So, it goes back to nineteenth century when American bars used to make use of the phrase ‘free lunch’ to attract drinking customers. The policy was very simple, whosoever buys one drink will get unlimited amount of free food. Sounds fair ? Well, it was not.
Many types of food on the offer were high on salt, so those who ate them ended up buying a lot of beer. So, the bar people were the only one benefiting from the policy while the customers lived in an illusion that they are getting a real profitable deal.

This implies, that even if something appears to be free, it has some external cost attached to it. Therefore making choices considering all the factors is important. So, if a friend takes you for a lunch and pays for your meal, you’ve still made an investment. You’ve invested your time and energy which you could have utilised somewhere else to be there. Even, going on a date has an opportunity cost. If you choose to go on a date with a particular person, you may are losing a chance to go on a date with some other person. So, that is a choice that you have to make.

Weighing your choices is an important task. From the simple task of choosing between going to gym or eating a cookie? to complex choices like applying for more challenging jobs or being satisfied with the current one?, opportunity costs plays an important role.

And, if you chose to do nothing, then that has its own opportunity costs.

An important thing to remember about opportunity costs is that they are different for different persons. We all have our own preferences and hence make different judgments. Each one of us would probably choose something different for different reasons. Like, you might choose vanilla ice cream after the chocolate one, and I might choose strawberry; so opportunity costs of chocolate ice cream is different for both of us. Therefore, all of us will incur different opportunity costs.

Apart from opportunity cost, there is one more term known as Sunk costs. Both of them have different meanings, sunk costs refers to the cost that cannot be recovered and hence should not influence your decision.

Example for the same can be, suppose you bought a movie ticket for Rs. 100 and you lost it. The utility you get from watching the movie is Rs. 150. Now you should not calculate your costs as Rs. 100 (Lost ticket) + Rs. 100 (New ticket) = Rs. 200 which is greater than Rs. 150 (which will force you to not to buy a new ticket) because the former Rs. 100 is your sunk cost which cannot be recovered and hence should not be considered. So, your cost is still Rs. 100 which is lower than the benefit derived. Therefore, you should go and buy the movie ticket.
Coming back to the topic, now when someone asks you for free food, you know it’s actually not free. So, make your choices wisely.

FUN FACT
IIM, Ahmedabad (A reputed institute for management studies) has a cafe in its campus named TANSTAAFL which is an acronym for ‘There ain’t no such thing as a free lunch’. The cafe represents a clear warning to students that spending too much leisurely time at the 24-hour cafe may come at the cost of poor grades in classes.

Find more about it here

 

Era of Startups

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“The only thing worse than starting something and failing is not starting something.” ~ Seth Godin
Heard about startups ? Give it a read 🙂

With the recent developments in the fields of technology, E-commerce, Space, Agriculture, Robotics, Social Media, our lives have become much easier than we had ever imagined it to be. This was made possible by the visionary leaders who with their intelligence and abilities made the impossible possible. The changes were so rapid that we don’t really remember the time before them. And, hereby startups played quite a major role in revolutionizing our lives. Startup is nothing but a new venture (Company/ Partnership/ Anything else) which is established to bring ease in life of other people by making use of the latent technologies and employing their innovative ideas and hence taking the industry further. Silicon Valley is known to be the icon of Startup culture for aspiring entrepreneurs, more than 50% startups have been founded here (like Google, Facebook, Apple and the countless others). The culture of startups is getting over India as well, In the past recent years the record shows that around 800+ startups gets established in India annually employing over 250K people. It is the 3rd largest base for the startup community. Let’s have a look at the Top 20 global startup ecosystem ranking 2015:

Bangalore grabbed the 15th place out of 20. Bangalore is like the hub of startups, it’s the place where the story began; where people started getting engaged in startups and today we see a budding entrepreneur in each student everywhere in India.

Startups, nowadays, act as a driver in economic growth. Generation of more employment opportunities is the one immediate result of increasing startups. People working in a startup generally turn out to be efficient in all the fields, compared to the individuals working for big companies for a single department. The influx of ideas that come up with each budding startup results in a dynamic market, plus the new entrepreneurs are aware about their social responsibilities as well, so society as a whole is also benefitted. And lastly, they are by large responsible for the growth of a country, more startups mean more employment and more self- production, it solves the problems of both unemployment and trade deficit and hence providing aid in economic growth. Our honorable Prime Minister, Mr. Narendra Modi, called up the young entrepreneurs by rolling out the campaign “Startup India, Standup India”. Following the PM’s call from the ramparts of Red Fort, NASSCOM, TiE and IIM Ahmedabad hosted the first India-US Startup Konnect in Silicon Valley on 27th September, 2015. More than 30 startups were selected working in varied fields to present their products to Narendra Modi. This event was performed to give a boost to the startup community. When one person intends to do a startup, he looks at various aspects- infrastructure, feasibility, funding, future plans, human resource and the like. We say that half of the young population of our country is going abroad to start their business. India is losing out on its talented youth. But why? What still lacks in India? Let’s find out: 1. Administrative Roadblocks- The biggest issue with India is the problem of red-tapism. There are so many unnecessary rules and regulations, it takes plenty of time even to pay your electricity bill and here we are talking about starting a new firm. If we start off with the procedures of starting a business then there are around 12 procedures for the same, India ranks 158 here out of 189 countries once surveyed. If an entrepreneur wants to build a warehouse then he has to go through 35 procedures, and if say there comes up any commercial dispute then according to the survey it takes around 1420 days and 46 procedures to solve the same, and if somebody needs to export/import something, he has to wait for like 15-20 days to get the documentation done. No wonder why people don’t prefer investing in India. 2. Infrastructural Support- Next in the line is the infrastructure, resources like capital, manpower, technology are necessary inputs in the growth process. However, the efficiency of these inputs depends on the environment. They help to increase returns on investment by reducing production cost and improving efficiency. Focus should be on development of roads, regular supply of electricity and water, proper transportation system and the like. In the days of internet and technology, developing only physical infrastructure is not enough, we need to build up our electronic infrastructure as well. 3. Educational Support- In a country like India, from the very start we are told to be Doctors, Engineers or CA. According to our education system, these are the only prestigious professions. Nobody asks us to be entrepreneurs. Infact, the way our syllabus has always been designed it focuses more on the theoretical parts, we are always taught about how to score more. Nobody really cares here about the actual knowledge a person possesses. We have never been give workshops about skill development or any kind of entrepreneurship training. To boost the startup culture, we need to start from the grass root level and provide students with more of practical knowledge. 4. Legal Aspects- Policy-makers and implementers are expected to form such policies or procedures that will make the task easy for the startup entrepreneurs. Today, there are like 33 kinds of tax payments one entrepreneur needs to make. Simplifying the tax procedure is the need of the hour. Government was discussing upon the Goods and Services tax, which aims at integrating all types of taxes into one, I would like to add the importance of GST which has been put on a halt by the government for some time. As we know if one needs to startup his own business, he has to go through all the VAT registrations from the States’ Sales Tax department, and since each state has its different procedures it becomes really difficult for a business to operate in multiple states. After the introduction of GST, the tax procedure would be centralized and businesses would no longer need to obtain multiple VAT registration thereby improving the ease of doing business. Introduction of GST would bring more such reforms. Land acquisition bill which is still in consideration, can also unleash a series of projects aimed at reshaping crumbling infrastructure in cities, setting up industrial corridors, building smart cities, expressways and super-fast bullet trains – all of which are land-intensive projects. India ranks at 142 in ease of doing business which includes all the factors like the registration process, paying taxes, getting electricity connection, etc. There is still a long way to go in making India conducive for business ecosystem. Before inviting people to start their own business, India must work on various factors, them being: Market, Capital, People, Culture, Infrastructure and Regulations. In addition to this, we need to make people aware that failing in their startups is okay, because many people are still reluctant because they are in constant fear of failure. Yet despite such concerns, the big growth in the number of new Indian start-ups continues, as does the level of investment they are able to secure. A change in shift and mindset is clearly in progress which could be witnessed by being a part of the existing ecosystem, though in nascent stage. But then, Rome wasn’t built in a day and every transformation requires time of its own. In case of India, the transformation may last longer. But efforts like Digitalizing the whole India, starting up campaigns like “Startup India, Standup India”, Reduction in corporate taxes cannot be ignored as well. Indian youth is contributing its share to take the country’s economy to new heights. The young entrepreneurs promise a bright future for the country, so let us keep our fingers crossed.

(Originally published at Okonomos )

Calculating Index Values

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Ever wondered how stock index points are calculated ?

How is it said that Sensex gained 100 points and CNX Nifty sheds 47 ?

Sounds complex ? Well, it’s pretty easy. Just simple multiplication and division.

There are many indices listed under different stock exchanges.The method we will be discussing is used for calculation of all the indices under BSE and for CNX Nifty under NSE excluding BSE-PSU Index and dollar linked versions of the indices under BSE.

We know from our current knowledge that Sensex lists down shares traded of around 30 companies and Nifty lists down for 50. You can find the names of the companies listed from the link below:

BSE SENSEX

NSE NIFTY

(Live reports are fascinating, do check out the above websites)

The companies are not chosen randomly but there is a procedure for the same. Few of the conditions include – It should be listed under the index for more than one year, it should be traded each day, it should come under top 150 companies listed under average number of trades for past one year or so and the like.

So, for calculating the stock index points we use a method called ‘Free-float Methodology’.

Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In short, it includes all those shares that are currently being traded in the market.

I’ll explain the process with the help of a simple example.

Suppose we are talking about Sensex, and assume that under Sensex we lists only three companies (to make things easier)

Company X- It has total 2000 shares but 200 shares are held by the promoters. This implies 1800 shares are available for the market trading. Assume the current prices to be Rs.10 ; Therefore, Free float market capitalization value would be 1800*10= 18,000

Company Y- It has total 4000 shares but 1000 shares are locked. This implies 3000 shares are available for the market trading. Assume the current prices to be Rs.18 ; Therefore, Free float market capitalization value would be 3000*18= 54,000

Company Z- It has total 2500 shares but 500 shares are held by the promoters. This implies 2000 shares are available for the market trading. Assume the current prices to be Rs.21 ; Therefore, Free float market capitalization value would be 2000*21= 42,000

Free Float Market Capitalisation of the Index = Company X + Company Y + Company Z

                                                                       = 18,000 + 54,0000+ 42,000

                                                                       = 1,14,000

Now assume that the base year for the index in question is say 1978-79, and at that time the free float market capitalization value is 30,000. (Stocks at that time might be different, but that does not matter). It is a universal assumption to take the market value equal to the index value ,ie, 100.

So, the value of index today would be = 114,000 * 100 / 30,000

                                                                        = 380 points

This calculation is done every day, every minute. Suppose the very next minute the value comes out to be 420 points then we will say Sensex jumped 40 points and similarly for the fall.

So, this is how we calculate index values. Under BSE-PSU Index, instead of free float market capitalisation value we use full market capitalisation value , ie, in case of company X it will be 2000 shares instead of 1800 shares, rest is the same. We’ll discuss calculations for the dollar linked versions and other indices under NSE in future posts.

For any queries, feel free to contact me.

Thank you.

 

Basics of Indian Economy

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Periodic reports are framed after certain intervals regarding inflation rates, GDP growth, CPI, WPI, and the like. Does it leave you confused as to what to infer from such reports? If yes, then I am writing this post for you. We will learn the Basics of Indian Economy and understand what these complex terms actually mean.

Let’s start off with the most used term, i.e, GDP (Gross Domestic Product).

Gross Domestic Product as the term suggests is the monetary value of final goods and services produced within a country for a specific period of time. But, we refrain from including proceeds from illegal activities and value of work done out of love and affection without any payment, the reason for former is that it is not supported by law and the latter is not included because of lack of data to calculate its value.

GDP estimates are considered to be a primary indicator of a country’s economic well-being.GDP is generally expressed as a comparison with previous year or quarter. Suppose, the GDP for 2014-15 is 7% (Imaginary) this implies that the economy has grown by 7% over the past one year. Usually, for comparison purposes, GDP of all the countries is converted into U.S. Dollars using either market exchange rates or purchasing power parity exchange rates and then measured against each other. You can take a look at ranking of GDP growth 2014 .

How does it impact the Stock Market ?

Understanding it in simpler terms, bad economic growth implies lower profits for a company and hence lower stock prices. Investors usually desist from investing in economies with falling GDP rates.

Is increasing GDP always considered favorable for the economy?

Not always. Increase in GDP may sometimes come at a cost of environmental damage, dissatisfaction, and decreasing quality of life. Constructing new factories leads to an elevation in GDP rates but the pollution it causes is never accounted. Construction of dams again raises the GDP but it leads to a large amount of displacement amongst people residing at that place and hence decreases their quality of life. So, increasing GDP is not actually favourable for the economy from every aspect.

Coming to the rescue, United Nations maintains a Human Development Index which ranks countries not only based on GDP per capita , but on other factors, such as life expectancy, literacy, and school enrollment.

The above explains Nominal GDP which is most of the times not considered as a reliable indicator of real growth because it largely gets affected by the prices prevailing at the current time period. Even with the same output, inflation can lead to a rise in GDP but we can avoid this issue with the help of Real GDP.

Real GDP

Real GDP is basically expressing Nominal GDP on the basis of a fixed unit value. For example: Expressing the GDP of a country between 2005 and 2010 taking base year as 2005 ( any recent normal year which is free from any type of disaster, calamity or economic slowdown). In order to calculate this real GDP figure for each year, the nominal GDP of the country (its national output) must be multiplied by a factor known as the GDP Price deflator that is equal to the relative rise in prices of goods and services (inflation) over this period of time.

I mentioned above about the calculation of GDP which can be done in two ways : Using market exchange rates or purchasing power parity rates. Market exchange rates is no new term for us, Let’s discuss about purchasing power parity.

So, under purchasing power parity, what we do is that we decide upon a basket of goods. The price of such basket is calculated in every country and then the price is converted in US dollars for comparison. The estimation is a bit complicated because of different types of goods consumed in each country, different quality of goods and different price levels; adjustments needs to be made to overcome such difficulties.

Purchasing power parity rates are sometimes considered better than the market exchange rates because of the stability and because of the fact that market exchange rates seems to be relevant only for traded goods, as non-traded goods and services are way cheaper in low income countries as compared to high income countries because of lower wages maybe.

Next in line is inflation, in simpler terms it is basically a continuous rise in prices over a certain period of time. Inflation is not considered good for the economy. But, do we desire zero inflation? No, certainly not; because inflation is a sign of growing economy. Let’s see how:

If economy is growing, this implies people are rewarded with more choices and income, which in turn leads to more demand for all the available goods and services, when demand exceeds the supply, prices rise and hence inflation occurs.

At times, inflation becomes negative (like WPI in the recent past), so is it a situation of rejoice or worry? In the context of Indian economy where inflation is skyrocketing, negative inflation might be taken as a situation of rejoice.

With inflation comes two more terms:

  • Deflation: It is just the opposite of inflation ,ie, a fall in prices.
  • Disinflation: It refers to a slower rate of inflation.

Both of them seems quite similar, the major difference is that in case of the former the prices actually fall while the latter doesn’t imply a fall but a slow increasing rate.

Recently in 2013 , Consumer Price Index (CPI) replaced Wholesale Price Index (WPI) as a main measure of inflation. Let’s learn more about these terms.

Wholesale Price Index (WPI) is basically a representative of basket of wholesale goods traded between the corporations. The data regarding WPI is released monthly unlike previously where it used to be released every week. The commodities for WPI are chosen based on their importance in a particular region. The new base year 2011-12 uses 676 items to calculate WPI. Movement of each commodity is tracked and then the WPI is calculated.

Consumer Price Index (CPI) is basically a representative of basket of consumer goods and services consumed by households. In 2013 CPI replaced WPI as a main measure of inflation, I am yet to find the reason for that.

Few more important terms :

  1. Trade Deficit– When the imports exceed the exports of a country, it is said to have a trade deficit. Mathematically, Trade deficit= Value of imports- Value of exports
  2. Real Income– Real Income refers to the income left with the consumer to spend on his needs after cutting out the necessary payments such as tax.
  3. Money Supply– It refers to the total amount of money circulating in a country.
  4. Fiscal Policy– It refers to the policy regulated by the government to manage the revenue and expenditure of a country. Government issues budget every year which is a part of fiscal policy. If expenditure exceeds revenue, then government resorts to borrowings. The difference between Expenditure and Revenue is known as Fiscal Deficit.
  5. Monetary Policy– It refers to the policy managed by central bank of a country by various tools. These tools are the rates and ratios managed by them. I have discussed about these in my previous post, you can take a look and have a better understanding about the same.

The topic is quite vast, I might have missed out on certain concepts. The idea was to brief about the basic and the important concepts. I hope it helped.

Leave a comment if you have any query, or if you want to add something please feel free to do that too.

Thank you.

 

 

Rates & Ratios

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Recently we came across these news’ “Repo Rate cut by 50 bps”, Raghuram Rajan saying “You call me hawk, some call me Santa Claus; I am Raghuram Rajan and I do what I do”. Every news channel and news magazines went crazy and covered this story. So, why is this repo rate so important? How is it going to affect us? In addition to repo rate, various other policy rates also faced a change.

Let’s have a look at all these rates and learn how they affect a consumer and the economy.

POLICY RATES:

  1. Repo Rate-

Repo Rate is the rate at which banks borrow from RBI (The central bank) in case of shortfall of funds. The loan can be kept for a good amount of time when compared to loans taken by way of MSF (Marginal Standing Facility). If a bank is borrowing under Repo Rate, it needs to pledge some government securities with it. Let’s take an example to understand how it works:

Suppose a bank is in need of ₹100, now imagine the margin requirement for loan is set at 20% (It is the difference between the loan value and the market value), this implies that the banks will be provided loans of only 80% of the securities. So, accordingly the bank will have to pledge the securities amounting to ₹125 to get a loan of ₹100. During the repayment, banks need to pay an amount = Amount taken as loan + Repo Rate.

However, these securities must not be included in SLR (Statutory Liquidity Ratio). Banks need to provide additional securities. Currently the Repo Rate stands at 6.75%

How does it affect a consumer and economy?

RBI uses the tool of repo rate to curb inflation. Suppose that RBI increases repo rate, this implies that banks would get loans at higher interest rates and therefore they will provide loans to consumers at higher interest rates (because of their increasing costs), and since the loans would be costlier people would demand less and if they would be having less money, the spending would be less. And following the laws of demand and supply, if demand falls and supply remains the same then prices are bound to fall and hence inflation stays under control. And if RBI decreases the repo rate then the effect would be exactly opposite, i.e., prices would rise.

So, the question here arises that why did Raghuram Rajan decreased the repo rate by 50 bps if it will increase the inflation?

RBI took the advantage of easing inflation to boost the economy growth. Even if inflation rises, that won’t be a problem these days. So the motive of the RBI governor was to give a boost to the manufacturing sector which is still lagging behind and thus help in quick economic growth of India (which is expected to be at 7.4% for the next quarter).

  1. Reverse Repo Rate-

There comes a time when banks have extra deposit against which they have no loans, so banks prefer parking these extra funds with RBI and earn some interest as well. This type of interest rate is known as Reverse Repo Rate. This is usually kept at 100 bps lower than the Repo Rate. Currently it is 5.75%

Suppose a bank deposits ₹100 with RBI, so after a period of time it will get the amount = Amount deposited + Reverse Repo Rate, in this case it would be ₹105.75

How does it affect a consumer and economy?

If RBI increases the reverse repo rate this implies that banks have a good incentive to park their funds instead of lending and therefore less funds would be available for the consumer to borrow and thereby RBI can control money supply in the market. And if, RBI lowers this rate, this will discourage banks to deposit their funds with RBI and therefore they will lend more and hence money supply would rise.

  1. Bank Rate-

It is the rate at which central bank lend funds to the commercial banks. It is used when funds are required for a comparatively longer period of time. Difference between repo rate and bank rate is basically that unlike repo rate, we don’t need to pledge any type of securities. Bank rate is charged on the amount of the loan taken. It usually kept at 100 bps higher than the repo rate. Currently, it is 7.75%

How does it affect a consumer and the economy?

Bank Rates have a direct impact on the lending rates. If RBI increases bank rate, then the lending rates of commercial banks will also rise and vice versa. Increasing lending rates would lead to less demands for loans, and decreasing lending rates would lead more demands for loans. This way RBI regulates the market rates, by changing bank rates according to the requirements.

  1. Marginal Standing Facility Rate (MSF)-

It is the rate at which commercial banks borrow money from RBI, the concept is same as the repo rate, except one thing. In repo rate, one has to pledge securities additional from SLR, while in MSF, one can provide securities which are already included in SLR, hence no need to buy new securities. So even if SLR goes below the required rate due to pledging securities under MSF, banks need not pay any kind of penalty which otherwise they would have.

Banks can borrow upto 2% of Net demand and time liabilities (NDTL)*, funds are borrowed in case of emergencies on an overnight basis. MSF is always kept 100 bps higher than the repo rate.

Currently, it is 7.75% 

How does it affect a consumer and the economy?

The implication is very simple. Increasing MSF, would lead to costlier borrowing which banks will transfer onto the consumer and hence loans become costlier and vice versa.

*NDTL- Bank accounts from which you can withdraw money at any time is known Demand Liabilities and accounts from where you cannot withdraw money anytime is known as Time Liabilities (These are being called liabilities from the point of view of banks)Suppose you deposited ₹X as demand and time liabilities and taken out ₹Y from them then NDTL would be ₹(X-Y).

RESERVE RATIOS: 

  1. Cash Reserve Ratio (CRR)-

It is the minimum amount of the total deposits which commercial banks are mandated to keep either as cash or as deposits with the central bank. The idea behind CRR is that banks should not run out of cash, nobody is sure about how many borrowers might turn up to get back their money so CRR keep the bank on the safer side.

Currently, CRR is fixed at 4%

How does it affect a consumer and the economy?

CRR is the tool of central bank to control the money supply in the economy. Suppose RBI increased CRR, this implies that banks will need to deposit more cash as compared to the previous situation, therefore banks will have less money to lend and hence money supply would be restricted; Vice versa would happen if RBI decreases the CRR.

  1. Statutory Liquidity Ratio (SLR)-

Statutory Liquidity Ratio says that banks need to keep a certain percentage of funds invested in gold or government approved securities before providing credit to its customers. Penalty is imposed on banks if they fail to maintain this much of percentage.

Currently, SLR is 21.5%

 How does it affect a consumer and the economy?

SLR ensures the safety of banks and that they invest in government securities. It controls the credit growth of the economy. The implications are rather similar as CRR, the difference between the two is the form in which banks are supposed to keep their money; while CRR directs banks to keep some deposits in form of cash, SLR directs them to invest some funds in gold or government securities.

The above were the various rates and ratios managed by the central bank. Hope it helped. Feel free to ask any queries or provide any suggestions!

Thank you 🙂

Stock Markets

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A term which we come across everyday is “Stock Markets”, daily newspapers are suffused with news like ‘ Nifty ends above 8200, Sensex up by 204 pts’ or ‘ Nestle India shares gain and ITC amongst the top traded shares’ So what exactly is a Share, Nifty, Sensex, how one determines the price of these stocks, what is a bearish or bullish market; these are the questions that arises in minds of various individuals and now here we’ll understand all these concepts in simpler terms.

When a company is incorporated, it raises capital so as to run its business. The capital is raised by issuing shares to general public, when a person buys a particular number of  shares of a company he/she becomes owner of that company till that limited amount. For eg: A company raises 1,00,000 capital by issuing 1000 shares of ₹100 each. If a person buys 10 shares,ie, spends ₹1000 (100×10) , he/she becomes eligible to share the profits and losses of business till that limited amount. There are various types of shares but we will take that topic in the next article.

These shares are traded on an online platform. There are various stock exchanges ( around 22 in India) where stocks are traded, the most popular ones are- National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Under these stock exchanges there are various stock indices, a stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value. An Index is used to give information about the price movements of products in the financial, commodities or any other markets. NSE and BSE have various indices, the ones which are most talked about are : NIFTY and SENSEX. Nifty which is a short for National Fifty shows the average of 50 stocks traded under it and Sensex which is a short for Sensitive Index shows the average of 30 stocks traded under it.

As one figures out the price of a product with the help of supply and demand curves, in similar manner prices of stocks are also determined. If demand exceeds the supply, price of the stock rises and when supply exceeds the demand, the price of the stock falls down. Sometimes, there comes a time when the prices of a stock is falling sharply, so the parent company coming to the rescue does something called “Buy-Back” of Shares which is simply buying your own shares to increase the demand. We will study this topic in detail in future.

Now, lets take a look at some important terms of stock market:

  1. Bearish Market- It is a market condition where investors anticipate the prices of stocks to fall in future, pessimism spread over the market and therefore people start to sell their shares in the market in order to avoid future losses.
  2. Bullish Market- It is a market condition where investors anticipate the prices of stocks to rise in future, optimism spread over the market and therefore people start to buy new shares in view of earning more profits in future.
  3. Chickens- Chickens refer to the people who are afraid to lose anything, their fear overrides their need to make profits and hence they only look upto to money market ( Market where short-term securities are sold and bought involving negligible risks) , since they never take risks, so they never earn huge profits.
  4. Pigs- Pigs refer to the people who are ready to take high-risks. They want to make profits in a very short span of time and hence they invest in various companies without doing much of their research work. This sometimes turns out to be against their interest as well.

Stock Market is quite a vast concept, the above article intends to solve the basic confusions regarding the same. Hope it helps.

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