...Preliminary draft: please do not quote or cite India’s Trilemma: Financial Liberalization, Exchange Rates and Monetary Policy∗ August 22, 2010 Michael M. Hutchison Department of Economics University of California Santa Cruz, CA 95064 USA Rajeswari Sengupta Department of Economics University of California Santa Cruz, CA 95064 USA Nirvikar Singh Department of Economics University of California Santa Cruz, CA 95064 Abstract A key challenge for macroeconomic policy in open economies is how to simultaneously manage exchange rates, interest rates and capital account openness—the trilemma. This paper calculates a trilemma index for India and investigates its evolution over time. We find that financial integration has increased markedly after the mid-2000s, with corresponding limitations on monetary independence and exchange rate stability. This tradeoff has been mitigated, however, with the rise of international reserves as a partially independent instrument of macroeconomic policy. In addition, we confirm that the weighted sum of the three indexes adds up to a constant, validating the notion that a rise in one trilemma variable should be traded-off with a drop of the weighted sum of the other two. Finally, we consider the implications of changes in the trilemma index for macroeconomic outcomes. We find some evidence that greater financial integration and corresponding loss of monetary autonomy and exchange rate stability has influenced inflation and inflation volatility, though not...
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...has been derived from the Greek word `Mikros' i.e. small and the word macro has been derived from Greek word `Makros' i.e. large. What is Microeconomics ? Meaning & Definition Micro means small. Thus, micro economics analyses individualistic behaviour. It studies an individual consumer, producer, price of a particular commodity, household, etc. According to Prof. K. E. Boulding, "Micro Economics is the study of particular firm, particular household, individual prices, wages, incomes, individual industries and particular commodities." Subject Matter or Scope of Microeconomics Micro Economics is concerned with the following topics :- 1. Commodity Pricing: Prices of individual commodities are determined by market forces of demand and supply. So micro economics makes demand analysis (individual consumer behaviour) and supply analysis (individual producer behaviour). 2. Factor Pricing: Land, labour, capital and entrepreneur, all factors contribute in production process. So they get rewards in the form of rent, wages, interest and profit respectively. Micro economics deals with determination of such rewards i.e. factor prices. So micro economics is also called as 'Price Theory' or 'Value Theory'. 3. Welfare Theory: Micro economics deals with optimum allocation of available resources and maximisation of social welfare. It provides answers for 'What to produce?', 'When to produce?', 'How to produce?' and 'For whom it is to be produced?'. In short, Micro economics guides...
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...A Study of Monetary Policy Impact on Stock Market Returns (With Special Reference to Nifty and Bank Nifty) A PROJECT REPORT Submitted by Chintan Divetia (1011416026) Submitted to Mr. Raviraj Gohil Assistant Professor Department of Finance In partial fulfilment for the award of the degree of POST GRADUATION DIPLOMA IN MANAGEMENT in Finance Shanti Business School, Shela, Ahmedabad. ACKNOWLEDGEMENT It was a great opportunity for me to work with Sharekhan Ltd., pioneers in the field of Stock Market. I am extremely grateful to all those who have shared their expertise and knowledge with me and without whom the completion of this project would have been virtually impossible. Firstly, I would like to thank my Company Mentor Mrs. Raina Vashi who has been a constant source of inspiration for me during the completion of this project. I would also like to thank Mr. Henal Bardoliwala, Relationship Manager of Sharekhan Ltd., for supporting me to complete my project. I am thankful to all staff of Sharekhan Ltd for their valuable support and cooperation during the entire tenure of this project. I thank my faculty guide Mr. Raviraj Gohil who helped me out at every critical situation that i faced in my project and gave us his valuable advice to solve problems. EXECUTIVE SUMMARY I feel great pleasure by presenting this project. As a student of PGDM of ‘Shanti Business School Ahmedabad’, there is a subject of partial training followed...
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...A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive. 2. What is Reverse Repo Rate? A: This is exact opposite of Repo rate. Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. RBI uses this tool when it feels there is too much money floating in the banking system. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. 3. What is CRR Rate? A: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.3 4. What is SLR Rate? A: SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. SLR is used to control inflation...
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...The Relationship between Interest Rate and Exchange Rate in India Pradyumna Dash[1] Introduction The theoretical as well as empirical relationship between the interest rate and exchange rate has been a debatable issue among the economists. According to Mundell-Fleming model, an increase in interest rate is necessary to stabilize the exchange rate depreciation and to curb the inflationary pressure and thereby helps to avoid many adverse economic consequences. The high interest rate policy is considered important for several reasons. Firstly, it provides the information to the market about the authorities’ resolve not to allow the sharp exchange rate movement that the market expects given the state of the economy and thereby reduce the inflationary expectations and prevent the vicious cycle of inflation and exchange rate depreciation. Secondly, it raises the attractiveness of domestic financial assets as a result of which capital inflow takes place and thereby limiting the exchange rate depreciation. Thirdly, it not only reduces the level of domestic aggregate demand but also improves the balance of payment position by reducing the level of imports. But the East Asian currency crisis and the failure of high interest rates policy to stabilize the exchange rate at its desirable level during 1997-1998 have challenged the credibility of raising interest rates to defend the exchange rate. Critics argue that the high interest rates imperil the ability of the domestic firms...
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...Rate Stock Price CHAPTER THREE 3.1) introduction This chapter is particularly focused on the various previous studies, which tries to explore the relationship between the exchange rate and stock price. Many studies had been conducted in context to the relation between the exchange rate and stock prices, some studies even have analyzed the relation by considering some of the other variables (like FDI, interest rate, inflation rate ect), to see if these variables have any influence on the fluctuating exchange rate and stock prices. The current literature provides year by year explanation about the Different opinions and arguments of various researches on the relationship between exchange rate and stock prices. For the easy understanding the chapter will be divided into two sections. The first section will cover all the research papers published prior to 1990's. one can observe that most of the studies in section one had established the relationship by measuring the exposure from fluctuating exchange rates to stock prices, so we will name this part as “literature review on measuring the exposure'. And in second section; we cover all the research papers which are published after 1990's and one can observe that some of the studies have established the relation by measuring the causal relation between the exchange rate and stock prices, so we would name the second part as” literature review on measuring the causality relation between the exchange rate and stock prices'. The reason...
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...The pursuit of financial stability* It gives me great pleasure to address this gathering at the 7th Annual Conference on Money and Finance in the Indian economy organised by the Indira Gandhi Institute of Development Research (IGIDR). Issues related to monetary policy and financial sector continue to attract a lot of research interest all over the world and this is all the more true for emerging economies like India which are gradually integrating with the rest of the world. Accordingly, the initiatives taken by the IGIDR to hold annual conferences on the topic of Money and Finance to bring together researchers and policymakers are indeed welcome. 2. With growing financial openness, globalisation and liberalisation, financial stability issues have come to the forefront. These issues have ranged from discussions on basic issues of the definition of financial stability itself to issues of measurement, issues of choice of instruments to achieve the objective of financial stability and even issues on the degree of activism that central banks should adopt in pursuing this objective. 3. Traditionally, it has been believed that monetary stability leads to financial stability. However, as the events of the 1990s show, it need not necessarily be the case. While there are complementarities between these two objectives, especially in the long run, the same need not hold in the short-run. A stable macroeconomic environment - low and stable inflation, sustained growth and low interest...
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...(particularly when measured in US dollars) have traded broadly sideways with significant country variations. In November, the MSCI World and MSCI Emerging Market indices rose 2.9% and 1.1% in local currency terms, respectively. Among developed markets, Japan was the best performing market (up 6.2%). For the first time in seven months, Europe outperformed the US (up 3.7% against 2.6%). Australia was the worst performing developed market, declining 3.5% in local currency terms, suffering as resource prices (notably oil and iron ore) declined precipitously. We will discuss the impacts of the rising US dollar and falling oil prices in some detail below, but suffice to say this backdrop was negative for emerging economies, in aggregate. Generally we try to avoid spending too much time analysing the impacts of currency movements on market returns as investors have differing currency exposures. However, November is a notable exception. The continuing surge in the US dollar and the interaction with commodity prices has been profound. In developed markets all major currencies depreciated against the US dollar, most notably the Japanese yen, transforming a 6.2% return in yen terms into a 0.3% return in US dollars. Similarly, weakness in the Australian dollar led to negative returns of 6.3% in US dollars. Emerging market returns in aggregate were -1.1% in US dollars, with Russian equities standing out,...
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...of a country's official exchange rate by its government i.e. central bank (RBI in India) relative to other currencies; Where as in floating or fluctuating exchange rate currency's value is allowed to fluctuate according to the foreign exchange market. In this case, it is known as Depreciation. There are two implications for currency devaluation. * First, Devaluation makes a country's exports relatively less expensive for foreigners and * Second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit. Revaluation: This term is used in a fixed exchange rate regime; it means a deliberate upward adjustment to a country's official exchange rate relative to other currencies. In floating exchange rate, it is known as Appreciation. The Liberalized Exchange Rate Management System (LERMS): LERMS was introduced in March 1992 involving the dual exchange rate system in the interim period. The dual exchange rate system was replaced by a unified exchange rate system in March 1993. History of Devaluation The Indian rupee, which was on par with the American currency at the time of Independence in 1947, has depreciated by a little more than 65 times in the past 66 years. At the time of independence, there were no foreign borrowings on India's balance sheet. After independence, India had chosen to adopt a fixed exchange rate currency regime. * The rupee was pegged...
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...THE EFFECT OF FISCAL DEFICIT ON WHOLE SALE PRICE INDEX IN INDIA Submitted by, Group 7 – Sec A Ankit Rout (U111007) Chinmaya Swain (U111017) Kavindra Sharma (U111027) Nikhil Lukose (U111037) Samik Bhattacharjee (U111047) Swarup Kumar Mishra (U111057) ------------------------------------------------- ACKNOWLEDGEMENT We would like to express our whole-hearted gratitude to all those who have helped with the report or have been associated with the report in any way and made it a worth-while experience. We are greatly indebted to our batch mates and our seniors for having shared their invaluable thoughts and opinions that went a long way in helping us gather information and analyse issues for the report. And, a special mention of Professor Latha Ravindran, whom we cannot thank enough for having given us the opportunity and her total support for working on this project and completing our report. Thank you. INtroduction For the last several years the GDP of India has been growing rapidly. The real GDP growth of India averaged 8.5% in the five years ending March 2010. But at the same time food price inflation and consumer price inflation too have been on the increasing curve. The relationship between fiscal deficit and inflation which is measured by WPI in India is an important issue in macroeconomics study. The main purpose of the study is to analyze the relationship between budget deficit and Whole Sale Price Index. The fiscal deficit influences demand...
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...Monetary Policy Statement (July-December 2012: H1FY13) Executive Summary This issue of the Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS) outlines the monetary policy stance that BB will pursue in H1 FY13 (July-December 2012), based on an assessment of global and domestic macro-economic conditions and outlook. BB’s monetary policy has two major objectives: (i) maintaining inflation at moderate levels and (ii) supporting inclusive growth objectives of the Government. This MPS was preceded by productive consultations with a range of key stakeholders and web-based comments were also received. In FY10 and FY11 the global economy continued languishing in the aftermath of the 2009 global financial crisis and BB eased monetary policy in order to limit the impact on the Bangladesh economy. Due to this and other pro-active measures, the Bangladesh economy emerged largely unscathed from this global crisis, averaging over 6% growth between FY09 and FY11. In FY12 the economy faced a different set of challenges related to rising inflation and balance of payments pressures. In order to address these challenges BB’s monetary stance was more restrained than earlier years and yet able to accommodate a private sector credit growth rate which was more than sufficient to meet the initial GDP growth target. The monetary growth targets set in January 2012 were met and the key outcomes – falling inflation and containment of external sector pressures – were achieved...
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...Monetary Policy Statement (July‐December 2012: H1FY13) Executive Summary This issue of the Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS) outlines the monetary policy stance that BB will pursue in H1 FY13 (July‐December 2012), based on an assessment of global and domestic macro‐economic conditions and outlook. BB’s monetary policy has two major objectives: (i) maintaining inflation at moderate levels and (ii) supporting inclusive growth objectives of the Government. This MPS was preceded by productive consultations with a range of key stakeholders and web‐based comments were also received. In FY10 and FY11 the global economy continued languishing in the aftermath of the 2009 global financial crisis and BB eased monetary policy in order to limit the impact on the Bangladesh economy. Due to this and other pro‐active measures, the Bangladesh economy emerged largely unscathed from this global crisis, averaging over 6% growth between FY09 and FY11. In FY12 the economy faced a different set of challenges related to rising inflation and balance of payments pressures. In order to address these challenges BB’s monetary stance was more restrained than earlier years and yet able to accommodate a private sector credit growth rate which was more than sufficient to meet the initial GDP growth target. The monetary growth targets set in January 2012 were met and the key outcomes – falling inflation and con...
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...Block IV MACROECONOMICS – II UNIT 17 Inflation 1-14 UNIT 18 Banking and Money Supply 15-31 UNIT 19 International Trade and Balance of Payments 32-50 UNIT 20 Economic Indicators 51-62 UNIT 21 Business Cycles 63-71 UNIT 22 Economic Growth, Development and Planning 72-84 Economics for Managers Expert Committee Dr. J. Mahender Reddy Vice Chancellor IFHE (Deemed to be University) Hyderabad Prof. Y. K. Bhushan Vice Chancellor IU, Meghalaya Prof. Loveraj Takru Director, IBS Dehradun IU, Dehradun Course Preparation Team Prof. Ramalingam Meenakshisundaram IFHE (Deemed to be University) Hyderabad Ms. Pushpanjali Mikkilineni IFHE (Deemed to be University) Hyderabad Mr. Pijus Kanti Bhuin IU, Sikkim Ms. Preetaq Dutta Rai IU, Jharkhand Ranchi Prof. S S George Director, ICMR IFHE (Deemed to be University) Hyderabad Dr. O. P. Gupta Vice Chancellor IU, Nagaland Prof. D. S. Rao Director, IBS, Hyderabad IFHE (Deemed to be University) Hyderabad Ms. Hadiya Faheem IFHE (Deemed to be University) Hyderabad Mr. Mrinmoy Bhattacharjee IU, Mizoram Aizawal Prof. Tarak Nath Shah IU, Dehradun Mr. Manoj Kumar De IU, Tripura Agartala © The ICFAI University Press, All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying or otherwise – without prior permission in writing from The ICFAI University Press, Hyderabad. Ref. No. Eco Mgrs SLM – 09...
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...FINANCING ENVIRONMENT IN INDIA: A CRITICAL REVIEW S No | Topic | Page No | 1. | Executive Summary | 2 | 2. | Financial Instruments | 3 | 3. | Financial Markets | 4 | 4. | Financial Intermediaries | 5 | 5. | The Regulatory Environment | 6 | 6. | The Way Forward | 9 | Executive Summary 1. Corporate finance is used to collectively identify the various financial dealings undertaken by a corporation. Ideally, corporate finance is the division of the company that is mostly concerned with the financial operations of the company. In some businesses, corporate finance primarily focuses on raising money for ventures and projects. For other corporations and investment banks, corporate finance concentrates on analysis of corporate buyouts and other decisions. The core functions of corporate finance are making wise use of the financial resources available to the company. Corporate finance may also take on many different aspects of the overall management of the finances of the company. The functions may also include managing of investments like acquisition and selling stocks, bonds, and other investment ventures pertaining to other companies. It may also involve creating and managing the process for issuing shares of stock or offering corporate bonds to generate resources for expansion projects. 2. The pattern of corporate financing in India has been different throughout its economic history. The outline of corporate financing in India has been determined by the...
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...Y V Reddy: Fiscal policy and economic reforms Address by Dr Y V Reddy, Governor of the Reserve Bank of India, at the National Institute of Public Finance and Policy (NIPFP), New Delhi, 26 May 2008 (edited transcript). * * * Respected Professor Govinda Rao and distinguished scholars, I am honoured by my friend, Prof. Govinda Rao’s, kind invitation to me to visit the National Institute of Public Finance and Policy (NIPFP). I had the opportunity of working very closely with the NIPFP on several occasions. Apart from my personal affinity to the NIPFP, there is a close relationship between the Reserve Bank of India (RBI) and the NIPFP, from an institutional point of view also. For instance, Prof. Govinda Rao is a Member of the Southern Local Board of RBI. Initially, I thought of speaking on fiscal policy and economic reforms from a central banker’s perspective. I realised later that while I have been working as a central banker over the last one decade, I had worked for most parts of the three decades prior to that in the Ministry of Finance, in the Government of India as well as in the Government of Andhra Pradesh. So it was a difficult choice for me as to whether I should give a fiscal view of the monetary policy or a monetary view of the fiscal policy. I have worked for a short period in the World Bank, which gives a global governments’ view and also in the IMF, which gives a global monetary authority’s view. As a via-media, I have opted to give a practitioner’s perspective...
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