I

What is exchange rate? How does it impact exports?

BEFORE GLOBAL CRISIS

China sold cheap goods to US consumers Dollars earned through exports, recycled back into US financial system This money eventually lent to indebted US consumers

AFTER GLOBAL CRISIS

DEVELOPED ECONOMIES US, JAPAN, EUROZONE Sluggish or stagnant growth Export oriented DEVELOPING ECONOMIES CHINA, BRAZIL, MEXICO, India Weaker currency : competitive advantage

DEVALUATION AS A POLICY WEAPON

DEVELOPED ECONOMIES EMARGING MARKETS esp China with huge forex reserve to allow their currencies to appreciate

Highly indebted western

nations devalue their currency through quantitative easing & want

INVERSE PROPORTINALITY TO CHANGE (BEGGAR THY NEIGHBOR)

USA PERSPECTIVE
EMERGING ECONOMIES Lagging behind: Consumption Employment Exports Massive injections of cash Cheaper dollar

Trump card against China

Strengthening of currencies

ACCUSATIONS AGAINS CHINA

Refused to let Yuan trade at its real value Subsidizing exports through artificial low interest rates Needs to get more of its growth from domestic consumption Beggar Thy Neighbor

CHINA S ARGUMENT
Appreciation to Yuan no solution to US troubles Other countries manipulating currencies Quantitative easing causing huge distortions in world economy Instability due to loss of employment Historical precedents: Plaza Accord in 1985 Nationalist Sentiments

STEPS AGAINST CHINA

Sept:legislation for countervailing duties on Chinese Imports Economic Violence Retaliatory capital controls Trade sanctions

CURRENCY MANIPULATION ACROSS THE GLOBE

Switzerland Japan Brazil Thailand Swiss franc Yen Real Baht

INDIA S CASE
STRONG APPRECIATION 12th oct: 44.15 to $ highest level since sep 2008 FIEO believes it can touch 42 within this fiscal

VIEWS ON CURRENCY WARS

FINANCE MINISTER India s approach would be to try and engage countries in negotiations and build up consensus through which the matter could be resolved RBI GOVERNOR hands off policy for the time being

RBI: POLICY STANCE

Jan 2007 May 2008 large scale purchases of foreign currency June 2008- July 2009 funds for financial stimulus ($42.33) through sales of forex holdings Aug 2009Ceasing operation in forex market Depreciation of rupee 3.12% Depreciation of rupee 7.13%

Appreciation of rupee 11.6%

Countries around the world are increasingly searching to practice diplomacy and war through their currencies
Will India have to join in ????

CHOICE ..
Losing competitiveness Trusting Draconian capital control Allowing economy to overheat

VIEWS REGARDING CAPITAL CONTROL

DY. GOVERNOR:SUBIR GOKARAN

FINANCE MINISTER We have not reached the stage where the panic button needs to be pressed. We can always take action when needed

Capital Inflows are emerging as a potential threat

PROBLEM ANALYSIS
Capita Inflow for FY 2007-08: $106 bn Capital inflow during last 12 months: $65-70 bn Current A/C deficit during last 12 months: $ 50 bn So far capital inflows manageable Risk if US fed adopts further Quantitative Easing: $ 100 bn

Don t wait for panic to strike

No room for complacency Praemonitus praemunitus Forewarned is forearmed

PORTFOLIO INFLOWS Continuous rise in Rupee Damage to export competitiveness Adverse effect on growth Volatility

RESISTANCE Link between inflation and excess liquidity Sterilized intervention Policy mix that differentiates between strategic & tactical investors

G20
Forum of finance ministers and central bank governors from 19 countries and EU Represents 60% of world s population 85% of total output Next meeting in Seoul in Nov.

G20 MEET AT GYEOGNJU

22nd Oct Agreed to shun competitive currency devaluations Move towards more market determined exchange rates No targets to reduce trade imbalances

WHAT IS THE SOLUTION .?

GRAND BARGAIN AT G20

US NEEDS
Jobs Restoration of Confidence Accommodative remedial action by foreign governments

CHINA NEEDS .
To show defiance of external pressure Lots of space to shift demand from ROW to China itself

US should
Invest in high-tech infrastructure and nontradeable services- the stimuls that will not leak away to low cost suppliers in other countries

BUT..!!
Debt is already so high

Further government borrowings withers rather than boosts business confidence

SO .

Get the Chinese to fund it(SPV)

FUTURE
Mr. Obama may lose his job USA may never regain its superpower status China will have the size and wealth of entire developed world today We all live in Global Republic of China