Power of Economics
Welcome to the 7th edition of the Finconomist - The Finsnap Newsletter!
We hope you all enjoyed reading the previous editions as much as we did making them! (If you missed any of them, you can always find them on our website!!)
This time, we bring to you something very relevant to today's scenario - the power of economics! So get ready for another ride across the Finsnap Ocean - a plethora of fun personal finance principles, terms as well as digital tips!
You must have heard people around you say “The economy is not doing well, prices are so high, the GDP is crashing” and so on. Ever wondered how these things affect you? Today’s edition of the Finconomist covers some basics of what economics is as well as some economic tools and phenomena that affect us in our daily lives.
An economy is an environment where all things related to money take place. Economics is the study of transactions and human behaviour relating to trading, making and using goods and services. It also includes investments. This study can be done through mathematics and other social sciences such as psychology, law and so on.
Now that we know that all these activities take place in an economy, let’s look at some economic concepts that are directly relevant to us Finsnappers:
Inflation : This means the rate at which prices increase due to the forces of demand and supply. Due to prices rising, the purchasing power of your money goes down. Purchasing power is the amount of goods and services you can afford at a time with a sum of money.
Mixed Economy : A mixed economy is one where there are balanced amounts of capitalism and government control. Capitalism exists when private persons and organizations trade at the prices they agree upon without government interference. Government control in the economy comes in the form of setting maximum retail prices on goods ( MRP) on minimum prices goods like wheat which benefit individuals such as farmers so that they can make a livelihood.India is an example of a mixed economy where we reap the benefits of having controlled capitalism.
RBI : The Reserve Bank of India controls policies that are followed by all the banks in India. It also issues currency notes and controls the Indian financial system.
SEBI : The Securities And Exchange Board of India mainly controls the rules and policies that are to be followed by stock exchanges and brokers in India.
Repo Rate : Repo rate is the interest rate at which the RBI buys government bonds from banks. RBI sells these bonds back to the banks at a fixed rate. Government bonds are debt investment options that help the government receive money from bond buyers.n return, buyers get interest.
Cash Reserve Ratio (CRR) : Banks are to keep a certain percentage of the total money deposited with them, in the RBI’s reserves. This is called the CRR.
So we know what these mean, but how do they affect our investments and buying?
When inflation is high, the value of your savings ( purchasing power ) goes down. To prevent this, you must increase the amount and value of your savings through investment.
A capitalist structure allows goods and service providers to make large margins of profit and thereby live comfortably. This increases competition among them to provide better quality to buyers, so our standard of consumption rises too. Government interference ensures that prices remain affordable through MRP which also provides people with lower income to have some means for a stable livelihood. Thus India follows a mixed economy structure to help control living costs.
The RBI acts as the ultimate authority of finance in India. (Financial babysitter)
The SEBI helps keep trading on the stock market lawful.
When the RBI increases the Repo rate, banks have to pay a higher interest rate to the RBI for buying their bonds. This reduces the money with banks, which in turn leads to less loans and advances given. Organizations that are listed on stock exchanges require these advances and loans to fund their operations frequently. Less of these mean lower share prices. Lowering prices lead to both the markets and the shareholders suffering losses.People also invest less with banks. The opposite of the same occurs when the RBI decreases the repo rate.
When the CRR increases, banks have less money with them and thus provide fewer advances. . Markets see share prices dropping and the value of investments by people go down.
There are several other economic concepts and phenomena that impact us, but these are some of the most direct and fundamental ones. We hope you now know a bit about the role that economics plays in our lives and are one step closer to financial mindfulness! P.S: Feel free to reach out to us if you want to talk about finance in a way that doesn’t put you to sleep. Or drop us a line saying hi! gofinsnapper@gmail.com
Until next time; Adios, Amigo! Team Finsnap
