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International finance 1(1)


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International finance 1(1)

  2. 2. FIXED EXCHANGE SYSTEM • Currency fluctuate within narrow boundaries • Less concerns about depreciation and appreciation • Attracts more funds • Disadvantage: Macro economic problems becomes contagious
  3. 3. 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.
  4. 4. PEGGED EXCHANGE SYTEM • • • • • • • • • To achieve stability. Home currency’s 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.
  5. 5. 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.
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. Contd… • • • • • • • Oligopolistic tendencies Strong trade unions Demand elasticities Increase in supply of money Erosion of capital formation Balance of payments problem Hidden tax
  10. 10. MONETARY POLICY • Instruements Repo Rate CRR Open Market Operations Limitations: Supply side bottlenecks are not taken care of Marginal efficiency of capital is important
  11. 11. 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.
  12. 12. 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
  13. 13. 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