VRIDDHI RESEARCH

Research Report on Currency

SUBMITTED BY:

Mayank Sapra and Sanyam Dhang

Batch 2020- 2022

MASTERS OF BUSINESS ADMINISTRATION (MBA)

IBS Hyderabad
Shankarapalli, Hyderabad, Telangana- 501203

CURRENCY
Money is any good that is widely used and accepted as medium of exchange in transfer of
goods and services from one person to another

Examples – Bank notes, Gold coins ,Silver coins, bills ,cheques, Drafts, bitcoins.

Evolution Of Money

Money has been a part of human history for almost 3,000 years. From the origins of bartering
to modern money, this is how the system has evolved.

 It started in 9000 BC when Barter exchange was done . In that period people used to
exchange live stock and grains for whatever item that was deemed essential.

 1100 BC-600BC – china started using replicas of coins made from bronze , those
were in shape of miniature and had hole between the, so that can be tied together. But
coins were officially introduced by king of Lydia (turkey).gold coins were introduced
around 1250 Ad.

 1290AD till 1661 AD – Paper currency was introduced in 7th century in tang dynasty
and it was introduced because of shortage of copper .Then around 1290 Ad but world
came to know with the help of Marco polco venetican merchant about paper notes
.But first bank notes were officially printed in 1661 Ad in Sweden (Stockholm bancos
- bank of plamstutch ) .
  1946 Ad till 2008 Ad - john biggins a banker introduced first credit card – Flatbush
bank of Brooklyn to be used in two square radius. The bank reimbursed the merchant
and then obtained payment from the customer . In 1990 Ad the chip technology was
introduced. This allowed large amount of information to be stored. Paypal was
founded in California in 1998 Ad .Different type of cards were introduced .

One of the major difference between a RuPay card, An American Express Credit card, a
MasterCard and a Visa debit card is the operating cost of these cards. Since RuPay supports
transactions, only within India, the merchants and the banks pay less service charge to the
payment gateway as compared to other cards, which are all international payment systems.

The MasterCard, Visa and the American Express, which is also commonly known as Amex
are American companies. So, every time you use the cards of these companies, the data is
sent to the company’s server, which is located overseas for processing and verification. This
sometimes can increase the processing time. However, if you use a RuPay card, the data is
processed and verified in India, which reduces the processing time.

The banks that issue a MasterCard or a Visa card are obliged to pay a fee every quarter for
joining these foreign payment networks. But with RuPay cards, the bank need not pay any
fees to join the network, hence there are no processing or transaction fees involved for using
these cards.

In terms of security, the RuPay cards are much more secured than the Amex, Visa and Master
Card because its operation is limited only within India and therefore the data is shared
between only national gateways. In the case of the international cards, the data is processed
internationally and therefore the risk of phishing or data theft is higher.

 2008 Ad- first contactless cards in the UK were issued by Barclaycard in September
2007. Pay Pass trialed the world's first NFC-enabled phone, the Nokia 6131 NFC, in
New York in 2007. In March 2008, Eat became the first restaurant chain to adopt
contactless.
  2009 Ad- bitcoins entered the mainstream
market they were launched in 2009 . It was
found by Satoshi nakamto it is till now unclear
that satoshi nakamoto is name of group or a
single person. It is based on the block chain
technology which means a continuous growing
list of records which are called blocks and they
are secured using cryptography.

The main thing about crypto currency is that each block is completed and time
stamped , so blocks cannot be altered after that which makes them completely
secure.and cant be hacked . it does not need help of centralised system like bank to
perform its actions . Bitcoins are registered to an specific address . To create a bitcoin
we need to generate a public & private key . Public key helps in receiving bitcoin and
private key helps in sending and spending the bitcoin.

The types of bitcoin are :

a )Lite coin b) Dash c)Monero d)Bitcoin Cash

1) Lite coin – It is considered as Digital silver, it takes 2.5

minutes per block for processing and the cost of
transaction 0.17 usd.

2) Dash – it takes 3-4 minutes for block generation, and it is really high speed crypto
currency and costs 0.16 usd for generation.
 Types of Money

 Commodity Money- Money contain its intrinsic value of the commodity itself.
The critical thing to note about commodity money is that its value is defined by the
intrinsic value of the commodity itself. In other words, the commodity itself
becomes money. Examples of commodity money include gold coins, beads, shells,
spices, etc.
 Fiat Money-Value get from government and which requires all people and firms
within the country to accept as means of payment. commodity money, fiat money is
not backed by any physical commodity. Hence, the value of fiat money is derived
from the relationship between supply and demand. Ex- coins and notes

 Fiduciary money-This is not required as a legal tender, but it is not rejected as means
of payment or we cans say it as representative money .In this the issuer of fiduciary
money promises to exchange it back for a commodity or fiat money if requested by
the bearer. Examples of fiduciary money include cheques, banknotes, or drafts.

 Commercial Money-Commercial money can be described as claims against financial

institutions that can be used to purchase goods or services. commercial bank money is
debt generated by commercial banks that can be exchanged for “real” money or to
buy goods and services. EX- Bills of exchange, certificated of deposit- deposit money
in fixed deposit and financial institution and they will give this certificate as a
collateral for raising money from public.
 FUNCTION OF MONEY

 Medium of Exchange -Money, as a medium of exchange, means that it can be

used to make payments for all transactions of goods and services. It is the most
essential function of money. Money has the quality of general acceptability So, all
exchanges take place in terms of money. FOR EX- barter system.
 Measure of Value (Unit of Value):- Money as measure of value means that
money works as a common denomination, in which values of all goods and
services are expressed. Money helps in calculating relative prices of goods and
services. Due to this reason, it is regarded as a Unit of Account’. For instance,
‘Rupee’ is the unit of account in India, ‘Pound’ in England and so on
 Standard of Deferred Payments- Money as a standard of deferred payments
means that money acts as a ‘standard’ for payments, which are to be made in
future.. Money encourages such transactions and helps in capital formation and
economic development of the economy. for ex- purchasing in installments.

 Store of Value- Money as a store of value means that money can be used to
transfer purchasing power from present to future. Money is easily portable. So, it
is easy and economical to store money as its storage does not require much space.
Under barter system, it was difficult to use goods as a store of wealth due to
perishable nature of some goods and high cost of storage. Savings in terms of
money are much more secured than in terms of goods.

Contingent Function

 Distribution of national income- Money helps in optimum distribution of

national income among different factors of production (land, labor, capital and
enterprise). Total output of the country is jointly produced by these factors. So, the
output should be distributed among them. Money helps in distribution of the
national product in the form of rent, wage, interest and profit, which are expressed
in money terms.
 Maximisation of satisafaction- Money helps the consumers and producers in
maximizing their satisfaction. A consumer derives maximum satisfaction by
equating the price (expressed in terms of money) of each commodity with its
marginal utility (satisfaction). Similarly, a producer maximises his satisfaction
(profit) by equating the marginal productivity of a factor with price of such factor.
 Basis of credit- Credit creation by commercial banks was not possible until
money was introduced. Money as a store of value has encouraged savings by
people in the form of demand deposits in banks. Such demand deposits are used
by the commercial banks to create credit. ‘
General form to capital- Money increases the productivity of capital as it is the
most liquid asset and can be put to any use. Due to liquidity of money, capital can
be easily transferred from less productive uses to more productive uses.

OTHER FUNCTION

 Liquidity function-Money is the most liquid form through which we can

easily purchase and sale.
 Bearer of option- Person who hold it has purchasing power . Money
provides purchasing power in the hands of the person (bearer) holding it
and he has numerous options for its use.
 Guarantor of solvency- If an individual has enough money (more than
his liabilities), then he cannot be declared insolvent or bankrupt. Due to
this reason, individuals and firms keep large amount of money to meet
unexpected needs.
 CURRENCY

 Currency use is based on the concept of lex monetae; that a sovereign

state decides which currency it shall use
 Currency in the most specific use of the word refers to money and it is
anything that is used in any circumstances, as a medium of exchange.
Currency is a system of money (monetary units) in common use,
especially in a nation.
 The International Organization for Standardization has introduced a three-
letter system of codes (ISO 4217) to define currency. In general, the three-
letter code uses the ISO 3166-1 country code for the first two letters and
the first letter of the name of the currency. For example: The US dollar is
represented as USD – the US coming from the ISO 3166 country code and
the D for dollar.
 The Indian rupee is the official currency of the Republic of India and its
first series of coins with the rupee symbol was launched on 8 July 2011.
The Indian Rupee sign (INR) is the currency sign: INR for the Indian
Rupee, the official currency of India. Designed by D. Udaya Kumar, it
was presented to the public by the Government of India on 15 July 2010.
 MONEY VS CURRENCY

MONEY CURRENCY

Money can be a store of value and it is Currency cannot be a store of value

intangible in nature
Money refers to the actual value of goods or
services that are traded for
Money has intrinsic value
although it is always tangible in nature
Currency is just a medium that we keep in
our pockets to increase our purchasing
power and to make day to day payments in
our lives
Currency does not have intrinsic value

Value of any goods or services can be
derived in the form of money and it can be
quoted in a certain currency
Money can perform various functions and it
has it’s own importance in any economy
Value of any goods or services cannot be
derived with the help of a certain currency
as it is just a medium of exchange and not a
measure of value
Currency is any form of money that is
circulated in public

Intrinsic Value : the price that investor is ready to pay for the given commodity.

RBI (RESERVE BANK OF INDIA)

The Reserve Bank of India (RBI) is the central institution of the country that manages all
major monetary policies of India and handles the economic stability and growth.It was set up
by recommendation of Hiltong Young Commission in 1935 during British rule in accordance
with the provisions of the The Reserve Bank Act, 1934 . The headquarters are in Mumbai,
Maharastra. The first Governor was Sir Osborne A smith who handled the position from 1st
April 1935 to 30th June 1937.The first Indian governor was Sir Chintaman S Deshmukh was
appointed from 11th august 1943 till 30th June 1949.

Issue of currency

RBI determines the amount of currency that is to printed in India is decided as they calculate
the annual cash requirement every fiscal year. The RBI works on econometric model
(demand & supply the economic factors) to decide the number of currency notes for each
denomination.

There is one more variable known as Minimum reserve system applicable in India since
1956. According to this RBI has to maintain asset of atleast 200 crores all the times . Out of
200 crore , 115 crore should be in the form of gold and 85 cr should be foreign currencies .
The final number of currency notes to be printed for each denomination is decided on the
basis of projections of GDP growth rate , inflation and electronic transactions . Data
collection is done at all the 19 regional office of RBI
India has four currency note printing presses. The central government controls two of them -
at Nashik in Maharashtra and Dewas in Madhya Pradesh while an RBI subsidiary, the
Bharatiya Reserve Bank Note Mudra (P) Ltd controls the other two - at Mysuru in Karnataka
and Salboni in West Bengal.

MONETARY AUTHORITY

Repo rate: The rate at which RBI lends to commercial banks generally against securities.
Repo rate helps getting Commercial banks money at cheaper rates current repo rate is 4.00%.

Reverse repo rate: The Reverse Repo Rate is an important Monetary Policy tool used by the
Reserve Bank of India (RBI) to control liquidity and inflation in the economy. Current
Reverse Repo Rate: Under the Reverse Repo Rate, banks deposit excess funds with the RBI
and earn interest for it. Current rate is 3.35%.

CRR: Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves in cash or as deposits with the
central bank.current rate is 3%.

SLR: Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a
commercial bank has to maintain in the form of liquid cash, gold or other securities. It is the
reserve requirement that banks are expected to keep before offering credit to customers.
Current rate is 18.50%.

MANAGER OF FOREIGN EXCHANGE

FERA FEMA
Parliament of India passed the Foreign Parliament of India enacted Foreign Exchange
Exchange Regulation Act in 1973 Management Act (FEMA) on 29 December
1999 replacing FERA.

FERA came into force from January 1, FEMA came into force from June 2000.
1974.
FERA was repealed in 1998 by Vajpayee FEMA succeeded FERA
Government
FERA has 81 sections FEMA has 49 sections
FERA was conceived with the notion that
Foreign Exchange is a scarce resource.
FERA rules regulated foreign payments.
The objective of FERA was conservation
of Foreign Exchange
The definition of “Authorized Person”
was narrow.
Banking units did not come under the
definition of Authorized Person.
If there was a violation of FERA rules,
then it was considered as Criminal
offence.
A person accused of FERA violation was
not provided legal help.
There was no provision for Tribunal, the
appeals were sent to High Courts
For those guilty of violating FERA rules,
there was provision for direct
punishment.
If there was a need for transferring of
funds for external operations, then prior
approval of the Reserve Bank of India
(RBI) is required.
There was no provision for IT
REGULATOR OF FINANCIAL SYSTEM
FEMA was conceived with the notion that
Foreign Exchange is an asset.
FEMA focused on increasing the foreign
exchange reserves of India, focused on
promoting foreign payments and forein trade.
The objective of FEMA is Management of
Foreign Exchange
The definition of “Authorized Person” was
widened
Banking units came under the definition of
Authorized Person.
If there was a violation of FEMA rules, then it
is considered as civil offence
A person accused of FEMA violation will be
provided legal help.
There is provision for Special Director
(Appeals) and Special Tribunal
For those guilty of violating FEMA rules,
they have to pay a fine, starting from the date
of conviction, if the penalty is not paid within
90 days, then the guilty will be imprisoned.
For External trade and remittances, there is no
need for prior approval from the Reserve
Bank of India (RBI).
There is provision for IT
  The Reserve Bank of India (RBI) is assigned with the responsibility of conducting
monetary policy. The Monetary Policy Committee (MPC) constituted by the Central
Government under Section 45ZB determines the policy interest rate required to
achieve the inflation target.
 It lays down rules & regulations for banking activities like loans debit/credit cards,
license etc.
 It also conducts economic research work to promote growth of Economy.
 It issues circulars for Customer Service, KYC Norms etc so that more information
can be known about the customer.

BANKER TO GOVERNMENT

 In terms of Section 20 of the RBI Act 1934, RBI has the obligation to undertake the
receipts and payments of the Central Government and to carry out the exchange,
remittance and other banking operations, including the management of the public debt
of the Union.
 Further, as per Section 21 of the said Act, RBI has the right to transact Government
business of the Union in India. State Government transactions are carried out by RBI
in terms of the agreement entered into with the State Governments in terms of section
21 A of the Act.
 it advises central and state governments on matters such as quantum , timing of issue
of new loans. For ensuring the success of government loan operations, the RBI plays
an active role in the gilt-edged market.
 The Reserve Bank represents the Government of India as member of the International
Monetary Fund and the World Bank.

SHOULD RBI PRINT NEW NOTES

Fiscal deficit – The difference between to total revenue and total expenditure of the
government is termed as fiscal deficit . it indicates the total borrowings needed by the
government . Generally, it takes place due to revenue deficit and India is facing similar issue
now because of the decrease in revenues due to lockdown economy is impacted adversely.
The pandemic has meant sharp rise in government expenditures.
So government will be need monetisation of fiscal deficit, which means RBI purchases
government bonds directly, rather than government borrowing from selling the market bonds.

In the past this was done through issuance of 91-day non-marketable ad-hoc treasury bills to
the RBI but this was phased out in 1994 and 1997 with two agreements between government
and RBI. But it still remain in practice was completely stopped by FRBM (Fiscal
Responsibility and Budget Management Act) as this act said “The Central Government shall
not borrow from the Reserve Bank of India,”

There was an escape clause which said RBI could subscribe to the primary issue of central
government securities in case the government exceeds the fiscal deficit target on “grounds of
national security, act of war, national calamity, collapse of agriculture severely affecting farm
output and incomes, structural reforms in the economy . But government did not utilize this
opportunity. Also, printing of more currency will increase inflation as printing of money
should always match the total production of goods and services in the country or else
inflation can destroy the economy.

Appreciation Vs Depreciation

 Appreciation- Means Increasing the value of currency in terms of other international

currency based on demand and supply.
 Depreciation-Means reduction in the value of cuurency in terms of other international
currencies based on demand and supply.
 Devaluation-Means reduction in the value of currency in terms of other international
currency due to government intervention.
 Revaluation-Means Increasing in the value of currency in terms of other international
currency due to government intervention.
For ex-
$1 = Rs. 65 (Before devaluation)
$1 = Rs. 70 (After devaluation)

Effect of Depreciation/Devaluation
 It has favourable effect on BOP of country devaluating its currency by improving
the BOP.
 Exports cheaper. A devaluation of the exchange rate will make exports more
competitive and appear cheaper to foreigners. This will increase demand for exports
 Imports more expensive. A devaluation means imports will become more expensive.
This will reduce demand for imports.
 Increased AD. Devaluation could cause higher economic growth. therefore higher
exports and lower imports should increase AD (assuming demand is relatively
elastic). Higher AD is likely to cause higher Real GDP and inflation

Effect of Devaluation on Exports

Effect of Devaluation on Imports

 Effect of Appreciation

 Exports more expensive. The foreign price of exports will increase – so Exporters
will find exports more expensive. Therefore with a higher price, we would expect to
see a fall in the quantity of exports.
 Imports are cheaper. consumers will now buys a greater quantity of goods.
Therefore, with cheaper imports, we would expect to see an increase in the number of
imports.

FOREX MARKET

 The market where the commodity traded is Currencies.

 It is the value of one currency in terms of another. For one unit of the home currency,
how many units of the foreign currency you will get.
 The rate at which exports and imports of a nation are converted into the domestic or
foreign currency at a given point of time.
 Price of each currency is determined in term of other currencies.
 24hrs trading , 5 days a week with continuous access to global dealers
 Enormous liquid market making it easy to exchange most currencies.
 Any financial transaction that involves more than one currency is a foreign exchange
transaction.

EXCAHNGE RATE

 Exchange Rate is the price of one country's currency expressed in another country's
currency. In other words, the rate at which one currency can be exchanged for
another.
Major currencies of the World USD

 EURO

 YEN

 POUND STERLING

Types of Exchange rate

1. Fixed Exchange Rate- This is where a Government maintains a given exchange

rate over a period of time. This could be for a few months or even years. In order
to maintain the exchange rate at the stated level government uses fiscal and
monetary policies to control aggregate demand.The forces of supply and demand do
not determine the rate. The central bank holds reserves of US dollars and intervenes
in order to keep the exchange rate pegged at that level known as the Official
Rate.The risk and uncertainty of trade and promoting foreign direct investment
(FDI) is reduced thus making business and investment planning possible.Reduced
Currency Speculation and creates a stability in knowing the exchange rate.

2. Floating Exchange Rate - A floating exchange rate regime is where the rate of
exchange is determined purely by the demand and supply of that currency on the
foreign exchange market.The value of a currency is allowed to be determined by the
forces of demand and supply on the foreign exchange market and there is no
government intervention.Any change in supply or demand for a currency will cause
a depreciation or appreciation in the exchange rate. An increase in demand for the
local currency causes it to appreciate or rise.

3. Managed Floating exchange rate- The Central Bank seeks to stabilize the
exchange rate within a predetermined range for a given period of time, but DOES
NOT FIX IT at any particular level. This allows for policy makers the benefit of
planning with some degree of certainty, for the macroeconomic affairs of a country.
Central bank intervenes to smoothen out ups and downs in the exchange rate of
home currency to its own advantage.The greater the instability, the more
 intervention is necessary by central banks and the less free they are to pursue
independent domestic monetary policies because they are frequently required to use
their money supplies to calm disturbances in the foreign exchange markets.

Types of Quote

 Direct Quote – A given number of units of local currency per unit of foreign
currency is quoted. Direct quotation is also called home currency quotation. Ex-
1$=Rs.73

 Indirect Quote –A given number of units of foreign currency per unit of local
currency is quoted. Indirect quotation is also called foreign currency quotation. Ex-
1Rs.=1/73$

Factor affecting exchange rate

 Inflation Rates- Changes in market inflation cause changes in currency exchange
rates. A country with a lower inflation rate than another's will see an appreciation in
the value of its currency.  A country with a consistently lower inflation rate exhibits a
rising currency value while a country with higher inflation typically sees depreciation
in its currency 

 Interest Rates- Changes in interest rate affect currency value and dollar exchange
rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest
rates cause a country's currency to appreciate because higher interest rates provide
higher rates to lenders, thereby attracting more foreign capital, which causes a rise in
exchange rates

 Country’s Current Account / Balance of Payments- A country’s current account

reflects balance of trade and earnings on foreign investment. It consists of total
number of transactions including its exports, imports, debt, etc. A deficit in current
account due to spending more of its currency on importing products than it is earning
through sale of exports causes depreciation
  Government Debt-A country with government debt is less likely to acquire foreign
capital, leading to inflation. Foreign investors will sell their bonds in the open market
if the market predicts government debt within a certain country.
 Terms of Trade-Related to current accounts and balance of payments, the terms of
trade is the ratio of export prices to import prices. A country's terms of trade improves
if its exports prices rise at a greater rate than its imports prices. This results in higher
revenue, which causes a higher demand for the country's currency and an increase in
its currency's value. This results in an appreciation of exchange rate.
 Political Stability & Performance-A country's political state and economic
performance can affect its currency strength. A country with less risk for political
turmoil is more attractive to foreign investors, as a result, drawing investment away
from other countries with more political and economic stability.
 Speculation-If a country's currency value is expected to rise, investors will demand
more of that currency in order to make a profit in the near future.

Determination of Foreign Exchange Rate

The
DD curve represents the demand for foreign exchange by India. The SS curve represents the
supply of foreign exchange to India.

The point where both DD and SS curves intersect is the point of equilibrium. At this point
demand for foreign exchange is exactly equal to the supply of foreign exchange.

At equilibrium point E0, the exchange rate is 1 $ equal to 5 Re.

In normal day to day functioning of markets, the exchange rate may fluctuate. If at any point
in time, the exchange rate is at E1, then the demand for foreign exchange falls short of supply
of foreign exchange, as a result at this point Indians are demanding less foreign currency due
to which Re will appreciate vis-à-vis foreign currency. The appreciation mainly occurs due to
a favourable balance of payment situation (Surplus).

By the same token at point E2, demand for foreign exchange is greater than the supply of
foreign exchange, at this point Indians are demanding excess foreign exchange than what the
foreigners are willing to supply, as a result, at E2 Re will depreciate vis-à-vis foreign
currency. The depreciation mainly occurs due to the unfavourable balance of payments
situation(Deficits).

FOREX RESERVE

 Foreign-exchange reserves (also called forex reserves or FX reserves) is money or

other assets held by a central bank or other monetary authority so that it can pay if
need be its liabilities DEBT.

Foreign Money kept with us(RBI) -mostly US-Dollar, Euro, Pound, Japanese-Yen

Components of Forex

1. Foreign Currency Asset (90%)

2. Gold(5-6%)
3. Special Drawing Rights(SDR) (2.76%)
4. Reserve Position in IMF(2-3%)

 Foreign exchange reserves should ideally include foreign bank notes, foreign bank
deposits, foreign treasury bills, and short and long-term foreign government
securities. However, they also include gold reserves, special drawing rights (SDRs),
and International Monetary Fund (IMF) reserve positions.
 India’forex reserve hit record level high $541.814 billion Gold, which is another
component of the reserves, rose by $2.16 billion to $39.785 billion. Special drawing
 rights (SDR) from the IMF increased by $6 million to $11.099 billion while reserve
position in the IMF fell by $7 million to $4.632 billion.

REASON FOR INCREASING FOREX RESERVE

 Increase in FDI
 Net inflow of funds by FPI(foreign portfolio instrument) and FDI through jio
 Sharp decline in import expenditure- due to lockdowwn
 Sharp decline in crude oil prices

BRETTON WOODS SYSTEM

The Bretton Woods Agreement was negotiated in July 1944 by 730 delegates from 44
countries at the United Nations Monetary and Financial Conference held in Mount
Washington Hotel,Bretton Woods, New Hampshire. It started after the 2nd world war to
increase the amount of trade between different countries . The main reason of bretton woods
conference was there was no common currency to decide the terms of exchange.

• its provisions called for the U.S. dollar to be pegged to the value of gold. Moreover, all
other currencies in the system were then pegged to the U.S. dollar’s value.

• The exchange rate applied at the time set the price of gold at $35 an ounce.

• The benefit of all currency pegging regimes, currency pegs are expected to provide currency
stabilization for trade of goods and services as well as financing.

The member country on joining was to pay 25 percent of its quota in gold and remainder in
its own currency. The member country could borrow 25 percent of its quota in one year upto
a total of 125 percent of its quota over a period of 5 years. The first 25 percent of its quota,
called gold tranche, could be borrowed almost automatically without any restriction or
condition.

The Bretton Woods System ensured the removal of all restrictions on the full convertibility of
the currencies of member countries into currencies of one another or into dollar. The member
countries were expected not to impose additional trade restrictions. The existing trade
restrictions were to be removed gradually through multilateral negotiations.

IMF Managing Director Kristalina Georgieva and World Bank Group President David
Malpass
The Bretton Woods Agreement created two Bretton Woods Institutions, the IMF and the
World Bank. Formally introduced in December 1945 both institutions have withstood the test
of time, globally serving as important pillars for international capital financing and trade
activities.

The World Bank Group works with developing countries to reduce poverty and increase
shared prosperity, while the International Monetary Fund serves to stabilize the international
monetary system and acts as a monitor of the world’s currencies. The World Bank Group
provides financing, policy advice, and technical assistance to governments, and also focuses
on strengthening the private sector in developing countries. The IMF keeps track of the
economy globally and in member countries, lends to countries with balance of payments
difficulties, and gives practical help to members. Countries must first join the IMF to be
eligible to join the World Bank Group; today, each institution has 189 member countries.

The Bretton Woods System effectively came to an end in the early 1970s when President
Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency
because the gold supply was not longer adequate to cover the number of dollars in
circulation.

The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon
announced the "temporary" suspension of the dollar's convertibility into gold

• Dollar was overvalued in 1960’s.which made exports expensive and imports cheap.

• One of the predominant causes of the breakdown of the Bretton Woods System was
the problem of liquidity. Any system of fixed or stable exchange rate could work efficiently
only if there were sufficient international reserves. During the 1950’s and 1960’s, the U.S.
deficits in BOP continued to increase on account of overseas investments and escalation of
Vietnam War. The European countries and Japan at the same time could create surpluses in
their BOP.

It was argued that the Bretton Woods System gave rise to the seigniorage of the United States
over other countries, since dollar became the international reserve currency that conferred
some undue privilege upon the Americans. The question of seigniorage arose because the
United States was the issuing country of dollar. As and when it required dollar, it could issue
more dollars.

DEMONETISATION IN INDIA

Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs
whenever there is a change of national currency: The current form or forms of money is
pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes,
a country completely replaces the old currency with new currency.

 In 1946, the Reserve Bank of India had demonetized Rs. 1,000 and Rs. 10,000
currency notes which were then under circulation.
 In 1954, the Government introduced new currency notes of Rs. 1,000, Rs. 5,000, and
Rs. 10,000.
 In 1978, the Moraji Desai Government demonetized Rs. 1,000, Rs. 5,000, and Rs.
10,000 to curb illegal transactions and anti-social activities.

In 1946, the currency note of Rs 1,000 and Rs 10,000 were removed from circulation. The
ban really did not have much impact, as the currency of such higher denomination was not
accessible to the common people. However, both the notes were reintroduced in 1954 with an
additional introduction of Rs 5,000 currency.

In the early ’70s, the Wanchoo committee, a direct tax inquiry committee set up by the
government, suggested demonetization as a measure to unearth and counter the spread of
black money. However, the public nature of the recommendation sparked black money
hoarders to act fast and rid themselves of high denominations before the government was able
to clamp down on them.
Similarities in 1978 and 2016 ban:

The note ban by Morarji Desai also aimed to drive away black money out of circulation in the
economy. Hence, The High Denomination Bank Notes (Demonestisation) Act was
implemented.

Narendra Modi announced the currency ban is an address that was broadcasted across all
news channels. Similarly, Desai announced the ban over the radio after which the banks were
closed the following day.

Both the affairs were kept confidential.

Differences in the ban:

Unlike honourable Prime Minister Modi, Desai didn’t have the backing of the RBI Governor.
The Governor I.G. Patel believed that the ban was implemented simply to immobilize the
funds of the opposition party. Patel also believed that people never store black money in the
form of currency for too long.

The demonetisation in 1978 didn’t have much effect on the people and affected only the
privilege few. While the recent ban had shaken the whole country.

IMPACT OF DEMONETISATION

1. Liquidity crunch (short term effect): liquidity shock means people are not able to get
sufficient volume of popular denomination especially Rs 500. This currency unit is the
favourable denomination in daily life. It constituted to nearly 49% of the previous currency
supply in terms of value. Higher the time required to resupply Rs 500 notes, higher will be
the duration of the liquidity crunch. Current reports indicate that all security printing press
can print only 2000 million units of RS 500 notes by the end of this year. Nearly 16000 mn
Rs 500 notes were in circulation as on end March 2016

2. Welfare loss for the currency using population: Most active segments of the population
who constitute the ‘base of the pyramid’ uses currency to meet their transactions. The daily
wage earners, other labourers, small traders etc. who reside out of the formal economy uses
cash frequently. These sections will lose income in the absence of liquid cash
3. Loss of Growth momentum– India risks its position of being the fastest growing largest
economy: reduced consumption, income, investment etc. may reduce India’s GDP growth
as the liquidity impact itself may last three -four months. he study noted that demonetisation
lowered the growth rate of economic activity by at least 2 percentage points. Agencies India's
gross domestic product (GDP) grew 6.8% in the December quarter of 2016, down from 7.6%
in the trailing three months. In the subsequent quarter, it declined to 6.1%

4. Cost of Printing New Currency -Of the Rs 15.41 lakh crore worth Rs 500 and Rs 1,000
notes in circulation on November 8, 2016, when the note ban was announced, notes worth Rs
15.31 lakh crore have been returned.

This meant just Rs 10,720 crore of the junked currency did not return to the banking system.

Post-demonetisation, RBI spent Rs 7,965 crore in 2016-17 on printing new Rs 500 and Rs
2,000 and other denomination notes, more than double the Rs 3,421 crore spent in the
previous year.

5. Demonetization and Tax Payments- Pushing Indians to deposit and account the cash
lying in their house also meant a rise in the tax payments for the country. According to
government reports the income tax payers saw a record increase in the post demonetization
era. 9.1 million New taxpayers were added to the slab which was an 80% rise over the typical
yearly rise.

6. Demonetization and GDP- The ban on old notes is being cited as one of the key
contributors to the economic slowdown. With the gross domestic product (GDP) for the
April-June quarter slipping to 5.7%, the reality of the economic slowdown could not be
ignored.

7. Digitalisation: In the short term, demonetization has led to the rapid adoption of e-wallets,
and credit and debit cards as a means of payment. Such digital payments have in a large way
replaced cash transactions at least in urban areas. Wallets like paytm , phonepe gained fame
after demonetisation as it became easy for people with help of them.

Reason for Demonetisation

 1. Increased Savings – It increased the savings as the people who were not getting their
salaries paid off got paid because of this and the government was able to increase its
revenues as people had to get their money exchanged through bank only.

2. Strike on black money holders : People holding black money had to disclose their
savings that they had illegaly and the amount they got exchanged was tracked through
it department .

3. To dismantle fake currency network- it also helped in dismantling fake currency

network as the new notes could not be printed easily .

4. Boost to economy & lifestyle – It gave boost to economy as the funds were available
with the government to spend on growth of economy.

BONDS

They are loan given to company or government by investors , they are issued to fund projects
and carry out specific stocks . They are considered to be less risky as compares to stock .

Types of Bonds

A) Government bonds-
A government bond represents debt that is issued by government and sold to
investors to support government spending. Government bonds are considered low-risk
investments since the government backs them it offer low rates of return , Fixed
income falls behind with rising inflation and Carry risk when market interest rates
increases .

Examples are :

1. Treasury Bonds –
Treasury bonds (T-Bonds) are long-term bonds having a maturity between 10 to 30
years.
2. Treasury Notes
Treasury notes (T-notes) are intermediate-term bonds maturing in two, three, five, or
10 years that provide fixed coupon returns
 B) Corporate Bonds

A corporate bond is debt issued by a company in order for it to raise capital.An investor who
buys a corporate bond is effectively lending money to the company in return for a series of
interest payments.

Standard and Poor's Corp, Moody's Investors Services, CRISIL, ICRA,(Indian credit rating
agency), CARE(Credit rating agency grading,sme ratings), among other firms, analyze the
financial stability of both corporate and government bond issuers..

The lowest rated corporate bonds are called high-yield bonds due to their greater interest rate
applied to compensate for their higher risk. These are also known as "junk" bonds.

A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep
discount, rendering a profit at maturity, when the bond is redeemed for its full face value.

Zero-coupon bonds trade at deep discounts, offering full face value (par) profits at maturity.

The difference between the purchase price of a zero-coupon bond and the par value, indicates
the investor's return.

C) Muncipal Bonds

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, countries
and other governmental entities to fund day-to-day obligations and to finance capital projects
such as building schools, highways or sewer systems. By purchasing municipal bonds, you
are in effect lending money to the bond issuer in exchange for a promise of regular interest
payments, usually semi-annually, and the return of the original investment, or “principal.” A
municipal bond’s maturity date (the date when the issuer of the bond repays the principal)
may be years in the future.

D) Foreign Bonds

A foreign bond is a bond issued in a domestic market by a foreign entity in the domestic
market's currency as a means of raising capital. For foreign firms doing a large amount of
business in the domestic market, issuing foreign bonds, such as bulldog bonds, Matilda
bonds, and samurai bonds, is a common practice.

Because investing in foreign bonds involves multiple risks, foreign bonds typically have
higher yields than domestic bonds. Foreign bonds carry interest rate risk. When interest rates
rise, the market price or resale value of a bond falls.

A bulldog bond is issued in the United Kingdom, in British pound sterling, by a foreign bank
or corporation. Foreign corporations raising funds in the United Kingdom typically issue the
bonds when interest rates in the United Kingdom are lower than those in the corporation’s
country.

A Matilda bond is a bond issued in the Australian market by a non-Australian company.

A samurai bond is a corporate bond issued in Japan by a non-Japanese company.

Yankee bonds are bonds issued in the U.S. bond market by a foreign entity, and they are
denominated in U.S. dollars. Governments, companies, and other entities issue Yankee
bonds.

E) Eurobond

A Eurobond is a debt instrument that's denominated in a currency other than the home
currency of the country or market in which it is issued.

Example:

• Canadian Company XYZ decides to go to Australia to issue bonds denominated in

British pounds.

Eurobonds are important because they help organizations raise capital while having the
flexibility to issue them in another currency.

Eurobond refers only to the fact the bond is issued outside of the borders of the currency's
home country; it doesn't mean the bond was issued in Europe.

Difference between foreign bonds & Euro Bonds

That is because foreign bonds were issued long before the first Eurobonds even existed.

For some investors, a foreign bond is referred to as an international bond. Eurobonds are also
referred to as an international bond. For beginning investors, the similarities in these labels is
what leads to high levels of confusion.

Eurobonds tend to be underwritten by financial institutions. For the average investor, that
makes them a safer investment option. Because these bonds have lower risk factors
associated with them.

Yield Curve

 The Yield Curve is a graphical representation of the interest rates on debt

for a range of maturities. It shows the yield an investor is expecting to earn
if he lends his money for a given period of time.
 The graph displays a bond’s yield on the vertical axis and the time to
maturity across the horizontal axis.  The curve may take different shapes at
different points in the economic cycle, but it is typically upward sloping.
 Types of Yield Curve

1. Normal Yield curve- This is the most common shape for the curve and,
therefore, is referred to as the normal curve. The normal yield curve reflects
higher interest rates for 30-year bonds as opposed to 10-year bonds.
2. Inverted Yield Curve- An inverted curve appears when long-term yields fall

below short-term yields. An inverted yield curve occurs due to the perception

of long-term investors that interest rates will decline in the future. This can
happen for a number of reasons, but one of the main reasons is the expectation
of a decline in inflation.

3. Steep Yield Curve- A steep curve indicates that long-term yields are rising at a
faster rate than short-term yields. Steep yield curves have historically indicated
the start of an expansionary economic period. Both the normal and steep curves
are based on the same general market conditions.
 4. Flat Yield Curve- A flat curve happens when all maturities have similar
yields. This means that the yield of a 10-year bond is essentially the same as
that of a 30-year bond.

INTER BANK RATES

• These are rates at which banks lend and borrow from another in interbank market . it
serves as indicator of levels of demand and supply.

There are 3 inter bank Rates :

Interbank
offered rates

LIBOR MIBOR HIBOR

LIBOR
LIBOR is administered by the Intercontinental Exchange or ICE. It is computed for five
currencies with seven different maturities ranging from overnight to a year. The five
currencies for which LIBOR is computed are Swiss franc, euro, pound sterling, Japanese yen
and US dollar. ICE benchmark administration consists of 11 to 18 banks that contribute for
each currency.

The rates received from the banks are arranged in descending order and the top and bottom
quartiles are excluded to remove outliers. The arithmetic mean of the remaining data is then
computed to get the LIBOR rate.

Month LIBOR Rate 0.16 2.07

3 Month LIBOR Rate 0.25 2.13

6 Month LIBOR Rate 0.30 2.01

The SONIA rate is based on actual overnight interest rates in active and liquid wholesale cash
and derivative markets - making it more robust and less volatile than LIBOR.  It is also
(virtually) risk free as it does not incorporate any credit risk/liquidity premium which is
inherent in the calculation of LIBOR because LIBOR is predicated on banks lending to each
other over longer time periods.

The key difference is that LIBOR is forward-looking – it is agreed at the start of an interest
period. SONIA is backward-looking – it cannot be determined until the end of an agreed
interest period. This means that borrowers will no longer have upfront certainty about the
amount of their interest payments, and will require relatively last-minute calculations of the
interest due.

MIBOR

The Mumbai Inter-Bank Offered Rate (MIBOR) is the interest rate benchmark at which
banks borrow unsecured funds from one another in the Indian interbank market. It is
currently used as a reference rate for corporate debentures, term deposits, forward rate
agreements, interest rate swaps, and floating-rate notes. The rate is only offered to first-class
borrowers and lending institutions, and it is calculated daily by the National Stock Exchange
of India, the Fixed Income Money Market, and the Derivative Association of India
Polling – Rates are taken through a representative panel of 30 banks and primary dealers. The
rates provided by this panel will then be summarized.

Bootstrapping – Since there is no guarantee that the panel of participants will provide honest
rates, bootstrapping has to be combined with the polling method

The panel has a mix of public sector banks including State Bank of India, Central Bank of
India and Indian Bank; private sector banks including Axis Bank Ltd, HDFC Bank Ltd and
ICICI Bank Ltd; foreign banks including Citibank NA and Deutsche Bank; and primary
dealers including ICICI Securities Ltd and PNB Gilts.

HIBOR

The Hong Kong dollar (HKD) interbank market is actively used by banks and financial
institutions to raise necessary funding and financing for daily commercial activities.

• Hong Kong Interbank Offered Rate (HIBOR) is the rate at which HKD-denominated
instruments are traded between banks in Hong Kong, and is the benchmark for short-term
interest rates in the HKD money market.

• Introduced in 1997 and 1998, HKEX’s One-Month HIBOR Futures and Three-Month
HIBOR Futures contracts provide a set of interest rate products which allow market
participants to manage their short-term interest rate exposures more effectively.

RUSSIAN RUBLE CRISIS

• Crisis : Speculative attack on a country’s currency that can result in a forced

devaluation and possible debt default

• Russia 1998: led to the devaluation of the rubble and the default on public & private
debt

The crisis started much before in 1991 after the collapse of soviet union as Russia was just
recovering from the Fall . Russia changed its strategy from planned economy to market
economy . In 1993 Goverment bonds were installed Called GKO .The following year, Russia
adopted a stabilization program to lower inflation to single-digit again. The main element of
the program was a currency peg — the Russian ruble was pegged against the United States’
Dollar (USD) at 5 rubles per USD.

April 1996

• Russian officials began negotiations to reschedule payment of foreign debt

inherited from the former Soviet Union = major step toward restoring investor
confidence

• Appeared to be a turning point for economic stability

September 1997

• Russia allowed to join the Paris Club of creditor nations after rescheduling the
payment of over $60 billion in old Soviet debt to other governments

October 1997

• Another agreement for a 23-year debt repayment of $33 billion signed with the
London Club

December 1997

• Prices of oil & nonferrous metal (2/3 of Russia’s earnings) begin to drop

• Instead real GDP declined 4.9%

February 1998

• Russian government submits new tax code with fewer yet more efficient taxes

• Crucial parts intended to increase federal revenue ignored

• Russia fails to reach agreements for additional IMF funding

March 1998

• President Yeltsin abruptly fires entire entire government

• Conflict between the government & CBR shake investor confidence

May 1998
 • With reporters in the room, CBR chair warns government ministers of debt crisis
within 3 years

• Government bond yields had swelled to 47%

• Commercial banks & firms had less cash to keep them afloat

• Federal government’s initiative to collect more taxes in cash lowered banks’ and
firms’ liquidity

• Oil priced dropped to $11 per barrel

August 13, 1998

• Annual yields on rubble-denominated bonds were at 200+%

• Russian stock, bond, & currency markets collapsed as a result of investor fears that
the government would devalue the rubble, default on domestic debt, or both

• Stock market closed for 35 minutes as prices plummeted

Russia’s economy is heavily dependent on crude oil and natural gas, especially when it
comes to state-owned giants like Gazprom. Between mid-2014 and early-2016, crude oil
prices have fallen from a high of around $100 per barrel to about $30 per barrel, cutting deep
into the country’s major source of revenue. Investors have responded by selling oil equities,
while there are broader concerns of the government’s ability to weather the storm.

the increased production of shale-based oil and gas in the U.S. could keep pressure on prices
over the long-term in the $75 to $80 per barrel range. While the Middle East initially kept
production at a high to try and encourage shale operations to shut down, OPEC leaders have
since reversed course and have relied on production cuts to boost prices. These dynamics
helped crude oil prices rebound from their lows made in early 2016 to reach over $50 by
2017.

The upshot for Russia is that crude oil prices are experiencing upward pressure as the global
economy continues to show signs of recovery and OPEC has committed to adhering to
production cuts. While prices remain well below their highs made a few years ago, they are
also well-above their lows made in early 2016 and appear to be moving higher throughout
2017.
In 2014, oil prices fell once again. At the same time, Western countries began introducing
sanctions to push back against the Russian government’s actions in Ukraine, which further
deterred investors. Unlike the other crises, this one was not followed by a rapid recovery. Oil
prices remained low, sanctions only became more severe, and investors from Russia and the
rest of the world alike directed their funds elsewhere. By the end of 2016, the budget had
been hollowed out, too, and those funding cuts represented yet another hit to manufacturing
levels and quality of life in Russia.

• Economic sanctions

Russia’s decision to invade Ukraine in mid-2014 resulted in a series of economic sanctions

on the country by the U.S. and its allies. According to Russian Prime Minister Dmitry
Medvedev, Western sanctions had cost the country $26.7 billion in 2014 and those costs may
have increased to $80 billion in 2015. The value of the country’s foreign trade slumped
approximately 30 percent during the first two months of 2015 alone, suggesting that things
may get worse before improving.

Economic sanctions have also had a direct impact on the ruble’s devaluation since Russian
companies preventing from rolling over debt have been forced to exchange rubles for U.S.
dollars or other currencies to meet their interest payment obligations on existing debt. Many
Russian individuals have even resorted to purchasing durable goods in order to reduce their
exposure to the currency risk – something that’s harder to do with economic sanctions.

The specific measures include:

1. Prohibitions on providing new debt or new equity of greater than thirty days’ maturity to
identified Russian corporate and banking entities

2. Prohibitions on providing new debt greater than ninety days’ maturity to identified entities
and individuals operating in the Russian energy sector

3. Prohibitions on the export of goods, services (except for financial services), and
technology in support of exploration or production for deepwater, Arctic offshore, or shale

projects that have the potential to produce oil in the Russian Federation, or in maritime areas
claimed by the Russian Federation and extending from its territory, to identified entities and
individuals operating in the Russian energy sector
4. Prohibitions on providing new debt greater than thirty days’ maturity to identified entities
and individuals operating in the Russian defense sector

5. Blocking sanctions on designated entities and individuals operating in the Russian defense
sector

6. Asset bans and travel freezes on key individuals close to President Vladimir Putin or
directly involved in Russian aggression against Ukraine

7. A total ban on transactions and economic cooperation with Russian-occupied Crimea.

Sanctions did not cause this recession. But, they have complicated Russia’s ability to cope
with the recession in two important ways.

First, they have reduced the overall attractiveness of investment in Russia, especially in its oil
and gas sector, since a variety of long-term projects are either under sanctions directly or
would be affected by sanctions associated with technology transfers. Second, sanctions have
limited Russia’s access to Western capital markets.

Russia’s sovereign debt is relatively modest, and corporate borrowers, who entered the crisis
structurally long dollars, have been selling off dollar assets during the crisis and paying down
their debts over the past two years. By deciding not to defend its currency and allowing the
ruble to float freely,

Western observers argued that the combination of a currency panic, low oil prices, import
requirements, and an inability to borrow externally had pushed the Russian economy into a
slow-motion crisis.

On December 15, investors started a massive sell-off of Russia's currency, the ruble. This
accelerated depreciation of the ruble, which had been ongoing for several months. In order to
stem its further depreciation, the Bank of Russia (Russia's central bank) announced its biggest
interest rate hike since 1998, raising a key interest rate from 10.5% to 17%, at an emergency
meeting on December 16.
Despite this measure, the ruble sharply depreciated throughout the day, falling from 58 rubles
per dollar to 80, before rising again to 70. The central bank is currently intervening in foreign
exchange markets (meaning it is selling foreign currencies and purchasing rubles) to support
the value of the

Questions

1. MCLR Rate :

MCLR (Marginal Cost of funds based Lending Rate) replaced the earlier base rate
system to determine the lending rates for commercial banks. RBI implemented MCLR
on 1 April 2016 to determine rates of interests for loans. It is an internal reference rate
for banks to determine the interest they can levy on loans. For this, they take into
account the additional or incremental cost of arranging additional rupee for a
prospective buyer.

MCLR is an improved version of the base rate. It is a risk-based approach to

determine the final lending rate for borrowers. It considers unique factors like the
marginal cost of funds instead of the overall cost of funds. The marginal cost takes
into account the repo rate, which did not form part of the base rate.

When calculating the MCLR, banks are required to incorporate all kinds of interest
rates which they incur in mobilizing the funds. Banks have the liberty to make
available all loan categories under fixed or floating interest rates. Additionally, banks
need to follow specific deadlines to disclose the MCLR or the internal benchmark.
They could be one month, overnight MCLR, three months, one year or any other
maturity as the bank deems fit.

2. Currency Denomination-A denomination refers to the units classification for the

stated or face value of financial instruments such as currency notes or coins, as well as
for securities, bonds, and other investments.A denomination defines the monetary unit
with which assets, securities, and transactions are priced in.Coins in India are
presently being issued in denominations of one rupee, two rupees, five rupees and ten
rupees. Coins in the denomination of 1 Paise, 2 Paise, 3 Paise, 5 Paise, 10 Paise, 20
Paise and 25 Paise have been withdrawn from circulation with effect from June 30,
2011 and are, therefore, no more legal tender. Banknotes in India are currently being
issued in the denomination of Rs 10, Rs 20, Rs 50, Rs 100, Rs 200, Rs 500 and Rs
2000. These notes are called banknotes as they are issued by the Reserve Bank of
India (Reserve Bank). The printing of notes in the denominations of Rs 2 and Rs 5 has
been discontinued as these denominations have been coinised.  Government of India
vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal
Tender status of Rs 500 and Rs 1,000 denominations of banknotes of the Mahatma
Gandhi Series issued by the Reserve Bank of India till November 8, 2016. Currency
paper is composed of cotton and cotton rag.The highest denomination note ever
printed by the Reserve Bank of India was the ₹ 10000 note in 1938 and again in 1954.
These notes were demonetized in 1946 and again in 1978.
 References

 economicshelp.org/blog/10050/economics/effects-
appreciation/
 https://corporatefinanceinstitute.com/resources/knowledge/fi
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exchange/determination-of-foreign-exchange-rate-explained-
with-diagram/38196
 https://www.slideshare.net/MRIDULGUPTA51/forex-
market-ppt-112821750
 https://www.investopedia.com/
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monetisation-led-to-highest-fake-currency-suspicious-
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%20banks,2016%20notes%20ban%20has%20revealed.
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economic-crisis-five-key-charts
 https://carnegieendowment.org/files/6-29-
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 https://www.theverge.com/2019/1/3/18166096/bitcoin-
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 https://www.educba.com/money-vs-currency/
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