Economics and Financial Markets
Core concepts
Monetary policy works through quantities (CRR, SLR, open market operations, refinance) and prices (repo, reverse repo, marginal standing facility, bank rate). A repo cut lowers the cost of short-term funds and, with a working transmission mechanism, pulls lending rates down and expands credit; a CRR hike withdraws liquidity and shrinks the money multiplier. Money stock is tracked in aggregates - reserve money (M0), narrow money (M1) and broad money (M3).
Markets divide into primary (new issues) and secondary (trading). Money market instruments mature within a year - call money, treasury bills, commercial paper, certificates of deposit - while capital market instruments are long term. Bond prices move inversely to yields: when market yields rise, the price of an existing fixed-coupon bond falls.
Exchange rates are quoted direct or indirect, spot or forward; a forward premium reflects the interest differential under interest rate parity. Currency appreciation helps importers and hurts exporters.
Traps
Questions routinely ask what happens to bond prices when the central bank raises rates - the answer is always "fall". Another trap is confusing CRR (cash parked with the central bank, earning no interest) with SLR (liquid assets held by the bank itself). Nominal versus real GDP, and demand-pull versus cost-push inflation, are frequent discriminators.
Rule of thumb
Approximate Fisher equation: nominal rate ≈ real rate + expected inflation. A bond with an 8% coupon (₹80) bought at ₹950 on ₹1,000 face value yields 80/950 = 8.42% currently - above the coupon, because it was bought at a discount.