International Liquidity & International Reserves

8/3/2019 International Liquidity & International Reserves

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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British pound has been replaced by US Dollar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

Documents

International Liquidity & International Reserves