Unit 1: gains

from international capital flow

 Types of international capital flow
Foreign investments: FDI, FII, ADR, GDR
Commercial borrowing or trade credit
NRI deposits
 Gains
FII: Home country availability of capital. Host country firms
especially in developing countries often find shortage of capital.
FII: Developed foreign countries that invest in emerging economies
can find better return on their investments.
FDI: contributes to economic growth and employment in the host
country.
FDI: Also promotes host country to become more competitive
according to world standards
FDI: Benefits the host country through technology transfer
Debt instruments: Capital attracts maximum rate of return
Increase in total variety of investment options
Profits from FDI contribute to corporate tax revenues in the host
country
 Globalization of markets
Move that is taking place in the direction of
complete mobility of capital and labour and their
products, so that the world's economies are on
the way to becoming totally integrated. The
driving forces of the process are reductions in
politically imposed barriers and in the costs of
transport and communication
 Features of globalization
Industrial (alias trans nationalization) - emergence of worldwide
production markets and broader access to a range of foreign
products for consumers and companies
Financial - emergence of worldwide financial markets and better
access to external financing for corporate, national and sub national
borrowers .
Economic - realization of a global common market, based on the
freedom of exchange of goods and capital.
Political - political globalization is the creation of a world
government which regulates the relationships among nations and
guarantees the rights arising from social and economic
globalization.
Informational - increase in information flows between
geographically remote locations .
 Cultural - growth of cross-cultural contacts; advent of new
categories of consciousness and identities such as Globalism -
which embodies cultural diffusion, the desire to consume and enjoy
foreign products and ideas, adopt new technology and practices,
and participate in a "world culture"
Ecological- the advent of global environmental challenges that can
not be solved without international cooperation, such as climate
change, cross-boundary water and air pollution, over-fishing of the
ocean, and the spread of invasive species. Many factories are built
in developing countries where they can pollute freely.
Social - the achievement of free circulation by people of all nations
Transportation - fewer and fewer European cars on European roads
each year (the same can also be said about American cars on
American roads) and the death of distance through the
incorporation of technology to decrease travel time.
 Impacts of globalization
1. Rise in Competition
With enhanced competition from foreign brands and companies, industries of
every nation are compelled to improve their standards and quality and customer
satisfaction services. This benefits the customers and the economy as a whole, and
raises the standard of living of everybody. This could be viewed as a negative
impact by many, but no-one can deny the impact it has had.
2. Rise in Technology and Know How
The rise in knowledge levels of countries as newer cultures and technologies are
opened to a particular area are clear, their knowledge base also grows and
expands simultaneously. As a result, they are better able to handle their primary
and secondary industries, and this ultimately affects their tertiary sectors in a
positive manner as well.
3. Rise in Opportunities
With a larger number of industries and resources available, the opportunities for
people grow exponentially too. There are many more jobs available to people, and
more and more people are also exposed to the lucrative benefits of moving
abroad. This increases immigration rates as well, thus giving people the chance to
grow economically and socially
 4. Rise in Investment Levels
The rise in foreign investment in countries helps industries and
native cities grow at a rapid pace, and this is something that
every nation should be open to since it is a highly beneficial
venture for them.
5. Meeting consumer expectations and tastes
Generally, consumers all over the world are better informed,
have higher incomes and therefore higher and more exacting
expectations. This forces businesses to meet higher standards.
6. Economies of scale
Selling into a global market allows for enormous economies of
scale, although not all industries benefit from these.
7. Choice of location
Businesses are now much freer to choose where they operate
from, and can move to a cheaper and more efficient location.
 8. Information transfer
Information is a most expensive and
valuable production factor in the current
environment. Information can be easily
transferred and exchanged from one
country to another

9. Increased mergers and joint ventures

The globalization allows the businesses
access to bigger markets and associated
cost advantages.
Unit 2: Rules for quoting exchange rate
regime in India
India uses the two way direct quote system,
stating the number of rupees for one US$ and
other major currencies.
 Evolution, development and present
status
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
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.
1978
RBI allowed the domestic banks to undertake intra-day trading in foreign
exchange.
 1978-1992
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. The 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.
1990-1991
Balance of Payments crisis
July 1991
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.
March 1992
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.
March 1993
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.
Exchange Rate Mechanism, additional
notes
Spot market: effect of inflation

PPP theory: Purchasing Power Parity (PPP) is an

economic theory that compares different
countries' currencies through a market "basket of
goods" approach. According to this concept, two
currencies are in equilibrium or at par when a
market basket of goods (taking into account the
exchange rate) is priced the same in both
countries.
E=Pa/Pb Absolute version of the PPP theory
 Relative PPP
Percent change in exchange rate = percentage
change in ratio of price indices

(Formula)
 Spot rates: effect of interest rate
Flexible price version of monetary theory
Rise in domestic interest means less money
demand means depreciation
Sticky price version of monetary theory
Rise in interest means increase in supply of
loanable funds, means depreciation
BOP, Attracts capital from abroad so
appreciation