Rates of Central Bank

Rates of Central Bank

Whenever we read the headlines of the business daily about the change of the rates by the Reserve Bank Of India (RBI). We think of it how a change in a rate has an effect on some of the important issues which the economy deals with like inflation, fluctuations in the lending rates etc.

This is because the RBI deals with the supply of money in our economy and the cost of credit.

By fluctuating the cost of credit, the RBI helps to deals with the supply of money in the economy because the money only deals with the purchasing power of the people as well as their growth. But the central bank also has to maintain a suitable environment so that the inflation should not go out of the permissible limits.

Now we would like to know some of the rates which the RBI deals with and also the banks working for the people in the country –

1.Repo Rate – it is also known as repurchase rate. It is the rate at which the banks borrow the money from RBI by selling their security ( or bond ) to the RBI to be purchased later on at a prefixed price. It is generally for a short duration of time.

It is like taking money from a bank by furnishing some security in lieu of the amount of loan.

Currently this rate is 7.250%.

2. Bank Rate – It is similar to the repo rate but the basic difference is that in this situation the bank has to pay some interest as there is no sale of security by the bank to the central bank. It is basically for a longer duration.

Currently this rate is 8.25%.

3. Reverse Repo Rate – As the name suggests it is opposite of the repo rate; it is the rate at which the central bank borrows the money from the banks and give them interest. This is usually done by the central bank at the time when there is excess money in the economy; then it increases the rate so that the banks lend money to the central bank.

Currently the rate prevailing right now is 6.25%.

4. Call Rate – It is the rate at which the banks on their own lend and borrow from each other on daily basis for their short term requirement.

5. Cash Reserve Ratio – It is the ratio of total deposits they have which is to be maintained with the Reserve Bank ; they cannot lend this money to any of its customers. No interest is given on them.

Currently thais ratio is 4%.

6. Statutory Liquidity Ratio – It si the ratio which need to be maintained by the bank at the end of each business day in the form of gold ,  cash , government bands , or other securities. Here it is done for the same purpose as CRR but here bank may earn some interest or capital appreciation.

Currently this ratio is set at 21.5%.

All these rates some or the other way are linked with the flow of money as well as the demand and supply of the same. These rates are determined by the central bank by considering many factors so that the money supply , growth , liquidity and the purchasing power could be maintained in a safe and prosperous manner.

Written and Posted by

SAMIR DEWAN

Editor at CHARTERED BLOOD

RISK MANAGEMENT

RISK MANAGEMENT

Now a days, the businesses has become complicated and advanced. The use of high end information technology, diversification and all other factors present in nowadays running globalised businesses has led to a great demand for the support of Risk Management.

Every other business has to take risks as it is directly related to reward and gains. But the real game lies in analyzing and predicting the risks involved and enacting the steps which can be taken in case the future occurrence start causing harm to the working and profitability of the organization.

Risk Management is a process of identifying and assessing, systematically an organization’s risks and devising and taking actions to protect the organization from them. It is best used as a preventive measure rather than a reactive measure.

The task of the risk managers is to predict and enact measures to control or prevent , losses within a company.

Risk managers can be anyone with a specialization in a particular field like a Chartered Accountant to test the financial risks , an Computer Engineer to test the working of the information technology involved in the organization ; or a geologist to test the risk in the place of the business, etc . Therefore the risk managers analyze the particular risk involved with the working of the organization and report it to the entity with particular recommendations so that the future unpredictable occurrences could be controlled or can be prepared for.

The different types of risks which a business can associate with are –

• 1.      Business risk – involves entity’s market or industry
• 2.      Market risk – such as fluctuation in prices , interest rates etc.
• 3.      Credit risks – related to potential for not receiving payments owed by debtors
• 4.      Operational risks-  related to internal controls
• 5.      Legal risks- possibility of change in statues or parties not meeting their contractual obligations

There are certain risk management methods which the risk managers rely to help organizations avoid and mitigate risks in an effort to position them for gains. The 4 methods are –

• 1.      Risk avoidance – it includes avoiding products and services and trade dealings with the potential for losses , like dealing with banned or restricted products
• 2.      Loss prevention – it roots out the potential for losses by regular training of employees and implementing safety programs to eradicate risks
• 3.      Loss reduction – it seeks to minimize the effects of risks through response systems that neutralize the effects of a disaster or mishap
• 4.      Risk financing – popularly used it includes paying them by retaining or transferring their costs

The risk managers work with the company’s managers to formulate a correct combination of the upper stated techniques since these techniques can be used not mutually exclusive but complimentary.

There are many risk management companies present in the industry specifically dealing with the risk management of large corporate houses and businesses; providing them with best of consultancy in this particular field.

So this is how the risk managers work to establish an organization with minimal risks by dealing with the risks involved in a highly effective and comprehensive manner.

WRITTEN AND POSTED BY

SAMIR DEWAN

EDITOR AT CHARTERED BLOOD

DEFICITS

DEFICIT

With Greece’s economic crises news going all around on the social platform, the word which emerges the most in these types of situations is ‘DEFICIT’. It seems more of an economic term. But we all in our daily life deal with the concept of this word.

Deficit, in a simple sense means that your expenditures is more than your revenues.

But just like the economy it is also a complex scenario to be dealt with.

The deficits which are normally associated with an economy and its working are –

1.       Revenue Deficit

2.       Fiscal Deficit

3.       Primary Deficit

4.       Capital Deficit

5.       Monetized Deficit

Now let us have a bird’s eye view of each if these different types of deficits stated above:-

1.      Revenue Deficit-

Total Revenue Expenditure –Total Revenue Receipts

This happens when government’s own earnings are not sufficient to meet normal functioning of different departments and for provision of services. The deficit is met by capital receipts ie through borrowings or sale of assets (disinvestment). Higher deficit gives a warning to the government either to curtail its expenditure or increase its tax and non tax receipts.

2.      Fiscal Deficit –

Total Expenditure – Total Receipts (excluding borrowings)

It is the amount of borrowing which the government has to resort to meet its expenses. It includes both revenue as well as capital components. The borrowings taken to deal with it may leads to debt trap as it increases the interest liability which increases revenue expenditure leading to higher revenue deficit. Deficit financing can be an option but may lead to inflationary pressures. Reduce expenditure and subsidies, increase tax base, disinvestment are some of the options to deal with this deficit.

3.      Primary Deficit –

Fiscal Deficit (of current year)  –  interest payment (of previous year borrowing)

                                                              

It shows the actual in hand amount of government borrowing is required to meet expenses other than interest payment.

In other words, where fiscal deficit indicates the amount of borrowing requirement inclusive of interest payment, primary deficit indicates borrowing requirement exclusive of interest payment.

4.      Capital Deficit –

Expenditure on Capital Ac  -  Capital Receipts

The excess of capital disbursements over capital receipts measures the capital deficit.

5.       Monetized Deficit

It indicates the level of support extended by Reserve Bank to government borrowing programme.

SAMIR DEWAN

Editor at CHARTERED BLOOD