Repo Rate

Bank of Baroda (BoB) has Government security bonds. But now BoB needs some extra-money.
So, RBI manager tell the BoB manager. I'm going to buy your bond for Rs.100, but you gotta promise me that
you'll buy it back from me after 6 months @ 120 Rs.
BOB agrees and deal is made.
So basically BoB is going to repurchase the same bond it is selling right now, That's why its called 'REPO'
(repurchase).
The return offered to RBI in above case is 120-100=20%
So REPO rate is 20%
This way banks borrow money from RBI.
Means,REPO rate is the interest charged by RBI on the money it gives to banks.

Technical definition of REPO Rate

Repo, RP, or Sale and Repurchase Agreement, is the sale of securities together with an agreement for the seller to
buy back the securities at a later date. The repurchase price will be greater than the original sale price, the
difference effectively representing interest, sometimes called the repo rate.

Suppose today the REPO rate is 20%.

After a month REPO rate is decreased to 10%
Means banks have to pay less interest on the money they borrow from RBI!
Means banks will borrow more money from RBI (as the interest rate has gone down from 20% to 10%)
=more money in market = liquidity= interest rates go down = easy to get home loans & car loans = boost in
economy.

Conclusion about REPO Rate

RBI increases money supply in market by decreasing Repo rate. But after some months,RBI sees that there is too
much money in the market, and not enough supply of items hence inflation is rising. So RBI needs to take out that
extra liquidity (money) from the market. For that, RBI will put up its REPO papers on sale.
Means this time Banks are doing the reverse; instead of selling REPO papers to RBI, they are buying the REPO
papers. So its called Reverse REPO. And the interest offered on such Reverse REPO agreement is Reverse repo
rate.
Suppose last month Reverse REPO rate was only 5.1%
This month reverse repo increased to 5.5%, means its attractive to lend money to RBI, as RBI is offering better
interest rate than last month! So Bank will give its extra money to RBI. This way liquidity is sucked out,
Now there is less money in the system, compared to earlier, so banks will increase their interest rates will giving
loans to customers. Thus less money compared to items available for purchase = inflation is curbed.
To sum up with a table:
Repo rate
Other name Short term lending rate
Means Interest charged by the central
bank (RBI) on borrowings by
commercial banks
What happens, if this Cost of borrowing costlier for the
rate is INCREASED? commercial banks.
Reverse repo rate
Short term borrowing rate
The rate at which the central bank borrows
money from commercial banks.
More lucrative for banks to park funds with
the RBI.
Means RBI will take out extra money from
the system, by increasing Reverse Repo
Rate = inflation is curbed.

Repo rate stands raised to 6.25 per cent and the reverse repo rate to 5.25 per cent.

What does above statement mean to a Bank?

When you take borrow money from RBI, you've to pay 6.25% interest
When RBI borrows money from you, they’ll pay 5.25% interest.

What are equity, bonds and debentures ?

You gave me 100 Rs and I gave you a paper writing" I'll pay back 120 Rs. after 1 year" This paper is bond.
You give me 100 Rs. and I gave you a paper "this gives you a partnership of 100 Rs. in my company, I'll share
profit with you accordingly."
This is equity /share. Here the you get a share in the profit only if my company makes profit.
But if you give me 100 Rs. and I gave you a paper writing "I'm gonna pay Rs.15 per year no matter how much
profit or loss I make in my company" this is debenture.

How to calculate GDP (PPP) and GDP nominal?

How is PPP measured? Suppose India's GDP is Rs 100. Convert this to dollars as GDP(nominal) and
GDP(PPP)
Take a basket of commodities (like 1 kg sugar,wheat,veggies and cloths etc).
Now find out how much money do you need to buy everything from that basket?
For India suppose the bill is 1700 Rs.
Go to America and buy same items from their local market, the bill is 100$
So 100$=1700 Rs. => 1$=17 Rs.
So, PPP exchange rate is 17 Rs. per 1 $

To calculate GDP (PPP)

GDP (in Rupees) / PPP exchange rate for Rupees
=100/17
=5 $
India's GDP (PPP)= 5$
To calculate nominal GDP in $.
Just convert the Rupee into dollar at official exchange rate.1$=50 Rs.
India's GDP (in Rupees)/official exchange rate
=100/50
=2$
So India's GDP (nominal) is 2$.
Why use GDP (nominal) instead of GDP (PPP) when comparing two nations?
After the previous question regarding GDP (at purchasing power parity) between Japan and China
> i have a query why GDP (ppp) is not used often to measure worth of countries as it give real picture than using
GDP (Nominal terms)

Answer
For example:
In India majority of people are poor, and receive subsidized grains (like 1 kilo rice for 3 Rs, kerosene etc. from
PDS shops.
In America poor people are supported by Government by food stamps and social security cheques.
Now comparing two nations, GDP (PPP) wise,
Obviously majority of Indians are poor, and majority of them get cheap- subsidized stuff, the purchasing power
parity of India may look better than Americans.
But does it really mean India is financially more powerful than America just because Indians can buy more stuff
in local market compared to Americans? No, because financial activity is not limited to local market.
We've to import crude oil from Middle east and buy jet-planes, missiles from Russia,France and Israel.
We've buy pulses and onions from Africa and Pakistan(!), Those people are not going to sell us stuff with
subsidy in Rupees, like we get in our local market.
They'll ask hard dollars (or gold or diamonds) as payment. So there, in international market, America can
purchase more crude oil, fighter-jets, missiles and onions compared to India, even though its GDP-PPP wise it may
not be powerful as India.

Even China can buy more stuff internationally than we can, because our forex reserve is only 270 billion, while
Chinese got 1400 billion $!
GDP at PPP gives us only picture of how much stuff we can buy within our country.
GDP at nominal rate ($) gives us bigger-picture of how much stuff we can buy internationally.
Using GDP (nominal), it becomes easier to compare two nations' financial strength, by comparing their ability to
purchase in international market in same currency (dollars). The one who has more $$, can purchase more stuff
internationally.
So bigger the GDP (Nominal), powerful a country is financially. While in case of GDP(PPP) we cannot say with
confidence that bigger the GDP (PPP) is, powerful a country is financially, because they may be heavily-
subsidizing it.
Purchasing power parity: The case of China and Japan GDP
I Came across this article from the HINDU. I could not understand some of the economic terms in them. Can
anyone please help out?
For many years before that China had been ahead of Japan only when GDP was measured in purchasing power
parity terms. PPP is an indicator that takes into account relative prices and therefore the command over goods that
a dollar of income provides. Since with lower wages and prices, a dollar in China when converted to RMB delivers
more purchasing power, Chinese GDP measured in PPP dollars is significantly higher than at official exchange
rates. Hence, becoming the world's second largest economy at official exchange rates does mark an important
transition.
Answer:
First the Purchasing Power Parity part:
Suppose you're earning 25,000 Rs. per month in India and I'm earning 1000$ in USA. How can we measure who's
getting better salary? who is happy?
We've to see how much stuff can you buy from the given income?
Suppose, Price of one burger in USA is 10$, I can only buy 100 burgers a month.
While its Rs.25 in India, you can buy 1000 burgers a month!
In this way you're in better position than I'm, because you can buy more food!
Same way we've to calculate not just burger but overall monthly food bill, house rent, electricity, telephone, petrol
etc. to measure who can buy more stuff in the given salary.
This is purchasing power parity.
Tech-definition
PPP is an economic technique used to determine the relative values of two currencies by comparing costs of the
identical products and services in different countries.
It is useful because often the amount of goods a currency can purchase within two nations varies drastically.
If we only use official exchange rate of 1$=40 Rs.
then my salary in USA is Rs. 40,000, while yours in India is only 25,000.
In that way my position is better than you according to official exchange rate.
In case of China and Japan, as you know China is a communist Government, so food-petrol etc. prices will be
strictly controlled by the Government along with lots of subsidies and benefits. While Japan is a liberal democratic
country so market forces of supply and demand decide the prices of everything from food, petrol to fertilizers and
movie tickets.
So obviously food, petrol and stuff will be cheaper in China compared to Japan.
So for the given salary a Chinese man can buy more stuff in China, compared to the stuff a Japanese can buy with
his salary, just like the same way you can buy more burgers in India than I can in America.
That's why China had been ahead of Japan only when GDP was measured in purchasing power parity terms.
When GDP is measured in absolute official exchange rate (in simple terms how much money the country has
irrespective of the amount of stuff it can buy using all that money)
This is GDP @ official exchange rate.
Earlier Japan was ahead of China in this race. But now Now China is ahead of Japan even in this race, means it has
got more $$ than Japan= China is exporting more and Chinese economy is booming more than Japan's.

Main reason:
China keeps its yuan undervalued, hence its exports are cheaper than Japan or India's.