Description
This is a PPT about External Sector Linkages of Monetary movements; Implications of Current Account Deficit; Size of India’s BoP over the years; Implications of the BoP dynamics; R Mundle; Market Stabilization Securities
? Transactions of residents with the rest of the world impact
the domestic monetary sector (via currency movement and valuation changes) of the Balance of Payments
? The key to getting an insight into this is the Current Account
Current Account = Total Receipts – Total Payments Income received by residents – (expenditure on goods and services plus transfers made) Hence, CA = (GNP + Transfers recd) – (E + Transfers made) = GNP + Net Transfers – E Now, GNP + Net Transfers = C + S + T and E = C + G + I Hence, CA = C + S + T – ( C + G + I ) = (T–G)+(S–I) = Government Budget Surplus + Private Surplus
? If CA = ( T – G ) + ( S – I ) ? Then it is obvious that the excess of government
budget deficit over the private sector surplus must result in a current account deficit ? This also means that economic actions of residents and governments that may seemingly be unrelated to the foreign sector may ultimately end up in positive or negative movements in the current account ? The CA deficit must be financed either by ? Depletion of F E Reserves ? External Borrowings ? Attracting foreign investments
(Figures in $ Billion) Credit A CURRENT ACCOUNT . MERCHANDISE INVISIBLES (a+b+c) 175.2 162.6
2008-09 P Debit Net
294.6 73.0
- 119.4 89.6
a Services )
b Transfers )
101.2
47.0
51.4
2.7
49.8
44.3
c Income )
Total Current Account (I+II)
14.3
337.7
18.8
367.6
- 4.5
- 29.8
2008-09 P B Capital Account 1 Foreign Investment 2 Loans 3 Banking Capital 4 Rupee Debt Service 5 Other Capital Total Capital Account C Errors & Omissions . 12.4 302.5 0.6 Credit 164.9 60.2 65.0 Debit 161.4 55.2 68.4 0.1 8.2 293.3 Net 3.5 5.0 - 3.4 - 0.1 4.2 9.1 0.6
D Overall Balance .
E Monetary Movements (addition (-) . or depletion (+) to foreign exchange reserves
640.8
660.9
- 20.1
+ 20.1
US$ B 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
CA 159 185 225 302 400 496 628 641
Capital 78 82 135 169 263 417 748 661
Total 237 267 360 471 663 913 1376 1302
? The last line (Line E) in the BoP account is defined as
monetary movement because it reflects an identical movement in the monetary aggregates ? The monetary side is reflected in the M3 data as “net foreign exchange assets of the banking sector” ? To the extent the ownership of these assets is with the central bank, it shows up in “reserve money” ? The key point is, the monetary impact of the BoP is not dependent on the central bank actions in the foreign currency market ? Capital inflows thus need to be carefully managed as they have the potential to lead to unplanned growth in domestic money supply ? What are the issues in the management of capital inflows ?
1. 2. 3. ? ? ?
?
Fixed exchange rates Open Capital Account Independent Central Bank The above three cannot coexist at the same time A nation has choice on only two, not all the three If you have an open capital account and fixed exchange rates, the central bank ends up loosing control over domestic money supply. In effect it becomes a slave to the above two policies The RBI policies and actions must be viewed in the light of this principle ? It still has some controls on the capital account ? Exchange rate is not fixed but is not allowed to float freely either
? Make a judgment about the nature of the capital flows ? Is the scale of inflow significant? ? Is it temporary or durable? ? Is it hot money? ? Does it call for intervention? ? Scale and timing of intervention? ? Do the flows need to be sterilized? ? What should be the scale and timing of
sterilization? ? What instruments need to be put in place? ? What is the operating procedure for the instruments to work?
? Special class of securities created to manage the ? ? ?
? ? ?
monetary impact of foreign exchange inflows Introduced in 2004 T-Bills or short maturity securities RBI forex market intervention ? Purchase of f.c. ? increase in domestic money supply ? chances of excess ? need for neutralizing impact ? Intervention followed by issue if MSS bonds Features of MSS bonds Money remains with the RBI, no addition to M3 At the time of reverse intervention, i.e. sale of f.c. the bonds are redeemed (unwinding) ? Sale of f.c ? reduction in domestic money ? redeem MSS bonds
? Process is termed as sterilization of foreign currency ? Cost – interest paid on MSS bonds. Revenue – interest
?
? ?
? ? ? ?
earned on f.c. assets Interest is accounted in GOI books but investment returns on FC assets accounted in RBI books. Net cost to the country ? So far around 3% Outstanding MSS securities ? As on end March 2008 Rs.170,000 crore ? As on end Aug 2009 Rs.20,000 crore How has this happened? Unwinding, buy back, de-sequestering Data available in RBI balance sheet every week T bill and G Sec auction and redemption data give an idea of the movement of MSS balances
doc_445422603.ppt
This is a PPT about External Sector Linkages of Monetary movements; Implications of Current Account Deficit; Size of India’s BoP over the years; Implications of the BoP dynamics; R Mundle; Market Stabilization Securities
? Transactions of residents with the rest of the world impact
the domestic monetary sector (via currency movement and valuation changes) of the Balance of Payments
? The key to getting an insight into this is the Current Account
Current Account = Total Receipts – Total Payments Income received by residents – (expenditure on goods and services plus transfers made) Hence, CA = (GNP + Transfers recd) – (E + Transfers made) = GNP + Net Transfers – E Now, GNP + Net Transfers = C + S + T and E = C + G + I Hence, CA = C + S + T – ( C + G + I ) = (T–G)+(S–I) = Government Budget Surplus + Private Surplus
? If CA = ( T – G ) + ( S – I ) ? Then it is obvious that the excess of government
budget deficit over the private sector surplus must result in a current account deficit ? This also means that economic actions of residents and governments that may seemingly be unrelated to the foreign sector may ultimately end up in positive or negative movements in the current account ? The CA deficit must be financed either by ? Depletion of F E Reserves ? External Borrowings ? Attracting foreign investments
(Figures in $ Billion) Credit A CURRENT ACCOUNT . MERCHANDISE INVISIBLES (a+b+c) 175.2 162.6
2008-09 P Debit Net
294.6 73.0
- 119.4 89.6
a Services )
b Transfers )
101.2
47.0
51.4
2.7
49.8
44.3
c Income )
Total Current Account (I+II)
14.3
337.7
18.8
367.6
- 4.5
- 29.8
2008-09 P B Capital Account 1 Foreign Investment 2 Loans 3 Banking Capital 4 Rupee Debt Service 5 Other Capital Total Capital Account C Errors & Omissions . 12.4 302.5 0.6 Credit 164.9 60.2 65.0 Debit 161.4 55.2 68.4 0.1 8.2 293.3 Net 3.5 5.0 - 3.4 - 0.1 4.2 9.1 0.6
D Overall Balance .
E Monetary Movements (addition (-) . or depletion (+) to foreign exchange reserves
640.8
660.9
- 20.1
+ 20.1
US$ B 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
CA 159 185 225 302 400 496 628 641
Capital 78 82 135 169 263 417 748 661
Total 237 267 360 471 663 913 1376 1302
? The last line (Line E) in the BoP account is defined as
monetary movement because it reflects an identical movement in the monetary aggregates ? The monetary side is reflected in the M3 data as “net foreign exchange assets of the banking sector” ? To the extent the ownership of these assets is with the central bank, it shows up in “reserve money” ? The key point is, the monetary impact of the BoP is not dependent on the central bank actions in the foreign currency market ? Capital inflows thus need to be carefully managed as they have the potential to lead to unplanned growth in domestic money supply ? What are the issues in the management of capital inflows ?
1. 2. 3. ? ? ?
?
Fixed exchange rates Open Capital Account Independent Central Bank The above three cannot coexist at the same time A nation has choice on only two, not all the three If you have an open capital account and fixed exchange rates, the central bank ends up loosing control over domestic money supply. In effect it becomes a slave to the above two policies The RBI policies and actions must be viewed in the light of this principle ? It still has some controls on the capital account ? Exchange rate is not fixed but is not allowed to float freely either
? Make a judgment about the nature of the capital flows ? Is the scale of inflow significant? ? Is it temporary or durable? ? Is it hot money? ? Does it call for intervention? ? Scale and timing of intervention? ? Do the flows need to be sterilized? ? What should be the scale and timing of
sterilization? ? What instruments need to be put in place? ? What is the operating procedure for the instruments to work?
? Special class of securities created to manage the ? ? ?
? ? ?
monetary impact of foreign exchange inflows Introduced in 2004 T-Bills or short maturity securities RBI forex market intervention ? Purchase of f.c. ? increase in domestic money supply ? chances of excess ? need for neutralizing impact ? Intervention followed by issue if MSS bonds Features of MSS bonds Money remains with the RBI, no addition to M3 At the time of reverse intervention, i.e. sale of f.c. the bonds are redeemed (unwinding) ? Sale of f.c ? reduction in domestic money ? redeem MSS bonds
? Process is termed as sterilization of foreign currency ? Cost – interest paid on MSS bonds. Revenue – interest
?
? ?
? ? ? ?
earned on f.c. assets Interest is accounted in GOI books but investment returns on FC assets accounted in RBI books. Net cost to the country ? So far around 3% Outstanding MSS securities ? As on end March 2008 Rs.170,000 crore ? As on end Aug 2009 Rs.20,000 crore How has this happened? Unwinding, buy back, de-sequestering Data available in RBI balance sheet every week T bill and G Sec auction and redemption data give an idea of the movement of MSS balances
doc_445422603.ppt