Global Finance Environment

8/3/2019 Global Finance Environment

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Global FinancialGlobal FinancialEnvironmentEnvironment


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Globalization

Globalization is a process of making, transformingsomething into a larger extent, i.e. worldwide. Globalization an integration of national economies

into an international economy through trade, capital,

investments, migration and technology. s a process o com n ng econom c, po ca , soc o-

cultural and technological forces. Globalization implies erasing national boundaries for

economic purposes. People of the world are unified into a single society

and function together.


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Globalization (contd.)

Globalization may be measured in the following ways:a) Exchange of good and services, i.e. proportion of

import-export in the total national income

b) Movement of people, i.e. net migration rates,

inward-outward migration flows w.r.t. population c) Capital flows, i.e. inward and outward direct

investments as a proportion of national income.Foreign Direct Investment (FDI), Foreign

Institutional Investments (FII)d) Technology, i.e. international research and

development flows, exchange of technical know-how etc.


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World Economy

World economy is becoming a single, homogenous, & complex entity, with highly interdependent economies. Phenomenal growth in international exchange of goods,

services, technology and finance has tied national

economies into a vast network of economic relations. s s poss e ue o e enormous grow n sc ence

and technology, i.e. rapid transport facilities, satellitecommunications, internet etc. have shrunk the world.

No nation is self-sufficient and can afford to be remote. Even developing countries (with conservative attitude)

have recognized the vital necessity of participating ininternational trade and commerce. E.g. India, China


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World Economy (contd.)

World exports increased from appxt $ 60 billion in 1950to $ 6270 billion in 2000. Developing nations exportsrose from $ 23 billion to $ 2200 billion.

Post 1970s, there was stupendous emergence of huge

multinational companies (MNC), with production and.

Global FDI inflows rose from $ 12,938 million in 1970to $ 651,188 million in 2002. Developing nations share

rose $ 3,461 million to $ 162,145 million, same period. Global FDI outflows $ 14,158 million to $ 647,363

million. Developing nation s stake increased from $ 47million to $ 43,095 million in the same period


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Indian perspective

Indian exports rose from INR 485 cr. to INR 159,561crores between 1950 - 2000. However, India s share in world exports (of goods) was

only 0.7% in 2000 and 1.1% in 2005.

India needs substantial amount of foreign capital toncrease omes c sav ngs, .e. ne surp us.

Technology upgradation necessitates continuous importof foreign technology, hardware and software.

Need for long term financing for engineering, projectsand infrastructure development sectors.

Firm platform for the Indian IT sector in global markets

Indian stock market opened up for FII in Sept, 1992.


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Finance Function Due to growth in international ventures finance managers must be

aware of theoretical & analytical issues involved in global markets. Global funding, investment channels, risks and returns on foreign

instruments are few features of global markets. Foreign exchange management plays a major role in international

financial management. omp ance o ega an regu a ory s a u es oca as we as

foreign) calls for a specialized knowledge, skills and application. A finance manager should possess a very wide outlook and must

be able to take advantage of opportunities available beyond hiscomfort zone.


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Finance Function (contd.)

Finance can be divided into two-functions, accountingand treasury management. Accounting deals with recording, reporting and control,

while treasury has planning, analysis and funds mgt.

Treasury manager needs to be proactive in exploitingmar e mper ec ons genera e pure nanc a ga ns.

Analysis of international markets, resulting in superiorforecasting is a pre-requisite of finance function.

Finance function is expected to assist top managementin formulation of strategic goals, and then support inthe attainment of these goals.

However, daily operational mgt. should not lose focus.


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Challenges in global trade

Updation with environmental changes and analysis of its implications for the firm, e.g. exchange rates, creditconditions (home & abroad), taxation, trade policies,stock markets, new financial instruments etc.

Comprehension, analysis of complex inter-relationships

e.g. effect of currency devaluation on trade policy etc. Adjustment w.r.t major strategic changes within the

firm, e.g. new product, policy change etc. Quick thinking and proactive implementation to tap

market opportunities, and effective risk management.


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Global Financial Markets

The last three decades have seen growth of a vastfinancial market, cutting through nations & boundaries. Degree of mobility of capital, growth of global markets

and financial instruments have been astounding.

Positive steps towards global markets were Exchange and capital controls were gradually relaxed

(liberalization in India 1991) , Non-residents given free access to domestic capital

markets, Foreign banks and financial institutions were permitted

to establish branches in various national markets.


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Domestic Markets Financial assets & liabilities denominated in a particular

currency (say Indian Rupees) are traded primarily in thenational financial markets of that country.

Hence, bank deposits, loans, promissory notes, bonds etc.denominated in Indian Rupees are bought and sold in Indian

money and capital markets. The above features represent Domestic Markets .

Domestic markets are generally under strict regulations andsupervision by relevant national authorities such as SEBI,

RBI, FEMA etc. These authorities regulate NRI access to markets by laying

down registration, disclosures requirements etc. Domestic banks are also regulated by RBI, such as reserve

ratios, lending norms etc.


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Offshore Markets

Financial assets & liabilities denominated in a particularcurrency (say US Dollars) are also traded outside thecountry of that currency.

Convertibility and strength of the currency is of prime

importance for such transactions. us, an epos s, oans, prom ssory no es, on s

etc. denominated in US Dollars are traded in financialmarkets of London, Singapore etc, i.e. outside US.

For e.g. a Spanish firm can raise a US dollar loan froma bank located in France.

The above features represent Offshore Markets . E.g.bank accounts in Switzerland, Mauritius etc.


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Offshore Markets

Advantages of offshore markets

Minimal legal restrictions and regulations as comparedto domestic markets,

Low or no taxation (i.e. tax havens),

Easy access to deposits (due to minimum regulations), .

Offshore banks facilitate mobility of funds / capital fromthe developed nations to developing nations.

However, offshore markets have been used for runninga parallel economy and organized crime through moneylaundering activities. Offshore banks, clearing houseswere involved in funding terrorist groups.


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Interest Rates In global markets, benchmark is provided by the inter-bank

borrowing and lending rates. The most known benchmark London Inter-Bank Offer Rate. LIBOR is just an indicator of demand-supply conditions in

inter-bank deposit market in London. Another rate is London Inter-Bank Bid Rate LIBID rate at

which bank is willing to pay for deposits. LIBOR varies according to the term of underlying deposits as

well as currency in which loan or deposit is denominated, i.e.quotations are provided for 3 / 6 months LIBORS.

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Global Finance Environment