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ASSIGNMENT

B.Com - General-3'' Semester

Subject code: BCC 303

Q 1 Describe the fixed and flexible exchange rate.

Fixed and Flexible Exchange RateExchange rate systems can be classified according to the degree to which Ow rates are controlled bythe government:

Flexible exchange rate

4lnder a flexible or floating system the market forces based on demand rid supply, determines acurrency's value. A surplus in a country results in n appreciation of its currency, immediate higherprices mass reserve and opportunity costs In addition too much money on reserve leads to a loss ofinvestment opportunities. On the other hand, a country's deficit will lower its currency value making iteasier to export later.

countries such as the Japan and United States are in a more flexibleange rate system in which currency values are allowed to float in ation to each other. Governmentintervention has a significant impact on jrency values, especially in the short-term Thus thesecurrencies are not ra truly floating rate system.

Though managed floating exchange rate-systems have no official bounds on currency values,governments do intervene in this system in order to accomplish their policy objectives. A managedfloating system allows governments to implement their policy objectives within a relatively flexibleexchange rate system and to coordinate monetary policies with othergovernments if they choose.

Q2 What are the key step taken by Indian government to integrate the Indian economy With the

world economy?

steps taken by indian government

Indian economy was in deep crisis in July 1991, when foreign currency ;erves had plummeted toalmost $1 billion; Inflation had roared to an nual rate of 17 percent; fiscal deficit was very high andhad become sustainable; foreign investors and NRIs had lost confidence in Indian onomy. Capital wasflying out of the country and we were close to faulting on loans. Along with these bottlenecks at home,many foreseeable changes swept the economies of nations in Western and stern Europe, South EastAsia, Latin America and elsewhere, around the me time. These were the economic compulsions athome and abroad that led for a complete overhauling of our economic policies and programs. ijormeasures initiated as a part of the liberalisation and globalisation ategy in the early nineties are as

follows:

Devaluation: The first step towards integration was taken with the announcement of the devaluationof Indian currency by 18-19 percent against major currencies in the international foreign exchangemarket. In fact, this measure was taken in order to resolve the BOP crisis.

Disinvestment:In order to make the process of globalization smooth, privatization and liberalisationpolicies are moving along as well. Under the privatization scheme, most of the public sectorundertakings have been/are being sold to private sector.

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Dismantling of the Industrial Licensing Regime: At present, only six industries are undercompulsory licensing mainly on accounting of environmental safety and strategic considerations. Asignificantly amended locational policy in tune with the liberalized licensing policy is in place. Noindustrial approval is required from the government ftw locations not falling within 25 kms of theperiphery of cities having a population of more than one million.

Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and encouragingnon-debt flows. The Department has put in place a liberal and transparent foreign investment regimewhere most activities are opened to foreign investment on automatic route without any limit on theextent of foreign ownership.

Opening the reserved industries for private sector. Now there are only three industries reserved forthe public sector.

Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion.

The removal of quantitative restrictions on imports severe restrictions on short-term debt andallowing external commercial borrowings based on external debt sustainability.

Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors,including the deregulation of interest rates, strong regulation and supervisory systems, and theintroduction of foreign/private sector competition.

Q3 What are the key instruments of monetary policy?

Quantitative measures

The key quantitative measures are as follows:

1. Open market operations:Open market operations make quite important instrument of creditcontrol. The Reserve Bank of ln purchases and sells securities in open market operations. Intimes inflation, RBI sells securities to mop up the excess money in the mark Similarly, toincrease the supply of money, RBI purchases securities OMO help control the money supplyin the economy.

2. Bank rate policy: Bank rate, also referred to as the discount rate, is t rate of interest which acentral bank charges on the loans and advance that it extends to commercial banks and otherfinancial intermediaries Changes in the bank rate are often used by central banks to control tmoney supply. During inflation the bank rate is increased and dun deflation, bank rate is

decreased.

3. Repo/reverse repo: Repo comes from the repurchasing Whenever the banks have anyshortage of funds the either from Reserve Bank of India (RBI) or from other L rate is the rateat which the banks borrow these excess borrowing bank pledges its government securities tocar transaction.

A reduction in the repo rate will help banks to get money rate. When the repo rate increases borrowing

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from RBI I expensive.

Reverse repo rate is the rate that RBI offers the banks fo funds with it Reverse repo operations suckout liquidity from the system.

4. Cash Reserve Ratio (CRR): All commercial banks are re( a certain percentage of their totaldeposits, comprising demand, deposits with RBI in form of cash This percentage is ca reserveratio. This instrument can change the money supp Higher the CRR, lower will be the lendableresources avail commercial banks and so will be the amount of credit created by them.Higherthe CRR, lower is the money supply in the economy versa.

Q4 Discuss the role of IMF in World trade.

lnternational Monetary Fund's Role in World Trade

The IMF prevent crisis in the system by encouraging countries to adopt sound economic policies; it isalsoas its name suggests - a fund thatbe tapped by members needing temporary financing to address problems balance of payments

The IMF works for global prosperity by promoting: Balanced expansion of world trade. Stability of exchange rates. Avoidance of competitive devaluations, and orderly correction of bal of payments problems.

To serve these purposes, the IMF:

1. Monitors economic and financial developments and policies of mer countries at the globallevel, and gives policy advice to its mem based on its more than fifty years of experienceFor example, in its annual review of the Japanese economy for 2( the IMF Executive Boardurged Japan to adopt a comprehend approach to revitalise the corporate and financial sectorsof its economy tackle deflation, and address fiscal imbalances

2. Lends to member countries with balance of payments problems not to provide temporaryfinancing but to support adjustment and reform policies aimed at correcting the underlyingproblems.

For example during the 1997-98 Asian financial crisis, the IMF act swiftly to help Korea bolster itsreserves It pledged $21 billion to ass Korea to reform its economy, restructure its financial and corporasectors and recover from recession Within four years, Korea h recovered sufficiently to repay the loans

and at the same time, rebuild its reserves.

3. Provides the governments and central banks of its member countries with technical assistanceand training in its areas of expertise. For example:

Following the collapse of the Soviet Union, the IMF stepped in to helpthe Baltic States, Russia, and other former Soviet countries set utreasury systems for their central banks as part of the transition from centrally planned to market-based economic systems.

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Q5 Try to identify the service Offered by investment banks in India

Role of Investment Banks

The role of investment banks includes a lot of consulting. For example, offer advices on mergers andacquisitions to companies. The other .. where they give advice are tracking the market anddetermining,. should a company come out with a public offering and what is the I possible way tomanage the public assets of businesses The role th4 investment bank plays sometimes gets overlappedwith that of a brokerage house The usual advice of buying and selling is also given by investmentbanks.

There is no demarcating line between the investment banking and forms of banking in India. All banks

nowadays want to provide customers the best of services and create a niche for themselves and IF whyapart from investment banks, all other banks too are aiming at makE big.

At the macro level, investment banking is related with the primary func assisting the capital market inits function of capital intermediation, i.e.movement of financial resources from those who have them (the invest to those who need to make useof them for producing GOP (the issu Over the decades, investment banks have always suited the needsof finance community and thus become one of the most vibrant and exciting segment of financialservices.Globally investment banks handle significant fund-based business of their own in the capital marketalong with their non-fund service portfolio which is offered to the clients. All these activities arebroadly segmented across three platforms - equity market activity, debt market activity and Merger

and Acquisitions (M&A) activity. In addition given the structure of the market, there is also asegmentation based on whether a particular investment bank''belongs to a banking parent or is a stand-alone pure investment bank.

Q 6 Discuss the impact monetary policy on individuals and Government.

Impact of monetary policy on individualsIn recent years, the policy had gained in importance due to announcement in the interest rates. Earlier,depending on the rates announced by the F the interest costs of banks would immediately either

increase or decrease reduction in interest rates would force banks to lower their lending ratesborrowing rates. So if you want to place a deposit with a bank or take a Ic it would offer it at a lowerrate of interest.

On the other hand, if there were to be an increase in interest rates, ba would immediately increase theirlending and borrowing rates. Since rates of interest affect the borrowing costs of corporates and as aresult, their bottom lines (profits), the monetary policy is very important to them also. Since thefinancial sector reforms commenced, the RBI has moved towards a market-determined interest ratescenario. This means that banks are free to decide on interest rates on term deposits and loans.

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Being the central bank, however, the RBI would have a say and determine direction on interest rates asit is an important tool to control inflation. The bank rate is a tool used by RBI for this purpose as itrefinances banks at this rate. In other words, the bank rate is the rate at which banks borrow fromFrom the RBI.