making by vishnulal v (lead college of management)

1. MODULE 2
Vishnu lal
Lead college of management

2. Contents
• Exchange Control
• India’s Forex Scenario
– BOP Crisis 1990’s
– LERMS
– Convertibility
• International Monetory Developments
– Gold Standards
– Bretton Woods
• Euro Markets
• Guarantees in Trade
– Performance
– Bid Bonds

3. PROBLEMS OF FOREIGN EXCHANGES
1.Existence of Different Currencies With Different
Values
In today’s world economy, each country is having its
own monetary system and monetary units and all
the currencies of the world have different values
2. Disequilibrium in Demand and Supply of Currencies
All the currencies of the world are not equally
demanded. Some currencies have more demand in
comparison to the supply and vice versa.
Currencies having more demand in international
market are called Hard or Dear currency
Currencies having more supply in comparison to
their demand are called Soft Currencies

4. 3 Lack of Stability in Exchange rates
The foreign exchange rates also fluctuates
frequently due to several reasons. Due to lack of
stability in their rates also there are many
problems.
4. Problem of the methods of International
Payments
There is no generally accepted means and there
are several problems in accepting payments in
soft currency. Due to these problems, the
international payments become more
complicated.

5. 5 Problem of Transfer of Payments
There are several problems in transferring
payments because of so many hurdles and
barriers imposed in the countries under
exchange control

6. EXCHANGE CONTROL IN INDIA
• Regulation at government level of money-flows
in and out of a country.
• Exchange controls are usually maintained in the
belief that they help to protect a country's
currency and its foreign-exchange reserves.
• The controls may restrict investments by
residents overseas and non-residents'
investments and participation in the local
market.
• Big international currency movements tend not
to obey such controls.

7. • Common exchange controls include banning the
use of foreign currency and restricting the
amount of domestic currency that can be
exchanged within the country.
• Countries that employ exchange controls are
those with weaker economies
• These controls allow countries a greater degree
of economic stability by limiting the amount of
exchange rate volatility due to currency
inflows/outflows

8. Objectives of exchange control in India
1. Protection of Balance of Payments.
• When the balance of payments deficit of a nation
becomes large an chronic an its automatic correction is
not possible, certain active measures have to be adopted.
• In normal times the adverse balance of payments caused
value of country's currency to fall and helps in restoring
equilibrium.
• But there are conditions under which a fall in the
exchange value and currency has no effect on imports
and exports.
• Under such situations, measures are adopted to stabilize
the exchange value of currency at level higher than
would b possible under free conditions.

9. 2. Reducing Burden of Foreign Debt.
• The exchange value of a currency is sometimes
fixed and maintained at higher level to lighten
the burden of foreign debts contracted in terms
of foreign currencies.
• By overvaluing currency, the foreign exchange
earnings of the country from exports are
increased in cases where the demand is inelastic
and the prices in terms of the home currency to
be paid for essential imports get reduced.

10. 3. Raising the Level of Prices.
• Sometimes the currency is undervalued to help
in raising certain conditions in thought desirable
to stabilize the exchange rate at what can be
called the equilibrium level, i.e., the level
determined by market forces.
• Short-term fluctuations are eliminated by
deliberate action of authorities.

11. 4. Elimination of Short-term Fluctuations in
Exchange Rate.
• Exchange regulation in certain conditions is
thought desirable to stabilize the exchange rate
at what can be called the equilibrium level, i.e.,
the level determined by market forces.
• Short-term fluctuations are eliminated by
deliberate action of authorities.

12. 5. Economic Planning.
• Exchange control is an important part of
economic policy in any planned economy.
• Planning involves a very careful use of foreign
exchange resources of the country so that only
those goods are imported which are essential for
the implementation of the plans.
• Exchange controls are resorted to regular the
exports and imports in the light of plans

13. 6. Encouragement of Certain Economic Activities.
• One of the objectives of exchange regulations is
to encourage certain economic activities in the
country.
• Certain industries can be developed by reducing
the imports of commodities produced by them
and restricting the availability of foreign
exchange to pay for them.
• For example tourist traffic in the country is
encouraged by making available to the tourists
home currency at favorable rates

14. What is Eurocurrency?
• Eurocurrency is the term used to describe
deposits residing in banks that are located
outside the borders of the country that issues
the currency the deposit is denominated in
– For example: a deposit denominated in US dollars
residing in a Japanese bank is a Eurocurrency
deposit, or more specifically a Eurodollar deposit.

15. Euro Currency Market
 Description and Size of the
Eurocurrency Markets
• Eurocurrency
It refers to commercial bank deposits outside the country
of their
issue.
e.g. a deposit denominated in U.S. dollars in a British
commercial
Bank (or even in a British branch of a U.S. bank) is called a
Eurodollar.
• Eurocurrency Market
The market where Eurocurrencies are borrowed and lent.

16. How it Originated?
• After the Second World War, the amount of U.S.
dollars outside the United States increased
enormously.
• As a result, enormous sums of U.S. dollars were
in custody of foreign banks outside the United
States.
• During the Cold War period, especially after the
invasion of Hungary in 1956, the Soviet Union
feared that its deposits in North American banks
would be frozen as a retaliation.

17. • It decided to move some of its holdings to the
Moscow Narodny Bank, a Soviet-owned bank
with a British charter.
• The British bank would then deposit that
money in the US banks. There would be no
chance of confiscating that money, because it
belonged to the British bank and not directly
to the Soviets. On February 28 1957, the sum
of $800,000 was transferred, creating the first
eurodollars.

18. • Gradually, as a result of the successive
commercial deficits of the United States, the
eurodollar market expanded worldwide.
• Thus, the currencies involved in the Eurodollar
market are in no way different from currencies
deposited with banks in the home country. It
is only that Eurodollar is not under the orbit or
surveillance of the monetary policy, where the
currency in their home country is under the
regulation of the national monetary policy

19. Features of Eurocurrency Market
• It is an international market and it is under no
national control
– It has come up as the most important channel for
mobilizing and deploying funds on an international scale.
• It is a short term money market
• Eurodollar markets are the time-deposit market.
The deposits here have a maturity period ranging
one day to several months. Eurodollar is the short-
term deposit. It is a wholesale market
– It is so because Eurodollar is the currency that is dealt in
only large units.
– Size of individual transaction is usually above $1million.

20. • It is highly competitive and sensible market:
– High competitive : This market is characterized as
highly competitive because the market is growing and
accepted internationally.
– Sensible Market: The Eurodollar market is said to be
sensible because it responds faster to the changes in
demand and supply of the funds and also reacts to
changes in the interest rates.

21. Participants in Eurocurrency Market
• Government
• International Organizations
• Central Banks
• Commercial Banks
• Corporations
• MNC
• Traders
• Individuals

22. • Participants have contributed in the demand
and supply of the fund, in the following way:
– Supply :
• Central Banks of various countries are the suppliers;
• they channel the fund through BIS.
• Increase in the Oil Revenue of the OPEC has added to the
fund. MNCs and the traders place their surplus funds for
the short-term gains.
– Demand :
• Government demand for these funds to meet the deficit
arising due to meet the deficit arising due to the deficit in
Balance of Payment and the rise in the oil prices.
• Commercial Banks needs extra fund for lending. Some also
borrow for the better ‘window dressing’ in the year-end

23. Reasons for the Development and
Growth of the Eurocurrency Market
• Higher interest rates often prevailing abroad on
short-term deposits
• International corporations often found it very
convenient to hold balances abroad for short
periods in the currency in which they needed to
make payments
• International corporations can overcome domestic
credit restrictions by borrowing in the Eurocurrency
market

24. Operation and Effects of Eurocurrency Markets
 Operation
Eurobanks do not, in general, create money, but they are
essentially financial intermediaries bringing together lenders
and borrowers.
 Effects
The Eurocurrency market can create great instability in exchange
and other financial markets.
The Eurocurrency market reduces the effectiveness of domestic
stabilization efforts of national governments
 Eurocurrency markets are largely uncontrolled. As a result, a deep
worldwide recession could render some of the system’s banks
insolvent and possibly lead internationally to the type of bank
panics that afflicted capitalist nations during the nineteenth
century and the first third of the twentieth century.