Banking for Beginners

Before we dwell on RBI’s Monetary policy let us understand the difference between Monetary and Fiscal policies. Monetary policy of a country is regulated by its Central Bank, which in our case is Reserve Bank of India (RBI). Function of monetary policy is to regulate money supply in the eco system which helps in controlling inflation and regulation of interest rates. The crux of monetary policy is to balance growth with moderate inflation. Fiscal policy is the aggregate of measures undertaken by a country’s Government for revenue generation  ie taxation and revenue expenditure. This comes as a part of what is known as Union Budget.   Here we shall be discussing various parameters of RBI’s monetary policy, as well as the latest policy measures announced on 5 th April 2016. RBI uses various tools to regulate the economy and achieve goals of its monetary policy. Chief amongst them are Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Bank rate, Repo rate/ reverse r

Finance Minister’s announcement in Union Budget 2016, for providing Rs. 25,000 crores towards capitalization of Public sector Banks, has sparked off a debate about adequacy of this amount. In this context it is important to understand what is Bank capitalization per se and its ramifications. As this blog is primarily meant for persons who have not been exposed to technicalities of Banks and Banking operations, the underlying issues are sought to be discussed in simple terms. ‘Capitalization’ of a company broadly refers to resources infused in the Company for acquiring assets or for its operations. Capital can be issued with varying terms of face value and premium. But for the limited purpose of this blog, structuring and terms are not very relevant and Capitalization can be assumed to mean aggregate funds infused as Capital to run the show. For a Bank, Capital  is classified under Tier I or core capital and Tier II or supplementary capital. Tier I capital consists of share