MOUDLE-1

International Financial System:

• Importance, rewards and risk of
international finance,
• Goals of MNC-
• International business methods,
• Exposure to international risk,
• International monetary system-
• The Exchange Rate Regimes,
• International Liquidity,
• Adjustment Process,
 MOUDLE-1
International Financial System:
• Currency blocks
• Economic and Monetary Union (EMU)
• European Currency Union (ECU),
• Multilateral financial institutions:
• International Monetary Fund (IMF),
• World Bank, European Bank for
• Reconstruction and Development (EBRD)
• European Investment Bank (EIB)
• Global Environmental Fund (GEF)
• (Only Theory)
List of Textbooks /Reference
books
Title Author Publication with edition

International Financial Apte McGraw Hill Education; 7

Management- edition, 2017
International Financial Sharan Vyuptakesh PHI Learning
Management
International Financial V. K. Bhalla Anmol Publications Pvt.
Management Ltd, 11th Edition – 2012

International Financial Excel Books India, 2010

Madhuvij
Management
International Financial Cengage Learning, 2012
Management Jeff Madura, Roland Fox
International Financial Cheol S. Eun, Bruce G. Mcgraw Higher Ed, 7 th
Management Resnick) Edition 2017
Assignment 1
(To be submitted before 2nd March 2020)

 1a. Multinational corporations are playing a significant role in the

economic development of host countries. Is it true? Explain.
(A Sec:1NH18MBA13-1NH18MBA56) (B Sec: 1NH18MBA04-
1NH18MBA63)

 1b.Exchange rate regimes have played significant role in

determining the exchange rate of currencies. Having said this,
critically evaluates the various exchange rate regimes in determining
the exchange rates. (A Sec: 1NH18MBA61-1NH18MBA86)(A
Sec:1NZ18MBA01-1NZ18MBA40)(B Sec: 1NH18MBA67-
1NH18MBA84) (B Sec1NZ18MBA07-1NZ18MBA21)

 1c. Summarize the European currency union and the emergence of

EURO currency in the context of BREXIT. (A Sec: 1NZ18MBA41-
1NZ18MBA89)(B Sec: 1NZ18MBA25-1NZ18MBA88)
Assignment 2
(To be submitted before 23rd March
2020)

 2a. Develop the Pattern of FDI inflows into India over the years,
particularly since the national government implemented the LPG
program. (A Sec:1NH18MBA13-1NH18MBA56)(B Sec:
1NH18MBA04-1NH18MBA63)

 2b. Formulate suggestive measures as to how the disequilibrium

in the BOP position in India can be corrected. (A Sec:
1NH18MBA61-1NH18MBA86)(A Sec:1NZ18MBA01-1NZ18MBA40)
(B Sec: 1NH18MBA67-1NH18MBA84) (B Sec1NZ18MBA07-
1NZ18MBA21)

 2c.India’s BOP position is not encouraging over the past years.

In this context, analyze the pattern of India’s BOP position over
the past 5 years and comment upon it. (A Sec: 1NZ18MBA41-
1NZ18MBA89)(B Sec: 1NZ18MBA25-1NZ18MBA88)
Assignment 3
(To be submitted before 13th April 2020)

 3a. Investigate into the various factors which will determine the
exchange rates of currencies.(A Sec:1NH18MBA13-
1NH18MBA56)(B Sec: 1NH18MBA04-1NH18MBA63)

 3b. “The type of foreign exchange transaction will decide the

foreign exchange rates”. In this context, develop the
relationship between them. (A Sec: 1NH18MBA61-1NH18MBA86)
(A Sec:1NZ18MBA01-1NZ18MBA40)(B Sec: 1NH18MBA67-
1NH18MBA84) (B Sec1NZ18MBA07-1NZ18MBA21)

 3c.Macro economic variables influence the foreign exchange

rates. Investigate into the different theories which have
attempted to exchange the causes for fluctuations in the
exchange rates. (A Sec: 1NZ18MBA41-1NZ18MBA89)(B Sec:
1NZ18MBA25-1NZ18MBA88)
Format of Assignment Cover
page


ASSIGNMENT NO:

COURSE & CODE : International Financial Management (19MBAFM421)

Submitted By:

(Student Name , Semester & Section)

(USN)

Submitted to:

Prof. A.R.Sainath Ph.D

DEPARTMENT OF MANAGEMENT STUDIES

NEW HORIZON COLLEGE OF ENGINEERING, BANGALORE

2019-20
7
Guidelines for
Assignments
 Only the cover sheet should be printed,
 All other sheets should be hand written,
 Assignment question should be written first and
then answered,
 A4 size white executive bond paper should be
used. Use only one side of the sheet,
 Every assignment should have at-least 5 pages.
 Tables, diagrams, charts can be used
appropriately,
 Assignment pages should be neatly stapled,
elegantly presented and then submitted in time.
Late submission will not be accepted.
Prof. Sainath, Ph.D. Dept of
Management Studies, NHCE 8
Importance, rewards and risk of international finance

 International Financial Management also known

as International Finance is a popular concept which
means management of finance in an
international business environment, it implies, doing
of trade and earning through the exchange of foreign
currency.
 The International Financial activities help the
organizations to connect with international dealings,
with overseas business partners,
customers, suppliers, lenders etc.
 The international financial activities is also used
by Government organization and Non-profit
institutions.
History and Background
 During the post-war years, the GATT (General Agreement for Tariffs
and Trade) was established in 1948 inorder to improve trade.
 Different countries started “liberalizing” i.e. when countries agreed
to open doors for each other and traded.
 It removed the trade barriers notably over the years, as a result of
which international trade grew manifold.
 The financial participation of the trader's, exporters, importers and
the international transactions increased significantly.
 The advancement of technology and liberalization resulted into the
idea of domestic and global financial management.
 The World Trade Organization (WTO) is an intergovernmental
organization that regulates international trade. The WTO officially
commenced on 1 January 1995 under the Marrakesh Agreement,
signed by 124 nations on 15 April 1994, replacing the General
Agreement on Tariffs and Trade (GATT), which commenced in
1948.
Domestic Vs International
Financial Management (IFM)
 Financial Systems may be classified as:
 1. Domestic or Closed financial system: A
‘domestic’ financial system is one inside a country.

 2. International or open or overseas financial

systems: International Financial Management is
management of finance in an
international business environment, it implies financial
systems of many countries.
Domestic Vs International
Financial Management (IFM)
Basis Domestic Financial International Financial
Management Management
1. Goal Maximization Maximization of stakeholders
of shareholders wealth. wealth

2. History History, culture, business History, culture and business

institutions known institutions unique
3.Corporat Governmental Governmental regulations
e regulations are known are uniquely different.
Governanc
e
4.Foreign Restricted to foreign Face foreign exchange risks
Exchange exchange risks from from import/export and
risk import/export and foreign competition in
foreign competition. addition to risks due to
subsidiaries.
5. Political Restricted to internal Exposed to foreign Political
Risk political risk risks
Domestic Vs International
Financial Management (IFM)
Basis Domestic Financial International
Management Financial
Management
6. Domestic Finance Traditional financial Traditional financial
theories theories can be theories relating to
applied capital budgeting,
cost of capital needs
to be modified
7. Domestic financial Lesser use of financial Use of modified
Instruments instruments and financial instruments
derivatives because like the options,
of less foreign futures, swaps, and
exchange and letters of credit.
political risks.
Challenges of International
Financial Management (IFM)
 1. Goal: The biggest challenge of IFM is not only
limited to maximize the shareholders wealth but
also to maximize the wealth of all the stakeholders.
 2. History: History, culture and business institutions
in foreign counties are uniquely different. IFM has to
understand the requirements first and then proceed
with the finance management.
 3. Corporate Governance: Governmental
regulations are uniquely different in different
countries. IFM has to confirm to the statues of
different counties in which it is operating, which is
again a big challenge.
Challenges of International
Financial Management (IFM)
 4.Foreign Exchange risk: The IFM has to
manage the foreign exchange risks from
import/export and foreign competition in
addition to risks due to its subsidiaries
operating in the foreign markets.
 5.Political Risk: IFM has to manage the

foreign Political risks to which the business

is exposed to in the foreign markets.
Challenges of International
Financial Management (IFM)
 6. Modification of Domestic Finance
theories: The IFM has to modify the
traditional financial theories relating to
capital budgeting, cost of capital etc., to
meet the needs of the foreign markets.
 7. Modification of Domestic financial

Instruments: The IFM has to consider the

use of modified financial instruments like
the options, futures, swaps, letters of credit
etc., depending upon the requirements,
which is again a big challenge.
Importance of International
Financial Management
1.Different shape and analytics: International markets
have different shape and analytics. Proper management of
international finances can help the organization in
achieving same efficiency and effectiveness in all markets,
hence without IFM sustaining in the market can be
difficult.
2. Invest abroad: Companies are motivated to invest
capital abroad in order to:
a. Efficiently produce in foreign markets than produce in
domestic market.
b. Obtain the essential raw materials needed for
production from foreign countries.
c. Broaden markets and diversify
d. Earn high returns
Importance of International
Financial Management
3. Overseas operations: Businesses can
raise funds, invest money, buy inputs,
produce goods and sell products and
services overseas. With the knowledge of
IFM, overseas operations can be done
effectively.
4. Control of Risk: With increased
opportunities comes additional risks. IFM
will help to identify these risks and then
suggests the ways and means of controlling
the risk.
Importance of International
Financial Management
 5. Flow of Funds: Liberalized trade barriers has
increased exports/imports resulting in quantum
increase of cross country transactions which
requires proper management of international flow
of funds for which the study of International
Financial Management will be indispensable.
The two way flow of funds, outward in the form of
investment and inward in the form of repatriation
divided (Giving back dividends as returns to
companies for investing in foreign country),
royalty, technical service fees, etc., requires
proper financial management.
Importance of International
Financial Management
6. Management of Working capital: The
decision concerning the management of
working capital among their different
subsidiaries and the parent units is a complex
issue especially because the basic polices
varies from one company to the other. Those
Multinational companies that were interested
in maximizing the value of global wealth
adopted a centralized approach and those not
interfering much with their subsidiaries
followed a decentralized approach.
Importance of International
Financial Management
7. Changes in the character of the
international financial market: with the
emergence of Euro banks and offshore banking
centre and various instruments, such as Euro
bonds, Euro notes and Euro commercial papers
(Commercial papers are unsecured, short-term debt
instrument issued by a corporation, typically
for the financing of accounts receivable, inventories
and meeting short-term liabilities) the nature of the
movement of funds become so complex that proper
management become a necessity and the study of
International Finance Management becomes highly
relevant.
Multinational Enterprises/
Corporations MNC’s
 A multinational enterprise (MNE) is defined as
one that has operating subsidiaries, branches
or affiliates located in foreign countries.
 A corporation that has its facilities and other
assets in at least one country other than its
home country is a MNC. Such companies
have offices and/or factories in different
countries and usually have a centralized head
office where they co-ordinate global
management.
 Very large multinationals have budgets that
exceed those of many small countries.
 Nike, Coca-Cola, Wal-Mart, Toshiba, Honda
and BMW are the examples of MNC’s
Goals of MNC
 Multinationals invest huge sums in other countries having multiple
goals. They operate in foreign counties to achieve the following
goals:
1. To take tax benefits of foreign countries: They
think it beneficial to operate in those countries where
the tax slabs are low.
2. To exploit natural resources of the foreign
countries: If the MNC’s think that a particular natural
resource which they require is abundantly available
in the foreign country, they go and operate there.
3. To take advantage of Government Concessions:
In order to take the advantage of government
concessions in terms of tax, subsidies, grants etc., the
MNC’s operate in foreign countries.
Goals of MNC
4. To reduce the impact of regulations in the home
country: If the MNC’s feel that the government of the
home country is regulating their activities too much, they
may think of operating in foreign country.
5. To Minimize the cost: Another goal of MNC is to take
the benefit of low material and labor cost in the foreign
country.
6. To gain market dominance in the foreign country:
one more goal of a MNC could be to dominate the foreign
market by increasing their market share there.
7. To expand their activities vertically: In order to get
specialized and to deal with the same products and
services at which they are good at, the MNC’s think of
foreign markets.
Operations of MNC’s in
Foreign countries
 A MNC can operate in a foreign country in
the following 5 ways:
1. Franchising agreement: MNC grants
license to companies in the foreign
counties to use its trade markets, patents,
brand name etc.
2. Establishing Branches: MNC establishes
its own branches in the foreign country.
The branches will be under the direct
supervision and control of the Head office.
Operations of MNC’s in
Foreign countries
 3. Setting up Subsidiaries: MNC will set up partially
owned or fully owned subsidiary in the foreign
country and conducts its operations through it.
 4. Joint Ventures: The MUC enters into a Joint
venture agreement with the companies in the foreign
country and conducts the operations and shares the
profit as per the joint venture agreement.
 5. Turnkey Projects: MNC enter into agreement with
the government of the foreign country for
commissioning and execution of projects such as
steel, roadways, railways dam, power etc., The
projects will be handed over to the governments after
some time
International Business
Models
Basis of Multinational Global International Transnational
distinction Corporations Organizations Organization Organization
s s
1. Configura- Decentralized and Centralized and Core Dispersed,
tion of Assets and nationally self globally scaled competencies interdependent
Capabilities sufficient centralized and and specialized
others
decentralized
2. Roles of Sensing and Implementing Adapting and Differentiated
Overseas exploiting the parent company leveraging parent contributions by
operations local strategy company national units to
opportunities strategies integrated
worldwide
operations.
3.Develop Knowledge Knowledge Knowledge Knowledge
ment and developed and developed and developed at the develo0ped
diffusion of retained in retained at the centre and jointly and shared
knowledge each unit centre transferred to worldwide
overseas units
Exposure to International Risk
 Firms business assets, liabilities and income is
subjected to two types of risks.
 1. The Macro economic environmental risks like
exchange rates, interest rates, inflation rates,
relative prices etc., and
 2. The Core business risks such as interruptions
to supply of raw-materials, labor problems, failure
of new products, technology failure etc.,
 Therefore firms are exposed to uncertain
changes in number of variables in the
environment which are called as risk factors.
Exposure to International
Risk
 Uncertainties arising out of fluctuations in
the exchange rates, interest rates and
relative prices of key commodities like the
oil, gold, copper etc., create exposure and
risk for a firm.
 “Exposure is a measure of the sensitivity of

the value of a financial item to changes”.

 “Risk is a measure of variability of the
value of the item”.
Exchange Rate Risk
 Since the advent of floating exchange rates
in 1973, the firms around the world are
aware of the risks involved in fluctuations in
exchange rates.
 Increase in the volume of cross border

financial transactions and increase in the

volatility in exchange rates has exposed
the business to exchange rate risks.
Exchange Rate Risk
 Example of Exchange Rate of Indian
Rupee
Year Dollar Pound Euro

1 45.67 77.91 53.57

2 44.25 86.96 58.30
3 39.42 78.79 58.14
4 48.46 70.00 68.25
5 46.69 75.11 67.14
One USD to INR over different periods
YEAR 1 USD TO INR YEAR 1 USD TO INR YEAR 1 USD TO INR

1913 0.09 1958 4.76 1971 7.49

1925 0.1 1959 4.76 1972 7.59
1947 4.16 1960 4.76 1973 7.74
1948 3.31 1961 4.76 1974 8.10
1949 3.67 1962 4.76 1975 8.38
1950 4.76 1963 4.76 1976 8.96
1951 4.76 1964 4.76 1977 8.74
1952 4.76 1965 4.76 1978 8.19
1953 4.76 1966 6.36 1979 8.13
1954 4.76 1967 7.50 1980 7.86
1955 4.76 1968 7.50 1981 8.66
1956 4.76 1969 7.50
1957 4.76 1970 7.50
One USD to INR over different periods(Cont)
YEAR 1 USD TO INR YEAR 1 USD TO INR YEAR 1 USD TO INR

1982 9.46 1995 32.43 2008 43.51

1983 10.1 1996 35.43 2009 48.41
1984 11.36 1997 36.31 2010 45.73
1985 12.37 1998 41.26 2011 46.67
1986 12.61 1999 43.06 2012 53.44
1987 12.96 2000 44.94 2013 56.57
1988 13.92 2001 47.19 2014 62.33
1989 16.23 2002 48.61 2015 62.97
1990 17.5 2003 46.58 2016 66.46
1991 22.74 2004 45.32 2017 67.79
1992 25.92 2005 44.1 2018 70.09
1993 30.49 2006 45.31 10, Oct, 18 74.35
1994 31.37 2007 41.35 31,Jan 2020 71.45
Interest Rate Risk
 Business borrows which involves certainty
in the payment of interest and invests
which involves uncertainty in its earnings.
 Adverse movement in interest rate hurts the

firm by increasing the cost of borrowing or

by reducing the return on investment.
 Since 1980’s investors preference shifted
towards floating rate of interest thus
exposing borrowers to interest rate risks.
Interest Rate Risk-
Examples
Example-1
 Consider a firm has borrowed on a floating

rate of interest. At every reset date, the

rate for the following period would be set in
line with the market rate. As a result, the
firms interest payments are uncertain. An
increase in the interest rates will adversely
affect the cash flows of the firm.
Interest Rate Risk-
Examples
 Example-2
 Consider a firm has borrowed at a fixed

rate of interest to finance a fixed

investment project. Subsequently, a low
inflation rate in the economy slows down
the market rate of interest. The cash flows
from the project may also decline as a result
of the fall in the rate of inflation but the firm
is locked into a high cost borrowing.
International Monetary System
 Business is much older than money
 Business was happening even before the

introduction of money. (Barter system)

 Money has enabled smooth business
 World monetary order has prompted the

world trade to flourish.

 “Efficient multilateral financial system

is a prerequisite for efficient operation

of world trade”.
International Monetary
System
 International Monetary System comprises of
world monetary and financial organizations
that facilitates:
 A. Transfer of funds between parties,
 B. Conversion of national currencies into

other currency
 C. Acquisition and liquidation of financial

assets
 D. International Credit Creation.
International Monetary
System
 a. Exchange Rate Regimes
 b. International Liquidity
 c. Adjustment Process
 d. Currency blocks
 e. Multilateral Financial

Institutions
a.Exchange Rate Regimes

 “Exchange rate regime refers to the

mechanism, procedure and
institutional framework for
determining exchange rates at a given
point of time including the factors
responsible for the change”.
 Three exchange rates are possible:
 I. Fixed/Rigid exchange rate
 II. Floating/Flexible exchange rate
 III. Managed Float
I. Fixed/Rigid exchange rate

 Gold Standard Regime of Fixed

Exchange Rates: (upto 1972): A system
in which the actual currency in circulation
consisted of gold coins with fixed gold
content is called the Gold Specie
standard.
I. Fixed/Rigid exchange rate

 In a system in which the currency in

circulation consists of paper money issued
by the central bank as a fixed weight of the
gold in reserve is called the Gold Bullion
Standard. Weight of the gold in reserve is
called the Gold Bullion Standard.
I. Fixed/Rigid exchange rate

 “Under the gold bullion standard, the monetary

authorities will fix the rate of conversion of paper
currency into gold”. For centuries, the values of
many currencies were fixed in relation to gold. For
example upto 1933 the US fixed 1 ounce of gold
at $20, this means that the government of the
United States was exchanging 1 ounce of gold for
20 US dollars. It has to be remembered that, at
the time of weighing gold, 31.103 grams of
gold = 1 ounce of gold. However, during the
great depression (1929 to early 1940s in the US),
the gold standard was finally abandoned
II. Floating/Flexible exchange rate

 Floating Rate Regime: (Since 1973 to

approximately 1985)
 In view of the collapse of the Bretton Woods
system of exchange rate, countries started to
move towards the floating rate regime. In
floating rate regime, the exchange rate is not
fixed nor administered but it is determined by
the market forces of demand and supply in
respect of foreign currency. The floating rate
regime ensured better stability to the exchange
rate. The exchange rate tend to be closer to
the equilibrium in the long run.
II. Floating/Flexible exchange rate

The floating rate regime also enjoyed higher

protection to the exchange rates from the
external shocks as the governments were
empowered to adopt independent economic
policy.
 However, after the period of wild
fluctuations in the exchange rates, since
1985 countries stared to swing towards
managed floating.
III.Managed Float
 Under the regime of managed floating, the
central bank influences the exchange rate
by means of active intervention in the
foreign exchange market by changing the
interest rates and buying or selling the
currency against the home currency. The
monitory authorities of the country involve
in direct or indirect interventions to stabilize
the exchange rate.
III.Managed Float

 In the direct intervention, the monitory

authorities will buy and sell the foreign
currencies in the domestic market and in
the indirect intervention the monetary
authorities will change the interest rates.
The government intervenes through the
monitory authorities (the central Bank) to
bring in stability in the exchange rates.
b. International Liquidity

1. International Liquidity:
It is the stock of means to make international
payments.

2. International Reserve:
They are the assets which a country can use in
settlement of payments imbalances with other
countries. They are held by the monetary
authorities of the countries and will be used to
intervene in foreign exchange markets.
c. Adjustment Process
 Any open economy from time to time faces the
problems of imbalances in external transactions
(Balance of payments-BOP)

 The disequilibrium in BOP may be temporary or

persistent.

I. Temporary:

 1. Its own reserves

 2. Borrowings from IMF
 3. Borrowings from others
 4. combination of the above.
Adjustment Process

II. Persistent Imbalances in BOP needs to be

adjusted by “financing the gap” from:
1. Curtailing Imports
2. Promote exports
3. Encourage capital inflows from foreign
investors
d. Currency blocks and unions like the
Economic and Monetary Union (EMU) and
European Currency Union (ECU)
 European Union is an economic and political
union of 27 member states which are
located primarily in Europe. The EU operates
through a system of supranational independent
institutions (European Commission, the Council
of the European Union, the European Council,
the Court of Justice of the European Union, and
the European Central Bank.)
and intergovernmental negotiated decisions by
the member states. The European Parliament is
elected every five years by EU citizens. The
EU's de facto capital is Brussels.
d.Currency blocks and unions like the Economic and Monetary Union
(EMU) and European Currency Union (ECU)

 The European Union is composed of 27 sovereign member

States: Austria, Belgium, Bulgaria, Cyprus, the Czech
Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta,
the Netherlands, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and
the United Kingdom.
 Single currency “EURO” came into existence on 1 Jan 1999.
 The parities for some of the member counties were fixed as
follows:
 1 euro=13.7603 Austrian schilling, 1 euro=40.3399
Belgium Franc, 1 euro=2.2037 Dutch Guilder etc
d.Currency blocks and unions like the
Economic and Monetary Union (EMU) and
European Currency Union (ECU)
“The Economic and Monetary
Union (EMU) and the EURO
provide a model for other
currency unions-a regime in
which a group of sovereign
nations share a single currency
and vest the power to design and
conduct monetary policy with a
supra-natural central bank”.
e.Multilateral Financial Institutions

1. International Monetary Fund (IMF),

2. World Bank,
3. European Bank for Reconstruction and
Development (EBRD),
4. European Investment Bank (EIB),
5. Global Environmental Fund (GEF)
International Monetary Fund (IMF)

The IMF is an international institution to supervise and

promote an open and stable international monetary system.

Objectives of IMF:

1. To Promote International Monetary Co-operation .

2.To facilitate expansion and balanced growth of international
trade
3. To promote exchange stability
4. To assist in the establishment of multilateral system of
payments
5. To give confidence to members
6. To shorten the duration and lessen the degree of
disequilibrium in the international trade
World Bank

The World Bank was founded in 1944. Although

it is familiar as ‘World Bank’, its original name
was International Bank for Reconstruction and
Development (IBRD). The institutions forming
the world bank includes:
1. International Development Association (IDA)
2. International Finance Corporation (IFC)
3. Multilateral Investment Guarantee
Association (MIGA), and the
4.International Centre for Settlement of
Investment Disputes (ICSID)
World Bank

Objectives of World Bank:

 to facilitate the reconstruction of postwar Europe.

 to support economic and social progress.

The Bank has three main functions:

a) providing credit for projects and programmes,

b) giving advice and collecting data and
c) the Bank plays a catalysing role in stimulating
private investments in developing countries.
5.Multilateral Financial Institutions-
2. World Bank
 It provides 15-20 years loans at market
rates, to governments to co -finance
programmes and projects. The Bank never
finances a project completely by itself, the
receiving country is supposed to finance the
domestic part (wages, domestic suppliers)
of a project.

 The Bank finances its loans by borrowing

from the international capital market.
European Bank for Reconstruction and Development (EBRD),

 The European Bank for Reconstruction and

Development (EBRD) is an international financial
institution founded in 1991.
 As a multilateral developmental investment bank, the EBRD
uses investment as a tool to build market economies.
 Initially focused on the countries of the former Eastern Bloc
it expanded to support development in more than 30
countries from central Europe to central Asia.
 Similar to other multilateral development banks, the EBRD
has members from all over the world (North America,
Africa, Asia and Australia), with the biggest shareholder
being the United States, but only lends regionally in its
countries of operations. Headquartered in London, the
EBRD is owned by 69 countries and two EU institutions,
69th being India recently in July 2018. Despite its public
sector shareholders, it invests in private enterprises,
together with commercial partners.
European Investment Bank (EIB),

 The European Investment Bank (EIB) is the European

Union's nonprofit long-term lending institution established
in 1958 under the Treaty of Rome. As a "policy-driven
bank" whose shareholders are the member states of the
EU.
 EIB uses its financing operations to bring about European
integration and social cohesion.
 The EIB is a publicly owned international financial
institution and its shareholders are the EU member
states.
 Thus the member states set the bank's broad policy goals
and oversee the two independent decision-making bodies
—the board of governors and the board of directors.
Global Environmental Fund
(GEF)
 The Global Environment Facility was
established on the eve of the 1992 Rio Earth
Summit to help tackle our planet’s most
pressing environmental problems.
 Since then, the GEF has co-financed for
more than 4500 projects in 170 countries.
 Today, the GEF is an international partnership
of 183 countries, international institutions, civil
society organizations and the private sector
that addresses global environmental issues.
Global Environmental Fund
(GEF)
 Areas of activities of GEF

 Protected areas,
 Sustainable landscape and seascape
 Sustainable Forest Management
 Sustainable Land Management
 Emission Reduction
 Integrated Water Resources Management
 Safe Disposal off hazardous chemicals
 Adaption of climate change
Case-1
The Great Depression In the US

 The Great Depression, an immense tragedy that placed millions of Americans out of
work, was the beginning of government involvement in the economy and in society
as a whole. It Dates between 1929 and early 1940s.

 The Stock Market Crash:

 After nearly a decade of optimism and prosperity, the United States was thrown into
despair on Black Tuesday, October 29, 1929, the day the stock market crashed and
the official beginning of the Great Depression. As stock prices plummeted with no
hope of recovery, panic struck. Masses and masses of people tried to sell their
stock, but no one was buying. The stock market, which had appeared to be the
surest way to become rich, quickly became the path to bankruptcy.

 And yet, the Stock Market Crash was just the beginning. Since many banks had also
invested large portions of their clients' savings in the stock market, these banks
were forced to close when the stock market crashed. Seeing a few banks close
caused another panic across the country. Afraid they would lose their own savings,
people rushed to banks that were still open to withdraw their money. This massive
withdrawal of cash caused additional banks to close. Since there was no way for a
bank's clients to recover any of their savings once the bank had closed, those who
didn't reach the bank in time also became bankrupt.
Case-1
The Great Depression In the US

 Businesses and industry were also affected.

Having lost much of their own capital in either the
Stock Market Crash or the bank closures, many
businesses started cutting back their workers'
hours or wages. In turn, consumers began to curb
their spending, refraining from purchasing such
things as luxury goods. This lack of consumer
spending caused additional businesses to cut
back wages or, more drastically, to lay off some of
their workers. Some businesses couldn't stay
open even with these cuts and soon closed their
doors, leaving all their workers unemployed.
Case-1
The Great Depression In the US

 The Dust Bowl:

In previous depressions, farmers were usually safe from the severe effects of a
depression because they could at least feed themselves. Unfortunately, during the
Great Depression, the Great Plains were hit hard with both a drought and horrendous
dust storms.
 Small farmers were hit especially hard. Even before the dust storms hit, the invention of
the tractor drastically cut the need for manpower on farms. These small farmers were
usually already in debt, borrowing money for seed and paying it back when their crops
came in. When the dust storms damaged the crops, not only could the small farmer not
feed himself and his family, he could not pay back his debt. Banks would then foreclose
on the small farms and the farmer's family would be both homeless and unemployed.
 Riding the Rails
During the Great Depression, millions of people were out of work across the United
States. Unable to find another job locally, many unemployed people hit the road,
traveling from place to place, hoping to find some work. A few of these people had cars,
but most hitchhiked or "rode the rails."
 A large portion of the people who rode the rails were teenagers, but there were also
older men, women, and entire families who traveled in this manner. They would board
freight trains and crisscross the country, hoping to find a job in one of the towns along
the way. The farmers who had lost their homes and land usually headed west to
California, where they heard rumors of agricultural jobs
Case-1
The Great Depression In the US


Roosevelt and the New Deal
 The U.S. economy broke down and entered the Great Depression
during the presidency of Herbert Hoover. Although President Hoover
repeatedly spoke of optimism, the people blamed him for the Great
Depression.
 During the 1932 presidential election, D. Roosevelt won in a landslide.
People of the United States had high hopes that President Roosevelt
would be able to solve all their woes. As soon as Roosevelt took office,
he closed all the banks and only let them reopen once they were
stabilized. Next, Roosevelt began to establish programs that became
known as the New Deal. These New Deal programs were most
commonly known by their initials, which reminded some people of
alphabet soup. Some of these programs were aimed at helping
farmers, like the AAA (Agricultural Adjustment Administration). While
other programs, such as the CCC (Civilian Conservation Corps) and the
WPA (Works Progress Administration), attempted to help curb
unemployment by hiring people for various projects.
Case-1
The Great Depression In the US

The End of the Great Depression

 To many at the time, President Roosevelt was a hero. They believed
that he cared deeply for the common man and that he was doing
his best to end the Great Depression. Looking back, however, it is
uncertain as to how much Roosevelt's New Deal programs helped
to end the Great Depression. By all accounts, the New Deal
programs eased the hardships of the Great Depression; however,
the U.S. economy was still extremely bad by the end of the 1930s.
The major turn-around for the U.S. economy occurred after the
bombing of Pearl Harbor and the entrance of the United States into
World War II. Once the U.S. was involved in the war, both people
and industry became essential to the war effort. Weapons, artillery,
ships, and airplanes were needed quickly. Men were trained to
become soldiers and the women were kept on the homefront to
keep the factories going. Food needed to be grown for both the
homefront and to send overseas.
Case 2
Indian Economic Crisis

 By 1985, India had started having balance

of payments problems. By the end of 1990,
it was in a serious economic crisis. The
government was close to default, its central
bank had refused new credit and foreign
exchange reserves had reduced to such a
point that India could barely finance three
weeks’ worth of imports. India had to airlift
its gold reserves to pledge it
with International Monetary Fund (IMF) for a
loan.
Case 2
Indian Economic Crisis

 Causes and Consequences:

 The crisis was caused by currency overvaluation,
the current account deficit and investor confidence
played significant role in the sharp exchange rate
depreciation.
 The economic crisis was primarily due to the large and
growing fiscal imbalances over the 1980s. During the
mid eighties, India started having balance of payments
problems. Precipitated by the Gulf War, India’s oil
import bill swelled, exports slumped, credit dried up and
investors took their money out. Large fiscal deficits,
over time, had a spill over effect on the trade deficit
culminating in an external payments crisis. By the end
of 1990, India was in serious economic trouble.
Case 2
Indian Economic Crisis

 The gross fiscal deficit of the government (center and states) rose from
9.0 percent of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7
percent in 1990-91. For the center alone, the gross fiscal deficit rose
from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to 8.4
percent in 1990-91. Since these deficits had to be met by borrowings,
the internal debt of the government accumulated rapidly, rising from 35
percent of GDP at the end of 1980-81 to 53 percent of GDP at the end of
1990-91. The foreign exchange reserves had dried up to the point that
India could barely finance three weeks worth of imports.
 In mid-1991, India's exchange rate was subjected to a severe
adjustment. This event began with a slide in the value of the Indian
rupee leading up to mid-1991. The authorities at the Reserve Bank of
India took partial action, defending the currency by expending
international reserves and slowing the decline in value. However, in mid-
1991, with foreign reserves nearly depleted, the Indian government
permitted a sharp depreciation that took place in two steps within three
days (July 1 and July 3, 1991) against major currencies.
Case 2
Indian Economic Crisis

 Recovery:
 With India’s foreign exchange reserves at $1.2 billion in January 1991 and
depleted by half by June, barely enough to last for roughly 3 weeks of
essential imports, India was only weeks away from defaulting on its
external balance of payment obligations.
 The caretaker government in India headed by Prime Minister Chandra
Sekhar,’s immediate response was to secure an emergency loan of $2.2
billion from the International Monetary Fund by pledging 67 tons of India's
gold reserves as collateral. The Reserve Bank of India had to airlift 47
tons of gold to the Bank of England and 20 tons of gold to the Union Bank
of Switzerland to raise $ 600 million. National sentiments were outraged
and there was public outcry when its was learned that the government
had pledged the country's entire gold reserves against the loan. Jolting
the country out of an economic slumber,
The Chandrashekhar government had collapsed a few months after
having authorized the airlift. The move helped tide over the balance of
payment crisis and kick-started Manmohan Singh’s economic reform
process.
Case 2
Indian Economic Crisis

 P.V. Narasimha Rao took over as Prime Minister in June, the

crisis forcing him to rope in Manmohan Singh as Finance Minister,
who unshackled what was then called the 'caged tiger'.
The Narasimha Rao government ushered in several reforms that
are collectively termed as liberalization in the Indian media.
Although, most of these reforms came because IMF required
those reforms as a condition for loaning money to India in order to
overcome the crisis. There were significant opposition to such
reforms, suggesting they are an "interference with India's
autonomy". The forex reserves started picking up with the onset
of the liberalization policies and peaked to $314.61 billion at the
end of May 2008.
 A program of economic policy reform has since been put in place
which has yielded very satisfactory results so far. While much still
remains on the unfinished reform agenda, the prospects of macro
stability and growth are indeed encouraging.
Case 3
Exchange Rate Regimes
 Exchange rate regime refers to the mechanism, procedure and
institutional framework for determining exchange rates at a given
point of time including the factors responsible for the change”.
Three exchange rates are possible: 1.Fixed/Rigid exchange rate 2.Floating/
Flexible exchange rate 3. Managed Float .
 1. Gold Standard Regime of Fixed Exchange Rates: (upto 1972): A
system in which the actual currency in circulation consisted of gold coins
with fixed gold content is called the Gold Specie standard. In a system in
which the currency in circulation consists of paper money issued by the
central bank as a fixed weight of the gold in reserve is called the Gold
Bullion Standard.
 “Under the gold bullion standard, the monetary authorities will fix the rate of
conversion of paper currency into gold”. For centuries, the values of many
currencies were fixed in relation to gold. For example upto 1933 the US fixed
1 ounce of gold at $20, this means that the government of the United States
was exchanging 1 ounce of gold for 20 US dollars. It has to be remembered
that, at the time of weighing gold, 31.103 grams of gold = 1 ounce of
gold. However, during the great depression (1929 to early 1940s in the US),
the gold standard was finally abandoned
Case 3
Exchange Rate Regimes
 The Bretton Woods System:
 The Bretton Woods Conference, officially known as the
United Nations Monetary and Financial Conference, was a
gathering of delegates from 44 nations who met from July
1 to 22, 1944 in Bretton Woods, New Hampshire, US to
agree upon a series of new rules for the post-World war-II
international monetary system. The two major
accomplishments of the conference were the creation of
the International Monetary Fund (IMF) and the
International Bank for Reconstruction and Development
(IBRD), now the world bank. The US and the UK took the
task of revamping the world monetary system which is
called the Bretton Woods System. “The exchange rate
regime was called as Gold Exchange Standard”.
Case 3
Exchange Rate Regimes
 Features of the Gold Exchange Standard: As per
the Bretton Woods System:
 1.The US Govt to convert the US dollar freely into gold
as a fixed parity of $35 per ounce of gold.(28.35 Grams)
 2. The member countries of the IMF agreed to fix the
parity of their currency with the dollar with variation
within 1% on either side being permissible.
 3. If the variation exceeded the limit, the monitory
authorities of the concerned countries were to buy or
sell their currencies against the dollar to keep their
exchange rate within the limits.
 4. The member countries were entitled credit facilities
from IMF to operate in their currency market.
Case 3
Exchange Rate Regimes
 The US dollar became the international money and other
countries were accumulating US dollars for international
payments. This system continued as long as the US
dollar was stable and the countries were having
confidence in the US Dollar. When the US dollar came
under pressure due to political and economic factors in
the mid 1960, on 15th August 1971, the US Government
abandoned the fixed exchange rate, and the major
currencies went on to the floating exchange rates. An
attempt was made by increasing the price of the gold
and widening the band from +- 1% to +-2.5% around the
central parity. This was called as Smithsonian
Agreement. This too failed. In the early 1973 the world
moved towards the floating rates regime.
Case 3
Exchange Rate Regimes
 2. The Floating Rate Regime: (Since 1973 to approximately
1985)
 In view of the collapse of the Bretton Woods system of exchange rate,
countries started to move towards the floating rate regime. In floating
rate regime, the exchange rate is not fixed nor administered but it is
determined by the market forces of demand and supply in respect of
foreign currency. The floating rate regime ensured better stability to the
exchange rate. The exchange rate tend to be closer to the equilibrium
in the long run. (For ex: due to inflation, if the currency depreciated, it
led to the greater volume of exports and greater volume of exports
resulting in currency appreciation and the equilibrium was thus
maintained). The floating rate regime also enjoyed higher protection to
the exchange rates from the external shocks as the governments were
empowered to adopt independent economic policy.
 However, after the period of wild fluctuations in the exchange rates,
since 1985 countries stared to swing towards managed floating.
Case 3
Exchange Rate Regimes
 3.Managed Floating (1985 Onwards)
 Under the regime of managed floating, the central bank
influences the exchange rate by means of active
intervention in the foreign exchange market by changing
the interest rates and buying or selling the currency
against the home currency. The monitory authorities of the
country involve in direct or indirect interventions to
stabilize the exchange rate.
 In the direct intervention, the monitory authorities will buy
and sell the foreign currencies in the domestic market and
in the indirect intervention the monetary authorities will
change the interest rates. The government intervenes
through the monitory authorities (the central Bank) to
bring in stability in the exchange rates.
Case 4
Indian Rupee Finally Managed Float:

 The Indian rupee went through varying experiences.

India being a member of the Sterling area (Group of
countries, which were mostly dominions (self-
governing colony or autonomous state within
the British Empire) and colonies of the British Empire)
rupee was linked to the British pound. Under the
fixed parity regime, the value of sterling-linked rupee
was fixed as equivalent to 0.268601 gram of fine
gold. In the year 1949, its devaluation (officially
lowering of the value of a country's currency)
changed its gold content to 0.186621 gram of gold
and again as a result of 1966 devaluation, its gold
content dropped to 0.118489 gram.
Case 4
Indian Rupee Finally Managed Float:

 In August 1971, it was briefly pegged (Peg=unit of

measurement) Pegging of currency means fixing a currency
of a country with a strong currency of another country with
which it has a very large part of the trade) to the US dollar at
Rs 7.50 per dollar for about five months till December. It
was pegged again to British pound at Rs 18.9677 per pound.
 After the collapse of the fixed parity system, rupee was de-
linked from sterling in September 1975 and was pegged to a
basket of five currencies, (US dollar, British pound, French
franc, German Mark and Japanese Yen. In July 1991, during
the external sector reforms rupee was devalued by about 20
percent to Rs 25.80/dollar. Finally, from march 1993, rupee
came on to managed float with Reserve Bank of India
making off and on intervention in order to stabilize the
exchange rate.