Biz Rising Forex


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Biz Rising Forex

  1. 1. ± CMYK %Bizness Read on ................................... Rising .OREX Reserves: as a currency of that particular country. This means that for an Indian the rupee is the native Why and What of it? currency while the dollar is a foreign exchange. More significantly, the worth of each of the currency is not the same. Each - KenSource currency has a value attached to it one loaf of bread go and exchange depending on various factors. India’s FOREX reserves have risen the wagon for a 1000 loaves of Thus, a dollar is worth nearly 44 by over 100 percent in less than bread when he needs only one? rupees. If you want to buy 15 years. It is presently over $120 This highlights the importance of something worth one dollar, you billion compared to $1billion in money as a medium of exchange. have to spend 44 rupees. Now if early nineties. Why does a country The wagon owner needs to you go and buy something in need forex? What of India’s forex? exchange something, the value of America or from America, the To know more read on… which is exactly just one loaf of person selling you that something bread and that something is M would not accept rupees in exchange, as he would not be able oney – dubbed to to use it in his homeland, which has be the root of all evil the dollar as its currency. You by the Bible and therefore need to pay him in Pink Floyd, those dollars. What you would do is buy little slips of paper some dollars in exchange for the with portraits of rupees and give him those dollars dead presidents and Governors are to settle the transaction. This revered and sought after by the concept when applied in a larger entire human race without setting brings us to the core of our exception. Well why can’t we just discussion – Foreign Exchange. print a million such paper slips for No country in the world is self- each one of us and make us all reliant. Trade has been the centre rich? This would have been stage of all human development, possible only if the literal meaning first carried out within the limits of the term money was paper slips of the country and later expanding without value. This brings us to Reserve Bank of India beyond boundaries. Each country the most vital principle involved trades with another in some in the discussion on money – respect or the other. The dollar, the value. Money is defined as a money. So, this is how money came most vibrant currency of the world generally accepted medium of into being as a common medium has been the common medium of exchange, which can be used to of exchange. But then every exchange in international trade. exchange for anything that you country has its own money, the Importers (those buying goods need. But why do you need money Americans have dollars and the from outside the country) pay in for that? Why can’t you just go and Indian have Rupees, the Chinese dollars converted out of rupees exchange what you have for have Renminbis and the Japanese and exporters (those selling goods something that you need. It is the have the Yen. Why then this outside the country) are paid in divisibility factor that plays its role discussion? We need money, we dollars, which are later converted, here. For instance a person who have money, what next? As simple to rupees. By inference, it is clear owns a wagon may be in need of as it may sound, it isn’t all that that you need to have enough bread. But the value of a wagon is plain. The different types of money dollars with you to pay for the much more than a loaf of bread. that each country has, whether a importers bills, and the exporters Let us assume the wagon’s value Dollar, a Yen, a Renminbi or a who get paid in dollars earn these to be worth a 1000 loaves of bread. Rupee are collectively referred to dollars. There has to be a balance Why would someone wanting just ± CMYK
  2. 2. ± CMYK %Bizness Read on ................................... between the supply of foreign is sitting on a huge pile of foreign exchange and the demand exchange and is actually causing stemming from import and other an embarrassment of riches for the obligations in order to keep policy makers. international trade going. Building There is a heated debate going a reserve of foreign exchange is on as to what we should do with therefore imperative to the this huge surplus of FOREX progress of any economy. reserves. Recent media reports India’s position of foreign suggest that the UPA government exchange reserves was seriously is toying with idea of utilising a jeopardised in the early 90s when part of this huge reserve of foreign the fiscal deficit. Since this would it had just about $1billion of exchange to finance infrastructure lead to an increase in money foreign exchange. At that time, to development in the country. The supply, which would be meet its import obligations the proposal has received support inflationary, the SPVs would use country had to pledge its gold from even the Left parties who the capital to import equipment reserves. The subsequent have been demanding that the and technology, by buying dollars liberalisation of the economy and reserves be used for generating from the RBI. In RBI’s balance re-valuation of the Indian currency employment in the country. There sheet, this would amount to has seen a gradual increase in the can be no two opinions on the need replacing FOREX by government foreign exchange reserve of the to develop infrastructure of all securities, thus, leaving money country. But again, during the kinds (roads, railways, airports, supply unchanged. However neat mid-90s the country had to power, etc). Bare numbers suggest this may sound, to spend $ 10 struggle hard to keep up the that freight payment in Indian billion of the foreign exchange foreign exchange reserves during ports amount to 11 percent of reserves on infrastructure projects the Asian currency crisis. The import value compared to a global call for caution. The utility of the position of the foreign exchange average of 5 percent while China’s FOREX reserves is limited to the reserves depends on how strong a highway network is seven times import of technology and country’s international trade is. larger and far more superior in equipment. What about the More of exports as compared to quality to that in India. In order to remaining components of such imports in addition to other acquire that competitive edge in capital-intensive projects? A major inflows like investment by today’s global economic scenario, part of such projects have to be foreigners in the country and we need to develop infrastructure. paid not out of FOREX reserves but repatriation of foreign money by The government has, therefore, from domestic resources. Lack of Indians working and staying devised a plan to utilise the foreign proper implementation would abroad are all important factors exchange reserves for developing mean that though we would end that determine the level of the total infrastructure in the country. up spending billions of dollars on FOREX reserves of the country. Significant features of the plan are: import of equipment and India has been a hot destination Special Purpose Vehicles (SPVs) technology the overall project for foreigners who are willing to will be established for undertaking would remain incomplete, wasting invest and this has added to the major infrastructure projects in the all that money. The Prime Minister precious foreign exchange reserves form of joint ventures between has asserted that the government of the country. India’s position of state, public and private owners. would assess the impact of a higher foreign trade also has been pretty The government’s equity in the fiscal deficit before embarking on comfortable only with the SPVs will be funded by the path to utilising the FOREX exception of the oil bill, which monetisation of government debt. reserves for financing takes away a major part of the In other words, the Reserve Bank infrastructure projects. If and reserves. However, the foreign of India will be asked to buy the when it is done how prudently it exchange reserves have been securities so that they are not a is managed and what will be the swelling for quite some time now drag on the resources of the outcome of such an investment, and today are at an all time high. commercial banking sector. This will be an interesting thing to In fact, at over US $120 billion India means a corresponding increase in watch. ± CMYK