Q Who is the Governor of Reserve Bank Of India?

Ans. Shri.D. Subba Rao is the governer of Reserve Bank of India.

Q Who is the Chairman and Managing Director of syndicate bank?

Q Who are the Executive Directors of the syndicate bank?

Q Who are the board of directors of syndicate bank?

Q Where is the head office of syndicate bank?

Q What is the Business Growth of the syndicate bank for second quarter 2008?

Q What services syndicate bank provides to customers?

Ans.
1. Internet Banking.
2. Cash Management Services.
3. DeMAT Services.
4. NRI Services.
5. Flexi Fixed Deposit Services.
6. Tax Saving Term Deposit Services.
7. Real Time Gross Settlement System (RTGS).
8. National Electronic Funds Transfer(neft).

Q. What are most popular 2008 Events?

Q. What are most popular 2009 Current Events?

Q. List Council of Ministers

What is a bank?

A bank is a financial institution whose primary activity is to act as a payment agent for
customers and to borrow and lend money. It is an institution for receiving, keeping, and
lending money

What is the activity of Banks?

Banks act as payment agents by conducting checking or current accounts for customers,
paying cheques drawn by customers on the bank, and collecting cheques deposited to
customers' current accounts. Banks also enable customer payments via other payment
methods such as telegraphic transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current account, accepting term
deposits and by issuing debt securities such as banknotes and bonds. Banks lend money
by making advances to customers on current account, by making installment loans, and
by investing in marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is considered
indispensable by most businesses, individuals and governments. Non-banks that provide
payment services such as remittance companies are not normally considered an adequate
substitute for having a bank account.

Banks borrow most funds from households and non-financial businesses, and lend most
funds to households and non-financial businesses, but non-bank lenders provide a
significant and in many cases adequate substitute for bank loans, and money market
funds, cash management trusts and other non-bank financial institutions in many cases
provide an adequate substitute to banks for lending savings to.

What is Banking Business?

“Banking Business” means the business of receiving money on current or deposit

account, paying and collecting cheques drawn by or paid in by customers, the making of
advances to customers, and includes such other business as the Authority may prescribe
for the purposes of this Act.

What is Accounting for Bank Accounts?

Bank statements are accounting records produced by banks under the various accounting
standards of the world. Under GAAP and IFRS there are two kinds of accounts: debit
and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are
Assets and Expenses. This means you credit accounts to increase their balances and you
debit accounts to increase their balances.

This also means you debit your savings account every time you deposit money into it
(and the account is normally in deficit) and you credit your credit card account every time
you spend money from it (and the account is normally in credit).

However, if you read your bank statement, it will say the opposite- that you have credited
your account when you deposit money and you debit when you withdraw it. If you have
cash in your account you have a positive or credit balance and if you are overdrawn it
will say you have a negative or a deficit balance.

The reason for this is because the bank, and not you, has produced the bank statement.
Your savings might be your assets, but it is the bank's liability, so your savings account is
a liability account which is a credit account and should have a positive credit balance.
Your loans are your liabilities but the bank's assets so they are debit accounts which
should have a negative balance.Below where bank transactions, balances, credits and
debits are discussed, they are done so from the viewpoint of the account holder which is
traditionally what most people are used to seeing.
What is SLR?

Every bank is required to maintain at the close of business every day, a minimum
proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash,
gold and un-encumbered approved securities. The ratio of liquid assets to demand and
time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 24%.
(reduced w.e.f. 8/11/208, from earlier 25%) RBI is empowered to increase this ratio up to
40%. An increase in SLR also restrict the bank’s leverage position to pump more money
into the economy.

What is SLR ? (For Non Bankers)

SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the
minimum percentage of deposits that the bank has to maintain in form of gold, cash or
other approved securities. Thus, we can say that it is ratio of cash and some other
approved to liabilities (deposits) It regulates the credit growth in India.

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the
banks. When the repo rate increases borrowing from RBI becomes more expensive.
Therefore, we can say that in case, RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for
banks to borrow money, it reduces the repo rate

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the
banks. When the repo rate increases borrowing from RBI becomes more expensive.
Therefore, we can say that in case, RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for
banks to borrow money, it reduces the repo rate.

Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected in
the banking system by RBI, whereas Reverse repo rate signifies the rate at which the
central bank absorbs liquidity from the banks.

What is the difference between Bank Rate and Repo Rate?

Bank Rate vs Repo Rate

Bank Rate is the rate at which RBI allows finance to commercial banks in India. There
are difference types of refinance that can be availed by banks and these are linked to
Bank Rate. Thus, banks can borrow at this rate only to the extent of their eligibility for
refinance.
On the other hand, Repo is a money market instrument, which enables collateralized
short term borrowing and lending through sale/purchase operations in debt instruments.
Under a repo transaction, a holder of securities sells them to an investor with an
agreement to repurchase at a predetermined date and rate. In the case of a repo, the
forward clean price of the bonds is set in advance at a level which is different from the
spot clean price by adjusting the difference between repo interest and coupon earned on
the security. In the money market, this transaction is nothing but collateralized lending as
the terms of the transaction are structured to compensate for the funds lent and the cost of
the transaction is the repo rate. Thus, a bank can borrow under repo provided he has the
extra securities which it can lend temporarily to RBI for borrowing short term funds.

What is relation between Inflation and Bank interest Rates?

Now days, you might have heard lot of these terms and usage on inflation and the bank
interest rates. Bank interest rate depends on many other factors, out of that the major one
is inflation. Whenever you see an increase on inflation, there will be an increase of
interest rate also.

How many types of banks there are?

Banks' activities can be divided into retail banking, dealing directly with individuals and
small businesses; business banking, providing services to mid-market business; corporate
banking, directed at large business entities; private banking, providing wealth
management services to high net worth individuals and families; and investment banking,
relating to activities on the financial markets. Most banks are profit-making, private
enterprises. However, some are owned by government, or are non-profits.

Central banks are normally government owned banks, often charged with quasi-
regulatory responsibilities, e.g. supervising commercial banks, or controlling the cash
interest rate. They generally provide liquidity to the banking system and act as the lender
of last resort in event of a crisis.

Type of Retail Banks

 Commercial bank: the term used for a normal bank to distinguish it from an
investment bank. After the Great Depression, the U.S. Congress required that
banks only engage in banking activities, whereas investment banks were limited
to capital market activities. Since the two no longer have to be under separate
ownership, some use the term "commercial bank" to refer to a bank or a division
of a bank that mostly deals with deposits and loans from corporations or large
businesses.
 Community Banks: locally operated financial institutions that empower
employees to make local decisions to serve their customers and the partners
 Community development banks: regulated banks that provide financial services
and credit to under-served markets or populations.
 Postal savings banks: savings banks associated with national postal systems.
 Private Banks: manage the assets of high net worth individuals.
  Offshore Banks: banks located in jurisdictions with low taxation and regulation.
Many offshore banks are essentially private banks.
 Savings bank: in Europe, savings banks take their roots in the 19th or sometimes
even 18th century. Their original objective was to provide easily accessible
savings products to all strata of the population. In some countries, savings banks
were created on public initiative, while in others socially committed individuals
created foundations to put in place the necessary infrastructure. Now a days,
European savings banks have kept their focus on retail banking: payments,
savings products, credits and insurances for individuals or small and medium-
sized enterprises. Apart from this retail focus, they also differ from commercial
banks by their broadly decentralized distribution network, providing local and
regional outreach and by their socially responsible approach to business and
society.
 Building societies and Lands banks: conduct retail banking.
 Ethical banks: Banks that prioritize the transparency of all operations and make
only what they consider to be socially-responsible investments.
 Islamic banks: Banks that transact according to Islamic principles.

Types of investment banks

 Investment banks "underwrite" (guarantee the sale of) stock and bond issues,
trade for their own accounts, make markets, and advise corporations on capital
markets activities such as mergers and acquisitions.
 Merchant banks were traditionally banks which engaged in trade finance. The
modern definition, however, refers to banks which provide capital to firms in the
form of shares rather than loans. Unlike venture capital firms, they tend not to
invest in new companies.

What is Bank Crisis?

Banks are susceptible to many forms of risk which have triggered occasional systemic
crises. Risks include liquidity risk (the risk that many depositors will request withdrawals
beyond available funds), credit risk (the risk that those who owe money to the bank will
not repay), and interest rate risk (the risk that the bank will become unprofitable if rising
interest rates force it to pay relatively more on its deposits than it receives on its loans),
among others.

Banking crises have developed many times throughout history when one or more risks
materialize for a banking sector as a whole. Prominent examples include the U.S. Savings
and Loan crisis in 1980s and early 1990s [10] the Japanese banking crisis during the
1990s, the bank run that occurred during the Great Depression, and the recent liquidation
by the central Bank of Nigeria, where about 25 banks were liquidated.[citation needed]

Numerous banks have suffered as a result of the Sub prime mortgage crisis, which has
occurred on a global scale, affecting investment banks such as Lehman Brothers in the
USA and retail banks such as Northern Rock in the UK. In January 2009, several major
UK banks such as Lloyds TSB and Barclays Bank, suffered severe falls in their London
stock exchange share prices as a result of a drop in investor confidence of the true asset
values of those banks.

What are the commercial roles of the Banks?

However the commercial role of banks is wider than banking, and includes:

• However the commercial role of banks is wider than banking, and includes:
• issue of banknotes (promissory notes issued by a banker and payable to bearer on
demand)
• processing of payments by way of telegraphic transfer, EFTPOS, internet banking
or other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by way of overdraft, installment loan or otherwise
• providing documentary and standby letters of credit (trade finance), guarantees,
performance bonds, securities underwriting commitments and other forms of off
balance sheet exposures
• safekeeping of documents and other items in safe deposit boxes
• currency exchange
• sale, distribution or brokerage, with or without advice, of insurance, unit trusts
and similar financial products as a 'financial supermarket'

What are the Economic functions of Banks?

The economic functions of banks include:

1. Issue of money, in the form of banknotes and current accounts subject to cheque or
payment at the customer's order. These claims on banks can act as money because they
are negotiable and/or repayable on demand, and hence valued at par and effectively
transferable by mere delivery in the case of banknotes, or by drawing a cheque,
delivering it to the payee to bank or cash.

2. netting and settlement of payments -- banks act both as collection agent and paying
agents for customers, and participate in inter-bank clearing and settlement systems to
collect, present, be presented with, and pay payment instruments. This enables banks to
economize on reserves held for settlement of payments, since inward and outward
payments offset each other. It also enables payment flows between geographical areas to
offset, reducing the cost of settling payments between geographical areas.

3. Credit intermediation -- banks borrow and lend back-to-back on their own account as
middle men

4. Credit quality improvement -- banks lend money to ordinary commercial and personal
borrowers (ordinary credit quality), but are high quality borrowers. The improvement
comes from diversification of the bank's assets and the banks own capital which provides
a buffer to absorb losses without defaulting on its own obligations. However, since
banknotes and deposits are generally unsecured, if the bank gets into difficulty and
pledges assets as security to try to get the funding it needs to continue to operate, this puts
the note holders and depositors in an economically subordinated position.

5. Maturity transformation -- banks borrow more on demand debt and short term debt, but
provide more long term loans. In other words; banks borrow short and lend long. Bank
can do this because they can aggregate issues (e.g. accepting deposits and issuing
banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintain
reserves of cash, invest in marketable securities that can be readily converted to cash if
needed, and raise replacement funding as needed from various sources (e.g. wholesale
cash markets and securities markets) because they have a high and more well known
credit quality than most other borrowers.

Tele Banking System

Q: 1: Tell me about Tele Banking System?

Ans: The Bank Offers 24 * 7 Tele Banking Services which can be availed by Customers
of all CBS branches of Bank through Tele Banking City Servers installed at 20 major
cities across India. By using this wonderful & convenient Technology which uses
Interactive Voice Response system (IVR), you can have Anytime, Anywhere (24 * 7)
access to your different Accounts. You can inquire about your Account balances and also
have general information about bank’s various product and services.

Q: 2: What is IVR System?

Ans: Tele Banking is based on an Interactive Voice Response System (IVR). This
technology helps the Customer to understand and execute the various options available in
the Tele Banking system by pressing keys of the Telephone instrument.

Q: 3: What Services are Offered in Tele Banking System?

Ans: (A) General Information For Public Enquiry about (1) Domestic Term Deposit
Rates (2) Domestic Term Deposit rates for Senior Citizens (3) NRE & FCNR Rates (4)
Daily Forex rates (5) Bank’s various retail products (6) Detail of ATM Locations (7)
Bank’s working hours & Holiday enquiry. (B) Account related Information - Uses
Customer Number & PIN For Authorisation (1) Account Balance Enquiry (2) Enquiry
about last five transactions (3) Account Statement for a given period through FAX,
Another Fax and Email options. (4) Cheque Status Enquiry.

Q: 4: How I can avail Tele Banking Services?

Ans: The Bank is offering Tele Banking Services, a 24 * 7 hours service, totally free of
costs for its esteemed Customers. To avail the Tele Banking services, you need to submit
duly filled-in Tele Banking form to your Branch. Kindly collect your secret PIN letter
from the Branch after 4-5 working days. After receiving the secret PIN number from
branch, you can enjoy our Tele Banking services from anywhere* anytime by just
moving your fingers on your Telephone instrument.
Q: 7: How I can use Tele Banking Services?
Ans: Language Selection:- The Customer can interact with the TeleBanking system by
selecting one of the four languages viz. 1. Hindi 2. English 3. Tamil 4. Bengali. When
you dial the nearest City’s TeleBanking Phone number, then after the recorded welcome
message, you need to select the language to interact with TeleBanking system. Next you
need to select either the option of 'Account Related Information' to access your accounts
Or you can choose the General Information option. To Access the “Account Related
Information”, you must enter your Customer ID and the secret PIN (which is being issued
to you by the bank). Key-in the various numbers on your keypad, for the services of your
choice as directed by the IVR System. During the Interaction session, you can Press/ dial
9 to repeat the previous menu, 0 for main menu and # to quit the TeleBanking system.

Q: 8: What is Customer-Id and PIN?

Ans: Customer-id is a unique Numeric Code allotted by the Computerized System to
identify the Customer and its details such as Customer name, addresses and various types
of accounts the Customer is operating with the Bank viz. SB A/c., Overdraft A/c.,
Current Account etc. All the personal details of the Customers are accessed using this
Customer-ID. The Personal Identification Number (called PIN), is a four digit number
generated by the Tele Banking system, which a customer needs along with the Customer-
ID number in order to access Tele Banking system. The PIN is issued by the Bank and
sent to a customer through sealed PIN mailers.

Q: 9: What is the Security in Tele Banking System?

Ans: The Customers who have opted for Tele Banking system are issued secret PINs by
the Bank which are sent through sealed PIN Mailers. When Customer uses the Tele
Banking system first time, he is forced to change the PIN number to keep its secrecy. He
further has the option of changing the PIN number as and when required by him. This
enhances the security feature of this facility.

Q: 11: What should I do, if I have forgotten my PIN number?

Ans: Re-Issuance of Personal Identification PIN: - In case Customer forgets his secret
PIN, he needs to give written request to the concerned branch for re-issuance of PIN. The
branch thereafter forwards the request to Tele Banking Cell at Head Office for re-
issuance of PIN for the Customer.

Automated Teller Machine

Q: What is an ATM?

A: An Automated Teller Machine (ATM) is a device that allows card-holding customer

to perform broad range of routine banking transactions without interacting with a human
teller.

Q: What are the types of ATMs?

Ans:

1. Touch Screen: Customers can touch the screen to choose options.

2. Key Operated: The keys border the screen and customers choose options these
keys.
3. Motorized: In this machine the card is carried by the motor to card reader and the
transaction takes place when the card is inside the machines.
4. Dip Card: The customer has to insert and remove the card and do the transaction
when the card is out of machine. Out of this syndicate bank have only (b), (c) &
(d) types of ATMs.

Q: To whom are the ATM cards not issued?

Ans: ATM Cards are not issued to minors below the age of 14 years, account operated
jointly and illiterate customers.

Q: What is Mini Statement?

Ans: It is statement of account showing last 10 transactions, in the account.

Q: What happens if wrong entry of PIN is given?

Ans: In case PIN is entered wrongly thrice in succession, the ATM card operations will
be blocked for 24 hours, although the ATM Card will not be captured instead it gets
ejected from the card reader slot. After 24 hours the operations through the same card is
allowed.

Q: What is to be done if one forgets his PIN or PIN is lost?

Ans: Duplicate PIN can be issued on receipt of written request from card holder. The
cardholder need to submit written request to his/her branch.

Q: Does Bank bears any liability for unauthorized use of the Card?

Ans: No. The responsibility is solely vested with the cardholder.

Q: How many accounts can be linked to one syndicate bank Debit Card?

Ans: At present three accounts can be linked to one syndicate bank Debit card.

Q: Can Customer/cardholder withdraw from ATMs other than syndicate bank own
ATMs using syndicate bank Debit card?

Ans: Apart from syndicate bank’s own Networked ATM customer/cardholder can use
ATMs of other banks who are member of MITR/NFS/VISA. ‘MITR’ Group have 5 other
Banks i.e. PNB, Indian Bank, Karur Vysya Bank, IndusInd Bank, UCO Bank.
Q: How many ATMs are deployed by syndicate bank and whether these ATMs
allow transactions to accepts cardholders of other banks also?
Ans: There are 800 ATMs deployed by syndicate bank. All these ATMs allow cash
withdrawal and balance inquiry to cardholders of other banks who are member of MITR/
NFS/VISA.

NET BANKING

Q1 .What is Internet Banking?

Ans: - Internet Banking enables a customer to perform basic banking transactions

through PC or laptop located anywhere in the globe.

Q2. What is special about Internet Banking?

Ans:- It is available 24 hours a day, 365 days a year and you can operate your account
anytime / anywhere at your convenience.

Q3. What are the facilities/services available through Internet Banking?

Ans: - Services offered through Oriental Banks Net Banking

1. Account Related Operations for all the accounts in the CBS branches
o Online Balance Inquiry on Accounts.
o View last (n) transactions.
o Statement of Account for given range of Dates, Amount and Cheques.
2. Fund Transfer Operations
o Fund Transfer to own accounts within the Bank.
Fund Transfer to other Customers account(s) within the Bank.
o NEFT - Fund Transfer to other Banks account(s).
3. Payments
o Bill Payments - BSES, MTNL, LIC of India, Vodafone etc.
o Scheduled repetitive bill payments.
o External payments viz. IRCTC (For Railway Reservation), E-Seva.
o Fund Transfer Facility for Sharekhan.com, DB (International) Ltd. etc.
4. Mails
o Customer can send mails for clarification of various queries and receive
certain information from the bank.
5. Activity:
o You can inquire your various financial and non-financial activities
performed during a period of
time.
6. Customize
o You can customize your various information like Change your passwords,
Add Nick names to your accounts, Change Date Format, Amount format
etc.
Q 4. What is RTGS?

Ans. Real Time Gross Settlement System (RTGS) is a modern, robust, integrated
payment and settlement system. RTGS is a system whereby the Banks and Financial
Institutions maintaining accounts with RBI can transfer funds to one another on an
immediate, final and irrevocable basis during business hours.

The Facility can be used for Fund Transfer to other Bank on behalf of the customers. This
is R41 transaction and funds are transferred by debiting customer’s account to the
destination account of other participating bank directly without any manual intervention.
For this purpose correct destination account number and IFSC code of the destination
bank / branch is required from the customer availing this facility.

Q:1 What is NEFT System?

Ans: National Electronic Funds Transfer (NEFT) system is a nation wide funds transfer
system to facilitate transfer of funds from any bank branch to any other bank branch.

Q:2 Are all bank branches in the system part of the funds transfer network?

A: No. As on July 20, 2008, 46363 branches of 87 banks are participating. Steps are
being taken to widen the coverage both in terms of banks and branches.

Q:3 Whether the system is centre specific or have any geographical restriction?

A: No, there is no restriction of centers or of any geographical area inside the country.
The system uses the concept of centralized accounting system and the bank's account that
is sending or receiving the funds transfer instructions, gets operated at one centre, viz,
Mumbai only. The individual branches participating in NEFT could be located any where
across the country, as detailed in the list provided on our website.

Q:4 What is the funds availability schedule for the beneficiary?

A: The beneficiary gets the credit on the same Day or the next Day depending on the
time of settlement.

Q:5 How does the NEFT system operate?

A: Step-1: The remitter fills in the NEFT Application form giving the particulars of the
beneficiary (bank-branch, beneficiary's name, account type and account number) and
authorizes the branch to remit the specified amount to the beneficiary by raising a debit to
the remitter's account. (This can also be done by using net banking services offered by
some of the banks.)

Step-2: The remitting branch prepares a Structured Financial Messaging Solution

(SFMS) message and sends it to its Service Centre for NEFT.
Step-3: The Service Centre forwards the same to the local RBI (National Clearing Cell,
Mumbai) to be included for the next available settlement. Presently, NEFT is settled in
six batches at 0900, 1100, 1200, 1300, 1500 and 1700 hours on weekdays and 0900, 1100
and 1200 hours on Saturdays

Step-4: The RBI at the clearing centre sorts the transactions bank-wise and prepares
accounting entries of net debit or credit for passing on to the banks participating in the
system. Thereafter, bank-wise remittance messages are transmitted to banks.

Step-5: The receiving banks process the remittance messages received from RBI and
affect the credit to the beneficiaries' accounts.

Q:6 How is this NEFT System an improvement over the existing RBI-EFT System?

A: The RBI-EFT system is confined to the 15 centers where RBI is providing the facility,
where as there is no such restriction in NEFT as it is based on the centralized concept.
The detailed list of branches of various banks participating in NEFT system is available
on our website. The system also uses the state-of-the-art technology for the
communication, security etc, and thereby offers better customer service.

Q:7 How is it different from RTGS and EFT?

A: NEFT is an electronic payment system to transfer funds from any part of country to
any other part of the country and works on Net settlement, unlike RTGS that works on
gross settlement and EFT which is restricted to the fifteen centers only where RBI offices
are located.

Q:11 What is IFS Code (IFSC)? How it is different from MICR code?

A: Indian Financial System Code (IFSC) is an alpha numeric code designed to uniquely
identify the bank-branches in India. This is 11 digit code with first 4 characters
representing the banks code, the next character reserved as control
character (Presently 0 appears in the fifth position) and remaining 6 characters to identify
the branch. The MICR code has 9 digits to identify the bank-branch.

What are the different channels of Banking you use in your daily life?

Banks offer many different channels to access their banking and other services:

• A branch, banking centre or financial centre is a retail location where a bank or

financial institution offers a wide array of face-to-face service to its customers.
• ATM is a computerized telecommunications device that provides a financial
institution's customers a method of financial transactions in a public space without
the need for a human clerk or bank teller. Most banks now have more ATMs than
branches, and ATMs are providing a wider range of services to a wider range of
users. For example in Hong Kong, most ATMs enable anyone to deposit cash to
 any customer of the bank's account by feeding in the notes and entering the
account number to be credited. Also, most ATMs enable card holders from other
banks to get their account balance and withdraw cash, even if the card is issued by
a foreign bank.
• Mail is part of the postal system which itself is a system wherein written
documents typically enclosed in envelopes, and also small packages containing
other matter, are delivered to destinations around the world. This can be used to
deposit cheques and to send orders to the bank to pay money to third parties.
Banks also normally use mail to deliver periodic account statements to customers.
• Telephone banking is a service provided by a financial institution which allows
its customers to perform transactions over the telephone. This normally includes
bill payments for bills from major billers (e.g. for electricity).
• Online banking is a term used for performing transactions, payments etc. over
the Internet through a bank, credit union or building society's secure website.

Q. What is Inflation?

In economics, inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. The term "inflation" once referred to increases in the
money supply (monetary inflation); however, economic debates about the relationship
between money supply and price levels have led to its primary use today in describing
price inflation. Inflation can also be described as a decline in the real value of money—a
loss of purchasing power in the medium of exchange which is also the monetary unit of
account. When the general price level rises, each unit of currency buys fewer goods and
services. A chief measure of price inflation is the inflation rate, which is the percentage
change in a price index over time.

Inflation can cause adverse effects on the economy. For example, uncertainty about
future inflation may discourage investment and saving. High inflation may lead to
shortages of goods if consumers begin hoarding out of concern that prices will increase in
the future.

Economists generally agree that high rates of inflation and hyperinflation are caused by
an excessive growth of the money supply. Views on which factors determine low to
moderate rates of inflation are more varied. Low or moderate inflation may be attributed
to fluctuations in real demand for goods and services, or changes in available supplies
such as during scarcities, as well as to growth in the money supply. However, the
consensus view is that a long sustained period of inflation is caused by money supply
growing faster than the rate of economic growth.

Today, most economists favor a low steady rate of inflation. Low (as opposed to zero or
negative) inflation may reduce the severity of economic recessions by enabling the labor
market to adjust more quickly in a downturn, and reducing the risk that a liquidity trap
prevents monetary policy from stabilizing the economy. The task of keeping the rate of
inflation low and stable is usually given to monetary authorities. Generally, these
monetary authorities are the central banks that control the size of the money supply
through the setting of interest rates, through open market operations, and through the
setting of banking reserve requirements.

Effects of Inflation

An increase in the general level of prices implies a decrease in the purchasing power of
the currency. That is, when the general level of prices rises, each monetary unit buys
fewer goods and services. The effect of inflation is not distributed evenly, and as a
consequence there are hidden costs to some and benefits to others from this decrease in
purchasing power. For example, with inflation lenders or depositors who are paid a fixed
rate of interest on loans or deposits will lose purchasing power from their interest
earnings, while their borrowers benefit. Individuals or institutions with cash assets will
experience a decline in the purchasing power of their holdings. Increases in payments to
workers and pensioners often lag behind inflation, especially for those with fixed
payments.

High or unpredictable inflation rates are regarded as harmful to an overall economy. They
add inefficiencies in the market, and make it difficult for companies to budget or plan
long-term. Inflation can act as a drag on productivity as companies are forced to shift
resources away from products and services in order to focus on profit and losses from
currency inflation. Uncertainty about the future purchasing power of money discourages
investment and saving. And inflation can impose hidden tax increases, as inflated
earnings push taxpayers into higher income tax rates.

With high inflation, purchasing power is redistributed from those on fixed incomes such
as pensioners towards those with variable incomes whose earnings may better keep pace
with the inflation. This redistribution of purchasing power will also occur between
international trading partners. Where fixed exchange rates are imposed, rising inflation in
one economy will cause its exports to become more expensive and affect the balance of
trade. There can also be negative impacts to trade from an increased instability in
currency exchange prices caused by unpredictable inflation.

* Cost-push inflation: Rising inflation can prompt employees to demand higher wages, to
keep up with consumer prices. Rising wages in turn can help fuel inflation. In the case of
collective bargaining, wages will be set as a factor of price expectations, which will be
higher when inflation has an upward trend. This can cause a wage spiral. In a sense,
inflation begets further inflationary expectations.

* Hoarding: people buy consumer durables as stores of wealth in the absence of viable
alternatives as a means of getting rid of excess cash before it is devalued, creating
shortages of the hoarded objects.

* Hyperinflation: if inflation gets totally out of control (in the upward direction), it can
grossly interfere with the normal workings of the economy, hurting its ability to supply.
* Allocative efficiency: a change in the supply or demand for a good will normally cause
its price to change, signaling to buyers and sellers that they should re-allocate resources
in response to the new market conditions. But when prices are constantly changing due to
inflation, genuine price signals get lost in the noise, so agents are slow to respond to
them. The result is a loss of allocative efficiency.

* Shoe leather cost: High inflation increases the opportunity cost of holding cash
balances and can induce people to hold a greater portion of their assets in interest paying
accounts. However, since cash is still needed in order to carry out transactions this means
that more "trips to the bank" are necessary in order to make withdrawals, proverbially
wearing out the "shoe leather" with each trip.

* Menu costs: With high inflation, firms must change their prices often in order to keep
up with economy wide changes. But often changing prices is itself a costly activity
whether explicitly, as with the need to print new menus, or implicitly.

* Austrian School explanation of business cycles: According to the Austrian Business

Cycle Theory, inflation sets off the business cycle. Austrian economists hold this to be
the most damaging effect of inflation. According to Austrian theory, artificially low
interest rates and the associated increase in the money supply lead to reckless, speculative
borrowing, resulting in clusters of mal-investments, which eventually have to be
liquidated as they become unsustainable.[20]

Some possibly positive effects of (moderate) inflation include:

* Labor Market Adjustments: Keynesians believe that nominal wages are slow to adjust
downwards. This can lead to prolonged disequilibrium and high unemployment in the
labor market. Since inflation would lower the real wage if nominal wages are kept
constant, Keynesian argue that some inflation is good for the economy, as it would allow
labor markets to reach equilibrium faster.

* Debt Relief: Debtors who have debts with a fixed nominal rate of interest will see a
reduction in the "real" interest rate as the inflation rate rises. The “real” interest on a loan
is the nominal rate minus the inflation rate. (R=n-i) For example if you take a loan where
the stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that you
are paying for the loan is 3%. It would also hold true that if you had a loan at a fixed
interest rate of 6% and the inflation rate jumped to 20% you would have a real interest
rate of -14%. Banks and other lenders adjust for this inflation risk either by including an
inflation premium in the costs of lending the money by creating a higher initial stated
interest rate or by setting the interest at a variable rate.

* Room to maneuver: The primary tools for controlling the money supply are the ability
to set the discount rate, the rate at which banks can borrow from the central bank, and
open market operations which are the central bank's interventions into the bonds market
with the aim of affecting the nominal interest rate. If an economy finds itself in a
recession with already low, or even zero, nominal interest rates, then the bank cannot cut
these rates further (since negative nominal interest rates are impossible) in order to
stimulate the economy - this situation is known as a liquidity trap. A moderate level of
inflation tends to ensure that nominal interest rates stay sufficiently above zero so that if
the need arises the bank can cut the nominal interest rate.

* Tobin effect: The Nobel prize winning economist James Tobin at one point had argued
that a moderate level of inflation can increase investment in an economy leading to faster
growth or at least higher steady state level of income. This is due to the fact that inflation
lowers the return on monetary assets relative to real assets, such as physical capital. To
avoid inflation, investors would switch from holding their assets as money (or a similar,
susceptible to inflation, form) to investing in real capital projects. See Tobin monetary
model

Controlling inflation

A variety of methods have been used in attempts to control inflation.

Monetary policy

Today the primary tool for controlling inflation is monetary policy. Most central
banksare tasked with keeping the federal funds lending rate at a low level, normally to a
target rate around 2% to 3% per annum, and within a targeted low inflation range,
somewhere from about 2% to 6% per annum.

There are a number of methods that have been suggested to control inflation. Central
banks such as the U.S. Federal Reserve can affect inflation to a significant extent through
setting interest rates and through other operations. High interest rates and slow growth of
the money supply are the traditional ways through which central banks fight or prevent
inflation, though they have different approaches. For instance, some follow a
symmetrical inflation target while others only control inflation when it rises above a
target, whether express or implied.

Monetarists emphasize increasing interest rates (slowing the rise in the money supply,
monetary policy) to fight inflation. Keynesians emphasize reducing demand in general,
often through fiscal policy, using increased taxation or reduced government spending to
reduce demand as well as by using monetary policy. Supply-side economists advocate
fighting inflation by fixing the exchange rate between the currency and some reference
currency such as gold. This would be a return to the gold standard. All of these policies
are achieved in practice through a process of open market operations.

Fixed exchange rates

Under a fixed exchange rate currency regime, a country's currency is tied in value to
another single currency or to a basket of other currencies (or sometimes to another
measure of value, such as gold). A fixed exchange rate is usually used to stabilize the
value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means
to control inflation. However, as the value of the reference currency rises and falls, so
does the currency pegged to it. This essentially means that the inflation rate in the fixed
exchange rate country is determined by the inflation rate of the country the currency is
pegged to. In addition, a fixed exchange rate prevents a government from using domestic
monetary policy in order to achieve macroeconomic stability.

Under the Bretton Woods agreement, most countries around the world had currencies
that were fixed to the US dollar. This limited inflation in those countries, but also
exposed them to the danger of speculative attacks. After the Bretton Woods agreement
broke down in the early 1970s, countries gradually turned to floating exchange rates.
However, in the later part of the 20th century, some countries reverted to a fixed
exchange rate as part of an attempt to control inflation. This policy of using a fixed
exchange rate to control inflation was used in many countries in South America in the
later part of the 20th century (e.g. Argentina (1991-2002), Bolivia, Brazil, and Chile).

Gold standard

The gold standard is a monetary system in which a region's common media of exchange
are paper notes that are normally freely convertible into pre-set, fixed quantities of gold.
The standard specifies how the gold backing would be implemented, including the
amount of specie per currency unit. The currency itself has no innate value, but is
accepted by traders because it can be redeemed for the equivalent specie. A U.S. silver
certificate, for example, could be redeemed for an actual piece of silver.

Gold was a common form of representative money due to its rarity, durability,
divisibility, fungibles, and ease of identification. Representative money and the gold
standard were used to protect citizens from hyperinflation and other abuses of monetary
policy, as were seen in some countries during the Great Depression. However, they were
not without their problems and critics, and so were partially abandoned via the
international adoption of the Bretton Woods System. Under this system all other major
currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of
$35 per ounce. That system eventually collapsed in 1971, which caused most countries to
switch to fiat money, backed only by the laws of the country. Austrian economists
strongly favor a return to a 100 percent gold standard.

Under a gold standard, the long term rate of inflation (or deflation) would be determined
by the growth rate of the supply of gold relative to total output. Critics argue that this will
cause arbitrary fluctuations in the inflation rate, and that monetary policy would
essentially be determined by gold mining, which some believe contributed to the Great
Depression.

Wage and price controls

Another method attempted in the past have been wage and price controls ("incomes
policies"). Wage and price controls have been successful in wartime environments in
combination with rationing. However, their use in other contexts is far more mixed.
Notable failures of their use include the 1972 imposition of wage and price controls by
Richard Nixon. More successful examples include the Prices and Incomes Accord in
Australia and the Wassenaar Agreement in the Netherlands.

In general wage and price controls are regarded as a temporary and exceptional measure,
only effective when coupled with policies designed to reduce the underlying causes of
inflation during the wage and price control regime, for example, winning the war being
fought. They often have perverse effects, due to the distorted signals they send to the
market. Artificially low prices often cause rationing and shortages and discourage future
investment, resulting in yet further shortages. The usual economic analysis is that any
product or service that is under-priced is over consumed. For example, if the official price
of bread is too low, there will be too little bread at official prices, and too little
investment in bread making by the market to satisfy future needs, thereby exacerbating
the problem in the long term.

Temporary controls may complement a recession as a way to fight inflation: the controls
make the recession more efficient as a way to fight inflation (reducing the need to
increase unemployment), while the recession prevents the kinds of distortions that
controls cause when demand is high. However, in general the advice of economists is not
to impose price controls but to liberalize prices by assuming that the economy will adjust
and abandon unprofitable economic activity. The lower activity will place fewer demands
on whatever commodities were driving inflation, whether labor or resources, and
inflation will fall with total economic output. This often produces a severe recession, as
productive capacity is reallocated and is thus often very unpopular with the people whose
livelihoods are destroyed (see creative destruction).

What is Gross Domestic Product (GDP)?

The gross domestic product (GDP) or gross domestic income (GDI) is one of the
measures of national income and output for a given country's economy. GDP can be
defined in three ways, all of which are conceptually identical. First, it is equal to the total
expenditures for all final goods and services produced within the country in a stipulated
period of time (usually a 365-day year). Second, it is equal to the sum of the value added
at every stage of production (the intermediate stages) by all the industries within a
country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum
of the income generated by production in the country in the period—that is,
compensation of employees, taxes on production and imports less subsidies, and gross
operating surplus (or profits).

The most common approach to measuring and quantifying GDP is the expenditure
method:

GDP = consumption + gross investment + government spending + (exports −

imports), or,
GDP = C + I + G + (X − M).
"Gross" means that depreciation of capital stock is not subtracted out of GDP. If net
investment (which is gross investment minus depreciation) is substituted for gross
investment in the equation above, then the formula for net domestic product is obtained.
Consumption and investment in this equation are expenditure on final goods and services.
The exports-minus-imports part of the equation (often called net exports) adjusts this by
subtracting the part of this expenditure not produced domestically (the imports), and
adding back in domestic area (the exports).

Economists (since Keynes) have preferred to split the general consumption term into two
parts; private consumption, and public sector (or government) spending. Two advantages
of dividing total consumption this way in theoretical macroeconomics are:

• Private consumption is a central concern of welfare economics. The private

investment and trade portions of the economy are ultimately directed (in
mainstream economic models) to increases in long-term private consumption.
• If separated from endogenous private consumption, government consumption can
be treated as exogenous so that different government spending levels can be
considered within a meaningful macroeconomic framework.

The India GDP is the culmination of all the differential factors that contributes to the
economy of India. India GDP reflects a consolidated report of the performance of the
Indian economy. The Indian Gross Domestic Product is determined either by 'cost factor'
or 'actual price' method. The growth of India GDP especially, after the 1990s was the
effect of opening-up of Indian economy. This paradigm shift of Indian economy occurred
in the wake of balance-of-payments crisis in the 1980s. The Government of India opened
up Indian markets to facilitate entry of private investments into the Indian markets. This
change in Indian economic policy, from a highly insulated market to an open market
facilitated inflow of foreign direct investment (FII) and foreign institutional investor
(FII). A good number of Government of India undertakings were divested to private
business

What is Recession and How US slowdown hit Indian Economy?

Ans: In economics, the term recession generally describes the reduction of a country's
gross domestic product (GDP) for at least two quarters. The usual dictionary definition is
"a period of reduced economic activity", a business cycle contraction.

The United States-based National Bureau of Economic Research (NBER) defines

economic recession as: "a significant decline in the economic activity spread across the
country, lasting more than a few months, normally visible in real GDP growth, real
personal income, employment (non-farm payrolls), industrial production, and wholesale-
retail sales

In macroeconomics, a recession is a decline in a country's gross domestic product (GDP),

or negative real economic growth, for two or more successive quarters of a year.
An alternative, less accepted, definition of recession is a downward trend in the rate of
actual GDP growth as promoted by the business-cycle dating committee of the National
Bureau of Economic Research. That private organization defines a recession more
ambiguously as "a significant decline in economic activity spread across the economy,
lasting more than a few months." A recession has many attributes that can occur
simultaneously and can include declines in coincident measures of activity such as
employment, investment, and corporate profits. A severe or prolonged recession is
referred to as an economic depression.

Causes of Recession

An economy which grows over a period of time tends to slow down the growth as a part
of the normal economic cycle. An economy typically expands for 6-10 years and tends to
go into a recession for about six months to 2 years.

A recession normally takes place when consumers lose confidence in the growth of the
economy and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a
decrease in production, lay-offs and a sharp rise in unemployment.

Investors spend less as they fear stocks values will fall and thus stock markets fall on
negative sentiment.

Stock markets & recession

The economy and the stock market are closely related. The stock markets reflect the
buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of
Economic Analysis, but investors are a worried lot. The Indian stock markets also
crashed due to a slowdown in the US economy.

The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The
markets bounced back after the US Fed cut interest rates. However, stock prices are now
at low ebb in India with little cheer coming to investors.

Current crisis in the US

The defaults on sub-prime mortgages (home loan defaults) have led to a major crisis in
the US. Sub-prime is a high risk debt offered to people with poor credit worthiness or
unstable incomes. Major banks have landed in trouble after people could not pay back
loans The housing market soared on the back of easy availability of loans. The realty
sector boomed but could not sustain the momentum for long, and it collapsed under the
gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the
US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel,
slowed down the growth of the economy.
How to fight recession

Tax cuts are the first step that a government fighting recessionary trends or a full-fledged
recession proposes to do. In the current case, the Bush government has proposed a $150-
billion bailout package in tax cuts.

The government also hikes its spending to create more jobs and boost the manufacturing
and services sectors and to prop up the economy. The government also takes steps to help
the private sector come out of the crisis.

Past recessions history

The US economy has suffered 10 recessions since the end of World War II. The Great
Depression in the United was an economic slowdown, from 1930 to 1939. It was a
decade of high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world
markets in the 1930s. Industries that suffered the most included agriculture, mining, and
logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938.
Production declined sharply, as did profits and employment. Unemployment jumped
from 14.3 per cent in 1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control
inflation and sharp correction to overproduction of the previous decade. This was
followed by Black Monday in October 1987, when a stock market collapse saw the Dow
Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of
Americans.

The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest
expansion on record.

From March to November 2001, employment dropped by almost 1.7 million. In the 1990-
91 recessions, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The
2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as well. The
economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as
technology stock prices crashed.

How US recession impact on India

A slowdown in the US economy is bad news for India.

Indian companies have major outsourcing deals from the US. India's exports to the US
have also grown substantially over the years. The India economy is likely to lose between
1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big
tickets deals in the US would see their profit margins shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But
experts note that the long-term prospects for India are stable. A weak dollar could bring
more foreign money to Indian markets. Oil may get cheaper brining down inflation. A
recession could bring down oil prices to $70.

Between January 2001 and December 2002, the Dow Jones Industrial Average went
down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record
highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs
it hit in January 2000. In contrast, the Sensex was down 45 per cent.

The whole of Asia would be hit by a recession as it depends on the US economy. Asia is
yet to totally decouple itself (or be independent) from the rest of the world, say experts