The above image is from this year govt. budget doc.
You can see that, in Cash management bills and ways and means advance...............the NET borrowing is zero in any particular year.................that means govt. borrowed for a small time in a year and then repaid completely. But if u will see Treasury bills......................then there is a net amount (outstanding) which will be paid in the next year. And the same is true for Dated securities also.
You can see that, in Cash management bills and ways and means advance...............the NET borrowing is zero in any particular year.................that means govt. borrowed for a small time in a year and then repaid completely. But if u will see Treasury bills......................then there is a net amount (outstanding) which will be paid in the next year. And the same is true for Dated securities also.
The above is news from express. A very good article to clear a lot of concepts for PRELIMS. First let us understand what is the context of this news.
CONTEXT: Because of the COVID-19 crisis, Foreign Portfolio Investors (FPIs) (also called Foreign Institutional Investors, FII) are leaving the Indian markets (shares and bonds market both). In case of normal situation, these FPIs come to emerging economies like India (because of higher growth and higher interest rate) but when there is a crisis, they sell their investments and want to hold CASH (in dollars). So due to the COVID-19 crisis, they were leaving Indian markets since last one month. Since they were selling their investments in India, they were getting RUPEEs and this rupee they were selling in the FOREX MARKET to purchase dollars..............sol dollar was appreciating and Rupee depreciating. Now, when RUPEE starts depreciating, RBI, from its FOREX reserves of around $450 billion, started selling dollars in the FOREX market, which resulted in increase in supply of dollars and hence dollars started depreciating and rupee starts appreciating, or we can say rupee's depreciation stopped.
CONTEXT: Because of the COVID-19 crisis, Foreign Portfolio Investors (FPIs) (also called Foreign Institutional Investors, FII) are leaving the Indian markets (shares and bonds market both). In case of normal situation, these FPIs come to emerging economies like India (because of higher growth and higher interest rate) but when there is a crisis, they sell their investments and want to hold CASH (in dollars). So due to the COVID-19 crisis, they were leaving Indian markets since last one month. Since they were selling their investments in India, they were getting RUPEEs and this rupee they were selling in the FOREX MARKET to purchase dollars..............sol dollar was appreciating and Rupee depreciating. Now, when RUPEE starts depreciating, RBI, from its FOREX reserves of around $450 billion, started selling dollars in the FOREX market, which resulted in increase in supply of dollars and hence dollars started depreciating and rupee starts appreciating, or we can say rupee's depreciation stopped.
Out of the $450 billion Forex Reserves, around 64% is in foreign currency, which is mostly dollars. (Actually Forex Reserves consist of four things = Foreign Currency Assets + Gold + SDR + RTP).
Now this dollars of around $250 billion, RBI does not hold in cash in its lockers, RATHER it has invested in US GOVT BONDS. (And this has been done by other countries also like China). Now, if RBI, TO SELLL DOLLARS IN THE FOREX MARKET (to curb rupee depreciation), FIRST RBI WILL HAVE TO SELL US GOVT BONDS.
Now if India (and China), starts selling (liquidate) US govt. bonds, bond price will come down and yield will go up. There is another logic also to judge about the yield which is ...................... If RBI will sell US govt bonds and take out the dollars, then there will be shortage of liquidity (dollars) in US market and the interest rate on dollars will go up.........and when interest rate goes up YIELD also goes up.
Now US don't want this, because it will further hurt their economy. So, that is why US FED may agree on a DOLLAR-RUPEE SWAP FACILITY.
Now this dollars of around $250 billion, RBI does not hold in cash in its lockers, RATHER it has invested in US GOVT BONDS. (And this has been done by other countries also like China). Now, if RBI, TO SELLL DOLLARS IN THE FOREX MARKET (to curb rupee depreciation), FIRST RBI WILL HAVE TO SELL US GOVT BONDS.
Now if India (and China), starts selling (liquidate) US govt. bonds, bond price will come down and yield will go up. There is another logic also to judge about the yield which is ...................... If RBI will sell US govt bonds and take out the dollars, then there will be shortage of liquidity (dollars) in US market and the interest rate on dollars will go up.........and when interest rate goes up YIELD also goes up.
Now US don't want this, because it will further hurt their economy. So, that is why US FED may agree on a DOLLAR-RUPEE SWAP FACILITY.
Now the SWAP facility is very simple.
US FED may give dollars to RBI (this will REMOVE the need of selling US Govt. bonds by RBI) and RBI will give Rupees to US FED at the present exchange rate. And max after 3 months, this transaction will be REVERSED at the same rate (or may be any pre-decided rate). And there will not be any INTEREST SWAP but only Principal as the time period is very small, so it will not make any such difference. This will remove any currency risk as the rate (rupee-dollar) at which swap will be done is finalized in advance.
US FED may give dollars to RBI (this will REMOVE the need of selling US Govt. bonds by RBI) and RBI will give Rupees to US FED at the present exchange rate. And max after 3 months, this transaction will be REVERSED at the same rate (or may be any pre-decided rate). And there will not be any INTEREST SWAP but only Principal as the time period is very small, so it will not make any such difference. This will remove any currency risk as the rate (rupee-dollar) at which swap will be done is finalized in advance.
The above news was about FOREX SWAP DEAL at Central Banks level, which will increase the DOLLAR/FOREX reserve of RBI (may be for 3 months). This is also called CURRENCY SWAP between two Central Banks. The Currency Swap can also be at companies level, which i have explained in my book, and I am sharing the image below.
Some students asked me regarding authentic and relevant information regarding Five Year Plans. Pls follow the link.............but don't spend too much time on it, just have a look and see what were the major objectives of each five year plan. http://mospi.nic.in/sites/default/files/Statistical_year_book_india_chapters/Five%20Year%20Plan%20writeup_0.pdf
Now those who have confusion in market interest rate..............then please read the following:
Some students have asked me that when a QUESTION says "interest rate or market interest rate", then what should we take it as deposit or lending rate or somthing else??? So, the answer is:
"Interst rate or Market Interest rate" is the rate at which money is available. Now, the rate at which money is available to banks (from public) is called the deposit rate and the rate at which money is available to public/companies (from banks) is called the lending rate. So "interest rate" is a general term which could mean lending rate or deposit rate depending on "for whom" we are talking about.
Now, if the question says just "interest rate", you could assume anything either deposit rate or lending rate and your answer will not get impacted. If the question requires a specif rate............then it will be mentioned in the question whether they mean depost or lending rate. But if its not mentioned, then try to understand it has deliberately been done and the question just demands that you assume any rate and solve the question.
Some students have asked me that when a QUESTION says "interest rate or market interest rate", then what should we take it as deposit or lending rate or somthing else??? So, the answer is:
"Interst rate or Market Interest rate" is the rate at which money is available. Now, the rate at which money is available to banks (from public) is called the deposit rate and the rate at which money is available to public/companies (from banks) is called the lending rate. So "interest rate" is a general term which could mean lending rate or deposit rate depending on "for whom" we are talking about.
Now, if the question says just "interest rate", you could assume anything either deposit rate or lending rate and your answer will not get impacted. If the question requires a specif rate............then it will be mentioned in the question whether they mean depost or lending rate. But if its not mentioned, then try to understand it has deliberately been done and the question just demands that you assume any rate and solve the question.
Media is too big
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Linkage between Bond Price, Interest Rate and Yield
The above two videos and the "interest rate" note..............should be read/understood as one topic, as all are interlinked.
Media is too big
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Linkage between liquidity and interest rate
The above article is from Express. The article is not much substantive but two terms need to be understood.
"Monetising the Deficit":
It means whatever is the government's deficit..........Borrow from RBI by asking it to print more rupee notes.
"Deficit Financing":
It generally means financing the deficit from market borrowings. But it can also include borrowing from RBI by asking it to print more rupee notes.
It means whatever is the government's deficit..........Borrow from RBI by asking it to print more rupee notes.
"Deficit Financing":
It generally means financing the deficit from market borrowings. But it can also include borrowing from RBI by asking it to print more rupee notes.
So, in case of "Monetising the Deficit", government of India will issue bonds to RBI and RBI will print extra cash and give it to government. This extra cash government can use to spend in the economy to stimulate the growth and restart the economic activity which has slowed down because of the economic crisis resulted from COVID-19. This extra cash govt. can transfer to poor also. Of course, all this will have impact on inflation, but the present problem is not of inflation but of subdued growth.
In RBI's balance sheet, The Govt. bonds will become ASSETS and the printed currency notes (given to govt.) will become LIABILITY for RBI. In future, Govt will repay back to RBI.
In RBI's balance sheet, The Govt. bonds will become ASSETS and the printed currency notes (given to govt.) will become LIABILITY for RBI. In future, Govt will repay back to RBI.