INTERNATIONAL FINANCE

FIXED EXCHANGE SYSTEM

Currency fluctuate within narrow
boundaries
Less concerns about depreciation and
appreciation
Attracts more funds
Disadvantage: Macro economic problems
becomes contagious
FLOATING EXCHANGE SYSTEM
Macro Economic problems not contagious.
Central Bank is no required to constantly
maintain the exchange rate.
Investors would invest in country having
the highest interest rates
Disadvantages: Reduced competition for
domestic consumers.
PEGGED EXCHANGE SYTEM
To achieve stability.
Home currencys value is fixed in terms of that currency.
Usually dollar.
Attraction of foreign investments
Weak economic conditions may raise the
apprehensions.
Investors withdraw their investments.
Exchange of local currencies for dollar puts further
downward pressure.
Intervention by the central bank may not help
Investments are sold.
MEXICAN PESO CRISIS
Pegged exchange system in 1994.
Frequent intervention by the central bank
Limiting the depreciation of peso was to contain
inflation.
Speculators feared that the value of peso is
artificially maintained very high.
This put even more downward pressure on peso
Devaluation of peso by the central bank.
Peso was allowed to float freely, which lead to
further decline.
Central bank increased the interest rates.
CURRENCY BOARDS
Another system of pegging the value
The board must maintain the currency
reserves for all the currency that it has
printed.
Currency board for a longer period, raises
the confidence. However Government
needs to convince the investors.
Currency boards and interest rates
Exchange rate movements
INTERNATIONAL ARBITRAGE
Locational :
Differences in the exchange rates. Capitalising
on the disrepencies
Bid/Ask spread makes the difference
Realignment of forces
Triangular:
Cross exchange rates
Covered Interest:
Taking advantage of interest rate differentials
INLFATION
Not to be equated with high prices.
Coverage keeps increasing
There is no absolute rate
Individual prices are under constant adjustment
No predetermined set of causes and effects
Expectations of further rise. Tendency of the
suppliers
Alteration of asset preferences
Inequality of incomes
Contd
Oligopolistic tendencies
Strong trade unions
Demand elasticities
Increase in supply of money
Erosion of capital formation
Balance of payments problem
Hidden tax
MONETARY POLICY
Instruements
Repo Rate
CRR
Open Market Operations
Limitations:
Supply side bottlenecks are not taken care
of
Marginal efficiency of capital is important
Contd
Kashinath travelled 40 km to come to
mandi at Nasik. He sold 1,000
cauliflowers for Rs 750, considerably less
than the price yesterday. Mandi charges
aside, there also a 7% commission to be
paid to the agent who facilitated the
auction of vegetables.
FDI IN RETAIL-A SOLUTION FOR
FOOD PROBLEM
Underinvestment in logistics.
Discussion paper by the department of
industrial policy and promotion (DIPP)
100% FDI in cold in cold chains
We cannot depend on a system dominated
by middlemen
Bharti Walmart, ITC e choupal
FISCAL POLICY
Policy related to public revenue and expenditure
Problems:
Burgeoning non plan expenditure
Tax evasion and avoidance
Dependence on indirect taxes
FRBM Act 2004
(i) Misgivings about revenue deficit
(ii) Low levels of capital expenditure
(iii) Neglect of equity and economic growth
(iv) Flawed assumptions of the act