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MANAGEMENT IN INDIA
GROUP-8
ARUNKUMAR K
JAGAN PRAVEEN
KIRTI RANJAN SAHOO
NIYATHI MAUN
SREEJITH MENON
SUDHEER TATIKONDA
VANYA PATHAK
CONTENTS OF STUDY
Introduction
Factors and Exchange Rate Models
Communication as an alternative
policy instrument
Regression Analysis
Conclusions
1947-1971
Par Value system of exchange rate. Rupees external par value was fixed in terms of gold with the
pound sterling as the intervention currency.
1971
Breakdown of the Bretton-Woods system and floatation of major currencies. Rupee was linked to
the pound sterling in December 1971.
1975
1978
1978-1992
1990-1991
July 1991
March 1992
March 1993
To ensure stability of the Rupee, and avoid the weaknesses associated with a single currency peg,
the Rupee was pegged to a basket of currencies. Currency selection and weight assignment was
left to the discretion of the RBI and not publicly announced.
RBI allowed the domestic banks to undertake intra-day trading in foreign exchange.
Banks began to start quoting two-way prices against the Rupee as well as in other currencies. As
trading volumes increased, the Guidelines for Internal Control over Foreign Exchange Business
were framed in 1981. TableThe foreign exchange market was still highly regulated with several
restrictions on external transactions, entry barriers and transactions costs. Foreign exchange
transactions were controlled through the Foreign Exchange Regulations Act (FERA). These
restrictions resulted in an extremely efficient unofficial parallel (hawala) market for foreign
exchange.
Balance of Payments crisis
To stabilize the foreign exchange market, a two step downward exchange rate adjustment was
done (9% and 11%). This was a decisive end to the pegged exchange rate regime.
To ease the transition to a market determined exchange rate system, the Liberalized Exchange
Rate Management System (LERMS) was put in place, which used a dual exchange rate system.
This was mostly a transitional system.
The dual rates converged, and the market determined exchange rate regime was introduced. All
foreign exchange receipts could now be converted at market determined exchange rates.
Effect on Domestic
Currency
Appreciate
High Inflation
Depreciate
Trade surplus
Appreciate
Depreciate
Appreciate
Depreciate
Supply of $ by
Indian exporter
Re appreciates
$ depreciates
Demand for $
by Indian importer
Quantity of $
COMMUNICATION AS AN INSTRUMENT
Michael Woodford told an audience of central bankers assembled at the federal reserves 2001 Jackson
hole conference that:
successful monetary policy is not so much a matter of effective control of overnight interest rates as of
affecting the evolution of market expectations... [therefore,] transparency is valuable for the effective conduct
of monetary policy
Hours after the September 2001 terrorist attacks, the US federal reserve put out a two sentence
statement:
the federal reserve system is open and operating. The discount window is open to meet liquidity
needs.
Those two seemingly banal sentences had a remarkable calming effect on the US, and by extension, on the
global financial markets. The announcement effect was simply stunning.
Again Mario Draghis famous words that the ECB will do whatever it takes to save the euro
prevented, more than anything else, what many thought was an imminent collapse of the euro.
Both the above are emphatic examples of the potency of central bank communication.
RBI Intervention in
Foreign exchange Column 2 over 3
Foreign exchange
Market Turnover ($
(in per cent)
market ($ billion)
billion)
1
2
3
4
2002-03
45.6
1,560
2.9
2003-04
80.4
2,118
3.8
2004-05
42.0
2,892
1.5
2005-06
15.8
4,413
0.4
2006-07
26.8
6,571
0.4
2007-08
81.2
12,249
0.7
2008-09P
83.9
12,092
0.7
P: Provisional
Note : RBI Intervention includes both purchases and sales of US dollar by the RBI
Source : Reserve Bank of India.
Daily Volatility
Monthly volatility
Announcement on reserve
requirements
Decrease
Decrease
Increase
Decrease
Decrease
More news
Decrease
Speeches
Decrease
Review
Increase
STEPS TAKEN
The marginal standing facility (MSF) rate is recalibrated with immediate effect to be 300 basis
points above the policy repo rate under the liquidity adjustment facility (LAF). consequently,
the MSF rate will now be 10.25 per cent. Accordingly, the bank rate also stands adjusted to
10.25 per cent with immediate effect.
The overall allocation of funds under the LAF will be limited to 1.0 per cent of the net demand
and time liabilities (NDTL) of the banking system, reckoned as RS.75,000 crore for this purpose.
The allocation to individual banks will be made in proportion to their bids, subject to the overall
ceiling. this change in LAF will come into effect from July 17, 2013.
The reserve bank will conduct open market sales of government of India securities of RS.12,000
crore on July 18, 2013. Details of the securities included for the OMO sale auction will be
announced through a separate press release tomorrow.
The reserve bank will continue to closely monitor the markets, the liquidity situation and the
macroeconomic developments and will take such other measures as may be necessary,
consistent with the growth-inflation dynamics and macroeconomic stability.
FACTORS IDENTIFIED
IDENTIFIED THREE INDEPENDENT VARIABLES:
Inflation
Interest Rates
Current Account
Deficit
10
Inflation
15
50
0
Interest rate
10 12 14 16 18 20
RECOMMENDATIONS/SUGGESTIONS
MEASURES BY RBI:
USING FOREX RESERVES
RAISING INTEREST RATES
MAKE INVESTMENTS ATTRACTIVE- EASING CAPITAL CONTROLS
RECOMMENDATIONS/SUGGESTIONS
MEASURES BY GOVERNMENT
GOODS AND SERVICES TAX (GST), DIRECT TAX CODE (DTC)
FDI
DIESEL DECONTROL AND MEASURE TO INCREASE
EXTERNAL COMMERCIAL BORROWINGS (ECB)
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