Tuesday, November 1, 2011

Deregulation on deposit rates and ISLAMIC BANKING CONCEPT

Since last year RBI is consistently increasing Repo Rate, 13 times in just one & half year.
Why ????
TO BRING DEMAND CURVE……….
That what I have listened from the various business news channels .
One of the banker during press conference told that people of India are spending more that’s why RBI is hiking repo rate
The concept of bringing demand curve has been actually used for controlling INFLATION, as we all know that the inflation has crossed double digit ( WPI is followed in India not CPI, if CPI will be followed then the inflation can become BLOODCRY for India ).

The real effect of Repo Rate in simple language.

When RBI hikes repo rate that means it is taking more & more money from the market and keep it with itself, which means the money flowing in the market will become less & thus purchasing power of the consumer will become less & hence the demand. If demand is decreased then the inflation will ultimately go down .
( we haven’t seen much control in inflation yet )

But my logic got another explanation, when RBI deregulated the saving account deposit rates .

When I thought deep on deregulation of deposit rates, I came to a conclusion that RBI is actually increasing money supply in the market, not from its account but from public pockets .

Saving power of Indians is the highest in the world but most of the people don’t keep their money in bank accounts. They generally prefer to keep it in safe drawer, so by deregulating the saving account deposit rates, RBI gave a golden opportunity to banks to persuade more and more customers for keeping money in banks.

Now
The depositors will soon start depositing money in bank accounts, because of attractive rate
( Return)without any RISK, as inflation is increasing day by day, to meet that they have to keep their idle money in safe haven, so that the purchasing power of that money could not be highly decreased.
&
They Will keep their money for longer period.

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ISLAMonomics
This deregulation on deposit rates paved the way for ISLAMIC BANKING CONCEPT in India

Since deregulation gives the power to bank to set any rate of interest on deposits in saving bank accounts, therefor by utilizing this power, the banks can start a new set of saving accounts which wil give ZERO % interest i.e. No interest, which muslim people prefer the most (because in islam receiving or paying interest on money is strictly prohibited, ‘HARAM’ )

This Islamic banking concept in deposits will bring lots and lots of money into banks ( the total working fund will increase but without paying any penny )

For example
If a person deposits Rs 1000 @ 0% A/c at time t1 and withdraw at time t2. The bank fund is increased by Rs 1000 for time t2-t1 without any interest cost.
For that time period (t2-t1), the bank can utilize that money & generate profit, but it does not have to share that profit with the depositers.
Now the question arises why the Muslim people will deposit into 0% A/c rather than their safe drawer ???

The answer of this question is that banks will provide all the modern technological facilities, like ATM, ONLINE BANKING, DEBIT CARD, MOBILE BANKING..... etc, to them for easy transactions.

RESERVE BANK OF INDIA IS ONE OF THE BEST CENTRAL BANK IN THE WORLD AND IT ALWAYS KEPT INDIA FINANCIALY RECESSION PROOF . WE ARE PROUD OF IT.

NOTES
RBI : Reserve Bank of India
WPI : Wholesale Price Index
CPI : Consumer Price Index
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This topic when i discussed with my friend SHADAB ANJUM, BA in ECONOMICS, he started cross questioning me and he acted as my biggest critic. but i managed to explain the money supply effect to him. You all know, satisfying any ECONOMICS GRADUATE is the toughest part.

Because of lack of time, i could not discuss with my another friend NADEEM KHAN, another ECONOMICS GRADUATE in my group, otherwise this topic would have become more interesting.

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