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International Liquidity &International Reserves
Presented by:Ashitha
Chella Pandian
Prabu
Rajeshwaran
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International Liquidity
International liquidity refers to those financial
resources and facilities that are available by a
country to finance on the deficit of its balanceof payment.
Term International liquidity refers to the
countrys international reserves and its
capacity to borrow in foreign market.
Gold cannot be directly used for settlement
between central banks.
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International Liquidity
Official reserve holdings may include some
foreign currency that is universally accepted &
convertible. Earlier British pound was considered as
common currency.
British pound has been replaced by US Dollar
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Conditions for reserve currency
Currency of great trading nation
The currency should be easily acquired via
normal trade.
It must have stable value (where the other
currencies are losing)
The currency should be supported in the homecountry by strong banking system.
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Components of International Liquidity
Gold & foreign currencies held by the
monetary authority of a country.
Borrowing facilities available from IMF.
Special drawing rights (SDRs).
Borrowing capacity of the country in
international market.
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Purpose of holding
To maintain public confidence in the capacity
of the country to honour its international
obligations. To increase the capacity of the monetary
authority to intervene in the foreign exchange
market.
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Indias International reserves
During early 1990s, as the reserves are
inadequate even for essential needs of the
country This lead to the liberalization of India.
After liberalization the Indian reserve started
increasing.
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Liquid surplus & Liquid deficit
Some countries will have liquid surplus while
others may be in a liquidity deficit.
If international reserves do not grow as fast asinternational trade, it will result in a global
shortage of liquidity.
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Current India International reserves2. Foreign Exchange Reserves
Item
As on Nov. 25, 2011Variation over
Week End-March 2011 End-December 2010 Year
` Crore US$ Mn. ` Crore US$ Mn. ` Crore US$ Mn. ` Crore US$ Mn. ` Crore US$ Mn.
1 2 3 4 5 6 7 8 9 10
Total Reserves 15,79,000 3,04,365 886 4,259 2,17,986 453 2,46,646 7,031 2,36,939 10,386
(a) Foreign Currency Assets + 14,10,555 2,70,377 610 4,199 1,85,672 3,953 2,10,478 2,563 1,97,276 5,122
(b) Gold $ 1,31,442 26,896 28,870 3,924 30,756 4,426 34,932 5,228
(c) SDRs @ 23,421 4,489 175 38 3,020 80 668 589 178 593
(d) Reserve Position in the IMF** 13,582 2,603 101 22 424 344 4,744 631 4,553 629
+ Excludes `1,982 crore/US$ 380 million invested in foreign currency denominated bonds issued by IIFC (UK).
* Foreign currency assets expressed in US dollar terms include the ef fect of appreciation/depreciation of non-US currencies (such as Euro, Sterling, Yen) held in reserves.For details, please refer to the Current Statistics section of the RBI Bulletin.
** Reserve Position in the International Monetary Fund (IMF), i.e., Reserve Tranche Position (RTP) which was shown as a memo item from May 23, 2003 to March 26,2004 has been included in the reserves from the week ended April 2, 2004 in keeping with the international best practice.
@ Includes SDR 3,082.5 million (equivalent to US$ 4,883 mi llion) allocated under general allocation and SDR 214.6 million (equivalent to US$ 340 million) allocated underspecial allocation by IMF done on August 28, 2009 and September 9, 2009, respectively.
$ Includes `31,463 crore (US$ 6,699 million) reflecting the purchase of 200 metric tonnes of gold from IMF on November 3, 2009.
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Reserve of Forex & Gold
RANK COUNTRYRESERVES OF FOREIGN EXCHANGE
AND GOLD
1 China $ 2,876,000,000,000
2 Japan $ 1,063,000,000,000
3 Russia $ 479,400,000,000
4 Saudi Arabia $ 445,100,000,000
5 Taiwan $ 387,200,000,000
6 Korea, South $ 291,600,000,000
7 Brazil $ 288,600,000,000
8 India $ 287,100,000,000
9 Switzerland $ 270,300,000,000
10 Hong Kong $ 268,700,000,000
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Indicators of adequacy of Foreign
Exchange Reserves
In current account deficit, Foreign exchange reserve
should be equal to at lease three months of imports.
This measure is more useful in situations where capital
flow are strictly controlled. This is import adequacy.
In Large volume of debt servicing, it is recommendedthat payment liabilities, in addition to imports, should
be taken into account while determining level of
reserves. This is debt adequacy.
In volatility of capital flows, reserves adequacy can bemeasured in terms of ratio of short term debt &
portfolio stock of reserves. In case of reverse capital
flow, the monetary authority would be able to prevent
a precipitous depreciation of exchange rate. This is
capital adequacy.
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Indicators of adequacy of Foreign
Exchange Reserves
Another measure of reserve adequacy is the net
foreign exchange assets to currency ratio. This would
prevent unwarranted expansion of currency & ensureremedial measures are put in place long before a
balance of payment deficit reaches crisis levels. This is
monetary adequacy.
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Alternative Indicators
The structural aspects of its balance of payments
The nature of shocks
The degree of flexibility in the exchange rate regime Its access to the international capital market
The more open an economy & greater variability of its
trade, the greater is need for reserves. The main benefit of holding reserves is that it helps in
preventing external crisis.
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Currencies among foreign exchange
reserve
US dollar
Euro
Japanese yen
British Pound
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Sterilization
Sterilization is the process of neutralizing the
additional money supply in the economy.
The central bank of country buys or sells foreigncurrency in order to set the temporary mismatch
between the foreign currency. Such intervention in the
market affect money supply in the economy.
The purchase of foreign currency will have a
squeezing impact on money supply, which in turn has
implications for price stability & financial stability in
the economy.
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References
https://www.cia.gov/library/publications/the-world-
factbook/rankorder/2188rank.html
http://www.rbi.org.in/scripts/WSSViewDetail.aspx?TYPE=Sectio
n&PARAM1=2
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Thank You