GDP Deflator GDP measured in nominal terms expresses the value of goods and services using the current level of prices, however to compare GDP (of different years) one needs the measure of Real GDP which uses constant base-year prices to value the goods and services produced in any year. The GDP deflator for a particular year, calculated as (Nominal GDP/Real GDP)×100, reflects the average prices of all goods and services produced in the economy for that year. The GDP deflator is similar to the consumer price index in that it measures inflation; or the cost of living at a particular period of time. However, CPI measures a fixed basket of goods and services while the GDP deflator takes into account a much broader variety of goods and services, especially new ones that are introduced into the economy. Further, technically the GDP deflator gives a measure of inflation for all goods produced domestically (CPI may include goods produced abroad but entering the domestic consumers’ basket).

Hedger A trader who enters into a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or who purchases or sells futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).

Hedger A trader who enters into a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or who purchases or sells futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).
I

IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. The foreign issuing company must have pre‐issue paid‐up capital and free reserves of at least US$ 50 million and a minimum average market capitalization (during the last 3 years) in its parent country of at least US$ 100 million; a continuous trading record or history on a stock exchange in its parent country for at least three immediately preceding years; a track record of distributable profits for at least three out of immediately preceding five years. In every issue of IDR—(i) At least 50% of the IDRs issued shall be subscribed to by QIBs;(ii) The balance 50% shall be available for subscription by non‐institutional entities.

IIP  Index of Industrial Production is an abstract number, the magnitude of which represents the status of production in the industrial sector for a given period of time as compared to a reference period of time It is a statistical device which enables us to arrive at a single representative figure to measure the general level of industrial activity in the economy.

Inflation A persistent tendency for prices and money wages to increase. Inflation is measured by the proportional changes over time in some appropriate index, commonly a consumer price index, or a GDP deflator. Because of changes in the type and quality of goods available, measures of inflation are probably not reliable to closer than a margin of 1 or 2 per cent a year, but if prices rise faster than this there is no doubt that inflation exists. Economists have attempted to distinguish cost and demand inflation. Cost inflation is started by an increase in some elements of costs, for example the oil price explosion of 1973-4. Demand inflation is due to too much aggregate demand. Once started, inflation tends to persist through an inflationary spiral, in which various prices and wage rates rise because others have risen. The inflation tax is the real cost to the holders of money due to its loss of real purchasing power during inflation. Hyperinflation is extremely rapid inflation, in which prices increase so fast that money largely loses its convenience as a medium of exchange.

Interest Rate  is the amount of money in percent that a borrower pays to borrow money.  For example, if a Rs.1,00,000 loan has a 5% interest rate, the borrower will have to pay RS.5,000 each year until the money is paid back.

Examples:

INR-MIBOR (Mumbai Inter Bank Offer Rate): Pay simple Fixed Rate against receipt of overnight

Floating Rate for tenures up to (and including) one year. Pay simple semi-annual Fixed Rate against receipt of overnight Floating Rate for tenures longer than one year.

INR-MITOR (Mumbai Inter Bank Tom(orrow) Offer Rate): Pay simple Fixed Rate against receipt of overnight Floating Rate for tenures up to (and including) one year. Pay simple semi-annual Fixed Rate against receipt of overnight Floating Rate for tenures longer than 1 year.

INR-MIFOR (Mumbai Inter Bank Forward Offered Rate): Pay annual Fixed Rate against receipt of three month Floating Rate for tenures up to (and including) one year. Pay semi-annual Fixed Rate against receipt of six month Floating Rate for tenures longer than one year.

INR-MIOIS (Mumbai Inter Bank Overnight Indexed Swap): Pay annual Fixed Rate against receipt of three month Floating Rate for tenures up to (and including) one year. Pay semi-annual Fixed Rate against receipt of six month Floating Rate for tenures longer than one year.

INR-BMK (Indian Government securities benchmark rate): Pay annual Fixed Rate against receipt of annualized Floating Rate for all tenures.

INR-CMT  (Indian Constant Maturity Treasury rate): Pay annual Fixed Rate against receipt of annualized Floating Rate for all tenures.

OIS (Overnight   Indexed Swap): Overnight Indexed Swaps are benchmarked typically against FIMMDA-NSE MIBOR rates.

Investment Bank Investment banks provide financial services for governments, companies or extremely rich individuals. They differ from commercial banks where you have your savings or your mortgage.

Leveraging Leveraging, or gearing, means using debt to supplement investment. The more one borrows on top of the funds (or equity) one already has, the more highly leveraged one becomes. Leveraging can maximise both gains and losses. Deleveraging means reducing the amount of borrowing.

LIBOR  London Interbank Offered Rate is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year. Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K.

Limited liability Confines an investor's loss in a business to the amount of capital they invested. If a person invests $100,000 in a company and it goes bankrupt, the investor will lose only his/her investment and not more.

Margin The amount of money or collateral deposited by a customer with his broker, by a broker with a clearing member, or by a clearing member with a clearing organization. The margin is not partial payment on a purchase.  (1) Initial margin is the amount of margin required by the broker when a futures position is opened; (2) Maintenance margin is an amount that must be maintained on deposit at all times. If the equity in a customer's account drops to or below the level of maintenance margin because of adverse price movement, the broker must issue a margin call to restore the customer's equity to the initial level. Exchanges specify levels of initial margin and maintenance margin for each futures contract, but futures commission merchants may require their customers to post margin at higher levels than those specified by the exchange.

Mark-to-market Recording the value of an asset on a daily basis according to current market prices. So for a futures contract, what it would be worth if realised today rather than at the specified future date. Also marked-to-market.

MIBOR  Mumbai Interbank Bid-Offer rate is equivalent to daily call rate; it is the overnight market determined benchmark rate at which funds can be borrowed. FIMMDA-NSE MIBID/MIBOR is jointly disseminated by FIMMDA as well as NSEIL The MIBID/MIBOR rate is used as a bench mark rate for majority of deals struck for Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits.

Monetary Aggregates

Monetary aggregates measure the amount of money circulating in an economy. Statistically, they are items in the balance sheet of the banking system. In the balance sheet the liabilities items are ordered, starting with very narrow definitions of money (such as notes and coin) and gradually widening through various types of bank accounts (e.g. term deposits) to very board items which include sophisticated products like financial derivatives. The Monetary aggreagates or Ms usually range from M0 (narrowest) to M4(broadest), where narrow money measures cover highly liquid forms of money (money as a means of exchange) while broad money includes the less liquid forms (money as a store of value).

Monetary Aggregates (RBI) Reserve money or the monetary base is a measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. RM is supplied by the RBI and is expanded when the central bank either lends to the government, or buys foreign exchange thus adding to reserves. Part of RM is held by the public as Currency with the Public. Commercial banks hold RM mostly in the form of eposits with RBI (and a small amount as cash in hand). M1 denotes money that is highly liquid or most readily usable for settling transactions. Reserve money (M0) induces broad money (M3) through the money multiplier: RM gets incorporated into the financial system either as currency with the public or as additional cash with banks. As per norms of  fractional reserve banking the surplus cash (over and above the reserve requirement) is lent out by banks to the public, who, in turn, retain a part of this in currency and deposit the rest with banks, which gets further lent and re-deposited, and so on. The end-result is that every unit of base money or RM generates multiple units of broad money through successive rounds of deposit-cum-credit creation; M3 represents the effective liquidity or purchasing power available in the system. M3 is determined by the quantum of RM, the proportion in which the public distributes its money holding between currency and bank deposits and the extent of bank reserves relative to deposits. The money multiplier is the additional/incremental supply of money that is brought into the system if reserve money is increased by 1 unit (or vice versa).

(Reserve Money) M0 = Currency in Circulation + Bankers' Deposits with the RBI + 'Other' Deposits with the RBI

(Narrow Money) M1 = Currency with the Public + Demand Deposits with the Banking System
+ 'Other' Deposits with the RBI

= Currency with the Public + Current Deposits with the Banking System + Demand Liabilities Portion of Savings Deposits with the Banking System + 'Other' Deposits with the RBI

M2 = M1 + Time Liabilities Portion of Savings Deposits with the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a contractual maturity of up to and including one year with the Banking

System (excluding CDs) = Currency with the Public + Current Deposits with the Banking System + Savings Deposits with the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a contractual maturity up to and including one year with the Banking System (excluding CDs) + 'Other' Deposits with the RBI

(Broad Money) M3 = M2 + Term Deposits of residents with a contractual maturity of over one year with the Banking System + Call/Term borrowings from 'Non-depository' Financial Corporations by the Banking System
= Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).

M4 = M3 + All deposits with post office savings banks (excluding National Savings Certificates).

Note: Money supply indicates holding of money balances with the public in which suppliers of money namely, RBI, other banks and the government are not included. Thus government deposits with RBI or other banks, inter-bank deposits and cash reserves of banks with RBI are not included in monetary aggregates. Demand and Time deposits of banks are included after netting out inter-bank holdings and government deposits.

For More details click on:

http://www.rbi.org.in/scripts/PublicationsView.aspx?id=9455

Monetary Policy Monetary policy uses a variety of tools to control money supply and interest, to influence outcomes relating to economic growth, inflation, exchange rates and unemployment.

Monetary Policy instruments include announcement of key policy rates, open market operations (OMO) and through fractional deposit lending or changes in the reserve requirements.

Monetary policy is referred to as being either an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supplyor raises the interest rate. Expansionary policy is traditionally used to combat unemployment or create further output expansion, while contractionary policy involves raising interest rates in order to combat inflation. Further, monetary policies are described as — accommodative (or dovish), if the interest rate set by the central monetary authority is intended to create economic growth; tight (or hawkish) if intended to reduce inflation or neutral, if it is intended to maintain status quo.

Impossible trinity: in the context of Monetary Policy the impossible trinity is referred to as a co-existence of  Open capital account, Pegged currency regime, Independent monetary policy.

A country with an open capital account cannot expect to have an independent monetary policy if it runs a pegged exchange rate. Pegging the exchange rate induces a loss of monetary policy autonomy.

Monetized Deficit (RBI) Measures the level of support the RBI provides to the Centre's borrowing program.

Money Markets Markets dealing in borrowing and lending on a short-term basis.

Mortgage-backed Securities These are securities made up of mortgage debt or a collection of mortgages. Banks repackage debt from a number of mortgages which can be traded. Selling mortgages off frees up funds to lend to more homeowners.

MSS Market Stabilisation Scheme of RBI involves the sale/auction of instruments (Government securities/ bonds) to curb the excess liquidity in the system created due to the consistent dollar inflows into the foreign exchange market. 

MWYC  The Marketwide Yield Curve would show the average yield (YTM) for liquid Indian Government bonds which are regularly traded in the secondary market.

N

Nationalisation The act of bringing an industry or assets like land and property under state control.

Negative Equity  Refers to a situation in which, say, the value of one’s house is below the amount of the mortgage that still has to be paid off.

Open Interest The total number of futures contracts long or short in a delivery month or market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery.

Option A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (excercise date). Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset. In terms of speculation, option buyers and writers have conflicting views regarding the outlook on the performance of an underlying security.

Over-the-Counter (OTC) The trading of commodities, contracts, or other instruments not listed on any exchange. OTC transactions can occur electronically or over the telephone.