International Liquidity & SDR

and Global Recession

Rameshraja.R.R (PG-16)
Vikrant.K.Patil (PG-15)
Vikash.Kumar (PG-08)
Chandraveer.S (PG-04)
Janardhan.S (MMS-19)
 International Liquidity

International liquidity is defined to include all

the assets gold and currencies that are freely
and unconditionally usable in meeting the
balance of payments deficits and other
international obligations of countries.
 Need for Reserves
With the growth of world trade and payments, under the
system of floating rates with a wider band of
fluctuations, the need for reserves increases due to the
following reasons to meet the payments and deficit
requirements

1. The larger the balance of payments deficits, the larger

is the need for reserves, and these deficits are
growing.

Contd..
2. Then existing exchange rate system called “managed
float” requires a larger official intervention, which
depends on the official holding of reserves.
3. The IMF has put an obligation on members to return to
the fixed par value system as and when conditions
permit, for which a comfortable stock of reserves is
necessary.
4. Increasing deficits in balance of payments of non-oil
producing countries in more recent years require to be
financed by reserves.
 Adequacy of Reserves
The adequacy of reserves of international liquidity is
equally important because..
1. Adequacy of reserves may be judged by the
relationship of reserves to imports.
2. By the rate of growth of world trade as compared
to the rate of growth of reserves.
3. By ‘the magnitude of balance of payments deficit
today as against a base year.
 Problems of Liquidity

1. Inadequacy of Growth

2. Unsatisfactory Distribution of Reserves

3. Unsatisfactory Composition of Reserves

 Special Drawing Rights (SDRs)

The SDR is an international reserve asset, created by

the IMF in 1969 to supplement the existing
official reserves of member countries.

“The SDR is neither a currency, nor a claim on the

IMF. Rather, it is a potential claim on the freely
usable currencies of IMF members.”
 SDR valuation

• SDR was initially equivalent to 0.888671

grams of fine gold
• Today consisting of the euro, Japanese yen,
pound sterling, and U.S. dollar.
• Values are revised after every five years
 SDR valuation criterion is
based on
• The value of the exports of goods and
services
• The amount of reserves denominated in the
respective currencies which were held by
other members of the IMF
 Potential pitfalls/limitations of
SDRs as a reserve currency
The SDR does not contain
Chinese Yuan,
Indian Rupee,
 Australian Dollar or Canadian Dollar,
(which are important benchmark or secondary
global reserve currencies.)
The current SDR is a relatively small basket of
currencies.
 Uses of SDRs
• SDRs are used in swap arrangements and in
forward operations, as a unit of account or
measure of value or a means of payment.
• The SDR is used as a currency peg by some
countries and as security or pledge.
• The Asian Currency Union and a number of
international and inter-regional bodies are
using SDRs
Global Recession
 What is Recession ?
 A Recession is a contraction phase of the business cycle.
 National Bureau of Economic Research (NBER) is the official
agency in charge of declaring that the economy is in a state of
recession.
 They define recession as :
“Significant decline in economic activity lasting more than a few
months, which is normally visible in real GDP, real income,
employment, industrial production, and wholesale-retail sales”.
 For this reason, the official designation of recession may not come
until after we are in a recession for six months or longer.
 What causes Recession?
 An economy typically expands for 6-10 years and tends to go into
a recession for about six months to 2 years.
 A recession normally takes place when consumers loose confidence
in the growth of the economy and spend less.
 This leads to a decreased demand for goods and services, which in
turn leads to a decrease in production, lay-offs and a sharp rise in
unemployment.
 Investors spend less as they fear stocks values will fall and thus
stock markets fall on negative sentiment.
 US Crisis Hits India

US faced major crisis because of -

• Subprime mortgage crisis (homeloan defaults)
• Rising oil prices at $100 a barrel
• Global Inflation
• High unemployment rates
• A declining dollar value
All this slowed down the growth of the economy
of India and as the GDP growth rate fell to 2%,
recession set in.
A slowdown in the US economy
is bad news for India because:-
• Indian companies have major outsourcing
deals from the US.
• India’s export to the US also grown
substantially over the years.
• Indian companies with big tickets deals in
the US are seeing their profit margin
shrinking.
 Crisis In The US
 The United States entered 2008 during a
housing market correction, a subprime mortgage crisis
and a declining dollar value
 In February, 63,000 jobs were lost, a 5-year record.
 In September, 159,000 jobs were lost, bringing the
monthly average to 84,000 per month from January to
September of 2008.
 On September 5, 2008, the
United States Department of Labour issued a report that
its unemployment rate rose to 6.1%, the highest in five
years
 How India will ride this
Recession?
India will surely be affected by the crisis but
at the same time, it will be the first country to
emerge stronger with a solid foundation of
sustained growth.
There are few good reasons for riding this
recession - -
 1.-Foreign Direct Investment(FDI)
• Being 10th largest economy in the
Years % of GDP World and 3rd in term of
2000-01 0.60 PPP(Purchasing Power Parity), India
has emerged as a potential player for
2001-02 0.85
FDI & NRI investment.
2002-03 0.61 • $16 billion total amount of FDI that
2003-04 0.44 came to India in 2006-2007 and $20
billion in 2007-08.
2004-05 0.54
• India provides highest returns on FDI
2005-06 0.69
than any other country in the World.
2006-07 0.84 • India has a strong English language
2007-08 1.32 base for business purposes .
 2.- Exports
 World bank Chief Economist
India Years Export as % of
GDP said that more jobs will be lost in
China than India because India is
2000-01 9.68 less dependent on exports and he
2001-02 9.17 said also emerging India is in
2002-03 10.39 much better shape in comparison
2003-04 10.65
to other emerging country.
 Half a million jobs have been
2004-05 11.92
lost in India and 20 million jobs
2005-06 12.75
have been lost in China in last
2006-07 13.79 quarter of 2008.
2007-08 13.92
 3.- Consumption
• Consumption accounts for just about 35% of GDP in China while it constitutes about
65% of GDP in India.
• India's huge population results in a per capita income of $3,300 at PPP and $714 at
nominal.
• India has a vast domestic market of 300 million strong middle class population
having a substantial purchasing power and another 700 million people whose
capacity to purchase is gradually increasing.
• Indian GDP growth rate will moderate from about 9% to about 6% in 2008-09 while
it is poised to crash from 13% to 6% in China. That’s why slow and steady is often
better.
 4.- Sixth pay commission
• Government has recently handed over a pay
hike that ranges from 40% to 100%.
• Employees will get hundreds of thousands
of rupees as Arrears.
 5.- Welfare Schemes
• National Rural Employment Guarantee Program (NREGP) that
provides 100 days of employment to the poor people in rural areas.

6.- Interest Rates

 The PLR rate is still more than 12% and its was 16% in mid 1990s.
 More than 7% of average GDP growth rates of the last decade come
after high interest rates in India.
 7.- Healthy Banks
• Europe and US banks have become habitual
for once mighty and then report losses.
• Analysts are deeply worried about Chinese
banking system.
• But no comments from western analysts
and their ilk about Indian Banks.
 8.- India Inc
 Western scholars acknowledge that India holds the advantage
compared to China because of 2 reasons –
1. Most successful India companies are private.
2. They have used capital for more productively and efficiently
than Chinese counterparts.
 Most Indian companies are sitting on billions of dollars of
reserves.
 AMI(Access Market Information) said SME channel partners
expect 12-13% growth in 2009.
 $6 millions for MSME programme to help Orissa unit by
UNIDO(United Industrial Development Organization)
 9.- Democracy

• India is the largest democratic county in the world.

That’s why the psychological impact on Indian
consumers and investors has been for more
sanguine than it has been in others countries.
• Business pundits say that democratic govt. is better
than an authoritarian or autocratic one when it
comes to delivering high growth rates and
economic prosperity.
• India 75th in Forbe’s best nations for business.
 Corrective
Steps
taken to Check
Recession
 RBI needs to neutralise the outflow of FII
money by unwinding the market
stabilisation securities that it had used to
sterilise the inflows when they happened.

 This will mean drawing down the dollar

reserves which is important at this hour.

 In the IT sector, there should be

correction in salary offerings rather than
job cutting.
 Public should spend wisely and save
more.

 Taxes including excise duty and

custom duty should be reduced to
lighten the adverse effect of economic
crunch on various industries.

 In real estate the builders should drop

prices, so as to bring buyers back into
the market.
• Also, the government should try and
improve liquidity , while CRR and SLR
must be cut further.

• Indian Companies have to adopt a

multi-pronged strategy, which includes
diversification of the export markets,
improving internal efficiencies to
maintain cost competitiveness in a tight
export market situation .
Thank You