Economic Reforms: Caiib Paper 1 (Module A), Unit 7

Economic Reforms: Caiib Paper 1 (Module A), Unit 7

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We all know that CAIIB exams are conducted by the Indian Institute of Banking and Finance (IIBF).  CAIIB is said to be one of the difficult courses to be cleared for the bankers. But we assure you that with the help of our “CAIIB study material”, you will definitely clear the CAIIB exam.
CAIIB exams are conducted twice in a year. Candidates should have completed JAIIB before appearing for CAIIB Exam. Here, we will provide detailed notes of every unit of the CAIIB Exam on the latest pattern of IIBF.
So, here we are providing “Unit 7: Economic Reforms” of “Module A: Economic Analysis” from “Paper 1: Advanced Bank Management (ABM)”.

The Article is Caiib Unit 7: Economic Reforms

♦Important Point

  • The economic Reforms started in 1991.
  • Real Sector Policy measures mainly focused on the manufacturing sector in the early stages of reform process.
  • MRTP Act Monopolies and Restrictive Trade Practices Act, 1969
  • APMC Act (Agricultural Produce Market Committee Act )
  • The primary objective of The APMC Act in each state of India requires all agricultural products to be sold only in government – regulated markets. This was amended and permitting the farmers to bypass the mandatory requirement of regulated market.
  • Essential Commodities Act, 1955

♦ Important Committee related Reforms

Financial Sector reforms have been arrived out in accordance with there commendations made by basically three committees:

♦Some Important Definition

  • IRS- Interest Rate Swaps: An interest rate swap is an interest rate derivative. It involves exchange of interest rates between two parties.
  • FRA – Forward Rate Agreements: A Forward Rate Agreement (FRA) is a financial contract between two parties to exchange interest payments for a `notional principal’ amount on settlement date.
  • Collateralized Borrowings and Lending Obligation  (CBLO): The Collateralized Borrowing and Lending Obligation (CBLO) market is a money market segment operated by the Clearing Corporation of India Ltd (CCIL). In the CBLO market, financial entities can avail short term loans by providing prescribed securities as collateral. In terms of functioning and objectives, the CBLO market is almost similar to the call money market.
  • CDs (Certificate of Deposits) are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a maximum of one year.
  • Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.
  • Who can issue Commercial Paper (CP)?:  Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs).
  • A ‘Future’is a contract to buy or sell the underlying asset for a specific price at a predetermined time. If you buy a futures contract, it means that you promise to pay the price of the asset at a specified time. If you sell a future, you effectively make a promise to transfer the asset to the buyer of the future at a specified price at a particular time. Every futures contract has the following features:
    – Buyer                        – Seller             – Price              – Expiry
  • Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.
  • Basis: The difference between the price of the underlying asset in the spot market and the futures market is called ‘Basis’. (As ‘spot market’ is a market for immediate delivery)
  • The Payment and Settlement Systems Act, 2007 empowering the RBI to regulate and supervise payments and settlement system.
  • Cheque Truncation System(CTS): Cheque Truncation System or Image-based Clearing System, in India, is a project of the Reserve Bank of India, commenced in 2010, for faster clearing of cheques.
  • G Sec is market auction related instruments and they are paid by Ways and Means Advances, automatic monetization.
  • Poverty is measured by Gini Coefficient, a standard measure of Income/Expenditure in equality
  • The Gini coefficient, invented by the Italian statistician Corado Gini, is a number between zero and one that measures the degree of inequality in the distribution of income in a given society. The coefficient would register zero (0.0 = minimum inequality) for a society in which each member received exactly the same income and it would register a coefficient of one (1.0= maximum inequality) if one member got all the income and the rest got nothing

♦Derivatives

Futures and options represent two of the most common form of “Derivatives”.

  • Derivatives are financial instruments that derive their value from an ‘underlying’. The underlying can be a stock issued by a company, a currency, Gold etc.
  • The derivative instrument can be traded independently of the underlying asset.
  • The value of the derivative instrument changes according to the changes in the value of the underlying.
Derivatives are of two types –
  1. Exchange traded and
  2. Over the counter.

Exchange traded derivatives

  • As the name signifies are traded through organized exchanges around the world. These instruments can be bought and sold through these exchanges, just like the stock market.
  • Some of the common exchange traded derivative instruments are futures and options.

Over the counter (popularly known as OTC)

  • Derivatives are not traded through the exchanges. They are not standardized and have varied features.
  • Some of the popular OTC instruments are forwards, swaps, swaptions etc.

♦Options

  • Options: Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price.
  • An option can be a ‘call’ option or a ‘put’ option.
Call
  • A call option gives the buyer, the right to buy the asset at a given price. This ‘given price’ is called ‘strike price’. It should be noted that while the holder of the call option has a right to demand sale of asset from the seller, the seller has only the obligation and not the right. For e.g.: if the buyer wants to buy the asset, the seller has to sell it. He does not have a right.
Put
  • A ‘put’ option gives the buyer a right to sell the asset at the ‘strike price’ to the buyer. Here the buyer has the right to sell and the seller has the obligation to buy.

♦Foreign Investment

Foreign investment is of two kinds – (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment.

Foreign Direct Investment (FDI)
Foreign Portfolio Investment
  • Portfolio investment in both primary and secondary market by FII was opened up in 1992.
  • foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets, sometimes for speculation.

♦External commercial borrowing

ECB
  • Source of funds for corporate from abroad with advantage of
  • lower rates of interest prevailing in the international financial markets
  • longer maturity period
  • for financing expansion of existing capacity as well as for fresh investment

About

  • ECB is Defined as to include commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years

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