Balance of payment and exchange rate


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India's Balance of Payment Analysis,
Indian Forex System after 1991,
USA China Issues
various concepts of BOP & Exchange Rate...

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Balance of payment and exchange rate

  1. 1. BALANCE OF PAYMENT AND EXCHANGE RATESubmitted To:Prof. Shrikant Iyenger Submitted By: Piyush Gaur Krutarth Gandhi Nishidh Shah Pratyancha Suryavanshi Sonal NagpalBALANCE OF PAYMENTS 1
  2. 2. The balance of payments of a country is a systematic record of alleconomic transactions between the residents of a country and the restof the world. It presents a classified record of all receipts on account ofgoods exported, services rendered and capital received by residentsand payments made by theme on account of goods imported andservices received from the capital transferred to non-residents orforeigners. - Reserve Bank of India The above definition can be summed up as following: - Balance ofPayments is the summary of all the transactions between the residentsof one country and rest of the world for a given period of time, usuallyone year.What is Balance of Payments?The BOP is a statistical record of the flow of all of the paymentsbetween the residents of a country and the rest of the world in a givenyear.Transactions are recorded on the basis of double entry bookkeeping –by definition it has to balance. - Every “source” must have a “use”.The two main components are: 2
  3. 3. - Current Account - Capital/Financial AccountImportance of BOPThe BOP is an important indicator of pressure on a country’s foreignexchange rate.The BOP helps to forecast a country’s market potential, especially in theshort run.Changes in a country’s BOP may signal the imposition or removal ofcontrols over payment of dividends and interest, license fees, royaltyfees, or other cash disbursements to foreign firms or investors.Contents of BOP  Current account  Capital account  Financial account  Net errors and omissions account  Reserves and related itemsCurrent account (CA) 3
  4. 4. This is record of a country’s trade in goods and services in the currentperiod. CA = Exports (X) – Imports (M)It is divided into 4 sub-categories:  Goods trade  Services trade  Income  Current transfers  The sum of the four sub-categories = CA balanceCurrent Account Deficit ( % of GDP) 4
  5. 5. Current Account ConvertibilityIn India, In Current Account can be converted into Foreign Currency(E.g. $) or Vice-versa.It is Freely permitted in India by Reserve Bank of India.Capital account (KA)This includes all short- and long-term transactions pertaining tofinancial assets.KA = Capital Inflow (cr) – Capital outflow (dr)The two main components:  Capital account.  Financial account (direct, portfolio, other).KA balance = Sum of capital account and financial account.Capital Account ConvertibilityIn India, Partial Capital Account convertibility is there, i.e. up to$200,000 is allowed by Reserve bank of India.Up to $500 million the bank need not to take permission from RBI forForeign Loan. 5
  6. 6. Capital Account Balance (in US $ Bn)What Financial account includes? Net foreign direct investment Net portfolio investment Other financial items 6
  7. 7. Net Foreign Investment in India (in US $ Bn)Net errors and omissions account includes Missing data such as illegaltransfers.Official ReservesRecords the purchase or sale of official reserve assets by the centralbank.These assets include  Commercial paper, Treasury bills and bonds  Foreign currency  Money deposited with the IMF 7
  8. 8. This account shows the change in foreign exchange reserves held by thecentral bank.Since the BOP must balance CA + KA + ∆RFX = 0 CA + KA = – ∆RFXFor floating rate regime countries, such as the U.S., official reserves arerelatively unimportant.India’s Foreign Currency Reserve (in $ Bn) 8
  9. 9. India’s Overall Balance Of Payment (April-Sept 2010 USD $ Million)Item Credit Debit NetA.CURRENTACCOUNTI. MERCHANDISE 110,518 177,457 -66,939II.INVISIBLES 87,982 48,924 39,058Total CurrentAccount (I+II) 198,500 226,381 -27,881B. CAPITALACCOUNT1. ForeignInvestment 120,179 91,042 29,1372.Loans 50,110 34,394 15,7163. Banking Capital 33,735 32,901 834 4. Rupee DebtService - 17 -175. Other Capital 3,756 12,765 -9,009Total CapitalAccount (1to5) 207,780 171,119 36,661 C. Errors &Omissions - 1,750 -1,750D. Overall Balance 406,280 399,250 7,030 9
  10. 10. Total CurrentAccount, CapitalAccount and Errors& OmissionsE. MonetaryMovements - 7,030 -7,030BOP Trends and 1991 crisisProtectionist Policies  The main objective of the Second Five Year Plan (1956-57 to 1960- 61) was to attain self reliance through industrialization.  Heavy capital goods were imported but other imports were severely restricted to shut off competition in order to promote domestic industries.  The high degree of protection to Indian industries led to inefficiency and poor quality products due to lack of competition. The high cost of production further eroded our competitive strength.  Rising petroleum products demand, the two oil shocks, harvest failure, all put severe strain on the economy. The BOP situation remained weak throughout the 1980s, till it reached the crisis situation in 1990-91; When India was on the verge of defaulting due to heavy debt burden and constantly widening trade deficit. External Debt 10
  11. 11.  India had to resort to large scale foreign borrowings for its developmental efforts in the field of basic social and industrial infrastructure  Government of India resorted to heavy foreign borrowings to correct the BOP situation in the short run out of panicky.  By the Seventh Five Year Plan, the debt service obligations rose sharply because of harder average terms of external debt, involving commercial borrowing, repayments to the IMF and a fall in concessional aid flow.Exchange rate  The instability of the exchange value of the rupee was another problem. The constant devaluations (to promote exports) raised the amount of external debt  India followed a strongly inward looking policy, laying stress on import substitution.  Ideally, imports should be financed by export earnings. But because there was export pessimism, the deficit was financed either by the invisible earnings or by foreign aid or depletion of valuable foreign exchange reserve.  Much import constraint to check trade deficit was also not possible because India’s imports were mainly ‘maintenance imports’. On one hand import reduction was not possible and on the other exports suffered due to the recession in the 1980s. 11
  12. 12.  India’s BOP was thus beset with several problems. The process of liberalization began from the mid 1980s. Restriction on certain imports were removed, particularly those which were used as inputs for export production. But by then the situation was already bad and all the mismanagement ultimately led to the 1990-91 BOP crisis.Components of the trade  Imports -bulk imports: petroleum, crude oil products, bulk consumption goods, other bulk items. -non bulk imports: capital goods, mainly export related items  Exports -agriculture and allied products, ores and minerals, manufactured goods, mineral fuels.Specialization and Trade  Absolute Advantage: Where one country can produce goods with fewer resources than others.  Comparative Advantage: Where one country can produce the goods with low opportunity costs – It sacrifices its less resources in production.India’s Foreign Trade Major Export Destinations 12
  13. 13. India’s Foreign Trade Major Import CommoditiesExport, Import & Trade Deficit (in $ Bn) 13
  14. 14. Invisibles Inflow & Outflow in India 14
  15. 15. Invisibles (in $ Bn)How to correct the Balance of Payment ?Solution to correct balance of payment disequilibrium lies in earningmore foreign exchange through additional exports or reducing imports.Quantitative changes in exports and imports require policy changes.Such policy measures are in the form of monetary, fiscal and non-monetary measures. Monetary Measures for Correcting the BoP ↓The monetary methods for correcting disequilibrium in the balance ofpayment are as follows :-1. Deflation 15
  16. 16. Deflation means falling prices. Deflation has been used as a measure tocorrect deficit disequilibrium. A country faces deficit when its importsexceeds exports.Deflation is brought through monetary measures like bank rate policy,open market operations, etc or through fiscal measures like highertaxation, reduction in public expenditure, etc. Deflation would makeour items cheaper in foreign market resulting a rise in our exports. Atthe same time the demands for imports fall due to higher taxation andreduced income. This would built a favourable atmosphere in thebalance of payment position. However Deflation can be successfulwhen the exchange rate remains fixed.2. Exchange DepreciationExchange depreciation means decline in the rate of exchange ofdomestic currency in terms of foreign currency. This device implies thata country has adopted a flexible exchange rate policy.Suppose the rate of exchange between Indian rupee and US dollar is $1= Rs. 40. If India experiences an adverse balance of payments withregard to U.S.A, the Indian demand for US dollar will rise. The price ofdollar in terms of rupee will rise. Hence, dollar will appreciate inexternal value and rupee will depreciate in external value. The new rateof exchange may be say $1 = Rs. 50. This means 25% exchangedepreciation of the Indian currency.Exchange depreciation will stimulate exports and reduce importsbecause exports will become cheaper and imports costlier. Hence, afavourable balance of payments would emerge to pay off the deficit.Limitations of Exchange Depreciation :- 16
  17. 17. 1. Exchange depreciation will be successful only if there is no retaliatory exchange depreciation by other countries.2. It is not suitable to a country desiring a fixed exchange rate system.3. Exchange depreciation raises the prices of imports and reduces the prices of exports. So the terms of trade will become unfavourable for the country adopting it.4. It increases uncertainty & risks involved in foreign trade.5. It may result in hyper-inflation causing further deficit in balance of payments. 3. Devaluation Devaluation refers to deliberate attempt made by monetary authorities to bring down the value of home currency against foreign currency. While depreciation is a spontaneous fall due to interactions of market forces, devaluation is official act enforced by the monetary authority. Generally the international monetary fund advocates the policy of devaluation as a corrective measure of disequilibrium for the countries facing adverse balance of payment position. When Indias balance of payment worsened in 1991, IMF suggested devaluation. Accordingly, the value of Indian currency has been reduced by 18 to 20% in terms of various currencies. The 1991 devaluation brought the desired effect. The very next year the import declined while exports picked up. When devaluation is effected, the value of home currency goes down against foreign currency, Let us suppose the exchange rate remains $1 = Rs. 10 before devaluation. Let us suppose, devaluation takes place 17
  18. 18. which reduces the value of home currency and now the exchange rate becomes $1 = Rs. 20. After such a change our goods becomes cheap in foreign market. This is because, after devaluation, dollar is exchanged for more Indian currencies which push up the demand for exports. At the same time, imports become costlier as Indians have to pay more currencies to obtain one dollar. Thus demand for imports is reduced. Generally devaluation is resorted to where there is serious adverse balance of payment problem. Limitations of Devaluation:- 1. Devaluation is successful only when other country does not retaliate the same. If both the countries go for the same, the effect is nil. 2. Devaluation is successful only when the demand for exports and imports is elastic. In case it is inelastic, it may turn the situation worse. 3. Devaluation, though helps correcting disequilibrium, is considered to be a weakness for the country. 4. Devaluation may bring inflation in the following conditions :- i. Devaluation brings the imports down, When imports are reduced, the domestic supply of such goods must be increased to the same extent. If not, scarcity of such goods unleash inflationary trends.ii. A growing country like India is capital thirsty. Due to non availability of capital goods in India, we have no option but to continue imports at higher costs. This will force the industries depending upon capital goods to push up their prices.iii. When demand for our export rises, more and more goods produced in a country would go for exports and thus creating 18
  19. 19. shortage of such goods at the domestic level. This results in rising prices and inflation.iv. Devaluation may not be effective if the deficit arises due to cyclical or structural changes. 4. Exchange Control It is an extreme step taken by the monetary authority to enjoy complete control over the exchange dealings. Under such a measure, the central bank directs all exporters to surrender their foreign exchange to the central authority. Thus it leads to concentration of exchange reserves in the hands of central authority. At the same time, the supply of foreign exchange is restricted only for essential goods. It can only help controlling situation from turning worse. In short it is only a temporary measure and not permanent remedy. Non-Monetary Measures for Correcting the BoP ↓ A deficit country along with Monetary measures may adopt the following non-monetary measures too which will either restrict imports or promote exports. 1. Tariffs Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the prices of imports would increase to the extent of tariff. The increased prices will reduced the demand for imported goods and at 19
  20. 20. the same time induce domestic producers to produce more of import substitutes. Non-essential imports can be drastically reduced by imposing a very high rate of tariff. Drawbacks of Tariffs :-1. Tariffs bring equilibrium by reducing the volume of trade.2. Tariffs obstruct the expansion of world trade and prosperity.3. Tariffs need not necessarily reduce imports. Hence the effects of tariff on the balance of payment position are uncertain.4. Tariffs seek to establish equilibrium without removing the root causes of disequilibrium.5. A new or a higher tariff may aggravate the disequilibrium in the balance of payments of a country already having a surplus.6. Tariffs to be successful require an efficient & honest administration which unfortunately is difficult to have in most of the countries. Corruption among the administrative staff will render tariffs ineffective. 2. Quotas Under the quota system, the government may fix and permit the maximum quantity or value of a commodity to be imported during a 20
  21. 21. given period. By restricting imports through the quota system, the deficit is reduced and the balance of payments position is improved. Types of Quotas :-1. the tariff or custom quota,2. the unilateral quota,3. the bilateral quota,4. the mixing quota, and5. import licensing.6. Merits of Quotas :-1. Quotas are more effective than tariffs as they are certain.2. They are easy to implement.3. They are more effective even when demand is inelastic, as no imports are possible above the quotas.4. More flexible than tariffs as they are subject to administrative decision. Tariffs on the other hand are subject to legislative sanction. Demerits of Quotas :-1. They are not long-run solution as they do not tackle the real cause for disequilibrium.2. Under the WTO quotas are discouraged.3. Implements of quotas is open invitation to corruption. 3. Export Promotion The government can adopt export promotion measures to correct disequilibrium in the balance of payments. This includes substitutes, tax 21
  22. 22. concessions to exporters, marketing facilities, credit and incentives to exporters, etc. The government may also help to promote export through exhibition, trade fairs; conducting marketing research & by providing the required administrative and diplomatic help to tap the potential markets. 4. Import Substitution A country may resort to import substitution to reduce the volume of imports and make it self-reliant. Fiscal and monetary measures may be adopted to encourage industries producing import substitutes. Industries which produce import substitutes require special attention in the form of various concessions, which include tax concession, technical assistance, subsidies, providing scarce inputs, etc. Non-monetary methods are more effective than monetary methods and are normally applicable in correcting an adverse balance of payments. Drawbacks of Import Substitution:-1. Such industries may lose the spirit of competitiveness.2. Domestic industries enjoying various incentives will develop vested interests and ask for such concessions all the time.3. Deliberate promotion of import substitute industries go against the principle of comparative advantage. BOP & Macroeconomic Variables 22
  23. 23. A nation’s balance of payments interacts with nearly all of its keymacroeconomic variables.Interacts means that the BOP affects and is affected by such keymacroeconomic factors as: – Gross Domestic Product (GDP) – Exchange rate – Interest rates – Inflation ratesFOREIGN EXCHANGE 23
  24. 24. Method by which rights to wealth expressed in terms of currency ofone country are converted into rights to wealth in terms of currency ofanother country are known as Foreign Exchange.Prices of foreign currencies expressed in terms of other currencies iscalled Foreign Exchange Rate.Determinants of Exchange Rates:Exchange rates are determined by the demand for and the supply ofcurrencies on the foreign exchange market.The demand and supply of currencies is in turn determined by:  Relative interest rates  The demand for imports  The demand for exports  Investment opportunities  Speculative sentiments  Global trading patterns  Changes in relative inflation ratesForeign Exchange Includes:  A Currency Note 24
  25. 25.  Travellers Cheque  Bills of Exchange  Bank balance in Foreign CurrencyFOREIGN EXCHANGE MARKETSPeculiarities  Largest financial market in the world.  No single location, No barriers.  Open 24 hours a day.  Indian market timings are 9.00 am to 5.00 pm  An over the counter market (OTC).  Exchange rate fluctuate almost every 2/3 seconds.  Controls/policies of respective countries.  Effect of other markets-Money,capital,debt.Sources of Foreign Exchanges 25
  26. 26.  Export Receipts (Diamond, Pharmacy, Cotton, etc)  Inward Remittances (Money sent by NRI through bank to India)  Borrowings (Company borrow from Foreign banks)Application of Foreign Exchanges  Import Payments (Gold, Crude Oil, Electronic Goods)  Outward Remittances (People send money Abroad)  Loan RepaymentsPlayers in Foreign Exchange Market  Central Bank (Reserve Bank of India)  Authorized Dealers  Exchange brokers  Authorized Money Changers  FEDAI – Foreign Exchange Dealers Association of India 26
  27. 27. Money Changers in India  Restricted Money Changers Can only Buy Foreign Currency e.g. Hotels  Full Fledged Money Changers Can buy & sell Foreign currency e.g. Thomas CookIndirect quotations INR 1 = USD 0.02225 INR 1 = GBP 0.01419- Home currency fixed. - Foreign currency variable . (Indirect quotations were being used in India till July 1993)Direct quotationsUSD 1 = INR 45.58GBP 1 = INR 73.70 - Foreign currency fixed - Home currency variable(Used in India from August 1993) 27
  28. 28. Inflation And Foreign Exchange  High Inflation in India (5% Average Inflation in India, more than 8% now) Whereas In developed countries Inflation is below 1%  Due to High Inflation Interest rate are higher in India  Foreign Currency is Appreciating & Indian Currency is DepreciatingFixed Exchange RateIn a fixed exchange rate system – foreign central banks buy and selltheir currencies at a fixed price in terms of the domestic currencyPrior to 1973, most countries had fixed exchange rates against eachother.  A fixed exchange rate acts like a price support system  In order to maintain a fixed exchange rate, the central bank has to make up for the excess demand or take up the the excess supply of foreign currency.  In order to carry out these interventions, it is necessary for the central bank to hold an inventory of foreign currencies.  However, if the country persistently runs deficits in the BOP, the central bank eventually runs out of foreign currencies, and will not be able to carry out the interventions 28
  29. 29.  In such a situation, the central bank will have to ultimately devalue its currencyPros and Cons of Fixed Exchange RateArgument in favor of fixed exchange rate  Certainty & Less inflationary  Promotes money and capital markets  Helps in the smooth working of the international monetary system & Prevents monetary shocks 29
  30. 30. Argument against fixed exchange rate  Heavy burden on exchange reserve  Country must have sufficient reserve  Fails to solve the balance of payment disequilibrium  Does not prevent real shock  It is not a long term solution if the underlying economy is weakFlexible Exchange RateIn a flexible exchange rate system, the central bank allows theexchange rate to adjust to equate the supply and demand for foreigncurrency. In effect since 1973Clean floating – the central bank stands aside completely and allowsthe exchange rate to be freely determined in the forex market – officialreserve transactions are zero  Managed float - the central bank intervenes to buy or sell foreign currencies periodically in an attempt to influence the exchange rates 30
  31. 31. Pros and Cons of Flexible Exchange RateArgument in favor of flexible exchange rate  Simple operation, smoother, more fluid adjustment  Brings realism in forex transactions  Disequilibrium in balance of payment autostabilized  No need for forex reserve to manage exchange rate  Prevents real shocks  Reinforces the effectiveness of monetary policyArgument against flexible exchange rate  Exchange rate risk –futures market  Adverse effect of speculation  Encourages inflation 31
  32. 32.  Far from perfect system, but no better system existsBretton Woods IThe original Bretton Woods system was the system of fixed exchangerates that existed from the end of World War II (1946), until its collapsein 1971. – John Maynard Keynes was a principle architect of the Bretton Woods System. – Global financial system would have fixed exchange rates in order to prevent the beggar-thy-neighbor policies of currency devaluations that characterized the 1930’s. – The dollar could be converted to any other major currency or gold at a fixed exchange rate.Role of IBRD & IMF  IBRD: International Bank For Reconstruction And Development  Give loans to countries for reconstruction of Infrastructure.  IMF: International Monetary Fund  To monitor Exchange rate stability  Advice country to follow Fixed exchange rate system  Give loans to countries to overcome BOP problemsBy the early 1970s, as the Vietnam War accelerated inflation, theUnited States was running not just a balance of payments deficit but 32
  33. 33. also a trade deficit. The crucial turning point was 1970, which saw coverage deteriorate from 55% to 22%.In the first six months of 1971, assets for $22 billion fled the UnitedStates. In response, on August 15, 1971, President Nixon unilaterally“closed the gold window.”“Bretton Woods II” is a term coined by three Deutsche Bankeconomists — Michael Dooley, Peter Garber, and David Folkers-Landau— in a series of papers in 2003–2004 to describe the currentinternational monetary system:In this system, the United States and the Asian economies have enteredinto an implicit contract where the U.S. runs current account deficitsand the Asian countries keep their currencies fixed and undervalued bybuying U.S. government debt.According to Dooley, Folkert-Landau, and Garber (DFG), this system hasbenefits to both parties: – The U.S. obtains a stable and low-cost source of funding for its current account and budget deficits, and can easily reduce taxes, and increase government spending at the same time. – For the Asian countries, the undervalued currency creates export-led development strategy that produces economic and employment growth to keep the lid on potentially explosive pressures rising large pools of surplus labor. 33
  34. 34. US-China Currency Issue  China have trade surplus with USA & World.  Chinese central bank maintained currency exchange fixed ($ = 8.28 Yuan)YEAR China Foreign CurrencyChina Trade Surplus (in $) Reserve (in $)2006 1.06 Trillion 178 Billion2007 1.5 Trillion 268 Billion2008 1.9 Trillion 297 Billion2009 2.39 Trillion 198 Billion2010 2.64 Trillion 184.7 Billion 34
  35. 35. US Trade with China Steps Taken by China to avoid Manipulation in its Currency • China Modified its Currency Policy on July 21, 2005. • Yuan’s Exchange rate become adjustable with respect to Market Demand & Supply of currency in Basket. • Basket includes Dollar, Euro & Yen etc. So $ = 8.11 Yuan (2.1% appreciation) • Also Yuan can fluctuate by 0.3% on daily basis against basket. 35
  36. 36. As per some Economist it was argued that: • China’s Currency is Undervalued by 40%. Which Resulted in:Chinese export to US Cheaper & US export to China ExpensiveAlso rise in Trade Deficit from $ 30bn in 1994 to $ 260bn in 2007.1988 Omnibus Trade & Competitiveness Act.Act requires the Treasury Department to report on exchange ratepolicies of Countries which have large Global Current Account Surplus &Trade Surplus with US.The aim was to find out, if they manipulate their currencies againstdollar.And if manipulation found than Treasury is required to negotiate & endsuch practices.China reformed its currency in July 2005 and Treasury made followingobservation about China: • Current Account Surplus has reduced by Chinese Government. • 2006 – China made progress to make currency more flexible. • 2007 – Under US law China has no currency manipulation. 36
  37. 37. • 2007 – China should accelerate the appreciation of RMB’s effective exchange rate in order to minimize risk.China Foreign Currency reserve China has highest foreign currency reserve because of: • High amount of Export • And Hot money arrival i.e. foreign funds bought into the country. • To tackle this the value of RMB should increase. • In 2008 Foreign Exchange Regulations approach RMB exchange rate against other fully convertible currencies using floating system, based on Demand & Supply of Foreign Currency. 37
  38. 38. Reasons China should let RMB appreciate, in its own interest 1. Overheating of economy 2. Reserves are excessive. – It gets harder to sterilize the inflow over time. 3. Attaining internal and external balance. – In a large country like China, expenditure-switching policy should be the exchange rate. 4. Avoiding future crashes.Policies to reduce the US CA deficit: • Reduce the US budget deficit over time, – thus raising national saving. – After all, this is where the deficits originated. • Depreciate the $ more. – Better to do it in a controlled way • than in a sudden free-fall. – The $ already depreciated a lot against the € • & other currencies • from 2002 to 2007. 38
  39. 39. – Who is left? – The RMB is conspicuous as the one major currency that is still undervalued against the dollar.Problems with BW2: People’ Bank of ChinaU.S. absorbs 80 percent of world’s savings not invested at their homecountry.The large CAD sends billions of dollars abroad, particularly to China.People’s Bank of China uses the inflow of dollars to purchase assets,mostly U.S. Treasuries.Much of the $400 billion fiscal deficit is financed by China.If China stops purchasing U.S. assets and switches to Japan, Europe, orother markets, it will cause a fall in the dollar and long-term interestrates will increase.Conclusions  In any case, the new Chinese Exchange Rate Mechanism is a step to the right direction.  The United States, in contrast, has not done anything.  President Bush has not vetoed a single spending bill. The government spending has increased faster than at any time since the 1960’s (“the Great Society” welfare programs and Vietnam War). 39
  40. 40.  The massive tax cuts passed in 2001–2003 are set to expire in 2008–2010.What the China should do?If China intends to allow a series of small appreciations in the renminbithen it either has to 1. Keep its interest rates below U.S. rates, so that low interest rates offset the expected return from renminbi appreciation over time (currently bank deposit rates in China are capped at 2.5%, below the 3.5% federal funds rate). 2. Intervene a lot. 3. Or do both.Either way, this policy prevents independent Chinese monetary policy.What the U.S. Should Do?Since these are temporary tax cuts and the likelihood they will be madepermanent is low, basic economic theory tells us that their positiveincentive effects are small.Since the President and the Congress are unable to control spending,the simplest way for the U.S. to reduce its fiscal deficit (and, indirectly,current account deficit) would be to repeal the 2001–2003 tax cuts. 40
  41. 41. References • RBI’s Master circular on risk management.( • FEDAI Rules • • • International Economics - H G Mannur • International Financial Management - P G Apte • Balance of Payments - Paul Madson 41