BoP and Currency Mechanism: Misc

Question 1

FERA

Answer 1

Foreign Exchange regulation Act. Repealed in 1973

FERA was to discourage foreign currency in country. It had a long list of negative activities. Cross border inflows and outflows were also restricted.

Foreign-owned companies were called FERA companies and domestic counterpart were MRTP (Monopolistic and restrictive trade practices)

Question 2

FEMA

Answer 2

FEMA was enacted in 1999. The basic difference was that FEMA was to ‘permit while FERA was to ‘prevent’

Criminal offences were to be looked after by a newly created body Enforcement Directorate

Rupee convertibility was also covered. Borrowing of corporate sector also covered

Question 3

ECB

Answer 3

External commercial borrowings. Private corporate sector can borrow from International market.

Restriction: End use should be declared and money can be used only for that purpose.

Interest rates for ECB is linked to LIBOR. Markup above LIBOR rates.

Question 4

How markups for ECB is decided?

Answer 4

Decided by international rating agencies. Like Moody’s, S&P etc

Broadly two grades: ‘Investment and Speculative

Why India has low rating?

Combined fiscal deficit of state and centre - 10%
High levels of Public debt - 70%
No fiscal consolidation
No reforms.

Question 5

Various phases in foreign investment

Answer 5

Selective and restricted to high priority areas.
The Hyphen Era: Maruti-Suzuki, BPL-Sanyo, Hero-Honda
Foreign companies could use their brand names.

Question 6

Problems faced by investors/reasons for low investment

Answer 6

Labour laws.

FIPB was ineffective e.g POSCO Odisha

Ease of doing Business index.

Infrastructure

Red Tapism

Imperfect market

States are not cooperative

Question 7

Retail in India

Answer 7

90% Unorganized-Mom Pop Shops

Criticisms of FDI in retail: They will promote consumerism due to their aggressive marketing.

Principle of big companies working: Large volumes, less margins. Scientific inventory management, and minimal wastage.

Supply chain linkage: Employment creation

They will be mostly located on outskirts. Won’t be a threat to Kirana stores.

Question 8

GDR, ADR, IDR

Answer 8

XDR => Raising money from X

GDR => Companies raising from “Globe (world)

ADR -> Money is raised from America (by non-American Company)

IDR => Money is raised from India (By Non-Indian Company)

Question 9

FCCBs

Answer 9

Foreign Currency Convertible bonds

Special category of bonds which are issued in currencies different form the issuing companies domestic currency. Issued by corporates to raise money in foreign currency

Question 10

Participatory notes PN

Answer 10

It allows unregistered FPI to invest in India by subscribing to PN’s floated by FII. Investors are anonymous in this case and this exposed Indian market to those investors whose neither nationality, nor identity nor purpose is known. SEBI has relaxed the registration norms as proportion of investment through PN is coming down.

Question 11

Impossible Trinity

Answer 11

Manage Foreign exchange rate, free capital mobility and Independent monetary policy.

Question 12

BND- 420

Answer 12

India’s own gold standard

India government mint + BARC + CSIR + NPL

Question 13

Extended Fund Facility EFF

Answer 13

It is a service provided by the IMF to its member countries which authorises them to raise any amount of foreign exchange from it to fulfil their BoP crisis, but on the conditions of structural reforms in the economy put by the body. It is the first agreement of its kind. India had signed this agreement with the IMF in the financial year 1981-82.

Question 14

Hard Currency

Answer 14

Any globally traded currency which has global demand, liquidity (adequate supply) and stability( does not fluctuate)

Question 15

Soft Currency

Answer 15

It is basically the opposite term for the hard currency.

Question 16

Hot Currency

Answer 16

Hot currency is a term of the forex market and is a temporary name for any hard currency.

Question 17

Heated Currency

Answer 17

A term used in the forex market to denote the domestic currency which is under enough pressure{heat) of depreciation due to a hard currency’s high tendency of exiting the economy.

Question 18

Cheap Currency

Answer 18

If a government starts re-purchasing its bonds before their maturities (at full-maturity prices) the money which flows into the economy is known as the cheap currency, also called cheap money.

Question 19

Dear Currency

Answer 19

when a government issues bonds, the money which flows from the public to the government or the money in the economy in general is called dear currency, also called as dear money.

Question 20

Capital control

Answer 20

Any measure taken by government/central bank to limit the flow of foreign capital in and out of the domestic economy. Ex: Tobin tax, quantitative restrictions.

Question 21

Begger thy neighbour Policy

Answer 21

When a country damages its competitors through a weak currency, India argues China practices this policy

Question 22

Weak currency

Answer 22

Cheapens the rate of country’s export, making them more attractive to international buyers.

Question 23

Sovereign Wealth Fund

Answer 23

It is the fund of foreign currency that is meant to be invested in global assets like, shares, bonds, energy assets etc. It diversify the income, secure external account

Question 24

Internationalization of currency

Answer 24

A currency used by other countries banks, firms and citizens as financial security. Degree of internationalization depends on, traded actively, liquid and stable. Ex: US dollar, euro, yen, pound, renminbi