Z-Miscellaneous 4 years Ago. The level of forex reserve is expressed in US dollars. Rupee is weakening against dollar, it means demand of rupee is less than the demand for dollars.

Past Papers Topicwise Essay: How not to write UPSC Essay Paper Papers Mock Essays GSM1 GS1: UPSC Interview Graduation Related Qs Roleplaying, SRT Qs Diplomacy: What is Balance of Payment? Convertibility Rupee-Dollar Exchange rate Building up Foreign Exchange Reserves FOREIGN EXCHANGE RESERVES FOREX Reserve: India vs other Why volatility in rupee? How did rupee recover? Exchange Rate of Other Emerging Economies NEER and REER Why is REER important? External Debt FDI Restrictiveness Index FRI FDI: BoP is made up of two parts: Current account and capital account.

As per IMF definition, three parts: Without getting into technical details, just a brief over view: Transfer gift, remittances from NRI to their families etc.

Foreign investment in India FDI, FII, ADR, direct purchase of land, assets. External commercial borrowing, external assistance etc. Same goes for everything in balance of payment remittances, External commercial borrowing whatever. For India, current account has been in deficit negative number and capital account has been in surplus positive number.

The BoP accounting system is similar to double entry book-keeping. In other words, if there is deficit in current account, there has to be equal surplus in capital account.

Assume there are only two countries India rupees and USA dollars. Since there is no forex agent, the Indian importer will pay billion Indian rupees to that American exporter. But that American exporter has no use of Indian rupees! He lives in USA, he cannot even buy a burger from local McDonalds shop using Indian rupees. So what can he do? He can import something else from India e.

Again our rupee currency comes back. Apple6 guy can sell his rupee currency to that third American fellow Rs. In short, if rupee goes out, it has to come back. But in reality, RBI or tax authorities never have complete details of all financial transactions and currency exchange rates keep fluctuating. Hence there will be statistical discrepancies, errors and omissions and.

So, BoP is expressed as: Because, BoP is calculated on quarterly and yearly basis. There is a good chance, that American Apple6 exporter may not invest back all those billion Indian rupees in India within that time-frame. But in the long run, system will balance itself.

There are many other possibilities and combinations — but the point is, in BoP, whatever currency goes out of the country, will come back to the country. Convertibility Suppose you want to import a dell computer from USA. And American exporter accepts only payments dollars.

If you can easily convert your rupee into dollars, that means Rupee is fully convertible. And rupee is fully convertible as far as Current account transactions are concerned e. But rupee is partially convertible for capital account transection. And vice versa e. Foreign Exchange Regulations Act, FERA. Tarapore Committee of RBIhad recommended that India should have full capital account convertibility. Meaning anyone should be allowed to freely move from local currency into foreign currency and back, without any restrictions by Government or RBI.

Government replaced FERA with Foreign Exchange Management Act FEMA. Although full capital account convertibility is yet not given. Full capital account convertibility has both pros and cons. Balance of Payment, exchange rates etc. Rupee-Dollar Exchange rate How does Fixed Exchange Rate system work? Assume following things There are only two countries in the world India and America. India has rupee currency.

American investor thinks that Indian economy is rising. During this time, RBI governor also buys billion kilo onions from the forex and stores these onions in his refrigerator. Because onions are selling cheap!

And why onions are selling cheap? Ok everything is going nice and smooth. Now add third country to our bogus model: They also want payment in onions. So India would agree to buy 1kg onion even for Rs. Then India can give that onions to some Sheikh of UAE and import crude oil. The Sheikh of UAE gets even greedier, he demands kg onions for 1 barrel of crude oil. Now 1kg onion sells for Rs. Thus, Rupee has weakened against onion Dollar. Now RBI governor decides to become the hero and save the fall of rupee against onion.

So, He loads a few tonnes of onions in his truck and drive it to the forex market. Now onions get little cheaper: Ok so what do we get from this story? When RBI sells its foreign exchange reserves, it stems halts the fall of rupee. Building up Foreign Exchange Reserves Prior toIndia followed License-quota-inspector and suitcase raj and import substitution strategy. Beautifully explained class 11 NCERT textbook.

And that led to rise of smugglers and mafias, and the Bollywood movies that romanticized their criminal lives. Finally India had to pledge its gold to IMF and get loans. Then India had to open up its economy for private and foreign invest dhaka stock market todays market investment.

Remove the license-quota-inspector raj etc. Although suitcase raj still continues, because the Mohans in the system are blinded by totally awesome people like A. But the lesson learnt: RBI should have good foreign exchange reserve. Hence post LPG reforms, RBI has been buying dollars, pound yen etc. Because during such situation, the foreign investors are nestle company stock symbol eager to get their dollars converted to rupee currency hence rupee is trading at higher rate e.

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Nowadays RBI intervenes in the forex market, only to stop the excess volatility fluctuation in rupee exchange rate. However, there was a sharp decline in rupee in Then RBI had to sell foreign exchange worth 20 billion dollars. Similarly in also RBI had to sell its foreign exchange reserve worth 3 billion dollars to new york stock exchange (nyse) definition the fall of rupee.

RBI gains Foreign exchange reserves by buying foreign currency via intervention in the foreign exchange market Funding from the International Bank for Reconstruction and Development IBRDAsian Development Bank ADBInternational Development Association IDA etc. India is 8 th position close to Billion USD. Countries with largest Forex reserves China Japan Russia Switzerland Brazil South Korea Hong Kong India Why volatility in rupee? Inthe rupee has experienced unusually high volatility.

If he raises the prices, then his export product becomes less competitive than Cheap China made stuff. FII In the total foreign investment in India, majority comes from FII and not from FDI. There corsicana livestock market week-to-week variation in such FII inflows and outflows.

Hence it leads to changes in rupee-dollar exchange rate. Dollar is strengthened US treasury bonds are consider the safest investment. During the peak of Eurozone, Greece crisis, the big investors started pulling out money from Europe and investing it in US treasury bonds. So other currencies would automatically weaken against dollar. They plug in their money quickly, they pull out their money quickly. Therefore, Indian Government needs to inspire and sustain the confidence of foreign investors, to prevent the fall of rupee.

RBI intervention in forex market, cannot help beyond a level. DuringRBI sold around 3 billion dollars from its forex reserves. Exchange Rate of Other Emerging Economies InRupee wasnot the only currency that weakened against dollar.

In the wake of sovereign debt crisis in the euro zone and due to uncertain global economic environment, more and more forex profit system zip are preferring to buy US treasury bonds and other securities in USA. NEER and REER We keep reading bad headlines that rupee weakened against dollar…rupee all time low against dollar…and so on.

Does it mean, Indian seminars stock market investing 101 coupon code is a really bogus weak and fragile currency? We also trade with many other countries in many other forms of currency.

This demand also depends on the inflation both in India and in USA. NEER and REER index calculated lucasville trade days dates RBIhelp us here get a clear picture here. Then using NEERs, you calculate REER. NEER REER Nominal Effective Exchange Rate Real Effective Exchange Rate REER The weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies.

Why is REER important? REER captures inflation differentials between India and its major trading partners. REER reflects the degree of external competitiveness of Indian products REER captures movements in cross-currency exchange rates.

RBI calculates two REER indices: REER-6 REER Here Indian rupee is measured against 6 big currencies viz.

Dollar Hong Kong dollar Euro Pound sterling Japanese Yen Chinese Renminbi As the name suggest, 36 currencies. Now Indian rupees vs.

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According to those statistics, in India was in fourth position in terms of absolute external debt stock after China, the Russian Federation and Brazil. External Commercial borrowings by Indian corporates Corporate borrowers in India and other emerging economies are keen to borrow in foreign currency dollar and Euro.

But such borrowings however, are not always helpful, especially in times of high currency volatility. FDI Restrictiveness Index FRI Prepared by OECD. A score of 1 indicates a closed economy and 0 indicates openness. The Government has liberalized FDI norms overtime. As a result, only a handful of sensitive sectors now fall in the prohibited zone and FDI is allowed fully or partially in the rest of the sectors. India needs to open up the defense production sector to get access and ensure transfer of technology.

The existing FDI policy for defence sector provides for offsets policy. FDI in multibrand retail, mandates that foreign company must buy 30 percent of the from small-scale industries. Recently Government revised the offsets policy for defense sector. But still, it has shown no visible direct or indirect benefits h on the domestic Indian defence industry. We cannot significantly increase our exports in the short run because they are dependent upon the recovery and growth of partner countries US, EU.

And this may take time. We should put greater emphasis on FDI including opening up sectors further. Finally, external commercial borrowing needs to be monitored carefully. Mock Question Which of the following, is not a part of Capital account FDI FII Remittances External commercial borrowing Which of the following is not a part of Current account? Gold Silver Special drawing rights SDRs How can RBI build its foreign exchange reserve? By Buying foreign currency via funding from World Bank, ADB etc.

Both None Which of the following country has second largest forex reserves in the world? India France Japan USA Among the countries with largest forex reserves, India ranks second third fifth eighth Rupee will strengthen against dollar when Government eases FDI policy Government raises the ceiling on FII investment Both None Correct statement NEER is calculated by RBI REER is calculated by Finance ministry both none REER captures difference in inflation between India and its trading partners external competitiveness of Indian products Both none Which of the following currency is not part of REER-6 calculation?

Hong Kong Dollar Japanese Yen Pound Sterling Canadian Dollar Incorrect Match S. Baht Which of the following is not released by World Bank? International Debt Statistics, FDI Restrictiveness Index Global Economic Prospects All of Above FDI Restrictiveness Index is released by IMF ADB OECD World Bank Majority of FDI to India, comes from Mauritius Germany USA None of above. Modern History Hindi English Bipin Chandra: Language papers Samnya Hindi by Unique Publication Compulsory English by AP Bhardwaj TMH.

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Print PDF need Chrome. Get notified whenever I post new article! Economy, Banking, Yearbook Schemes solved with explanation Just a small observation, Regarding Q. The weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies. Here Indian rupee is measured against 6 big currencies viz. Dollar Hong Kong dollar Euro Pound sterling Japanese Yen Chinese Renminbi.