FIXED EXCHANGE SYSTEM
• Currency fluctuate within narrow
• Less concerns about depreciation and
• Attracts more funds
• Disadvantage: Macro economic problems
FLOATING EXCHANGE SYSTEM
• Macro Economic problems not
• 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
PEGGED EXCHANGE SYTEM
To achieve stability.
Home currency’s value is fixed in terms of that currency.
Attraction of foreign investments
Weak economic conditions may raise the
Investors withdraw their investments.
Exchange of local currencies for dollar puts further
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
• 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
• Central bank increased the interest rates.
• Another system of pegging the value
• The board must maintain the currency
reserves for all the currency that it has
• Currency board for a longer period, raises
the confidence. However Government
needs to convince the investors.
• Currency boards and interest rates
• Exchange rate movements
• Locational :
Differences in the exchange rates. Capitalising
on the disrepencies
Bid/Ask spread makes the difference
Realignment of forces
Cross exchange rates
Taking advantage of interest rate differentials
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
• Alteration of asset preferences
• Inequality of incomes
Strong trade unions
Increase in supply of money
Erosion of capital formation
Balance of payments problem
Open Market Operations
Supply side bottlenecks are not taken care
Marginal efficiency of capital is important
• 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
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
Bharti Walmart, ITC e choupal
Policy related to public revenue and expenditure
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