Feb 28, 2011

[Tip] CSAT online Application session expired, no email etc

Some friends are experiancing trouble in online application like website not opening swifitly, no email recieved etc.

A good friend on IOforum, Deltabravo has given this tip

General perception is that website is not functioning properly during odd hours i.e. from 5:00 pm to 8:00 am. If people fill the form in this time slot, they have been experiencing more problems like session being expired, e-mail confirmation not coming. I guess the website also calls it a day after the working hours of UPSC

So, anyone who is yet to fill up the online application, if possible then try to do it during office hours to safe yourself from any accidental trouble.

Feb 26, 2011

[Economy Q] Future options call option put option

Since economy books are hellbent on confusing a simple thing. Long thing cut short it means this....

future contract

I shall deliver and you shall buy.
Options contract

I shall deliver product on that date but you may/may not buy depending on your mood.

There are two types of options contracts
Call option

I shall deliver but you may /may not buy.
Put option

I may / may not deliver but you must buy!

Related to this
Waydaa Bazaar (વાયદા બજાર)

Feb 25, 2011

[CSAT application Q] The signature resize should meet both limits

Pradeep asked,

After resizing my signature it is coming to around 3Kb, but pixel dimensions are 284width X 110 height.

My question is is it acceptable as size is less than 40kb but dimension mismatches?

Answer

No, your signature image must remain under both limits.

Size no more than 40 KB

And dimension no more than 110 px height * 140 px width.

I'm told by some friends that, the UPSC site accepts any dimensions. but there is a possible serious problem.

Your signature will be printed on the roll-number attendance sheet.

When its out of the dimension, it'll not print properly and some portion of your signature will be left out.

So better meet both limits.

Feb 24, 2011

CSAT Application -common errors and problems

Case#1

print Name and DOB on the photo in paper application

To everyone who has confusion regarding CSAT-2011 paper-application's photo column.

Column 19: Photograph and signature

Paste firmly in the space provided your recent photograph of 3.5 cm. x 4.5 cm. size with your Name and Date of Birth printed on it.

Solution:

Friends on IOforum are suggesting that one should goto studio, get a new photograph taken and ask the photographer to print the name and DOB on it.

Case#2

While uploading the photograph and signature in the online application, I made some mistake, like oversized photo or very light signature or anything like that, now will UPSC accept my application or not??

It is my general advise to everyone, whenever you're in doubt about your application,...re-apply.

Otherwise such thought will keep bothering you until UPSC sends you the hall ticket in April-May. And you won't be able to concentrate in studies in the mean time.

Double applications are allowed. If Mr.X sends two applications, one of his application will be rejected (according to UPSC guidelines) whoever in reality they send hall-tickets to both applications. So you don't need to worry in either case.

Case#3

After sending the application (via post or online) I'm not sure whether I ticked some xyz column or not!

Answer: refer to case#2

Just remember whatever you do,

1. for paper application, do take a photocopy (xerox) of filled application before sending it via post.

2. for online application, do note down registration number and keep it somewhere safe.

[And save your application form number or registration number as a 'phone number' in your mobile phone, so in emergency you can easily get it]

[Economy Q] Infy at 3000 premium 100 what does that mean?

Rudranil Ghose asked,

what exactly does it mean when we say that in the stock market, a company is at (say) 3000, premium (say 100) ..For eg: Infy at 3000 premium 100

Answer

Infy at 3000 premium 100.

It means this is a call-options contract: Buy infy shares at 3000 Rs. on x date.

Right now you don't have to pay Rs.3000, but only that premium Rs.100 to that broker.

Suppose on that x date, price of infy share has gone down to 2000 Rs. you can cancel the contract, and loose only Rs.100/- (and may purchase those shares from another broker at 2000 Rs.)

But suppose on x date, the price of infy shares went upto 4000 Rs. then you'll exercise your option to buy it from that broker at 3000 Rs. and sell back to someone else at 4000 Rs. thus earning a profit of [4000-3000-100]=900 Rs.

[Economy Q] Oil hedging and its impact on Oil subsidy

Rahul asked,

what 'Oil Hedging' means and how is it related to the subsidies given by the govt. on oil products??

Answer

hedge= a fence or compound wall built to protect your property.

hedging = a method of preventing risk.

Oil prices go up and down very rapidly due to unpredictable and unforeseeable events, such as political unrest in Egypt and Libya.

So buyers enter in futures and options contracts with the producers to prevent themselves from such unpredictable price rises.

For example,

Indian Oil Co. makes an options contract with Libyan supplier in October 2010, that on Feb 2011 Libyan supplier will send 5000 barrels @ 70$ each.

Now due to unrest in Libya in February, the oil prices have escalated to 90$/barrel but still that Libyan supplier is bound by contract to sell 5000 barrels @ 70$ each to the Indian company.

So Indian company prevented the risk of having to pay higher prices.

This is oil hedging.

But suppose there was no riots in Libya and in fact they had discovered a new big oil well, and thanks to the extra oil supply, Barrel prices went down to 20$ per barrel! In that case Indian oil company would cancel to options contract and would loose the premium money paid on the contract.

how is Oil Hedging related to the subsidies given by the govt. on oil products?

Sorry I don't have exact idea, but i think if Oil headgeing prevents Indian Oil Companies from big price rise, then Government has to pay less subsidy on oil products.

[Economy Q] Wayda Bazaar or Futures market

Vinay asked

what is wayda bazaar?

Answer

waydaa / Wadaa = promise to buy something in future.

Waydaa bazaar= future (and options) market.

When you make an agreement with someone that you'll buy gold/potato or anything in x quantity at y price on z date in future. This is future contract.

Waydaa Bazaar is the place where brokers hang out to make and trade such future and options* contracts.

*Options means, with such agreement, you've the right to buy that 1000 kg potato at the pre-determined price Rs.150,000 in future, but not the obligation to buy it.

Means you can refuse to buy it later on, if you're not in mood or find someone who is selling the same thing at lower prices! But in that case you loose the premium money paid on that options contract.

[Q] Can a guy from X State appear in PSC exam of Y state?

Abhishek asked,

i want to ask that...apart from UPSC whether a candidate belonging to "X" state can apply for other "Y" state's administrative posts examination in "Y" state's respective service commission?

Answer:

Yes, a candidate from X state can apply for Y state's exam.

But unfortunately, most state PSC exams have a compulsory regional language paper (and sometimes its marks are counted in final merit list.)

For example In Gujarat state PSC exams [Dy.Collector, DySP, Tehsildaar etc] there is a compulsory Gujarati language paper in mains and its marks are counted in the final merit list. So obviously a non-Gujarati candidate will lag behind.

So its better to check the notification of a state PSC exam regarding its mains-exam scheme, before applying.

Similarly those wanting to claim OBC benefits for a different state's PSC exam also need to verify whether they're in that category in that state. (because OBC caste-lists differ statewise.)

[f anyone knows more about this.. please throw some light, via email or comment]

Feb 22, 2011

[App Q] didnot sit in last year's prelim, my attempt counts or not?

Milin asked

sir i had filled up upsc prelim exam form before but was unable to sit for that exam.

So for this year upsc prelim exam form in the number of attempts column what should i write?

Number of attempts 00 or 01?

Ans: Number of Attempt: 00

If you had filled application form, but didnot sit in the prelim exam then your attempt is not counted.

[Economy Q] Lower trade deficit and its effect on economy

Lokraj asked,

How would lower trade deficit strengthen rupee and its effect on economy??what is trade deficit?

Answer

in simple terms

Trade deficit

=imports minus exports

suppose 2009: India exported 10 billion$ worth stuff, and imported 50 billion$ worth stuff.

So trade deficit (2009)=50-10=40 billion$.

in 2010, the case improves, our import remains same, but we export 20 billion$ worth stuff. So,

trade deficit (2009) = 50-20=30 billion$

As you see, our trade deficit has lowered from 40 to 30.

How would lower trade deficit in above example, strengthens rupee?

Forex market is a place where people buy and sell currency, based on supply and demand.

When you've to import from USA to India, you goto forex market, get your rupees converted into dollar$ to pay the bill and import it.

When an American, is importing mangoes from India, he pays the Indian seller in dollar$, and that Indian guy, goes to forex market and gets those dollar$ converted into Rupees, so that he can do his son's wedding, payback the home-loan etc. for which he needs Indian currency (Rs.)

So like that, there is a supply-demand of currencies in the Forex Market.

A currency strengthens when its in more demand in forex market.

When trade deficit is lower,

means we are exporting more.

Means we are receiving more dollars than earlier.

Means people are demanding more rupees than earlier @ Forex Market.

So Rupee is in higher demand @ Forex market, hence Rupee is strengthened.

Effect on economy

When Rupee strengthens, i.e.

(2009) 1$=60 Rs.

(2010) 1$=40 Rs.

In above case, Rupee is strengthened. So, when you're importing, you've to pay less Rupees.

But when you're exporting, you also get less Rupees money as payment.

So Rupee's strengthening or appreciation, is good for importers but bad for exporters.

Hence lower trade deficit, in long term is good for importers but bad for exporters.

In such a scenario, If a country has export oriented economy (like China or Taiwan) it'll move towards recession.

Majority of people make living by working in some export oriented mobile-phone, stuffed toys factory. when they receive less money for export = job loss etc bad things.

[Economy Q] Capital Adequecy ratio

Nitro asked,

What is capital adequacy ratio ?

Answer

Banks give loans to people. But if majority of the people default on their loans, and bank doesn't have enough cash to pay back to its depositors, fixed deposit account holders, employee's salary, monthly electricity bill, building rent etc. In that case bank's assets will have to be liquidated (i.e. auction) to payback all those people, and the bank will close down.

To prevent such disaster, banks are required to maintain Capital adequacy ratio (CAR). Beyond which they shouldn't give loans or get involved in any other risky business. So even if they get in trouble, they've enough money to payback all its liabilities.

For example, If bank has 100 cr. worth capital, then it should not give loans of more than 10 cr.

Capital adequacy ratios (CAR) = bank's capital (like cash, building, bonds etc) divided by bank's risky assets (like loans given)

Generally it should not be more than 10% according to BASEL norms.

[Q] -10 glass power doesn't mean physically disabled for UPSC civil service exam

Ayush asked in comment

i have -10 power.can someone plz tell me if i come under physically disabled category?

Answer

If after wearing the glasses, your vision is 6/6 or 6/9 (i.e. you can see as good as a normal person) then you're not blind or partially blind.

infact even with -10 power, you're still medically fit' for non-technical jobs (IAS,IFS,IRS etc.)

But if even after wearing glasses or going through surgeries,you are 6/18 to 6/36 or more, then you're 40% blind and will be admitted in disabled category.

Glass power has nothing to do with physical-disability.

For more, refer

http://mrunal-exam.blogspot.com/2010/05/faq-physical-standards-eye-sight-for_11.html

[Q] Integrated 5 year M.Sc or MBA course and want to apply for CSAT 2011

To all those people in that "I'm in 5 year integrated course and want to apply for prelims"

if you're in final year or final semester, you can apply for prelims, provided that you're going to get the marksheet or degree by august 2011 [this applies to every body in every field +MBBS need include another certificate if they've not finished their internship]
(from some discussion on IOforum), suppose you're in 5 year integrated course like M.Sc, MBA or MCA and currently in 4th year but want to apply for prelims, in that case you need to get a provisional certificate from your university that states that your 3 year course is equivalent to the graduation in that field (B.Sc/BBA/BCA etc.)

[Q] webcam/digital photos not allowed for online applications in UPSC CSAT exam

Kapy asked in comments

I've digital copy of the photo? do i have to get it made and then scan it? please help

Answer

whatever photo you're uploading, you should have passport sized paper- copies of it.

I tell you the reason,

after you clear the prelims, they'll send you mains application form. In that form, you'll be required to paste the same passport-sized photos which you had used to prelim application.

So one needs to have paper-copies of the passport sized photo he is uploading for online application.

[Q] No need to use black and white photo in UPSC prelim form

Tariq asked,

Can we use black white photo for application.is it necessary to use color?

Answer:

In earlier notifications (upto 2010), UPSC used to specifically mention that a candidate should use b/w (black and white) photo,

although even in those days, applications with color-photos were accepted.

This time (2011), UPSC notification hasn't mentioned anything about b/w or color photo, so you are completely free to use a color photo.

And if you use b/w, i don't think there should be any problem either, but you might want to call their helpdesk and get it confirmed.

[Q] Second Year BA candidate cannot apply for UPSC 2011

Reet asked,

my age is 18.07.1982.. and i'm doing BA 2nd year as private candidate. my 2nd year exams are in april 2011.... am i eligible to appear in cs exam 2011(june).. ?? PLEASE REPLY I'M VERY CONFUSED...

Answer:

You're not a graduate yet. You're not in final year yet. So You cannot apply even if you meet the age requirement.

A final year / final semester student can apply, provided that he's going to get his marksheet/ graduation degree by August 2011.

Feb 20, 2011

[Coaching class review] Pradip Sarkar of Sapian academy for Anthropology in Delhi

This time it is Pradeep Sarkar of Sapian coaching class for Anthropology.

People on IOforum are alleging that he doesn't finish the syllabus.

Whole report and experiences can be read on following thread on Indianofficer forum

http://www.indianofficer.com/forums/9503-my-feedback-sapiens-indian-administrative-service-anthropology-pradeep-sarkar.html#post30260

Feb 19, 2011

[Tutorial] Resizing photo and signature for UPSC online application

If you intend to fill the application via online route, the notification requires you to upload 2 photos in a specific size and dimension. It says

Each of the scanned images of the photograph/signature should not exceed 40 KB in size (for photograph, the pixel size is 140 pixels height x110 pixels width and for sign it should be 110 pixels height x140 pixels width) and also to be ensured that the uploaded photograph/signature are proper.

So what to do?
1. First get your passport sized photo scanned , (or if you are getting a new photo, ask the cameraman to copy the photo in a new pendrive / CD.)
2. take a white paper, sign on it using black pen. Now scan that paper.

There are many ways to resize an image. Default MS paint program doesn’t provide some features, so for a hassle-free resizing, download and install Paintdotnet software (free) from following link. (size 3.5MB)
http://www.softpedia.com/progDownload/Paint-NET-Download-19322.html

[You can also use gimp, adobe-photoshop, irfanview anything, the principle remains the same.]
Now open the image using paintdotnet.

Once you have resized the image, paintdotnet provides facility to save it with along with an option to change the image-quality so that it meets the 40 kb size restriction.

Still confusion in photo resizing and meeting the 40 kb size limit?
Then do as directed in following video (download size 600 kilobytes)
http://ahb.me/1SAD

For signature, do as directed in following video (download size 300 kilobytes)
http://ahb.me/1SAH

[CSP 2011] Notification is out, online applications, syllabus and more

To everyone, who intends to apply for civil service exam in 2011.

Notification for 2011
Right click>Save as
http://164.100.9.99/CSP2011.pdf
Above pdf contains entire syllabus, scheme of exam, vacancies of PH candidates and everything you need to know.
You can apply either by offline method (regular application form from post-office)
or by Online method.
Instructions for filling the online application
Right click>Save as
http://164.100.9.99/INSTR_CSP2011.pdf

Website for online application
http://www.upsconline.nic.in/

Offline vs online application

Online application is 30 rupees cheaper than offline (form price)
Last time some offline applications (sent by post) didn't get acknowledged and you remain tense all the time, that affects the preparation rhythm. It happened to some friends last year : (see this link)
Anyone intending to fill up the offline (paper) application, you might want to see my technical tips :click ME

Thanks Dontheone for the links.

If you get any problem or confusion while filling up the form

Without hesitation post a new thread on IOforum (click ME)

Feb 18, 2011

[Economy Q] what are equity, bonds and debentures ?

munai asked

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.

[Economy Q] How to calculate GDP (PPP) and GDP nominal?

Abhi asked,

How is PPP measured? Suppose India's GDP is Rs 100. Convert this to dollars as GDP(nominal) and GDP(PPP)

Answer:

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$.

[Economy Q] 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

Tarun asked,

> 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.

[Economy Q] Purchasing power parity: The case of China and Japan GDP

nforninad asked,

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.
Now if you wonder, how does undervalued currency help a nation's exports?
Read this

http://mrunal-exam.blogspot.com/2010/01/economy-4-newbies-currency-devaluation.html

[Q] With American college degree can I apply for UPSC Civil service in India

Mehar asked

I have done my Bachelors in Accounting from Purdue University based in West Lafayette, Indiana, USA.

I am an Indian national and want to sit for the UPSC Civil services examination? Am I eligible to appear for the examination?

Quoting Puneetg's answer from IAS Eligibility for a bachelor's degree from US thread

Answer:

It is possible to seek recognition of your degree here in India. There is a procedure to be followed.

You need to send attested copies (from Indian High Commission in the US) of your degree and transcripts to the Evaluation Division of Association of Indian Universities in New Delhi. They will examine your degree and if they find the name of your college or university in their list of accredited institutions, they will award you an Equivalence Certificate. With that, you are eligible for all government recruitment exams in India.

You will need to spend USD 200 for getting this equivalence. Generally, the staff at AIU is helpful and accommodating and will try to give you an equivalence certificate within a week. They can even mail it to you. In case you are visiting Delhi some time, do go and visit AIU. Their building is next to Maulana Azad Medical College, New Delhi.

For further information refer to AIU's website ASSOCIATION OF INDIAN UNIVERSITIES

http://www.aiuweb.org/Evaluation/evaluation.asp

Unfortunately you won't be able to put down anything concrete in the percentage column. Your best bet is to put down the grades. I did that for my Mains form. It worked fine. Alternatively, approach your university and see if they can give you the marks equivalent for the grades.

You can submit copies of your degree and transcripts as of now. It wouldn't be a problem I think. You'll be able to sit for the Mains. But I recommend that you go and get the AIU equivalence certificate before you are called for interview. This is because they will check all the originals at the time of the interview. If you don't have any document that they require, your result may be withheld.

My degrees too were from reputable universities overseas. However, it's best not to take chances with these things. And if your degree is from a reputable university, it'll be quite straightforward to get your equivalence certificate. All the best for the Mains!

For more refer

UPSC with an American degree

Feb 17, 2011

[Economy Q] Repo rate and Reverse repo rate, How they curb inflation?

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	Reverse repo rate
Other name	Short term lending rate	Short term borrowing rate
Means	Interest charged by the central bank (RBI) on borrowings by commercial banks	The rate at which the central bank borrows money from commercial banks.
What happens, if this rate is INCREASED?	Cost of borrowing costlier for the 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.

02 Nov 2010

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.

Feb 16, 2011

[Economy Q] ADR and GDR

Spectramind asked

What is ADR and GDR?

Answer

American Depositary Receipt (ADR)

ADR is method of trading non-U.S. stocks on U.S. exchanges

Suppose, Indian Co. wants to raise money from America, by issuing shares in American stock exchange.

But then Indian co. will have to maintain accounts according to American standards.

To prevent this problem, Indian company gives its shares to American bank.

American bank gives that Indian company receipts (called ADR) in return of those shares. Then Indian Co. can trade those ADR receipts in American share market, to raise money.

Global Depository Receipts (GDR)

Serve as same function like GDR, but on Global scale, it helps the countries from third world, to raise money from the stock exchanges in developed countries.

Several international banks issue GDRs, such as JPMorgan, Citigroup, Deutsche Bank, Bank of New York.

Normally 1 GDR = 10 Shares, but not always.

[Economy Q] CDS : Credit default swaps

CDS = Credit default Swaps

In simplest form Its buying insurance against a default.
Example
I'm a banker, gave car-loans to dude, but I'm afraid he might not pay back the full money. So I'll goto some other Bank X who sells Credit default Swaps (CDS).
I've to pay regular premium Bank X, but if someday that dudes default on his car-payment, Bank X will pay me the money.

RBI is currently drafting rules for starting a CDS market in India.

These CDS bonds, once issues, can be sold and bought like any other bond or security.
i.e. Bank X sells my CDS to Bank Y. So now Bank Y gets my premium but in case of default by that Dude, Bank Y is supposed to pay me.

(CDS also means combined defense services exam, conducted by UPSC)

[Economy Q] Yield Spread and its use

Yield Spread :Meaning

Yield spread is a way of comparing any two financial products.
Yield spread is the difference between profit you can make in two different types of investment.

Why do we need to calculate Yield spread?

Before coming to the purpose of calculating yield spread, lets go in a different direction.

When you buy a Government bond, you can be certain that you’ll be paid in full, after the maturity and they’ll not run away. So in this case risk is very low, hence they sell like hot-cakes. That's why they're called "Gilt edged securities"

When risk is low, it doesn’t carry much profit.

But some junk company is issuing bonds, no one has ever heard of them.

So their bonds carry high-risk of default, hence people won't be interested in buying it as such.So,The company will offer extra-high return (profit) on their bonds, to attract people.

In short : Higher return is offered when Risk is HIGH.

Scene 1: Year 2010

For every 100 rs. Invested in Government bond, you get Rs.5 return after 1 year.

For every 100 Rs. Invested in the junk bond, you’re offered Rs.13 return after 1 year.

So yield spread = (13% minus 5%) = 8%

Scene 2: Year 2011

Government bond’s return remains the same but now that junk bond company is offering you 20% return.

So Yield spread = (20% minus 5%)=15%

In one year, the yield spread has widened from 8% to 15%.

As we saw above, Higher the risk, higher return is offered.

So, market is forecasting a greater risk of default which implies a slowing economy.

A narrowing of spreads (between bonds of different risk ratings) implies that the market is factoring in less risk (due to an expanding economy).

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