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Economic Terms-Part 2


‘CALL MONEY RATE’

  • Call money rate is the rate at which short term funds are borrowed and lent in the money market.
  • The duration of the call money loan is 1 day. Banks resort to these type of loans to fill the asset liability mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds. RBI, banks, primary dealers etc are the participants of the call money market. Demand and supply of liquidity affect the call money rate.
  • A tight liquidity condition leads to a rise in call money rate and vice versa.

CALL MONEY MARKET

  • The call money market (CMM) the market where overnight (one day) loans can be availed by banks to meet liquidity.
  • Banks who seeks to avail liquidity approaches the call market as borrowers and the ones who have excess liquidity participate there as lenders.
  • The CMM is functional from Monday to Friday. Banks can access CMM to meet their reserve requirements (CRR and SLR) or to cover a sudden shortfall in cash on any particular day.
  • Effectively, the Call Money Market is the main market oriented mechanism to meet the liquidity requirements of banks.

‘CAPITAL ACCOUNT’

  • Capital account can be regarded as one of the primary components of the balance of payments of a nation.
  • It gives a summary of the capital expenditure and income for a country.
  • The capital expenditure and income is tracked by way of funds in the form of investments and loans flowing in and out of an economy.
  • This account comprises foreign direct investments, portfolio investments, etc. It gives a summary of the net flow of both private and public investment into an economy.
  • A capital account deficit shows that more money is flowing out of the economy along with increase in its ownership of foreign assets and vice-versa in case of a surplus. The balance of payments contains the current account (which provides a summary of the trade of goods and services) in addition to the capital account which records all capital transactions.

‘CAPITAL MARKET’

  • Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.
  • Capital markets help channelise surplus funds from savers to institutions which then invest them into productive use. Generally, this market trades mostly in long-term securities.
  • Capital market consists of primary markets and secondary markets. Primary markets deal with trade of new issues of stocks and other securities, whereas secondary market deals with the exchange of existing or previously-issued securities. Another important division in the capital market is made on the basis of the nature of security traded, i.e. stock market and bond market.

CARBON TAX:

  • An environmental tax which is imposed on products which utilize carbon-based materials, and hence contribute to greenhouse gas pollution (including oil, gas, coal, and other fossil fuels).
  • The level of the tax should depend on the carbon (polluting) content of each material.
  • Carbon taxes offer a potentially cost-effective means of reducing greenhouse gas emissions. From an economic perspective, carbon taxes are a type of Pigovian tax.
  • They help to address the problem of emitters of greenhouse gases not facing the full (social) costs of their actions.
  • Carbon taxes can be a regressive tax, in that they may directly or indirectly affect low-income groups disproportionately.
  • The regressive impact of carbon taxes could be addressed by using tax revenues to favour low-income groups.

‘CASA’

  • CASA stands for Current Account and Savings Account which is mostly used in West Asia and South-east Asia. CASA deposit is the amount of money that gets deposited in the current and savings accounts of bank customers. It is the cheapest and major source of funds for banks. The savings accounts portion pays more interest compared to current accounts.

‘CETERIS PARIBUS’

  • This commonly-used phrase stands for ‘all other things being unchanged or constant’. It is used in economics to rule out the possibility of ‘other’ factors changing, i.e. the specific causal relation between two variables is focused.

CENTRAL SECTOR SCHEMES

  • Central sector schemes are schemes with 100% funding by the Central government and implemented by the Central Government machinery.
  • The central sector schemes are mainly formulated on subjects mainly from the Union List. Besides, there are some other programmes that various Central Ministries implements directly in States and UTs which also comes under Central Sector Schemes.
  • In these schemes, the financial resources are not shifted to states

CENTRALLY SPONSORED SCHEMES

  • Centrally Sponsored Schemes are the schemes by the centre where there is financial participation by both the centre and states. Historically, CSS is the way through which central government helps states to run its Plans financially.
  • A stipulated percentage of the funding is provided by the States in terms of percentage contribution.
  • The ratio of state participation may vary in 50:50, 60:40, 70:30, 75:25, or 90:10; showing higher contributions by the centre. Various central government ministries directly transfer money to the state governments. Implementation of Centrally Sponsored Scheme is made by State/UT Governments.  Centrally Sponsored Schemes are created on areas that are covered under the State List.

CLASSIFICATION OF MSMES

An enterprise will be classified as a Micro, Small or Medium enterprise based on the following criteria:

(i)  Micro enterprise: investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees.

(ii) Small enterprise: investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees.

(iii) Medium enterprise: the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

Table: New composite classification for MSMEs – Investment and turnover limits in (Rs crores)

Investment (plant and machinery) should not exceed (Rs): Turnover should not exceed (Rs):
Micro Enterprise 1 crore 5 crores
Small Enterprise 10 crores 50 crores
Medium Enterprise 50 crores 250 crores

The New criteria will be same for both Manufacturing Enterprises and Enterprises providing Services.

CESS & SURCHARGE

  • A cess imposed by the central government is a tax on tax, levied by the government for a specific purpose. Generally, cess is expected to be levied till the time the government gets enough money for that purpose.
  • A cess is different from the usual taxes like excise duty and personal income tax as it is imposed as an additional tax besides the existing tax (tax on tax).
  • Another difference between cess and the usual tax is the way in which tax revenue from cess is kept. Revenue from main taxes like Personal Income taxes are kept at Consolidated Fund of India (CFI). The government can use it for any purposes.
  • Surcharge is a charge on any tax, charged on the tax already paid. As the name suggests, surcharge is an additional charge or tax. The main surcharges are that on personal income tax (on high income slabs and on super rich) and on corporate income tax.
  • From the revenue side, surcharges are important as around 35% of all cesses and surcharges comes from the surcharge on direct taxes.

A common feature of both surcharge and cess is that the centre need not share it with states. Following are the difference between the usual taxes, surcharge and cess.

  • The usual taxes goes to the consolidated fund of India and can be spend for any purposes.
  • Surcharge also goes to the consolidated fund of India and can be spent for any purposes.
  • Cess goes to Consolidated Fund of India but can be spend only for the specific purposes.

CENTRAL BANK DIGITAL CURRENCY

The Basel based Bank for International Settlement which is doing pioneering and authoritative research works in central banking appointed a Committee on Central Bank digital currencies (2018). The Committee in its report observed that it is not easy to define CBDC. “CBDC is not a well-defined term. It is used to refer to a number of concepts.” – the BIS Committee on CBDC.

  • One fact about CBCD is that central banks across the world already provides digital money to commercial banks and other financial institutions in the form of reserves or settlement of balances. This means that when a bank is having higher reserves with the Reserve Bank of India, it gets a that much money in the form of CBCD.
  • CBDC is a digital payment device which is issued and fully backed by a central bank and is a legal tender.s

COLLATERALIZED BORROWING 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.
  • The uniqueness of CBLO is that lenders and borrowers use collateral for their activities. For example, borrowers of fund have to provide collateral in the form of government securities and lenders will get it while giving loans. 
  • There is no such need of a collateral under the call money market.
  • Institutions participating in CBLO are entities who have either no access or restricted access to the inter -bank call money market. 
  • It is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to one year.

COMPONENTS OF THE RBI’S CAPITAL RESERVE

  • There are five components in the RBI’s capital reserve. The first two (CF and ADF) are Funds created to meet specific purposes and provisions are made yearly to add money to these funds.
  • The other three (CGRA, IRA and FCVA) are valuation accounts just shows the gain or losses in foreign exchange, government securities or foreign currency contracts handled by the RBI.

Following are the five components of the RBI’s capital reserve.

  1. Contingency Fund (CF)
  2. Asset Development Fund (ADF)
  3. Currency and Gold Revaluation Account (CGRA)
  4. Investment Revaluation Account (IRA) and
  5. Foreign Exchange Forward Contracts Valuation Account (FCVA).

All these five components are recorded in the liability side of the RBI’s balance sheet.

  1. What is Contingency Fund (CF)?
  • The CF is a fund set apart for meeting the unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks and any risk arising on account of the special responsibilities enjoined upon the Bank.
  1. What is Asset Development Fund?
  • The Asset Development Fund (ADF) has been set aside for investment in subsidiaries and associates and internal capital expenditure.
  1. Currency and Gold Revaluation Account (CGRA)
  • The CGRA shows fund that is available to compensate RBI’s loss in the value of gold and foreign exchange reserve holdings. Gains and losses of the values of Gold and Foreign Currency Assets decreases or increases the CGRA money.
  • Maintained by the Reserve Bank of India.
  • To take care of currency risk, interest rate risk and movement in gold prices.
  • Unrealised gains or losses on valuation of foreign currency assets (FCA) and gold are not taken to the income account but instead accounted for in the CGRA.
  • Provides a buffer against exchange rate/ gold price fluctuations.
  • Thus, changes in the market value of gold and forex assets (like the US Government securities where the RBI invested its foreign exchange reserves) is reflected in the CGRA.
  • CGRA provides a buffer against exchange rate/gold price fluctuations. When CGRA is not enough to fully meet exchange losses, it is replenished from the contingency fund.
  • Increase in gold price and depreciation of the rupee increases the CGRA fund.
  1. Investment Revaluation Account (IRA)
  • The investment Revaluation Account shows the buffer amount available with the RBI to compensate losses and to accommodate gains in (i) foreign securities and (ii) domestic securities. RBI holds significant portion of foreign securities and domestic securities (government of India). Under IRA, the marked to market gains and losses are measured.
  1. Foreign Exchange Forward Contracts Valuation Account (FCVA)
  • The FCVA measures marked to market (periodic) gains and losses for the RBI from foreign exchange forward contracts.

‘CONSUMER PRICE INDEX’

  • A comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy is called consumer price index.
  • The calculation involved in the estimation of CPI is quite rigorous. Various categories and sub-categories have been made for classifying consumption items and on the basis of consumer categories like urban or rural.
  • Based on these indices and sub-indices obtained, the final overall index of price is calculated mostly by national statistical agencies.
  • It is one of the most important statistics for an economy and is generally based on the weighted average of the prices of commodities.
  • It gives an idea of the cost of living.
  • Inflation is measured using CPI.
  • The percentage change in this index over a period of time gives the amount of inflation over that specific period, i.e. the increase in prices of a representative basket of goods consumed.

CONSOL BONDS

  • The government can issue Consol bonds to deal with the current economic challenges.
  • A consol bond doesn’t have date of maturity, but offers a higher coupon rate.
  • These bonds were used by European countries to fund to the ongoing cost of the First World War in 1917 and for redevelopment works post World War II.
  • It is also known as perpetual bond.
  • Consols have a fixed interest rate (coupon payments).
  • They are not redeemable until the issuer (government) decides to call it back.
  • Therefore, this type of bond is often considered a type of equity, rather than debt.

CPI BASE YEAR FOR INDUSTRIAL WORKERS

  • The Labour and Employment Ministry revised the base year of the Consumer Price Index for Industrial Workers (CPI-IW) from 2001 to 2016
  • Reflect the changing consumption pattern, giving more weightage to spending on health, education, recreation and other miscellaneous expenses, while reducing the weight of food and beverages.
  • Apart from measuring inflation in retail prices, the CPI-IW was used to regulate the DA of government employees and industrial workers, as well as fixing and revising minimum wages in scheduled employments
  • Note: CPI for agriculture workers, currently has the base year of 1986-87

‘CONTAGION’

  • In economics and finance, a contagion can be explained as a situation where a shock in a particular economy or region spreads out and affects others by way of, say, price movements.
  • The contagion effect explains the possibility of spread of economic crisis or boom across countries or regions.
  • This phenomenon may occur both at a domestic level as well as at an international level.
  • The failure of Lehman Brothers in the United States is an example of a domestic contagion.

‘CONTRACTIONARY POLICY’

A contractionary policy is a kind of policy which lays emphasis on reduction in the level of money supply for a lesser spending and investment thereafter so as to slow down an economy.

  • A nation’s central bank uses monetary policy tools such as CRR, SLR, repo, reverse repo, interest rates etc to control the money supply flows into the economy. Such measures are used at high growth periods of the business cycle or in times of higher than anticipated inflation.
  • Discouraging spending by way of increased interest rates and reduced money supply helps control rising inflation.
  • It may also lead to increased unemployment at the same time.

‘CORE INFLATION’

  • An inflation measure which excludes transitory or temporary price volatility as in the case of some commodities such as food items, energy products etc.
  • It reflects the inflation trend in an economy.
  • A dynamic consumption basket is considered the basis to obtain core inflation. Some goods and commodities have extremely volatile price movements. Core inflation is calculated using the Consumer Price Index (CPI) by excluding such commodities.

CORE-INVESTMENT COMPANIES

  • Non-banking financial companies with asset size of ₹100 crore and above
  • Carry on the business of acquisition of shares and securities, subject to certain conditions.
  • Allowed to accept public funds, hold not less than 90% of their net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies.
  • Asset size of below Rs 100 crore are exempted from registration and regulation from the RBI, except if they wish to make overseas investments in the financial sector.

COST INFLATION INDEX

  • Used for Computation of Long-Term Capital Gain.
  • Notified by Central Board of Direct Tax (CBDT) every year and till date CBDT has notified Cost Inflation Index for the Financial Year 1981-82 to Financial year 2020-21.
  • Used for computing indexed cost of acquisition.

‘COST PUSH INFLATION’

  • Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods.
  • While the demand remains constant, the prices of commodities increase causing a rise in the overall price level.
  • This is in essence cost push inflation.
  • In this case, the overall price level increases due to higher costs of production which reflects in terms of increased prices of goods and commodities which majorly use these inputs. This is inflation triggered from supply side i.e. because of less supply. The opposite effect of this is called demand pull inflation where higher demand triggers inflation.
  • Apart from rise in prices of inputs, there could be other factors leading to supply side inflation such as natural disasters or depletion of natural resources, monopoly, government regulation or taxation, change in exchange rates, etc. Generally, cost push inflation may occur in case of an inelastic demand curve where the demand cannot be easily adjusted according to rising prices.

‘COUNTERVAILING DUTIES’

  • Duties that are imposed in order to counter the negative impact of import subsidies to protect domestic producers are called countervailing duties.
  • In cases foreign producers attempt to subsidize the goods being exported by them so that it causes domestic production to suffer because of a shift in domestic demand towards cheaper imported goods, the government makes mandatory the payment of a countervailing duty on the import of such goods to the domestic economy.
  • This raises the price of these goods leading to domestic goods again being equally competitive and attractive. Thus, domestic businesses are cushioned. These duties can be imposed under the specifications given by the WTO (World Trade Organization) after the investigation finds that exporters are engaged in dumping. These are also known as anti-dumping duties.
  • The objective of CVD is to nullify or eliminate the price advantage (low price) enjoyed by an imported product when it is given subsidies or exempted from domestic taxes in the country where they are manufactures.
  • Often countries give subsidies to their exported products so that they can compete in the international market at a reduced price. 

CREDIT RATING

  • Credit rating is an assessment of the creditworthiness of a borrower including an individual, a company or a country.
  • Credit ratings are expressed as letter grades and used for businesses and governments.
  • Credit scores are numbers used for individuals and some small businesses.
  • An individual’s credit score is based on information from the three major credit reporting agencies, and scores range from 300 to 850.
  • A FICO score takes information from all three major credit bureaus to create an individual’s credit score.
  • Credit ratings are produced by credit rating agencies, such as S&P Global.

‘CREDIT DEFAULT SWAPS’

  • Credit default swaps (CDS) are a type of insurance against default risk by a particular company. The company is called the reference entity and the default is called credit event. It is a contract between two parties, called protection buyer and protection seller. Under the contract, the protection buyer is compensated for any loss emanating from a credit event in a reference instrument. In return, the protection buyer makes periodic payments to the protection seller.

‘CROSS ELASTICITY OF DEMAND’

The measure of responsiveness of the demand for a good towards the change in the price of a related good is called cross price elasticity of demand. It is always measured in percentage terms.

‘CROWDING OUT EFFECT’

  • A situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called crowding out effect.
  • Sometimes, government adopts an expansionary fiscal policy stance and increases its spending to boost the economic activity.
  • This leads to an increase in interest rates. Increased interest rates affect private investment decisions. A high magnitude of the crowding out effect may even lead to lesser income in the economy.
  • With higher interest rates, the cost for funds to be invested increases and affects their accessibility to debt financing mechanisms.
  • This leads to lesser investment ultimately and crowds out the impact of the initial rise in the total investment spending. Usually the initial increase in government spending is funded using higher taxes or borrowing on part of the government.

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