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VisionIAS - Video Classroom Lecture
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Economics Class 04

QUANTITATIVE EASING: (1:11:06 PM):

  • It is a bond-buying program performed by the Federal Bank of the USA to inject liquidity into the US market. 
  • Part of the extraordinary monetary policy of the federal bank is to inject liquidity into the US market.
  • Federal tightening:
  • Contractionary policy followed by US federal bank to tame inflation.
  • Interest rates in the US market will increase due to federal tightening.
  • Nominal GDP:
  • It is nothing but the total output of the country at the current year's prices.
  • Not adjusted to inflation.
  • Real GDP: (2:10:08 PM):
  • Real GDP is the GDP calculated at the base year or reference year prices (Constant prices)
  • Real GDP indicates an increase in growth due to production. 
  • Criteria for deciding base year- 
  • Year with no major natural calamity, drought, or famine.
  • Availability of data.
  • The year should not have inflation at an alarming rate.
  • Unstable years in terms of economic activity are not considered as the base year. 
  • There should not be many gaps between the year chosen and the current year i.e. Base year should be a recent year. 

MONETARY POLICY: (2:38:34 PM):

  • Monetary policy deals with money supply
  • In India, Monetary policy is handled by the RBI taking into factors like economic growth, inflation, exchange rate policy, and some developmental aspects like poverty, unemployment, etc.
  • Monetary policy as an important macro-economic tool can be used to inject liquidity (Expansionary monetary policy) or to reduce the money supply in the economy (Contractionary monetary policy) 
  • The Indian rupee started depreciating leading to a higher inflation level.
  • Along with high inflation, India's GDP growth rate went below 5 percent consecutively for 2 years which created a dilemma wrt the focus of monetary policy. (Inflation or growth).
  • Then a committee was appointed named the Urjit Patel Committee and it laid the foundation of the Monetary Policy framework agreement between RBI and the Government. 

TOOLS USED BY RBI: (3:10:43 PM)

  • RBI uses Quantitative and Qualitative tools to control the amount of credit or money supply in the economy.
  • Quantitative tools focus on the overall credit of the money supply whereas Qualitative tools focus on selective credit control i.e. selectively encouraging or discouraging credit for specific sectors. 
  • Different quantitative tools used by RBI are:
  • Quantitative tools :
  •  Liquidity adjustment facility (LAF)- REPO rate, Reverse REPO rate.
  • Repo rate:
  • It is an interest rate at which RBI lends money to banks and other financial institutions for a short-term period.
  • In REPO there is a repurchase agreement that the G-secs would be re-purchased by the banks after the loan period (REPO= Repurchase agreement). 
  • (* If RR increases money supply decreases- It means RBI is giving money to Banks at higher interest and now banks will also give loans at higher rates.)
  • Generally, the REPO rate is used as the policy rate except during COVID, the policy rate was shifted to the Reverse REPO rate. 
  • Reverse REPO rate:
  • It is the interest rate at which Banks and financial institutions park their money with RBI.
  • Earlier the difference between the REPO rate and the Reverse REPO rate was 25 basis points (0.25) but currently the gap between REPO and Reverse REPO has been widened to handle the impact of COVID. 

The topic for the next class is Quantitative Tools of RBI