EUROCURRENCY MARKET

Foreign exchange reservesForex reserves are generally held in the form of gold reserves, hard currencies such as Dollar, Pound Sterling and other international financial assets, SDRs. Etc.. In order to accumulate foreign exchange reserves a nation must earn foreign exchange by exporting goods and services ( current a/c surplus) and non borrowing types of capital a/c surplusThere is a difference between the term international liquidity and term foreign exchange reserves. The term international liquidity is a broad term which covers foreign exchange reserves plus other forms of foreign means of payments. Foreign exchange reserves are the part and parcel of international liquidity. International Liquidity refers to all accepted means of international payments available to a country for the settlement of international trade transactions Historically, reserves were used to back up a countrys home currency. It is necessary to maintain the value of domestic currency. Adequate amount of Reserves help the nation to maintain the exchange rate at normal levels. It is necessary for market interventionReserves also help countries to manage risks they face.. It helps to boost confidence in both the country and its currency. In case inadequate reserves, the exchange rate may fall dramatically or profit seeking speculators or currency manipulators sell a countrys currency. Reserves also help countries to manage risks they face. The term Foreign exchange reserve refers to various types of forex reserves held by a nation to meet external payments and obligations. A nation must have adequate foreign exchange reserves to meet its short term and long term commitments otherwise the nation will face serious macro economic problems and financial crises. The amount of foreign exchange reserves depends upon the degree of openness of the country and Size of the country from the point of view of population and GDP. It also depends upon the degree of participation in global trade.OBJECTIVES OF HOLDING FOREIGN EXCHANGE RESERVES:1) To create confidence in the Foreign Exchange Market:- The very fact that the monetary authority of the country or the Central Bank of the country possesses a comfortable surplus of foreign exchange reserve create confidence in the in the foreign exchange market of the country The knowledge and information of having enough forex with the government imparts a sense of confidence in the market.2) To deal with volatility in foreign exchange market: Foreign exchange market becomes less volatile when it is known that the monetary authorities are capable of managing the market with the help forex at their disposal.3) To control irrational speculations:- Foreign exchange reserves act as a buffer to deal with speculative attack on currency . In an open economy system, exchange rate fluctuate. Speculators usually tries to take advantages of market. Any instability may give-rise to serious repercussions. Larger foreign exchange reserves helps to defend itself from speculative attacks on the domestic currency. 4) To create capacity for market intervention : Though under flexible exchange rate the market plays a major role, yet it is necessary to intervene in the market to maintain the exchange rate within margin5) To create buffer to deal with the external vulnerability due hot money movements: In an open system the foreign capital flows in and out freely. Speculators usually tries to take advantages of market. Any instability may give rise to serious repercussions. Hence the intervention is necessary and it is possible only with sufficient the forex, a buffer against external vulnerability.6) To Overcome Financial Risks : Large reserves of forex reserves help to make the currency stronger. Sufficient reserves help to overcome financial risks in international trade. Large buffer stocks help in protecting against volatility of domestic currency ADEQUACY CRITERIA :An adequate stock of reserves is necessary for the smooth functioning of the international monetary system, expansion of world trade. How ever, how much foreign exchange reserve should a country maintain is not precisely defined. a) Under fixed exchange rate system the country need to hold more foreign exchange reserves for necessary market intervention, b) If country follows flexible exchange rate system then there is no need for the country to hold more foreign exchange reserves. The foreign exchange rate automatically gets adjusted as per market forces of demand for and supply of foreign exchange. C) In case country follows managed floating exchange rate system it has to intervene into the foreign exchange market occasionally to iron out erratic fluctuations in the foreign exchange rate. The country is required to keep more foreign exchange reserves There are diverse views on the amount of reserves to be maintained by a nation. Historically, developing countries used hold reserves to the value of three to four months imports. The amount of foreign exchange reserves depends upon the degree of openness of the country and Size of the country from the point of view of population and GDP. The larger the participation, more will be the need to maintain foreign exchange reserves. In addition to size of participation other factors the determines the demand for foreign exchange reserves are. (i) size of the country 2) size of participation 3) Size of current account deficit (4) capital account vulnerability (5) opportunity cost of holding reserves, (vi) International cooperation etc.Traditionally, the adequacy of reserves is determined by a simple rule, that is, the stock of reserves should be equivalent to a few months of imports. Such adequacy criterion arises from the fact that official flows of reserves are adequately balanced to absorb shocks in external payments. Many economists suggest different quantitative ratio of gross reserve to annual imports as a criterion to judge the adequacy.Robert Triffin after studying the case of 12 leading countries came to conclusion that 25% annual import bill as reserves l. Tarapore committee on Capital Account Convertibility suggested three indicators for evaluating the adequacy of foreign exchange reserves. I) Sufficient Reserve to meet at least six months of import billii) Three months import cover plus half of annual debt service payments iii) Proportion of short-term debt and portfolio stock should not exceed 60% reserves.Indias approach to reserve management: Since 1990s India has been witnessing a steady increase in Indias forex reserves. Thanks to the LPGM program of government of India . On August 2012, forex reserve of India stood at 289.169 billion dollars. This has given confidence to foreign investors who are responding positively to growth story of India in the form of FDI and FPI. Question:- Discuss the significance of foreign exchange reserves

CONVERTIBLITY OF CURRENCYcurrencies without prior permission of the monetary Currency convertibility is an essential requirement of free trade. Convertibility of a currency means free exchange of a currency into other currencies in forex market at market rate. According to IMF As long as domestic currency can be freely transformed into foreign currency at a unified rate the currency is regarded as convertible A convertible currency is one which can be converted into other currencies at the market rate with out any restrictions. It implies the freedom to buy or sell foreign exchange for the following international transactions. on convertible or Controlled currency cannot be converted into foreign authority. A convertibility currency can be freely converted into any other currency.. Some countries follow the system of multiple exchange rates for convertibility, therefore , such currencies cannot be regarded as convertible. The currency convertibility concept originated in Britton Woods Agreement The currency convertibility has two different interpretations. Current account convertibility & Capital account convertibility. Current account convertibility means convertibility of a currency on the current account of balance of payments. It relates to the removal of restriction on payments relating to the imports and exports of goods, services and factor income. It implies the freedom to buy or sell foreign exchange for the following international transactions: All payments due in connection with foreign trade, Payments due as interest on loans & income from other investments. Payments of moderate amount of amortization of loans Moderate remittances for family living expenses Capital account convertibility: Capital account convertibility lies at the heart of globalization &financial liberalization. CAC refers to the freedom to convert local financial assets into foreign financial assets and vice versa at the market determined rate of exchange. Capital account convertibility leads to the removal of the restrictions on payments relating to the capital transactions like inflow and outflow of short-term and long-term capital. The process of globalization and liberalization has resulted into openness of economies with integration of different economies In the world. Capital account liberalization lies at the heart of globalization &n financial liberalizationCONVERTIBILITY OF INDIAN RUPEE . 1) Until 1993 Indian Rupee was not convertible Rupee is non convertible since independence. There were restrictions on even current account transactions. The serious BOP deficits of 1980s forced India to keep strict restrictions on the current account transactions. As a part of the LPGM program rupee was made partially convertible( current a/c) since 19922) Introduction of LERMS: As a first step in the direction of convertibility, the Liberalized Exchange Rate Management System was introduced in 1992. Through LERMS partial convertibility in current account was tried for the first time. It was dual exchange rate system under which two exchange rates were allowed. 40% of the current a/c receivables at official rate & and the balance of 60% at market rate. . However LERMS was in force for only one year and from 1993, the scheme of 40:60 was scrapped and as a pleasant surprise to everybody, Indian rupee was made fully convertible in current account in the year 1994. However Capital a/c convertibility is still a pending or contentious issue3) CAPITAL ACCOUNT CONVERTIBILITY OF INDIAN RUPEE : There is a lot of pressure from international community for capital a/c convertibility . In 1997, a committee headed by. Tarapore, was asked to study the issue & suggest the possibility of implementation of CAC. The committee prescribed capital a/c convertibility on the following grounds Tarapore committee on CAC- or Advantages of CACCAC leads to inflow of foreign capital to supplement the domestic resources CAC also allows resident Indians to hold on internationally diversified assets abroad. CAC will keep an Effective Control on Hawala transactions: Before the introduction of current account convertibility, Hawala route was very active for the remittance of funds. By allowing free convertibility remittance of funds will take place through proper channel. CAC encourages exports due to increasing profitability of exports. CAC leads to import substitution and export promotion. CAC will motivate NRIs to remit funds to India. CAC helps to arrive at real value to the currency. CAC enables on alignment of domestic financial markets with global financial markets How ever the recommendations of the Tarapore committee was not accepted and implemented because of international financial crises such as the banking Crisis in south Asia, currency failures in Brazil and Russia in 2001. and recent Euro zone crises Issues associated with CAC or objections to CAC: Serious objections are raised against the implementation of full convertibility of Rupee because 1) It would stimulate Hot money movement and flight of capital; sudden inflow and outflow of short term funds may disturb the working of domestic economy ii) It is difficult to absorb the sudden inflows. The nation may not be in a position to absorb of capital outflows due to weak economic fundamentals iii) Speedy implementation of Trade sector reforms Total capital decontrol appears to be difficult until the trade sector reforms are completed in India iv) The fiscal consolidation, capital convertibility cannot be established until fiscal consolidation is complete. RBI measures in the direction of Capital Account Convertibility: At present CAC is allowed, subject to conditions: However govt of India is seriously considering CAC at the earliest RBI has initiated number of steps towards the full CAC 1) Resident Indians are permitted to invest up-to USD 1,00,000 in international securities.2). Resident Indians allowed maintaining foreign currency accounts. The accounts, to be known as resident foreign currency (domestic) accounts, can be used to invest forex received while on visit to any place outside India by way of payment for services 3) Indian banks located in Special Economic Zones are permitted to conduct banking operations, in foreign currencies. 4). Mutual funds have been allowed to invest up to $1 billion in listed companies abroad 5) Indian companies are permitted to invest in companies abroad - acquire immovable property- and retain of ADR and GDR proceeds without limit Tarapore committee-2 The committee was reconstituted once again in 2006 to suggest a road map for achieving Full Capital Account Convertibility .The recommendations, will be implemented by the RBI in a phased manner so as to achieve the desired level of capital account convertibility (CAC) by 2011-12. Question: Explain the concept of convertibility of currency. Should India go for Capital Account Convertibility ? -------------

Foreign exchange Risk and its managementForeign exchange riskorcurrency risk is type of risk caused by unexpected changes in theexchange rate. Foreign exchange risk arises due to fluctuating rates of exchange. It is caused by uncertainty and volatility of exchange rate.3. It is linked to fluctuating rates of exchange. When the exchange rate fluctuate, the exporters and importers are uncertain of the amount of money they receive and required to pay. Factors Affecting Exchange Rate Risk:- Basically, Exchange rate risk arises on account 1) Exchange Rate System: Unlike fixed exchange rate, flexible exchange is inherently risky due to unexpected fluctuations 2) Hot money movements: Unexpected inflow and out flow of funds in search of better returns make exchange rates volatile and risky. 3) Speculative purchase and sale of currencies make exchange rates volatile and risky: 4) Strength of the Economy Weak economic fundamentals make the domestic currency fragile and risky. A strong economy with a strong currency may be able to withstand risks related to changes in exchange rate. Types of foreign exchange risk:Transaction Exposure Risk: It is the outcome of various types of transactions like international trade, borrowing and lending in foreign currencies , FDI,FPI transactions. When the exchange rates may move up or down the participants cash flow get affected. Translation Exposure Risk: It is the extent to which the firms financial reporting is affected by exchange rate movements. Exchange rate fluctuations will have a significant impact on the firms reported earnings and hence on the stock price. Contingent Exposure Risk: happens when the firm bids for foreign projects or negotiates for other contracts or in the case of Foreign Direct Investments. The waiting period involves uncertainty as to whether the receipt will happen or not.Measures to Cover the risk: Risk is an integral part of foreign exchange markets. Exchange rate risks need to be managed very effectively and cautiously so that the participants do not suffer losses in the process of thin trading activities. In the floating or flexible exchange rate system the possibility of fluctuation and there by high risk. It can not be avoided. However it can be minimized through appropriate strategies. They are Exchange Risk Avoidance: In this case exchange risk is eliminated by doing business locally i.e. by introducing import substitution methods Diversification of sourcing: When sources of purchases are changed now and then, exchange risks can minimized. Such a strategy is followed by many firms to minimize or spread the risk of exchange rate fluctuations. Forward exchange Transactions/ dealings: Under flexible exchange rate system the possibility of wide fluctuation is high. Therefore both exporters and importers try to protect their position through a forward agreements. By entering into such an arrangement foreign exchange participants can minimize the possible risk. 2. Swap agreements: Swap arrangement also undertaken to cover the risk in the forward deal. Usually the banks which enter into a forward sale agreement to sell at a certain rate (forward rate ) would cover their risk by entering a forward purchase agreement simultaneously with another bank. Such swaps help the bank to cover risk by matching the outflow and inflow of dollars and also earn profit based on swap margin. 3. HEDGING It is a cover taken by participants to protect themselves against the risk arising out of exchange rate fluctuations. Firms tries cover foreign exchange rate fluctuations through Hedging. They transact in forward market to cover the risk. Hedging helps the firms cover the risk arising out of changes in exchange rates. It is essential for those firms which have large amounts receivables or commitments to pay in foreign currencies. The strategy of hedging involves 1) Taking long position in currencies which is likely to appreciate and short position in currency which is likely to depreciate 2) Minimize hard currency liabilities and Postpone soft currency liabilities. 3) In case, the local currency is expected to appreciate, then the hedging Strategy would be to increase the stock of local currency, speed up the collection, buy local currency forward, reduce imports of soft currency goods, reduce local currency borrowing, delay remittance. Flexible exchange rate systemUnder the flexible Exchange rate system, the rate of exchange is freely determined by the interaction between demand and supply of foreign exchange market. The exchange rates are not rigidly fixed up but are allowed to float with the changing conditions. Govt, or the central bank normally does not interfere in the market ARGUMENTS FOR FLEXIBLE EXCHANGE RATE SYSTEMSmooth Adjustment in Balance of Payments:: Flexible exchange Exchange rate refers to the price of one currency in terms of another. Exchange rate is determined by the monetary authorities( Fixed rate ) or market by demand and supply forces (Flexible rate). The world has experienced broadly two types of exchange rates. Fixed and (ii) Flexible exchange rates. rates helps in smooth adjustment in the balance of payments .The adjustments in BOP takes place automatically. When there is a deficit in the balance of payments, the external value of the currency falls. This encourages exports, discourages imports and ultimately brings about equilibrium in the balance of paymentsSimple and automatic: The flexible exchange rate system is simple. The exchange rate moves freely to equate demand & supply and the problem of scarcity or surplus is automatically solved. Monetary Autonomy: The flexible exchange rates enables automatic adjustments in economic variables. It allows the country to adopt an independent monetary policy to maintain economic stability. Flexible exchange rate system provides sufficient monetary autonomy to the central banks. Each government is free to follow its macroeconomic policies. There is no need to follow any basic rules of fixed exchange system ( Market intervention by central banks)Flexible exchange system promotes Economic Stability: According to Milton Friedman the flexible exchange rate system helps to maintain economic stability. It is better to allow exchange rate to appreciate or depreciate rather than artificial price changes No need to maintain huge foreign exchange reserves. Fixed exchange rate system necessitates huge foreign exchange reserves funds to maintain the rate. Flexible system does require any such foreign exchange equalization fund. Since the exchange rate moves freely, there is no need to maintain large-scale reserves. The flexible exchange rate system solves the problem of international liquidity automatically. Promotes free trade: Flexible exchange rate promotes free trade. It does not require the use of exchange control which may be necessary under the fixed exchange rate system. Limitations of flexible exchange rate systemFluctuations create uncertainly: frequent fluctuations in the exchange rates create an environment uncertainty for exports and importers. They remain unsure about the amount required for the payment or the one which they expect to receive. Irrational Speculation: Under flexible exchange rate, speculation is continuous. Speculators may have a wrong assessment of the strength and weakness of different currencies. Such wrong judgments lead to irrational speculation and destabilization of the exchange rate.Inflationary in Nature: Flexible exchange rate,. has an inherent inflationary bias because depreciation increases prices of traded goods but appreciation does not cause parallel reduction in prices. Thus flexible exchange rate may result in frequent increase in pricesAdverse effect on Investment and Borrowing: Foreign investment is discouraged due to uncertainty. So also, in the case of international lending and borrowing. Thus the flexible exchange rate, is not conducive for promoting economic growth. Poor International Co-operation: Flexible exchange rate system does not allow the exchange rate to be determined in the market; it is not binding on them to establish co-ordination with other countries. Unstable because of small trade Elasticity of demand: Any change in exchange rate may create instability because it may increase the price more than it decreases the quantity of imports. Depreciation also may not increase exports if demand elasticity is small. Therefore if the demand elasticity (of import and export) is small, flexible exchange rate may not bring the desired result. ===========

ARBITRAGEArbitrage refers to making a risk free profit out of discrepancies between the interest rate differentials & forward rate differentials ( forward discount or forward premium). When exchange rate given currency differ in different markets, one can make risk free profit by buying from a low priced market and selling the same in the high price market.Arbitrage refers to the simultaneous purchase of a financial asset in a low price market and sale in a higher price market. This process leads to equalization of prices of an asset in all the markets. Finally, difference in prices exists if at all, is not more than transport or transaction cost. Arbitrage operations are conducted in stock markets, Currency markets. An interesting type of arbitrage is Inter bank arbitrage. Different Banks offer different bids and ask rates. An Arbitrageur can take advantage of the situation, Let us illustrate this with an example. Following are the quotes of bank A and bank B. INR/$ 61.50/61.60 and 61.40/61.45 The rates are close to each other. Therefore an arbitrager can take the advantage of the situation. The profit earned is without any risk and blocking capitalForeign exchange Arbitrage will take advantage of the different exchange rates prevailing in various foreign exchange markets due to interest rate differentials. Let us explain this with an example suppose Rs. = $ exchange rate prevailing in India is Rs. 61 = 1$ and in London Rs. 62 = 1$. Arbitrager will purchase dollars from Mumbai foreign exchange market and sell it in London, earning a profit of Rs. 1 per dollar. In the process, increasing demand for dollars in Mumbai market will push up the prices to Rs. 61.50 and more supply of dollar will bring down the price of dollar London to Rs. 61.50. Arbitrage, therefore helps equalize the exchange rate indifferent markets When only two currencies and two countries are involved in arbitrage, it is is called two-point arbitrage. When three currencies and three monetary authorities are involved, we have three point arbitrageINTEREST RATE ARBTRAGE It is a type of foreign exchange arbitrage. There is a close interrelationship between exchange rates, interest rates .The theory of interest arbitrage states that Interest rates for comparable short term Investments in different countries & currencies must differ by the some proportion as the spot rate differs from the forward exchange rate. In other words, the annualized percentage difference between interest rates must be equal to the annualized percentage difference between the spot rate and forward rate. It arises on account of difference in real interest rate and difference in forward discount/ premium rates in different financial centers. If the real interest rates between the countries differ then arbitrage takes place. For example, the real interest rate in India is 6% and in USA it is 4 % then funds will flow from US to India, to take the advantage of the difference in real interest rate. The process will lead to an increase in money supply in India leading to a lower real interest rate and shortage of dollars in USA and consequent increase in real interest rate. Due the development of communication system, the dealers can use the situation to their advantage. Purchase of the foreign currency to make the investment and offsetting with forward sale (swap) of the foreign currency to cover the foreign exchange risk.. Interest arbitrage may be uncovered or covered Uncovered Arbitrage:-- In this system, arbitrageurs would take a risk to make profit by investing in a high interest bearing risk free securities in a foreign market.. His earnings would be according to his calculations if the currency of the foreign market where he invested does not depreciate. If currency the depreciation is equal to the difference in interest rate, the investor would not incur loss. However, if the depreciation more than interest rate differential, then the arbitrageur will end up in loss .If a trader from U.S.A. invests in risk free Indian security at 4 % more than what he gets at home for a period of 3 months, his profits will be 1 percent. This is based on the assumption of exchange rate remains the same. If Indian rupee depreciates more than 1 percent during this period the U.S.A. dealer will lose, whereas, if the Indian rupee appreciates, his earnings will be more than what he estimated at the time of investmentCovered interest rate Arbitrage: When Interest rates for same period differ In two different countries / currencies, the arbitrageurs can make risk free profit by borrowing the currency in low Interest market and simultaneously investing the same in high interest market. However, as the currencies borrowed & invested are different, there is a possibility of foreign exchange risk For covering the exchange risk the arbitrageur enters into forward contract while borrowing . By covering exchange rate risk through forward contract, arbitrageur make profit borrowing of low interest and investing of high interest. covered interest arbitrage refers to the spot purchase of the foreign currency to make the investment and offsetting simultaneous forward sale (swap) of the foreign currency to cove foreign exchange risk. It is nothing but a combination of two contracts-Arbitrage and hedging Investors would like to avoid the foreign exchange risk. Hence ,the interest arbitrage is usually covered. The covered interest arbitrage refers to the purchase of the foreign currency to make the investment and offsetting with forward sale (swap) of the foreign currency to cover the foreign exchange risk.. Covered Interest Arbitrage Parity:Once the covered arbitrage continues, the difference in interest gain diminishes and finally the gain arising out of interest arbitrage completely disappears. The reasons are:When funds are transferred from USA to India, the interest rate rises in USA and declines in India, as the supply of funds decreases in USA and increases in India. As a result the interest rate on funds decreases in USA and increases in India.Secondly, 1) the purchase of rupee in the market increases the spot rate and 2) sale of dollars in the forward market reduces its forward rate. Thus the forward discount on rupee rises. The above reasons, that is, the interest differential in favor of India declining and forward discount on rupee rising, the net gain will be less. The reduced gain should be taken as cost of covering risk. The difference in interest rates in monetary centers of different countries and the forward premium and discount which lead to a outflow or inflow of foreign currency may ultimately result in elimination of gain out of arbitrage.

Merits of flexible Exchange Rate Smooth adjustment in exchange Rate : the balance of payments automatically. When there is a deficit in the balance of payments automatically. When there is a deficit in the balance of payments, the external value of the currency falls. This encourages exports, discourages imports and ultimately brings about equilibrium in the balance of payments. Simple and automatic: The flexible exchange rate system is simple. The exchange rate moves freely to equate demand & supply and the problem of scarcity or surplus is automatically solved. Eases Liquidity Problem: Since the exchange rate moves freely, there is no need to maintain large-scale reserves. The flexible exchange rate system solves the problem of international liquidity automatically. Continuous adjustments.: So a prolonged disequilibrium is automatically avoided. Helps to maintain domestic stability with minimum interference: The free exchange rates enables automatic adjustments in economic variables. It allows the country to adopt an independent monetary policy to maintain economic stability. Promotes free trade: Flexible exchange rate promotes free trade. It does not require the use of exchange control which may be necessary under the fixed exchange rate system. Suitable to promote full employment: Flexible exchange rates reflect the true cost-price structure relationship. They are more suitable to countries seeking to follow a policy a full employment. Demerits of Flexible Exchange Rate: Instability and uncertainty: The Flexible exchange rates lead to instability and uncertainty. This reduces the volume of investments and international trade. Due to increasing risks, long-term investments are curtailed. Destabilizing effect; Flexible exchange rates have a destabilizing effect on a countrys production and allocation of factors of production. From the point of view of domestic stability, fixed exchange rates are superior to flexible exchange rates. Speculation: Under flexible exchange rate system there will be more speculation causing further fluctuations.

Income Inequalities in IndiaIn India, there are income inequalities. In India, there is no official organization to compile data on income distribution. However, various attempts have been made by several organizations and individuals to study the pattern of income distribution since 1950s. Pattern of Income Distribution in 1950s: According to estimates of Lydall and NCAER, the top 10% of the households received about 35% of the total income. The NCAER study indicates that the bottom 20% of the households received 4 to 5% of the total income. Pattern of Income Distribution in 1960s: The studies conducted by NCAER, Ojha and Bhatt and Kanta Ranadive estimate show that, the top 20% had a share of about 47% of the total households income. All the studies also point out that the bottom 20% of the households had a share of 7.5% of household income. Pattern of Income Distribution in 1970s: The top 20% accounted for 40% of the consumption expenditure in urban areas, an 38% of the consumption expenditure in the rural areas. The World Bank Estimates: The World Bank provided estimates for 1970s, 1980s, and 1990s. Over the years from 1790 to 1990s, there has been a slow reduction in the income inequalities. World Development Report, 2003: According to World Development Report, 2003, the top 10% of Indias population has 33.5% of the total income, and the bottom 10% has only 3.5% of the income in the country. The main causes of income inequalities: Law of Inheritance: Defective Land Holdings: Unequal Distribution of Income and Wealth: Social Discrimination: Differences in Skills: Poor Implementation of Government Schemes: Inflation: Illiteracy: High Birth Rate among Poor: Unemployment: Malpractices by Money Lenders: Inherited Debt: Low Efficiency among Poor: Faulty Regional Development: Over dependence on Agriculture: GOVERNMENT MEASURES TO REDUCE INEQUALITIJES IN INDIA EMPLOYMENT MEASURES LAND REFORMS FISCAL MEASURES FOOD SECURITY MEASURES RURAL DEVELOPMENT MEASURES

Foreign exchange reservesThe term foreign exchange reserves are associated with the system of international payments of a country. The term international liquidity in very broad which encompasses foreign exchange reserves to settle the international obligation a nation must have adequate foreign exchange reserves. In order to accumulate foreign exchange reserves a nation must earn foreign exchange by exporting goods and services. There reserves are generally hold in the form of gold, Dollar, Pound Sterling and other strong currencies of the world plus other international financial assets, S.D.Rs. Etc. There is a difference between the term international liquidity and term foreign exchange reserves The term international liquidity is a broad term which encompasses foreign exchange reserves while foreign exchange reserves is a very narrow term in the realm of meeting the balance of payments deficit and settling other international obligation. It is a part and parcel of international liquidity. International Liquidity refers to all accepted means of international payments available to a country for the settlement of international trade transactions. The foreign exchange reserves held by the country depends upon the system of foreign exchange rate followed by a country. If a country follows fixed exchange rate system the country will have to hold more foreign exchange reserves to maintain the desired foreign exchange rate. If aI country follows flexibly foreign exchange rate system then the country need not possess more foreign exchange reserves. The foreign exchange rate automatically gets adjusted as per the twin market forces of demand for and supply of foreign exchange. When a country follows managed floating exchange rate system it has to intervene into the foreign exchange market to iron out undue for erotic fluctuations in the foreign exchange rate as such it is required to keep more foreign fluctuations in the foreign e rate as such it is required to keep more foreign exchange reserves. The demand to hold foreign exchange reserves also depends upon the size of the demand to hold foreign exchange reserve also depends upon the size of the country from the point of view of population and GDP. The larger the size of population and GDP the more will be demand for holding the foreign exchange reserves. How much forex should a country hold depends on many factors. The important of them are: (i) size of the country (ii) current account deficit (iii) capital account vulnerability (iv) vulnerability of exchange rate flexibility and (v) opportunity cost.OBJECTIVES OF HOLDING FOREIGN EXCHANGE RESERVES: Spreading confidence in the Foreign Exchange Market:- The very fact that the monetary authority of the country ie the Central Bank of the country possesses a confortable surplus of foreign exchange reserve spreads confidence in the in the foreign exchange market of the country and as such brings stability.To curb the speculative tendency:- The speculators create instability in the country to avoid the speculation the Central Bank used the foreign exchange reserves. Enhancing the capacity to intervene in foreign exchange markets: Though under flexible exchange rate the market plays a major role, yet it is necessary to intervene in the market to maintain the exchange rate within marginLimiting external vulnerability: In an open system the foreign capital flows in and out freely. Speculators usually tries to take advantages of market. Any instability may give rise to serious repercussions. Hence the intervention is necessary and it is possible only with sufficient the forex, a buffer against external vulnerability.Providing confidence to the markets: The knowledge and information of having enough forex with the government imparts a sense of confidence in the market.Reducing volatility in foreign exchange market: Foreign exchange market becomes less volatile when it is known that the monetary authorities are capable of disciplining market with the help forex at their disposal.Creating Confidence: Foreign exchange reserves may help the countries manage the international financial risks they face. They also infuse confidence in both the country and currency. ADEQUACY CRITERIA Traditionally the adequacy of reserves is determined by a simple rule, that is, the stock of reserves should be equivalent to a few months of imports. Such adequacy criterion arises from the fact that official reserves serve as a precautionary balance to absorb shocks in external payments. How much foreign exchange reserve should a country maintain is not a precisely settled question. Many economists suggest some ratio of gross reserve to annual imports as a criterion to judge the adequacy. In India, the Report of the Committee on Capital Account Convertibility) proposed four comprehensive indicators to be used for evaluating the adequacy of foreign exchange reserves. I) Cover at least six months of import .ii) Three months import cover plus half of annual debt service payments possibilities of leads and lags. iii) The short-term debt and portfolio stock to be no more than 60 percent of the level of reserves. iv) I Net foreign exchange assets to currency in circulation to be maintained around 70 percent with a minimum of 40 percent. =========================

SOURCES OF PUBLIC REVENUEThe income of the government from all sources is called public revenue. According to Dalton, public income can be classified asPublic Revenue consists of taxes, revenue from administrative activities like fines, fees, income from public enterprises, gifts and grants. Public Receipts includes public revenue plus the receipts from public borrowings, Public Receipts includes public revenue plus the receipts from public borrowings, the receipts from the sale of public assets and printing and issuing new currency notes. SOURCES OF PUBLIC REVENUETAX REVENUE The revenue raised by the government through various taxes is known as tax revenue. Tax is a compulsory payment imposed by the government. There is no direct quid pro quo between the tax payers and the government as4) There Is no direct quid pro quo between the tax payers and the government .Tax is levied to meet public expenditure incurred by the government. Tax has to be paid regularly and periodically as determined by the taxing authority. In modern public3, taxes constitute a significant source of public revenue.NON-TAX REVENUE The revenue obtained by the government from sources other than tax is called non-tax revenue. The sources of non-tax revenue are:

Fees : Fees are charged by the government for providing certain services to the people, For e.g. court fees, passport fees, licensee fees for issuing driving licenses. Fees are paid by those who receive some special advantages. There exists quid pro quo. So fees differ from tax. Fees are also different from prices. Fees are paid for administrative services. Fines and Penalties : Fines and penalties are levied on offenders of laws as punishment. The main object of such levies Is not to earn income but to prevent the offending of laws. Hence they are insignificant sources of revenue. Special Assessment : When the government undertakes public projects like ^construction of roads, drainage system etc., It may confer special benefits to those possessing properties nearby. The values of these properties may rise. So the government Imposes special levy in proportion to the Incre se In the value of the property, so as to recover a part of the cost of the project. Special assessments are known as betterment levy in India.

POVERTY IN INDIAPoverty is a situation in which a section of the society is unable to fulfill even its basic necessities of life, i.e, food, clothing and shelter. The Task Force (on Projections of Minimum Needs and effective demand) constituted by the planning commission in 1977, defined the poverty line on The basis of recommended Nutritional Requirements of 2400 calories per person per day in rural areas and 2100 calories in urban areas. As per the latest estimates of Dr Montec Singh Aluwalia, Dy Chairman planning commission, People who earn less than Rs 32/- per capita income per day is to be treated as living Below Poverty LineTrends of Poverty in India Decline in Poverty Rate: The overall poverty rate has declined in India from 55% in 197374 to 26% in 1999-00. The rural poverty has declined from 56% in . 73-74 to 27% in 1999-00, The urban poverty has also declined from 49% in 1973-74 to 24% in 1999-00. High Higher Rate of Poverty in Rural Areas: The incidence of poverty is high in case of rural as compared to urban areas.Low Poverty States: As per the poverty estimates of 1999-00, there is low incidence of poverty in certain states like Jammu & Kashmir (3.5%), Goa (4.4%), followed by Chandigarh (5.75%) High Poverty States: As per the poverty estimates of 1999-00, there is high incidence of poverty in states like Orissa (47%), Bihar (43%), followed by Madhya Pradesh (37%). Number of Poor: Over the years the total number of poor in the country has declined from 321 million in 1973-74 to 260 million in 1999-00. High Incidence of Poverty among Weaker Sections: In India, there is high incidence of poverty among the weaker sections of the society. CAUSES OF POVERTY Problem of Unemployment, High Growth of Population among poor, Poor Implementation of Anti-Poverty Programmes, Slow Economic Development, Unequal Distribution of Income and Wealth, Inflation, Inherited Debt, Malpractices by Money Lenders, Excessive Social Expenditure, . Social Exploitation:POVERTY ALLEVIATION MEASURES The Government of India has initiated several measures to eradicate poverty. The major poverty alleviation and employment generation programmes currently being implemented include the following: Swamajayanti Gram Swarozgar Yojana (SGSY) Under this scheme poor families are provided with bank credit and government subsidy to set up self-employment micro units. This scheme is a centrally sponsored scheme on a cost-sharing ratio of 75:25 between the Central Government and the States. Pradhan Mantri Gramodaya Yojana (PMGY) :. Thi main objective of this scheme is to improve the quality of life in ruralareas. PMGY initially focused on village level development in five important areas ie Primary education, primary health ,drinking watery, housing, and rural roads. Antyodaya Anna Yojana: This scheme was launched in 2000. At present 2 crore poorest families out of BPL (Below Poverty Line) families covered under Targeted Public Distribution System BPL (Below Poverty Distribution System are benefited. 35 kgs of food grains per month were made available to each eligible family at a highly subsidized rate. Wheat is provided at the rate ofRs.2pe kg and Rs.3 per kg for rice. Annapurna Scheme: It aims at providing food security to meet the requirement of those senior citizens who are eligible but not getting the pension under the National Old Age Pension Scheme. 10 kg of food grains per person per month are supplied free of cost.Indira Awaas Yojana: . Under this scheme houses are provided free e of cost to the poor families belonging to Sc,ST and bonded labor families living below poverty lineValmiki Ambedkar Awaas Yojana .This scheme aims at improving the living conditions of the urban slum dwellers living below the poverty line who do not possess adequate shelter. . The scheme has the primary objective of facilitating the construction and up gradation of dwelling units for the slum dwellersPublic Distribution System: The government has introduced public distribution system. The people are provided with essential commodities like food grains, sugar, cooking oil, and such other items at lower prices through fair price shops. In order to make PDS more responsive to the needs of the poor, the Targeted Public Distribution System (TPDS) was introduced in 1997. Thi . This system attempts to target families below poverty line (BPL) by providing food grains at heavily subsidized rates.

INDIAS POPULATION POLICYPopulation control has been a priority area for sustaining the economic growth in the country, Therefore, the Govemment has initiated policy measures to control population. The main aim of population policies during the planning period was not only to control the population but also to improve the quality of population. The 1951 Population Policy: Realizing the need to control population, Government India declared an official population policy called National Family Planning Programme in l951. Objectives of NFPP: To reduce birth rate considerably from 40 persons per 1000 to about 25 persons per 1000 To reduce death rate from 27/1000 to less than 10/1000.To educate masses on family welfare, so , so as to limit the family size to two children. The 1976 Population Policy: The Population Policy, 1976 was completely different from the earlier population policy of the government. . Prior to this policy, the family planning was entirely voluntary. The government role was to motivate people to adopt family planning and to provide clinical facilities. In other words, the government adopted CLINICAL APPROACH prior to this policy. Sixth Plan Programme on Population: The sixth plan (1980-85) placed a lot of emphasis on population growth reduction. It placed emphasis on small family concept, i.e., one child per family by the year 2000. Eighth Plan Programme on Population: The eighth plan gave top priority to contain population. It aimed at controlling population with people cooperation and with the help of family welfare schemes. National Population Policy, , 2000: The NPP, 2000 outlines immediate, medium term and long-term objectives. Some of the important features of NPP, 2000 are: To make school education upto age 14 free and compulsory, and reduce dropouts at primary and secondary school levels to below 20 percent for both boys and girls. To reduce infant mortality rate to below 30 per 1000 live births. To reduce maternal mortality rate to below 100 per 1,00,000 live births. To promote delayed marriage for girls, not earlier than 18 and preferably after 20 years of age. To prevent and control communicable diseases. To achieve a stable population by 2045. EVALUATION OF THE POPULATION POLICY Overemphasis on Contraceptives: Lack of Political Will: Low Plan Outlay: Problem of Literacy: Poor Coordination: Poor Implementation of Campaigns: ACHIEVEMENTS: The following are the achievements of the population policies, adopted since Independence in India: Fall in Birth Rate: The birth rate has come down from 40/1000 in 1951 to 25.4/1000 in 2001. Fall in Death Rate: The death rate has come down from 27/1000 in 1951 to 8.4/1000 in 2001. Decline in Growth Rate of Population: The growth rate of population has come down from 2.2% in 1971 to 1.7% in 2001.Small Family Concept: The small family concept is being adopted by a good number of families, especially among the middle class Decline in Infant Mortality Rate: Better medical facilities and awareness have resulted in low infant mortality rates from 146/1000 in 1951 to 64/1000 in 2001. Improvement in Life Expectancy: The population policy has also resulted in improvement in life expectancy from 32 years in 1951 to 65 years in 2001 due to better health and medical born per woman. The total fertility rate has declined from about 6 in 1951 to 3.2 in 1999. Increase in Couple Protection Rate: The percentage of couples effectively protected in reproductive age group has significantly gone up from 10.4% in 1971 to 48.2% in 1999.