Syndicate+Bank+Interview+Question+Bank

8/7/2019 Syndicate+Bank+Interview+Question+Bank

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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 forcustomers and to borrow and lend money. It is an institution for receiving, keeping, andlending 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 tocustomers' current accounts. Banks also enable customer payments via other paymentmethods such as telegraphic transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current account, accepting termdeposits and by issuing debt securities such as banknotes and bonds. Banks lend money


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by making advances to customers on current account, by making installment loans, andby investing in marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is consideredindispensable by most businesses, individuals and governments. Non-banks that provide

payment services such as remittance companies are not normally considered an adequatesubstitute for having a bank account.

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

What is Banking Business?

Banking Business means the business of receiving money on current or depositaccount, paying and collecting cheques drawn by or paid in by customers, the making ofadvances to customers, and includes such other business as the Authority may prescribefor the purposes of this Act.

What is Accounting for Bank Accounts?

Bank statements are accounting records produced by banks under the various accountingstandards of the world. Under GAAP and IFRS there are two kinds of accounts: debitand credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts areAssets 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 timeyou 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 creditedyour account when you deposit money and you debit when you withdraw it. If you havecash in your account you have a positive or credit balance and if you are overdrawn itwill 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 isa 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 whichshould have a negative balance.Below where bank transactions, balances, credits anddebits are discussed, they are done so from the viewpoint of the account holder which istraditionally what most people are used to seeing.


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What is SLR?

Every bank is required to maintain at the close of business every day, a minimumproportion 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 to40%. An increase in SLR also restrict the banks leverage position to pump more moneyinto the economy.

What is SLR ? (For Non Bankers)

SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates theminimum percentage of deposits that the bank has to maintain in form of gold, cash orother approved securities. Thus, we can say that it is ratio of cash and some otherapproved 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 thebanks. 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 toborrow money, it increases the repo rate; similarly, if it wants to make it cheaper forbanks 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 thebanks. 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 toborrow money, it increases the repo rate; similarly, if it wants to make it cheaper forbanks to borrow money, it reduces the repo rate.

Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected inthe 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. Thereare difference types of refinance that can be availed by banks and these are linked toBank Rate. Thus, banks can borrow at this rate only to the extent of their eligibility forrefinance.


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On the other hand, Repo is a money market instrument, which enables collateralizedshort 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 anagreement to repurchase at a predetermined date and rate. In the case of a repo, theforward 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 onthe security. In the money market, this transaction is nothing but collateralized lending asthe terms of the transaction are structured to compensate for the funds lent and the cost ofthe transaction is the repo rate. Thus, a bank can borrow under repo provided he has theextra 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 bankinterest rates. Bank interest rate depends on many other factors, out of that the major oneis inflation. Whenever you see an increase on inflation, there will be an increase ofinterest rate also.

How many types of banks there are?

Banks' activities can be divided into retail banking, dealing directly with individuals andsmall businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entities; private banking, providing wealthmanagement services to high net worth individuals and families; and investment banking,relating to activities on the financial markets. Most banks are profit-making, privateenterprises. 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 cashinterest rate. They generally provide liquidity to the banking system and act as the lenderof last resort in event of a crisis.

Type of Retail Banks

Commercial bank: the term used for a normal bank to distinguish it from aninvestment bank. After the Great Depression, the U.S. Congress required thatbanks only engage in banking activities, whereas investment banks were limitedto capital market activities. Since the two no longer have to be under separateownership, 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 largebusinesses.

Community Banks: locally operated financial institutions that empoweremployees to make local decisions to serve their customers and the partners

Community development banks: regulated banks that provide financial servicesand 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.


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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 sometimeseven 18th century. Their original objective was to provide easily accessiblesavings products to all strata of the population. In some countries, savings banks

were created on public initiative, while in others socially committed individualscreated 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 commercialbanks by their broadly decentralized distribution network, providing local andregional outreach and by their socially responsible approach to business andsociety.

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 capitalmarkets activities such as mergers and acquisitions.

Merchant banks were traditionally banks which engaged in trade finance. Themodern definition, however, refers to banks which provide capital to firms in theform of shares rather than loans. Unlike venture capital firms, they tend not toinvest in new companies.

What is Bank Crisis?

Banks are susceptible to many forms of risk which have triggered occasional systemiccrises. Risks include liquidity risk (the risk that many depositors will request withdrawalsbeyond available funds), credit risk (the risk that those who owe money to the bank willnot repay), and interest rate risk (the risk that the bank will become unprofitable if risinginterest 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 risksmaterialize for a banking sector as a whole. Prominent examples include the U.S. Savingsand Loan crisis in 1980s and early 1990s [10] the Japanese banking crisis during the1990s, the bank run that occurred during the Great Depression, and the recent liquidationby 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 hasoccurred on a global scale, affecting investment banks such as Lehman Brothers in theUSA and retail banks such as Northern Rock in the UK. In January 2009, several major


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UK banks such as Lloyds TSB and Barclays Bank, suffered severe falls in their Londonstock exchange share prices as a result of a drop in investor confidence of the true assetvalues 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 offbalance 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 orpayment at the customer's order. These claims on banks can act as money because theyare negotiable and/or repayable on demand, and hence valued at par and effectivelytransferable 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 payingagents for customers, and participate in inter-bank clearing and settlement systems tocollect, present, be presented with, and pay payment instruments. This enables banks toeconomize on reserves held for settlement of payments, since inward and outward

payments offset each other. It also enables payment flows between geographical areas tooffset, reducing the cost of settling payments between geographical areas.

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

4. Credit quality improvement -- banks lend money to ordinary commercial and personalborrowers (ordinary credit quality), but are high quality borrowers. The improvement


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comes from diversification of the bank's assets and the banks own capital which providesa buffer to absorb losses without defaulting on its own obligations. However, sincebanknotes and deposits are generally unsecured, if the bank gets into difficulty andpledges assets as security to try to get the funding it needs to continue to operate, this putsthe note holders and depositors in an economically subordinated position.

5. Maturity transformation -- banks borrow more on demand debt and short term debt, butprovide more long term loans. In other words; banks borrow short and lend long. Bankcan do this because they can aggregate issues (e.g. accepting deposits and issuingbanknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintainreserves of cash, invest in marketable securities that can be readily converted to cash ifneeded, and raise replacement funding as needed from various sources (e.g. wholesalecash markets and securities markets) because they have a high and more well knowncredit 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 Customersof all CBS branches of Bank through Tele Banking City Servers installed at 20 majorcities across India. By using this wonderful & convenient Technology which usesInteractive Voice Response system (IVR), you can have Anytime, Anywhere (24 * 7)access to your different Accounts. You can inquire about your Account balances and alsohave general information about banks 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 inthe 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 DepositRates (2) Domestic Term Deposit rates for Senior Citizens (3) NRE & FCNR Rates (4)Daily Forex rates (5) Banks various retail products (6) Detail of ATM Locations (7)Banks working hours & Holiday enquiry. (B) Account related Information - UsesCustomer Number & PIN For Authorisation (1) Account Balance Enquiry (2) Enquiryabout 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 ofcosts for its esteemed Customers. To avail the Tele Banking services, you need to submitduly filled-in Tele Banking form to your Branch. Kindly collect your secret PIN letterfrom 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 justmoving your fingers on your Telephone instrument.


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Q: 7:How I can use Tele Banking Services?Ans: Language Selection:- The Customer can interact with the TeleBanking system byselecting one of the four languages viz. 1. Hindi 2. English 3. Tamil 4. Bengali. Whenyou dial the nearest Citys TeleBanking Phone number, then after the recorded welcome

message, you need to select the language to interact with TeleBanking system. Next youneed to select either the option of 'Account Related Information' to access your accountsOr you can choose the General Information option. To Access the Account RelatedInformation, you must enter your Customer ID and the secret PIN (which is being issuedto you by the bank). Key-in the various numbers on your keypad, for the services of yourchoice as directed by the IVR System. During the Interaction session, you can Press/ dial9 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 toidentify 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 thisCustomer-ID. The Personal Identification Number (called PIN), is a four digit numbergenerated 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 andsent 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 bythe Bank which are sent through sealed PIN Mailers. When Customer uses the TeleBanking system first time, he is forced to change the PIN number to keep its secrecy. Hefurther has the option of changing the PIN number as and when required by him. Thisenhances 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 secretPIN, he needs to give written request to the concerned branch for re-issuance of PIN. Thebranch 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 customerto perform broad range of routine banking transactions without interacting with a humanteller.

Q: What are the types of ATMs?


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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 thetransaction 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 operatedjointly 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 willbe blocked for 24 hours, although the ATM Card will not be captured instead it getsejected from the card reader slot. After 24 hours the operations through the same card isallowed.

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. Thecardholder 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 banks own Networked ATM customer/cardholder can useATMs of other banks who are member of MITR/NFS/VISA. MITR Group have 5 otherBanks i.e. PNB, Indian Bank, Karur Vysya Bank, IndusInd Bank, UCO Bank.


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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 cashwithdrawal 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 transactionsthrough 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 brancheso 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. Paymentso 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. Mailso 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. Customizeo You can customize your various information like Change your passwords,

Add Nick names to your accounts, Change Date Format, Amount formatetc.


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Q 4. What is RTGS?

Ans. Real Time Gross Settlement System (RTGS) is a modern, robust, integratedpayment and settlement system. RTGS is a system whereby the Banks and FinancialInstitutions 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. Thisis R41 transaction and funds are transferred by debiting customers account to thedestination account of other participating bank directly without any manual intervention.For this purpose correct destination account number and IFSC code of the destinationbank / 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:2Are 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 arebeing taken to widen the coverage both in terms of banks and branches.

Q:3Whether 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 whereacross the country, as detailed in the list provided on our website.

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

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

Q:5How does the NEFT system operate?

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


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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 insix batches at 0900, 1100, 1200, 1300, 1500 and 1700 hours on weekdays and 0900, 1100and 1200 hours on Saturdays

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

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

Q:6How 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 availableon our website. The system also uses the state-of-the-art technology for thecommunication, security etc, and thereby offers better customer service.

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

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

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

A: Indian Financial System Code (IFSC) is an alpha numeric code designed to uniquelyidentify the bank-branches in India. This is 11 digit code with first 4 charactersrepresenting the banks code, the next character reserved as controlcharacter (Presently 0 appears in the fifth position) and remaining 6 characters to identifythe 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 orfinancial institution offers a wide array of face-to-face service to its customers.

ATM is a computerized telecommunications device that provides a financialinstitution's customers a method of financial transactions in a public space withoutthe need for a human clerk or bank teller. Most banks now have more ATMs thanbranches, and ATMs are providing a wider range of services to a wider range ofusers. For example in Hong Kong, most ATMs enable anyone to deposit cash to


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any customer of the bank's account by feeding in the notes and entering theaccount number to be credited. Also, most ATMs enable card holders from otherbanks to get their account balance and withdraw cash, even if the card is issued bya 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 containingother matter, are delivered to destinations around the world. This can be used todeposit 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 allowsits customers to perform transactions over the telephone. This normally includesbill payments for bills from major billers (e.g. for electricity).

Online banking is a term used for performing transactions, payments etc. overthe 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 aneconomy over a period of time. The term "inflation" once referred to increases in themoney supply (monetary inflation); however, economic debates about the relationshipbetween money supply and price levels have led to its primary use today in describingprice inflation. Inflation can also be described as a decline in the real value of moneyaloss of purchasing power in the medium of exchange which is also the monetary unit ofaccount. When the general price level rises, each unit of currency buys fewer goods andservices. A chief measure of price inflation is the inflation rate, which is the percentagechange in a price index over time.

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

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

Today, most economists favor a low steady rate of inflation. Low (as opposed to zero ornegative) inflation may reduce the severity of economic recessions by enabling the labormarket to adjust more quickly in a downturn, and reducing the risk that a liquidity trapprevents monetary policy from stabilizing the economy. The task of keeping the rate ofinflation low and stable is usually given to monetary authorities. Generally, thesemonetary authorities are the central banks that control the size of the money supply


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through the setting of interest rates, through open market operations, and through thesetting of banking reserve requirements.

Effects of Inflation

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

High or unpredictable inflation rates are regarded as harmful to an overall economy. Theyadd inefficiencies in the market, and make it difficult for companies to budget or planlong-term. Inflation can act as a drag on productivity as companies are forced to shiftresources away from products and services in order to focus on profit and losses fromcurrency inflation. Uncertainty about the future purchasing power of money discouragesinvestment and saving. And inflation can impose hidden tax increases, as inflatedearnings push taxpayers into higher income tax rates.

With high inflation, purchasing power is redistributed from those on fixed incomes suchas pensioners towards those with variable incomes whose earnings may better keep pacewith the inflation. This redistribution of purchasing power will also occur between

international trading partners. Where fixed exchange rates are imposed, rising inflation inone economy will cause its exports to become more expensive and affect the balance oftrade. There can also be negative impacts to trade from an increased instability incurrency exchange prices caused by unpredictable inflation.

* Cost-push inflation: Rising inflation can prompt employees to demand higher wages, tokeep up with consumer prices. Rising wages in turn can help fuel inflation. In the case ofcollective bargaining, wages will be set as a factor of price expectations, which will behigher 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 viablealternatives as a means of getting rid of excess cash before it is devalued, creatingshortages of the hoarded objects.

* Hyperinflation: if inflation gets totally out of control (in the upward direction), it cangrossly interfere with the normal workings of the economy, hurting its ability to supply.


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* Allocative efficiency: a change in the supply or demand for a good will normally causeits price to change, signaling to buyers and sellers that they should re-allocate resourcesin response to the new market conditions. But when prices are constantly changing due toinflation, genuine price signals get lost in the noise, so agents are slow to respond tothem. The result is a loss of allocative efficiency.

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

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

* Austrian School explanation of business cycles: According to the Austrian BusinessCycle Theory, inflation sets off the business cycle. Austrian economists hold this to bethe most damaging effect of inflation. According to Austrian theory, artificially lowinterest rates and the associated increase in the money supply lead to reckless, speculative borrowing, resulting in clusters of mal-investments, which eventually have to beliquidated as they become unsustainable.[20]

Some possibly positive effects of (moderate) inflation include:

* Labor Market Adjustments: Keynesians believe that nominal wages are slow to adjustdownwards. This can lead to prolonged disequilibrium and high unemployment in the

labor market. Since inflation would lower the real wage if nominal wages are keptconstant, Keynesian argue that some inflation is good for the economy, as it would allowlabor markets to reach equilibrium faster.

* Debt Relief: Debtors who have debts with a fixed nominal rate of interest will see areduction in the "real" interest rate as the inflation rate rises. The real interest on a loanis the nominal rate minus the inflation rate. (R=n-i) For example if you take a loan wherethe stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that youare paying for the loan is 3%. It would also hold true that if you had a loan at a fixedinterest rate of 6% and the inflation rate jumped to 20% you would have a real interestrate 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 statedinterest rate or by setting the interest at a variable rate.

* Room to maneuver: The primary tools for controlling the money supply are the abilityto set the discount rate, the rate at which banks can borrow from the central bank, andopen market operations which are the central bank's interventions into the bonds marketwith the aim of affecting the nominal interest rate. If an economy finds itself in arecession with already low, or even zero, nominal interest rates, then the bank cannot cut


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these rates further (since negative nominal interest rates are impossible) in order tostimulate the economy - this situation is known as a liquidity trap. A moderate level ofinflation tends to ensure that nominal interest rates stay sufficiently above zero so that ifthe need arises the bank can cut the nominal interest rate.

* Tobin effect: The Nobel prize winning economist James Tobin at one point had arguedthat a moderate level of inflation can increase investment in an economy leading to fastergrowth or at least higher steady state level of income. This is due to the fact that inflationlowers the return on monetary assets relative to real assets, such as physical capital. Toavoid 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 monetarymodel

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 centralbanksare tasked with keeping the federal funds lending rate at a low level, normally to atarget 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. Centralbanks such as the U.S. Federal Reserve can affect inflation to a significant extent throughsetting interest rates and through other operations. High interest rates and slow growth ofthe money supply are the traditional ways through which central banks fight or prevent

inflation, though they have different approaches. For instance, some follow asymmetrical inflation target while others only control inflation when it rises above atarget, 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 toreduce demand as well as by using monetary policy. Supply-side economists advocatefighting inflation by fixing the exchange rate between the currency and some referencecurrency such as gold. This would be a return to the gold standard. All of these policiesare 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 toanother single currency or to a basket of other currencies (or sometimes to anothermeasure of value, such as gold). A fixed exchange rate is usually used to stabilize thevalue of a currency, vis-a-vis the currency it is pegged to. It can also be used as a meansto control inflation. However, as the value of the reference currency rises and falls, so


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does the currency pegged to it. This essentially means that the inflation rate in the fixedexchange rate country is determined by the inflation rate of the country the currency ispegged to. In addition, a fixed exchange rate prevents a government from using domesticmonetary policy in order to achieve macroeconomic stability.

Under the Bretton Woods agreement, most countries around the world had currenciesthat were fixed to the US dollar. This limited inflation in those countries, but alsoexposed them to the danger of speculative attacks. After the Bretton Woods agreementbroke 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 fixedexchange rate as part of an attempt to control inflation. This policy of using a fixedexchange rate to control inflation was used in many countries in South America in thelater 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 exchangeare 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 theamount of specie per currency unit. The currency itself has no innate value, but isaccepted by traders because it can be redeemed for the equivalent specie. A U.S. silvercertificate, 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 goldstandard were used to protect citizens from hyperinflation and other abuses of monetarypolicy, as were seen in some countries during the Great Depression. However, they werenot without their problems and critics, and so were partially abandoned via theinternational adoption of the Bretton Woods System. Under this system all other majorcurrencies 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 toswitch to fiat money, backed only by the laws of the country. Austrian economistsstrongly favor a return to a 100 percent gold standard.

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

Wage and price controls

Another method attempted in the past have been wage and price controls ("incomespolicies"). Wage and price controls have been successful in wartime environments incombination 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


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Richard Nixon. More successful examples include the Prices and Incomes Accord inAustralia 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 beingfought. They often have perverse effects, due to the distorted signals they send to themarket. Artificially low prices often cause rationing and shortages and discourage futureinvestment, resulting in yet further shortages. The usual economic analysis is that anyproduct or service that is under-priced is over consumed. For example, if the official priceof bread is too low, there will be too little bread at official prices, and too littleinvestment in bread making by the market to satisfy future needs, thereby exacerbatingthe problem in the long term.

Temporary controls may complement a recession as a way to fight inflation: the controlsmake the recession more efficient as a way to fight inflation (reducing the need to

increase unemployment), while the recession prevents the kinds of distortions thatcontrols cause when demand is high. However, in general the advice of economists is notto impose price controls but to liberalize prices by assuming that the economy will adjustand abandon unprofitable economic activity. The lower activity will place fewer demandson whatever commodities were driving inflation, whether labor or resources, andinflation will fall with total economic output. This often produces a severe recession, asproductive capacity is reallocated and is thus often very unpopular with the people whoselivelihoods are destroyed (see creative destruction).

What is Gross Domestic Product (GDP)?

The gross domestic product (GDP) or gross domestic income (GDI) is one of themeasures of national income and output for a given country's economy. GDP can bedefined in three ways, all of which are conceptually identical. First, it is equal to the totalexpenditures for all final goods and services produced within the country in a stipulatedperiod of time (usually a 365-day year). Second, it is equal to the sum of the value addedat every stage of production (the intermediate stages) by all the industries within acountry, plus taxes less subsidies on products, in the period. Third, it is equal to the sumof the income generated by production in the country in the periodthat is,compensation of employees, taxes on production and imports less subsidies, and grossoperating surplus (or profits).

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

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

imports), or,GDP = C + I + G + (X M).


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"Gross" means that depreciation of capital stock is not subtracted out of GDP. If netinvestment (which is gross investment minus depreciation) is substituted for grossinvestment 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), andadding back in domestic area (the exports).

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

Private consumption is a central concern of welfare economics. The privateinvestment and trade portions of the economy are ultimately directed (inmainstream 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 beconsidered within a meaningful macroeconomic framework.

The India GDP is the culmination of all the differential factors that contributes to theeconomy of India. India GDP reflects a consolidated report of the performance of theIndian 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 theeffect of opening-up of Indian economy. This paradigm shift of Indian economy occurredin the wake of balance-of-payments crisis in the 1980s. The Government of India openedup Indian markets to facilitate entry of private investments into the Indian markets. Thischange 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 privatebusiness

What is Recession and How US slowdown hit Indian Economy?

Ans: In economics, the term recession generally describes the reduction of a country'sgross 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 thecountry, lasting more than a few months, normally visible in real GDP growth, realpersonal 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.


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An alternative, less accepted, definition of recession is a downward trend in the rate ofactual GDP growth as promoted by the business-cycle dating committee of the NationalBureau of Economic Research. That private organization defines a recession moreambiguously 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 asemployment, investment, and corporate profits. A severe or prolonged recession isreferred 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 partof the normal economic cycle. An economy typically expands for 6-10 years and tends togo 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 adecrease 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 onnegative 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 ofEconomic Analysis, but investors are a worried lot. The Indian stock markets alsocrashed due to a slowdown in the US economy.

The Sensex crashed by nearly 13 per cent in just two trading sessions in January. Themarkets bounced back after the US Fed cut interest rates. However, stock prices are nowat 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 orunstable incomes. Major banks have landed in trouble after people could not pay backloans The housing market soared on the back of easy availability of loans. The realtysector boomed but could not sustain the momentum for long, and it collapsed under thegargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting theUS economy on shaky ground. This, coupled with rising oil prices at $100 a barrel,slowed down the growth of the economy.


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How to fight recession

Tax cuts are the first step that a government fighting recessionary trends or a full-fledgedrecession 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 manufacturingand services sectors and to prop up the economy. The government also takes steps to helpthe 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 GreatDepression in the United was an economic slowdown, from 1930 to 1939. It was adecade of high unemployment, low profits, low prices of goods, and high poverty.

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

In 1937, the American economy unexpectedly fell, lasting through most of 1938.Production declined sharply, as did profits and employment. Unemployment jumpedfrom 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 controlinflation and sharp correction to overproduction of the previous decade. This wasfollowed 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 ofAmericans.

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 longestexpansion 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. The2001 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. Theeconomy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled astechnology stock prices crashed.

How US recession impact on India

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


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Indian companies have major outsourcing deals from the US. India's exports to the UShave also grown substantially over the years. The India economy is likely to lose between1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with bigtickets deals in the US would see their profit margins shrinking.

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

Between January 2001 and December 2002, the Dow Jones Industrial Average wentdown by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the recordhighs reached is taken, the DJIA was down 30 per cent in December 2002 from the highsit 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

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