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Money and Banking in One Shot | Class 12th Commerce | CUET Crash Course

Commerce Wallah by PW・2 minutes read

The text discusses the importance of money supply, banking functions, and key concepts like SLR and demand deposits. It emphasizes the role of RBI in controlling inflation through tools like Repo Rate and Open Market Operations, highlighting the impact on the economy.

Insights

  • The text introduces a new unit of Mitra Economics, focusing on Money and Banking.
  • The challenges of the barter system, like the double coincidence of wants, are highlighted.
  • Commercial banks create money by accepting deposits and giving loans.
  • RBI plays a crucial role in controlling inflation through monetary policies.

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Recent questions

  • What is the primary function of money?

    Medium of exchange and measure of value

  • How do commercial banks create money?

    Through loans and demand deposits

  • What is the role of the Reserve Bank of India (RBI)?

    Controls money supply and formulates policies

  • How does the RBI control inflation?

    By adjusting money supply and interest rates

  • What are the key functions of commercial banks?

    Accepting deposits and providing loans

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Summary

00:00

Money and Banking: Essential Concepts Explained

  • The text introduces a new unit of Mitra Economics, focusing on Money and Banking.
  • The chapters covered in the video include Money Supply, Central Commercial Bank, and the functions of banks.
  • The text delves into topics like SLR, reverse repo rate, and aims to enhance understanding.
  • Emphasis is placed on the importance of studying and practicing concepts for better comprehension.
  • The discussion starts with the basics of money, defining it as a medium of exchange.
  • It explores the evolution of money from barter systems to modern digital transactions.
  • The challenges of the barter system, like the double coincidence of wants, are highlighted.
  • The text explains the significance of money in simplifying transactions and determining value.
  • It contrasts the ease of storing and transferring money with the difficulties of goods.
  • Forms of money are detailed, distinguishing between fiat money and fiduciary money.

12:30

Trustful exchange of money and goods

  • Fight money is printed in Arabic on government orders
  • Trustful relationship between feet and P written example
  • Ram bought Samaj from Shyam for ₹1 lakh
  • Ram has to pay ₹1 lakh to Shyam in the evening
  • Ram gives Shyam a cheque for ₹1 lakh
  • Ram assures Shyam he will have money in the evening
  • Ram's cheque bounces after a month
  • Ram tells Shyam he still has money
  • Ram and Shyam have a trustful relationship
  • Commodity value and money value explained, with examples

24:21

"Understanding Demand Deposits in Banking System"

  • Demand deposit refers to money deposited in a bank that can be withdrawn at any time.
  • Deposits made in demand deposit form allow individuals to demand their money back at any time.
  • NABARD, a financial institution, adopts money in the form of demand deposits.
  • Foreign central banks deposit money with RBI in the form of demand deposits.
  • The International Monetary Fund and World Bank also deposit money with RBI in demand deposit form.
  • RBI has to keep a minimum reserve of Rs. 200 crores, with Rs. 115 crores in gold and foreign security forms.
  • Money supply in the country involves the government, RBI, and commercial banks.
  • RBI prints notes and issues coins, while the Ministry of Finance issues coins.
  • The primary function of money is as a medium of exchange and a measure of value.
  • Money is accepted as a medium of exchange based on trust between parties.

36:43

Government and RBI Influence Money Creation Process

  • Government supplies money in the market
  • Government issues government orders
  • RBI prevails only if it gives orders
  • Commercial banks come to the bank if RBI prevails
  • Demand deposits are explained further
  • Demand deposits can be made through checks
  • Demand deposits can be withdrawn on demand
  • M1 includes demand deposits, other deposits, and deposits with RBI
  • RBI has to keep a reserve of Rs 200 crores
  • Commercial banks create money by accepting deposits and giving loans

49:01

Bank Deposits: Interest, Types, and Money Creation

  • Depositing money in the bank allows for interest to be earned, with an example of 8% interest being mentioned.
  • The difference between the interest rate on deposits and loans is highlighted, with a 2% spread being discussed.
  • The bank's objective is profit, which is achieved through the spread between interest rates on deposits and loans.
  • Different types of deposits are explained: demand deposit, fixed deposit, and savings deposit, each with specific features and restrictions.
  • Demand deposits allow for immediate withdrawal, fixed deposits have a fixed period with no interest, and savings deposits offer interest with limitations on transactions.
  • Savings deposits are commonly used by individuals, while demand deposits are favored by businesses for large transactions.
  • Check facilities are available for demand deposits, but not for fixed deposits, and savings deposits have transaction limits.
  • The money creation process by commercial banks is detailed, showing how loans create money through the deposit-reserve ratio.
  • An example is given where a deposit is made, and the bank uses a percentage reserve to lend out the remaining funds, creating money in the process.

01:00:44

"RBI Reserve Ratio Generates Market Money"

  • RBI fixes the reserve at 10% and the rest is used for loans
  • 10% of 1000 is ₹100, leaving ₹900 for loans
  • Loans are given in demand deposit form, not cash
  • Demand deposits are credited to accounts, not given in cash
  • Bank reserves 10% and loans the remaining amount
  • Initial deposit is the primary deposit, generating money in loans
  • Secondary deposits are derivative deposits from initial ones
  • Total demand deposit formula: Initial deposit divided by minimum reserve ratio
  • Initial deposit of ₹1000 can generate ₹3000 in demand deposits
  • RBI sets the reserve at 10% and loans the rest, creating money in the market

01:12:36

Role of RBI in Banking and Finance

  • RBI is the apex body that controls all banks and formulates policies.
  • It regulates and supervises all banks, ensuring they follow rules and prevent fraud.
  • RBI is responsible for issuing currency notes and has the sole authority to print them.
  • The notes issued by RBI are legal tender and accepted nationwide.
  • RBI does not have control over one rupee notes and coins, which are issued by the Ministry of Finance.
  • RBI controls the money supply through various policies like CRR, SLR, Repo Rate, Reverse Repo Rate, and Bank Rate.
  • RBI acts as a banker to the government, maintaining accounts, managing receipts and payments, and providing loans.
  • The government can resort to deficit financing through borrowing from RBI in case of financial shortages.
  • RBI acts as the lender of last resort for commercial banks, providing funds in times of crisis.
  • In situations where banks face losses and run out of funds, RBI steps in to prevent a financial collapse.

01:24:52

RBI's Authority and Tools in Banking

  • Banks will be last in a caste situation, with RBI being the ultimate authority.
  • If a bank is facing significant losses, customers and money are at risk.
  • The RBI ensures that any deductions from a bank are repaid to customers.
  • The Clearing House Function involves the exchange of foreign currency.
  • RBI controls credit to manage the money supply in the market.
  • Instruments like Repo Rate, Reverse Repo Rate, and Open Market Operations are used to control credit.
  • Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are key tools in controlling the money supply.
  • Inflation is controlled by adjusting the money supply to maintain stability.
  • Increasing reserves reduces the money supply in the market, curbing inflation.
  • Decreasing reserves increases the money supply, stimulating economic activity.

01:36:42

Impact of Reserve Reduction on Market Stability

  • To reduce the given reserve, the money supply will be reduced, affecting the market when people have more money.
  • Increased purchasing power due to more money in people's pockets will lead to flooding in the market.
  • If people's purchasing power increases, demand will rise, impacting prices.
  • The stability and depression cycle is influenced by price fluctuations.
  • Deflation will occur if prices increase, affecting the country's stability.
  • The Statutory Liquidity Ratio (SLR) requires banks to keep reserves in various forms.
  • Commercial banks keep reserves not deposited with the RBI, affecting money supply.
  • Inflation is controlled by reducing reserves, impacting loan availability and market supply.
  • Reduced purchasing power due to less money in the market will lead to decreased demand and lower prices.
  • Stability is crucial to avoid inflation and deflation issues, ensuring economic balance in the country.

01:49:03

"RBI Raises Repo Rate to Control Inflation"

  • Inflation is high, leading to increased demand for money from people.
  • RBI plans to increase the repo rate from 10% to 15% to control the situation.
  • This increase means higher interest rates on loans, reducing available money.
  • The reduced money supply in the market affects people's purchasing power.
  • Gradual inflation problems are addressed by controlling inflation and ensuring stability.
  • Repo rate is for short-term borrowing, while bank rate is for medium to long-term borrowing.
  • Reverse repo rate is the opposite of repo rate, indicating banks depositing money with RBI.
  • Banks earn interest on deposits with RBI, affecting the overall interest rates in the market.
  • Understanding the differences between repo rate, bank rate, and reverse repo rate is crucial.
  • The goal is to maintain stability by managing inflation, deflation, and overall economic conditions.

02:00:21

"Managing Inflation: RBI's Monetary Policy Strategies"

  • The text discusses the concept of inflation and its impact on the economy.
  • It explains how inflation occurs due to increased demand and money circulation.
  • The Reserve Bank of India (RBI) plays a crucial role in controlling inflation through monetary policies.
  • The text delves into the significance of repo rates and reverse repo rates in managing inflation.
  • It highlights the impact of changing interest rates on bank deposits and loans.
  • The text emphasizes the role of open market operations in regulating the money supply.
  • It explains how selling government securities can help reduce inflation by decreasing money circulation.
  • The text also touches upon the concept of deflation and how it can be controlled through similar monetary policies.
  • It discusses the importance of credit control in managing inflation and deflation.
  • The text concludes by introducing qualitative instruments like margin requirements in financial management.

02:12:12

Understanding Mortgage, Margin, and Economic Stability

  • The speaker discusses the concept of mortgage and selling assets to recover money.
  • Mention of pledging assets for obtaining money from the bank.
  • Reference to the value of Rs 10 lakh being mortgaged and the use of 2 lakhs from it.
  • Explanation of margin and its role in obtaining loans.
  • Clarification on margin retirement and its significance.
  • Discussion on the difference between the value of security and the loan debt.
  • Explanation of inflation and deflation, and their impact on the economy.
  • Reference to RBI's role in controlling inflation and managing loan limits.
  • Details on the impact of loan limits on money supply and purchasing power.
  • Emphasis on maintaining stability in the economy through proper financial management.

02:24:08

"Bank Reserves, Money Creation, and Control"

  • Reserves can be in two forms: with RBI or with commercial banks.
  • SLR refers to the reserves that commercial banks keep with themselves.
  • Hi Power Money includes reserves kept with RBI and cash reserves kept by commercial banks.
  • Bank money is the money created by commercial banks in the form of loans.
  • Commercial banks create money through demand deposits.
  • Commercial banks are required to maintain a percentage of demand deposits as reserves.
  • Operative Cash Reserves are cash reserves that commercial banks maintain for daily operations.
  • The Reserve Bank of India is the central bank of India.
  • Credit control involves managing the supply of money to increase or decrease it.
  • SLR and margin requirements impact the money supply in the market.

02:37:22

"Managing Credit and Inflation with RBI"

  • Bada diya 8 lakh instead of 2 lakh means 4 lakh
  • Loans give less money, reducing money supply in the market
  • Credit decrease leads to decrease in company's supply to the market
  • Open Market Operation is performed by RBI to control credit
  • Repo rate is crucial in Open Market Operation
  • Inflation control involves SLR, Repo Rate, and Reverse Repo Rate adjustments
  • Difference between repo rate and reverse repo rate is always 1%
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