2. FIXED EXCHANGE SYSTEM
• Currency fluctuate within narrow
boundaries
• Less concerns about depreciation and
appreciation
• Attracts more funds
• Disadvantage: Macro economic problems
becomes contagious
3. FLOATING EXCHANGE SYSTEM
• Macro Economic problems not
contagious.
• Central Bank is no required to constantly
maintain the exchange rate.
• Investors would invest in country having
the highest interest rates
• Disadvantages: Reduced competition for
domestic consumers.
4. PEGGED EXCHANGE SYTEM
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To achieve stability.
Home currency’s value is fixed in terms of that currency.
Usually dollar.
Attraction of foreign investments
Weak economic conditions may raise the
apprehensions.
Investors withdraw their investments.
Exchange of local currencies for dollar puts further
downward pressure.
Intervention by the central bank may not help
Investments are sold.
5. MEXICAN PESO CRISIS
• Pegged exchange system in 1994.
• Frequent intervention by the central bank
• Limiting the depreciation of peso was to contain
inflation.
• Speculators feared that the value of peso is
artificially maintained very high.
• This put even more downward pressure on peso
• Devaluation of peso by the central bank.
• Peso was allowed to float freely, which lead to
further decline.
• Central bank increased the interest rates.
6. CURRENCY BOARDS
• Another system of pegging the value
• The board must maintain the currency
reserves for all the currency that it has
printed.
• Currency board for a longer period, raises
the confidence. However Government
needs to convince the investors.
• Currency boards and interest rates
• Exchange rate movements
7. INTERNATIONAL ARBITRAGE
• Locational :
Differences in the exchange rates. Capitalising
on the disrepencies
Bid/Ask spread makes the difference
Realignment of forces
Triangular:
Cross exchange rates
Covered Interest:
Taking advantage of interest rate differentials
8. INLFATION
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Not to be equated with high prices.
Coverage keeps increasing
There is no absolute rate
Individual prices are under constant adjustment
No predetermined set of causes and effects
Expectations of further rise. Tendency of the
suppliers
• Alteration of asset preferences
• Inequality of incomes
10. MONETARY POLICY
• Instruements
Repo Rate
CRR
Open Market Operations
Limitations:
Supply side bottlenecks are not taken care
of
Marginal efficiency of capital is important
11. Contd
• Kashinath travelled 40 km to come to
mandi at Nasik. He sold 1,000
cauliflowers for Rs 750, considerably less
than the price yesterday. Mandi charges
aside, there also a 7% commission to be
paid to the agent who facilitated the
auction of vegetables.
12. FDI IN RETAIL-A SOLUTION FOR
FOOD PROBLEM
Underinvestment in logistics.
Discussion paper by the department of
industrial policy and promotion (DIPP)
100% FDI in cold in cold chains
We cannot depend on a system dominated
by middlemen
Bharti Walmart, ITC e choupal
13. FISCAL POLICY
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Policy related to public revenue and expenditure
Problems:
Burgeoning non plan expenditure
Tax evasion and avoidance
Dependence on indirect taxes
FRBM Act – 2004
(i) Misgivings about revenue deficit
(ii) Low levels of capital expenditure
(iii) Neglect of equity and economic growth
(iv) Flawed assumptions of the act
