Economy (http://mrunal.org/category/economy) / 10 months Ago / 37 Comments (http://mrunal.org/2014/03/fed-taperingpart2-2-measures-immunize-indian-econ 1. Prologue 2. Desi Vaccine against Fed Tapering? 3. Volatility in Forex market: Why should Rajan intervene? 1. [More onions 1] BRICS bank 2. [More onions 2] Currency Swap agreement with Japan 3. [More onions 3] Dollar swap for Oil companies 4. [More onions 4] FCNR swap 4. Summary 5. Mock Questions Prologue So far, we learned 1. What is Quantitative Easing click me (http://mrunal.org/2014/03/economy-quantitative- easing-meaning-phases-impacts-indian-economy-rupee-dollar-exchange-rate-pros-cons- positive-negative-aspects-explained.html) 2. What is fed tapering? What will be its (negative) consequences on Indian economy? click me (http://mrunal.org/2014/03/fed-taperingpart1-2-meaning-fed-tapering-negative- impact-indian-economy-worst-case-scenarios-balance-payment-crisis-explained.html) 3. Now third important question (for GS2): “what has RBI (and Government) done to immunize Indian economy against the negative impacts of Fed tapering.” Desi Vaccine against Fed Tapering? Fed Tapering’s worst case negative outcome = BoP crisis. BoP crisis needs three pre- conditions. Hence RBI and Government must to stop those pre-conditions from happening. BoP Crisis precondition How to stop? RBI helped oil companies to arrange dollars easily. (dollar swap [Fed Tapering:Part2 of 2] Measures to immunize Indian Economy against negative impacts of Fed Tapering, Currency Swap, Dollar Swap, FCNR swap, Brics bank explained Mrunal (http://mrunal.org/)
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Economy (http://mrunal.org/category/economy) / 10 months Ago /37 Comments (http://mrunal.org/2014/03/fed-taperingpart2-2-measures-immunize-indian-economy-negative-impacts-fed-tapering-currency-swap-dollar-swap-fcnr-swap-brics-bank-explained.html#comments)
1. Prologue
2. Desi Vaccine against Fed Tapering?
3. Volatility in Forex market: Why should Rajan intervene?
1. [More onions 1] BRICS bank
2. [More onions 2] Currency Swap agreement with Japan
3. [More onions 3] Dollar swap for Oil companies
4. [More onions 4] FCNR swap
4. Summary
5. Mock Questions
Prologue
So far, we learned
1. What is Quantitative Easing click me (http://mrunal.org/2014/03/economy-quantitative-
3. Now third important question (for GS2): “what has RBI (and Government) done to
immunize Indian economy against the negative impacts of Fed tapering.”
Desi Vaccine against Fed Tapering?
Fed Tapering’s worst case negative outcome = BoP crisis. BoP crisis needs three pre-
conditions. Hence RBI and Government must to stop those pre-conditions from happening.
BoP Crisisprecondition
How to stop?
RBI helped oil companies to arrange dollars easily. (dollar swap
[Fed Tapering:Part2 of 2] Measures to immunize Indian Economyagainst negative impacts of Fed Tapering, Currency Swap, Dollar Swap,FCNR swap, Brics bank explained
Govt. took some initiatives / subsidies / schemes to boost exports.
(not going into details here, or article will run 5 miles long)
2.Low Capitalsurplus
Govt: relaxed FDI norms, changed environment minister to quickly
give clearance to POSCO etc.; set up Project monitoring group in PMO
to hasten file clearance. (all these done to boost investors’ confidence
so more FDI, FII can come, despite fed tapering)
RBI – reformed FCNR-accounts, so NRIs can earn more interest from
their (dollar) deposits in desi banks.
3.BackupagainstBoP/volatility
Explained below.
Mismatch between Current account vs capital account, creates two negative outcomes
1. In every case: Rupee weakens because onion (dollar) supply gets low in the market. (in
other words “volatility in Forex market”.)
2. in Worst case: BoP crisis.
Volatility in Forex market: Why should Rajan intervene?
There are two types of exchange rate regimes
FIXED EXCHANGE RATE REGIME FLOATING (OR FLEXIBLE)
RBI “fixes” the exchange rate say $1=50 Rs. If you can’tget dollars at that price, you can walk in Rajan’s cabin,deposit fifty rupees and get one dollar from his forex-reserve.
RBI doesn’t fix the exchangerates. It lets the market forces ofsupply-demand to decide theexchange rate.
Discontinued after 1992-93, because RBI did not haveenough Forex reserve to fullfill its commitment.(thanks to BoP crisis)