BoP and Currency Mechanism: Misc Flashcards
FERA
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 Repealed in 1973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)
FEMA
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
ECB
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.
How markups for ECB is decided?
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.
Various phases in foreign investment
Selective and restricted to high priority areas.
The Hyphen Era: Maruti-Suzuki, BPL-Sanyo, Hero-Honda
Foreign companies could use their brand names.
Problems faced by investors/reasons for low investment
Labour laws.
FIPB was ineffective e.g POSCO Odisha
Ease of doing Business index.
Infrastructure
Red Tapism
Imperfect market
States are not cooperative
Retail in India
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.
GDR, ADR, IDR
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)
FCCBs
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
Participatory notes PN
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.
Impossible Trinity
Manage Foreign exchange rate, free capital mobility and Independent monetary policy.
BND- 420
India’s own gold standard
India government mint + BARC + CSIR + NPL
Extended Fund Facility EFF
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.
Hard Currency
Any globally traded currency which has global demand, liquidity (adequate supply) and stability( does not fluctuate)
Soft Currency
It is basically the opposite term for the hard currency.
Hot Currency
Hot currency is a term of the forex market and is a temporary name for any hard currency.
Heated Currency
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.
Cheap Currency
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.
Dear Currency
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.
Capital control
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.
Begger thy neighbour Policy
When a country damages its competitors through a weak currency, India argues China practices this policy
Weak currency
Cheapens the rate of country’s export, making them more attractive to international buyers.
Sovereign Wealth Fund
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
Internationalization of currency
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
