International Monetary Fund

and it’s impact on india

International Monetary Fund • IMF is the intergovernmental organization that

oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments.

• It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development through the enforcement of liberalising economic policies on other countries as a condition for loans, restructuring or aid.

..International Monetary Fund

• IMF is a forum of national economic policies, international monetary and financial systems, which involves active dialogue with each member country.

• Total quotas of $312 billion; outstanding loans of $71 billion to 82 countries (According to the report of August 31, 2005).

• Five largest shareholders:United States, Japan, Germany, France, United Kingdom.

..International Monetary Fund

• The IMF was created to support orderly international currency exchanges and to help nations having balance of payment problems through short term loans of cash.

• Its headquarters are in Washington, United States.

Purposes of the IMF

Promote international monetary cooperation.

Expansion and balanced growth of international trade.

Promote exchange rate stability.

The elimination of restrictions on the international flow of capital.

Help establish multilateral system of payments and eliminate foreign exchange restrictions.

Make resources of the Fund available to members

Shorten the duration and lessen the degree of disequilibrium in international balances of payments

Promote international monetary cooperation, exchange stability, and orderly exchange arrangements.

Foster economic growth and high levels of employment.

Temporary financial assistance to countries to help the balance of payments adjustments

ROLE OF IMF

• Focusing on its core macroeconomic and financial areas of responsibility.

• Working in a complementary fashion with other institutions established.

• Collection and allocation of reserves. Rendering advice to member countries on their international monetary affairs.

ROLE OF IMF

• Promoting research in various areas of international economics and monetary economics.

• Providing a forum for discussion and consultation among member countries. Being in the center of competence.

Where does the IMF get it’s Money from?

• Most loans are provided by member countries, determined by their quota, which is calculated based upon a country’s relative size in the world economy.

• For a closer look at the Member Quotas we can reference the IMF website.

• Upon joining, the 25% of the quota is paid in some major currency US Dollar, British Pound, Yen while the remaining 75% is paid in their own currency.

FUNCTIONS OF IMF

• Surveillance (like a doctor) Gathering data and assessing economic policies of countries.

• Technical Assistance (like a teacher) Strengthening human skills and institutional capacity of countries.

• Financial Assistance (like a banker) Lending to countries to support reforms

India and the IMF

• India and the IMF has a positive relationship. The IMF has provided financial assistance to India, which has helped in boosting the country's economy.

• The IMF praised the country for it was able to avoid the Asian Financial Crisis in 1999 and was also able to maintain the average rate of growth of its economy.

• In 2005, the IMF said that the budget of India is very positive for it points that the economy of the country will grow at the rate of 6.7%.

• The Managing Director of International Monetary Fund Rodrigo De Rato visited India in May 2005.

• International Monetary Fund said that the reasons behind the economy growth of India are that the RBI has been able to control inflation and has also handled its monetary policies very skillfully.

• The IMF has suggested that India can become a financial super power by bringing in more reforms in its economic policies that will increase its growth rate to 8%.

India and the IMF

IMF and India Relations

• India is among one of the developing economies that effectively employed the various Fund programmes to fortify its fiscal structure. Through productive engagement with the IMF, India formulated a consistent approach to expand domestic and global assistance for economic reforms.

• Whenever India underwent balance of payments crises, it sought the help of IMF and in turn the internationally recognized reserve willingly helped India to overcome the difficulties.

• Recently, India purchased IMF gold to lend money to developing countries.

This proves that the fiscal reforms set in motion by the previous finance ministers have finally started gaining momentum, transforming India from fiscal borrower to major lender.

IMF and India Relations(Contd.)

• The speed at which the gold was purchased by India on September 18, 2009 astonished the market observers, who later considered it as a smart move towards shoring its bullion funds and steadily trying to stake on the US dollar.

• Some analysts predict that India is purchasing gold to move forward for higher voting share in the IMF. India is also seeking for a considerable say in global fiscal affairs and greater account in the IMF.

• The Reserve Bank of India forfeited USD 1,045/ ounce of yellow metal paying the amount in hard exchange and not in the IMF's internal division of account.

IMF 2010-11 prediction of Indian Economy

The International Monetary Fund (IMF) predicted 8%

expansion during 2010-11. However, the growth will be affected by high inflation and increasing monetary deficit in the concerned fiscal year. India's long term economic prospects will continue to remain sturdy in 2010-11 followed by lower growth rate at 7.7% for the FY 2011-12. Other than high inflation and rising financial deficit, the major areas of concern are rise in asset cost and the prospects of an unanticipated slowdown in the influx of foreign investment in India caused due by the chaos in worldwide financial markets.

How Does the IMF help Poor Countries?

1. Most of the IMF's loans to low-income countries are made on concessional terms, under the Poverty Reduction and Growth Facility.

2. Under a mechanism introduced by the IMF in 2005—the Policy Support Instrument—countries can request that the IMF regularly and frequently review their economic programs to ensure that they are on track.

How Does the IMF help Poor Countries? (Cont.)

3. The success of a country's program is assessed against the goals set forth in the country's poverty reduction strategy, and the IMF's assessment can be made public if the country wishes.

4. The IMF also participates in debt relief efforts for poor countries that are unable to reduce their debt to a sustainable level even after benefiting from aid, concessional loans, and the pursuit of sound policies.

5. To ensure that developing countries reap full benefit from the loans and debt relief they receive, in 1999 the IMF and the World Bank introduced a process known as the Poverty Reduction Strategy Paper (PRSP) process.

Collaborating with Other Institutions

• The IMF collaborates with – the World Bank, – the regional development banks, – the World Trade Organization, – United Nations agencies, and – other international bodies.

Each of these institutions has its own area of responsibility

and specialization and its particular contribution to make to the world economy.

What is the SDR? • The SDR, or Special Drawing Rights, is an international reserve

asset that member countries can add to their foreign currency and gold reserves and use for payments requiring foreign exchange.

• Its value is set daily using a basket of four major currencies: the euro, Japanese yen, pound sterling, and U.S. dollar.

• The IMF introduced the SDR in 1969 because of concern that the stock and prospective growth of international reserves might not be sufficient to support the expansion of world trade. (The main reserve assets at the time were gold and U.S. dollars.)

India and the IMF

India’s current quota in the IMF is SDR 4158.2 millonin the total quota of SDR 213 billion, giving it a shareholding of 1.95 per cent. India’s relative position based on quota is 13th. However, based on voting share, India (together with its constituent countries, viz., Bangladesh, Bhutan and Sri Lanka) is ranked 21st in the list of 24 constitutencies. The IMF members can either retain SDRs, use them in payments etc. or sell them to other member countries. IMF has played an important role in Indian economy. IMF has provided economic assistance from time to time to India and has also provided appropriate consultancy in determination of various policies in the country. Till 1970, India was among the first five nations having the highest quota with IMF and due to this status India was allotted a permanent place in Executive Board of Directors. In July 2004, India and IMF joint training programme at the National Institute of Bank Management, Pune was established.