 Banking

 Share market
 Economic curve

Banking

Banking is an industry that handles cash, credit, and other

financial transactions for individual consumers and businesses
alike.

The Reserve Bank of India, chiefly known as RBI, is

India's central bank and regulatory body responsible
for regulation of the Indian banking system. It is under
the ownership of Ministry of Finance, Government of
India. It is responsible for the control, issue and
maintaining supply of the Indian rupee.
The overall direction of the RBI lies with the 21-member
central board of directors, composed of: the governor;
four deputy governors; two finance ministry representatives
(usually the Economic Affairs Secretary and the Financial
Services Secretary); ten government-nominated directors;
and four directors who represent local boards
for Mumbai, Kolkata, Chennai, and Delhi. Each of these
local boards consists of five members who represent
regional interests and the interests of co-operative and
indigenous banks.

The Reserve Bank of India was established following the

Reserve Bank of India Act of 1934. Though privately owned
initially, it was nationalised in 1949 and since then fully
owned by the Ministry of Finance, Government of
India (GoI).

The Reserve Bank of India was conceptualised in

accordance with the guidelines presented by Dr. B.R.
Ambedkar to the Hilton Young Commission (also known
as Royal Commission on Indian Currency and Finance)
based on his book, 'The Problem of the Rupee – Its Origin
and Its Solution.
 In 1926, the Hilton Young Commission recommended the
setting up of the Reserve Bank of India.

At the time of establishment, the authorized capital of the

Reserve Bank of India was ₹5 crores. The government's
share in this was only ₹20-lakhs.

 The first Governor of RBI was Osborne Smith,

 The first Indian governor of RBI was C D Deshmukh.

 Originally, the Reserve Bank of India was privately

owned; and was established as a private bank with two
extra functions: the regulation and control of all banks
in India, and to be the banker to the then government.

Important Functions of RBI

Being a central bank of India, RBI serves a critical role

in regulating the financial transactions in the country.
Some of the important functions of RBI are listed
below:

 Issue of Bank Notes

 Banker to the Government

 Custodian of country’s forex reserves

 Lender of last resort

 Controller of credit

The Issuer of Bank Notes

The most important function of RBI is the issuance of

currency notes and coins, except the one rupee note
and coin which are issued by the Ministry of
Finance. All other notes bear the signature of the RBI
Governor. However, the agency of distribution of all
notes and coins issued by the Government of India is
the Reserve Bank of India.

Banker to the Government

Another chief function of RBI is that it takes care o f

the banking needs of the government, which includes
maintaining & operating the deposit accounts of the
government, collecting the receipts of funds, and
making payments on behalf of the Government of
India. It also represents the Indian Government, as
a member of the International Monetary Fund and
the World Bank.

Custodian of Cash Reserves of Commercial Banks

Commercial banks are required to maintain the cash
reserves at a rate decided by the RBI in its monetary
policy.

Custodian of Foreign Exchange Reserve

Another of the important functions of RBI is

maintaining a reserve of foreign currencies that
enables the RBI to deal with any crisis situation.

Lender of the Last Resort

Often regarded as the banker of banks, the RBI acts as

a parent to all commercial banks in India. Thus, it
becomes the lender of the last resort for all banks
when they are in a crisis situation. RBI helps them by
lending money, although at higher RoI, to sail through
the tide of financial difficulties.

Controller of Credit

RBI controls the credit created by the commercial

banks in India, in accordance with the economic
priorities of the government of India. RBI uses
quantitative and qualitative methods to control and
regulate the flow of money in the market. These are
implemented by announcing monetary policies at
regular intervals. The monetary policy involves the
management of interest rates and money supply. The
central bank of India tweaks the money supply to
achieve objectives such as liquidity, inflation, and
consumption.
 Share Market
What is share?

A share is a single unit of ownership in a company or

financial asset.

The value of a share that a company issues depends on its

face value the capital of a company divided by the total
number of shares.

People who own shares in a company are called

shareholders or stockholders. Shareholders receive income
from the shares they own on a routine basis.
What is Share Market?
The share market is a platform where buyers and sellers
come together to trade on publicly listed shares during
specific hours of the day. People often use the terms ‘share
market’ and ‘stock market’ interchangeably. However, the
key difference between the two lies in the fact that while
the former is used to trade only shares, the latter allows
you to trade various financial securities such as bonds,
derivatives, forex etc.

The principal stock exchanges in India are the National

Stock Exchange (NSE) and the Bombay Stock Exchange
(BSE).

Types of Share Markets

Stock markets can be further classified into two parts:
primary markets and secondary markets.

 Primary Share Markets

When a company registers itself for the first time at

the stock exchange to raise funds through shares, it
enters the primary market. This is called an Initial
 Public Offering (IPO), after which the company
becomes publicly registered and its shares can be
traded within market participants.

 Secondary Market

Once a company’s new securities have been sold in the

primary market, they are then traded on the secondary
stock market. Here, investors get the opportunity to
buy and sell the shares among themselves at the
prevailing market prices. Typically investors conduct
these transactions through a broker or other such
intermediary who can facilitate this process.

What Is Traded On The Share Market?

There are four categories of financial instruments that are
traded on the stock exchange. These include:

1. Shares

A share represents a unit of equity ownership in a

company. Shareholders are entitled to any profits that
the company may earn in the form of dividends. They
are also the bearers of any losses that the company
may face.
2. Bonds

To undertake long term and profitable projects, a

company requires substantial capital. One way to raise
capital is to issue bonds to the public. These bonds
represent a “loan” taken by the company. The
bondholders become the creditors of the company and
receive timely interest payments in the form of
coupons. From the perspective of the bondholders,
these bonds act as fixed income instruments, where
they receive interest on their investment as well as
their invested amount at the end of the prescribed
period.

3. Mutual Funds

Mutual funds are professionally managed funds that

pool the money of numerous investors and invest the
collective capital into various financial securities. You
can find mutual funds for a variety of financial
instruments like equity, debt, or hybrid funds, to
name a few.

Each mutual fund scheme issues units that are of a

certain value similar to a share. When you invest in
 such funds, you become a unit-holder in that mutual
fund scheme. When instruments that are part of that
mutual fund scheme earn revenue over time, the unit-
holder receives that revenue reflected as the net asset
value of the fund or in the form of dividend payouts.

4. Derivatives

A derivative is a security that derives its value from an

underlying security. This can have a wide variety such
as shares, bonds, currency, commodities and more!
The buyers and sellers of derivatives have opposing
expectations of the price of an asset, and hence, enter
into a “betting contract” with regards to its future
price.

Stock exchange

According to the Securities Contracts (Regulations) Act of

1956, a stock exchange is ‘an association, organisation or
body of individuals, whether incorporated or not, established
for the purpose of assisting, regulating and controlling
business in buying, selling and dealing in securities’.

Functions and Services of Stock Exchange:

(a) Ready market for securities;

(b) Evaluation of securities;

(c) Convincing place for transfer of ownership of securities;

(d) Safeguards for investors and encouragement of savings;

(e) Flow of capital into industry;

Bombay Stock Exchange (BSE)

BSE Limited, also known as the Bombay Stock

Exchange (BSE), is an Indian stock exchange located
on Dalal Street in Mumbai. Established in 1875 by cotton
merchant Premchand Roychand, a Jain businessman, it
is the oldest stock exchange in Asia, and also the tenth
oldest in the world. The BSE is the 8th largest stock
exchange with an overall market capitalisation of more
than ₹276.713 lakh crore, as of January 2022
National Stock Exchange (NSE)
National Stock Exchange of India Limited (NSE) is the
leading stock exchange of India, located
in Mumbai, Maharashtra. NSE was established in 1992 as
the first dematerialized electronic exchange in the country.
NSE was the first exchange in the country to provide a
modern, fully automated screen-based electronic trading
system.

National Stock Exchange has a total market

capitalization of more than US$3.4 trillion, making it the
world's 10th-largest stock exchange as of August 2021.
NSE's flagship index, the NIFTY 50, a 50 stock index is
used extensively by investors in India and around the
world as a barometer of the Indian capital market.
The NIFTY 50 index was launched in 1996 by NSE

SEBI
The Securities and Exchange Board of India was
constituted as a non-statutory body on April 12, 1988
through a resolution of the Government of India.
The Securities and Exchange Board of India was
established as a statutory body in the year 1992 and the
provisions of the Securities and Exchange Board of India
Act, 1992 (15 of 1992) came into force on January 30,
1992.

 SEBI is primarily set up to protect the interests of

investors in the securities market.

 It promotes the development of the securities market

and regulates the business.

 SEBI provides a platform for stockbrokers, sub-

brokers, portfolio managers, investment advisers, share
transfer agents, bankers, merchant bankers, trustees
of trust deeds, registrars, underwriters, and other
associated people to register and regulate work.
 It regulates the operations of depositories, participants,
custodians of securities, foreign portfolio investors, and
credit rating agencies.

 It prohibits insider trading, i.e. fraudulent and unfair

trade practices related to the securities market.

 It ensures that investors are educated on the

intermediaries of securities markets.

 It monitors substantial acquisitions of shares and take-

over of companies.

 SEBI takes care of research and development to ensure

the securities market is efficient at all times.
 Economic Curve
Kuznets Curve

It shows the relationship between economic growth and inequality. It is inverted U shaped meaning that
as initially economic growth leads to greater inequality, followed later by the reduction of inequality.

Kuznets Curve is used to demonstrate the hypothesis that economic growth initially leads to greater inequality,
followed later by the reduction of inequality. The idea was first proposed by American economist Simon Kuznets.

As economic growth comes from the creation of better products, it usually boosts the income of workers and investors
who participate in the first wave of innovation. The industrialisation of an agrarian economy is a common example.
This inequality, however, tends to be temporary as workers and investors who were initially left behind soon catch up
by helping offer either the same or better products. This improves their incomes.

Laffer Curve
The Laffer Curve states that if tax rates are increased above a certain level, then tax revenues can actually fall because
higher tax rates discourage people from working. The Curve was developed by economist Arthur Laffer to show the
relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate
Laffer's argument that sometimes cutting tax rates can increase total tax revenue.

Laffer Curve states that cutting taxes could, in theory, lead to higher tax revenues.
 It starts from the premise that if tax rates are 0% – then the government gets zero revenue.

 Equally, if tax rates are 100% – then the government would also get zero revenue – because there is no point in
working.

 If tax rates are very high, and then they are cut, it can create an incentive for business to expand and people to work
longer. This boost to economic growth will lead to higher tax revenues – higher income tax, corporation tax and VAT.

 The importance of the theory is that it provides an economic justification for the politically popular policy of cutting tax
rates.

Phillips Curve
The Phillips curve is an economic concept developed by A. W. Phillips. It states that inflation and unemployment
have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in turn
should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven
empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and
unemployment.
The Phillips curve states that inflation and unemployment have an inverse relationship. Higher inflation is associated
with lower unemployment and vice versa.3

The Phillips curve was a concept used to guide macroeconomic policy in the 20th century, but was called into question
by the stagflation of the 1970's.

Understanding the Phillips curve in light of consumer and worker expectations, shows that the relationship between
inflation and unemployment may not hold in the long run, or even potentially in the short run.

Lorenz Curve
The Lorenz curve is a way of showing the distribution of income (or wealth) within an economy. It was developed by
Max O. Lorenz in 1905 for representing wealth distribution.

The Lorenz curve shows the cumulative share of income from different sections of the population.

If there was perfect equality – if everyone had the same salary – the poorest 20% of the population would gain 20% of
the total income. The poorest 60% of the population would get 60% of the income.

The Lorenz Curve can be used to calculate the Gini coefficient – another measure of inequality.

Example of Lorenz Curve

Following is the example to understand the Lorenz curve with the help of a graph.

Let us consider an economy with the following population and income statistics:

And for the line of perfect equality, let us consider this table:

Let us now see how a graph for this data actually looks:
 As we can see, there are two lines in the graph of the Lorenz curve, the curved red line, and the straight black line.

The black line represents the fictional line called the line of equality i.e. the ideal graph when income or wealth is
equally distributed amongst the population.

The red curve, the Lorenz curve, which we have been discussing, represents the actual distribution of wealth among
the population.

Hence, we can say that the Lorenz curve is the graphical method of studying dispersion.

Lorenz Curve can be used to calculate Gini Coefficient.

The Lorenz curve is the Visual Indicator and

The Gini Coefficient is the Mathematical Indicator.

Uses of the Lorenz Curve

 It can be used to show the effectiveness of a government policy to help redistribute income. The impact of a particular
policy introduced can be shown with the help of the Lorenz curve, how the curve has moved closer to the perfect
equality line post-implementation of that policy.

 It is one of the simplest representations of inequality.

 It shows the distribution of wealth of a country among different percentages of the population with the help of a graph
which helps many businesses in establishing their target bases.

 It helps in business modeling.

 It can be used majorly while taking specific measures to develop the weaker sections in the economy.

Gini Coefficient
The Gini-coefficient is a statistical measure of inequality that describes how equal or unequal income or wealth is
distributed among the population of a country. It was developed by the Italian statistician Corrado Gini in 1912. The
coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect
inequality. Values over 1 are theoretically possible due to negative income or wealth.
Engel curve

It displays how household expenditure on a particular good or service varies with change in
household income.

Eg. As income of a household increases its expenditure of food as a percentage declines. However, its
expenditure on status goods increases.
The Engel curve describes how the spending on a certain good varies with household income. The shape of an Engel
curve is impacted by demographic variables, such as age, gender, and educational level, as well as other consumer
characteristics.

The Engel curve also varies for different types of goods. With income level as the x-axis and expenditures as the y-axis,
the Engel curves show upward slopes for normal goods, which have a positive income elasticity of demand. Inferior
goods, with negative income elasticity, assume negative slopes for their Engel curves. In the case of food, the Engel
curve is concave downward with a positive but decreasing slope.
Wage Curve
The wage curve is a graphical representation of unemployment levels and wages when presented in local terms or for a
specific region. It is seen that there is a negative relationship between the levels of unemployment and wages.

Wage curve, in simple terms, summarises the fact that a worker who is already employed in an area where the
unemployment rate is high earns far less compared to an area or a region in the country where there are fewer jobs
available. Labour supply is a function of wage rate. The higher the wage rate offered, the more is the supply of labour
evident.

This happens because it gives an individual the incentive to work for some extra hours if the need ar ises. Under
normal circumstances, a labourer for a specific task gets Rs 100/hr. This is the wage rate at a time when there is no
shortage of work and the workforce is available even for working some extra hours. Let’s assume a scenario where
there are not many jobs in the labour market.

The unemployment rate is high, which means that lot of people who want to work are underemployed. In this situation
the prevailing wage rate would be much less than what a person earns under normal circumstances, which is Rs
100/hr.
 ENVIRONMENTAL KUZNET’S CURVE

Shows the relationship between economic progress and environmental degradation through time as an
economy progresses. As countries develop initiallly, pollution increases, but later, with further
development pollution begins to come down. Thus, it is an inverted U-shaped curve.

Shows the relationship between economic progress and environmental degradation through time as an
economy progresses. As countries develop initiallly, pollution increases, but later, with further
development pollution begins to come down. Thus, it is an inverted U-shaped curve.

Law of demand
The law of demand states that a higher price leads to a lower quantity demanded and that a
lower price leads to a higher quantity demanded.
The law of demand states that the quantity purchased varies inversely with price. In other words, the
higher the price, the lower the quantity demanded.