IFM (9 marks Questions)

Q1. Collect the details with regard to new innovative financial instruments in India.
Answer:
There have been various innovative financial instruments introduced in India aimed at
catering to different investment needs and promoting economic growth. Please note that
the financial landscape is dynamic, and new instruments may have emerged since then.
Here are a few notable ones:
1. Real Estate Investment Trusts (REITs): REITs are investment vehicles that allow
investors to invest in income-generating real estate assets, such as commercial
properties and infrastructure projects, without directly owning them. REITs provide a
way for small investors to participate in real estate markets that were traditionally
accessible only to larger investors.
2. Infrastructure Investment Trusts (InvITs): Similar to REITs, InvITs allow investors to
invest in income-generating infrastructure assets, such as roads, bridges, and power
plants. These instruments provide a way to mobilize funds for infrastructure
development while offering investors the opportunity to earn returns.
3. Sovereign Gold Bonds (SGBs): SGBs are government securities denominated in
grams of gold. They provide an alternative to holding physical gold. Investors receive
interest on their investments and the capital gains are tax-exempt if held until
maturity.
4. Startup India Seed Fund Scheme: Introduced to support startups, this scheme
provides financial assistance to early-stage startups for proof of concept, prototype
development, product trials, market entry, and commercialization.
5. Bharat Bond ETFs: These are exchange-traded funds (ETFs) that allow investors to
invest in a basket of bonds issued by central public sector enterprises (CPSEs) and
other government organizations.
6. Gold Monetization Scheme: This scheme allows individuals, institutions, and trusts
to deposit gold and earn interest on it. It aims to mobilize the idle gold held by
households and institutions in the country.
7. RBI Floating Rate Savings Bonds: These bonds offer a floating interest rate linked to
the prevailing National Savings Certificate (NSC) rate. They provide an avenue for
risk-averse investors to earn returns in a rising interest rate environment.
8. Equity-Linked Savings Schemes (ELSS): ELSS are mutual funds that offer tax benefits
under Section 80C of the Income Tax Act. They provide an opportunity to invest in
equities while reducing tax liability.
9. Co-operative Banks Bonds: To strengthen the capital base of co-operative banks, the
Reserve Bank of India introduced guidelines for the issuance of bonds by these
banks. This provides an additional source of capital for these banks.
10. Alternate Investment Funds (AIFs): AIFs are a class of pooled-in investment vehicles
for investing in real estate, private equity, venture capital, and other assets. They
cater to sophisticated investors and provide diversification opportunities.
Q2. Prepare a chart showing the impact of exchange rate on country’s BOP position.
Answer:
Scenario 1 – Incresase in Exchange Rate
When the exchange rate of a country's currency increases (appreciates) relative to other
currencies, several effects can be observed in the BOP:
1. Export Decrease: An increase in the exchange rate can make a country's goods and
services more expensive for foreign buyers. This can lead to a decrease in exports as
foreign customers find the country's products less affordable.
2. Import Increase: A stronger currency can make imported goods cheaper for
domestic consumers. This might lead to an increase in imports as consumers opt for
more affordable foreign products.
3. Trade Balance Impact: The combined effect of reduced exports and increased
imports can negatively affect the trade balance, leading to a potential deterioration
of the current account.
4. Current Account Impact: A trade balance deficit caused by a decrease in exports and
an increase in imports can lead to a corresponding decrease in the current account
surplus or an increase in the deficit.
5. Capital Inflows: An appreciation can attract foreign investors who want to take
advantage of the stronger currency. This can lead to an inflow of foreign capital,
positively impacting the financial account of the BOP.
6. Investment Impact: An influx of foreign capital can lead to an increase in foreign
direct investment (FDI) and portfolio investment, both of which contribute positively
to the financial account.
7. Tourism and Remittances: A stronger currency can make the country less attractive
for foreign tourists and might decrease the value of remittances sent back by
overseas workers.
8. Reserve Accumulation: A country's central bank might intervene in the foreign
exchange market to prevent excessive currency appreciation. This could lead to an
increase in foreign exchange reserves, impacting the capital account.
9. Debt Servicing: An increase in the exchange rate can make the servicing of foreign-
denominated debt cheaper in domestic currency terms. This can have a positive
impact on the financial account.
10. Global Demand Impact: An appreciation might lead to a reduction in demand for
the country's exports in global markets, potentially affecting export-oriented sectors.
11. Domestic Demand Impact: An increase in the exchange rate can dampen domestic
demand for imported goods, helping to reduce imports and potentially improving
the trade balance.
It's important to note that the impact of exchange rate changes on a country's BOP position
is not always linear and can be influenced by various factors, including the country's
economic structure, trading partners, policy responses, and market sentiment. These effects
can interact in complex ways, shaping the overall impact on the BOP.
Scenario 2 – Decresase in Exchange Rate
When the exchange rate of a country's currency decreases (depreciates) relative to other
currencies, several effects can be observed in the BOP:
1. Export Increase: A decrease in the exchange rate can make a country's goods and
services more competitive in international markets, as they become relatively
cheaper for foreign buyers. This can lead to an increase in exports.
2. Import Decrease: A weaker currency can make imported goods more expensive for
domestic consumers. This might lead to a decrease in imports as consumers opt for
more affordable domestic products.
3. Trade Balance Impact: The combined effect of increased exports and decreased
imports can positively affect the trade balance, potentially leading to an
improvement in the current account.
4. Current Account Impact: A trade balance surplus caused by increased exports and
decreased imports can lead to a corresponding increase in the current account
surplus or a decrease in the deficit.
5. Capital Outflows: A depreciation might lead to capital outflows as investors seek
stronger currencies or assets in other countries. This can impact the financial
account of the BOP.
6. Investment Impact: Capital outflows can lead to a decrease in foreign direct
investment (FDI) and portfolio investment, negatively impacting the financial
account.
7. Tourism and Remittances: A weaker currency can make the country more attractive
for foreign tourists and can increase the value of remittances sent back by overseas
workers.
8. Reserve Usage: A country's central bank might intervene in the foreign exchange
market to prevent excessive currency depreciation. This could lead to a decrease in
foreign exchange reserves, impacting the capital account.
9. Debt Servicing: A decrease in the exchange rate can make the servicing of foreign-
denominated debt more expensive in domestic currency terms. This can impact the
financial account.
10. Global Demand Impact: A depreciation might lead to an increase in demand for the
country's exports in global markets, potentially benefiting export-oriented sectors.
11. Domestic Demand Impact: A decrease in the exchange rate can increase domestic
demand for imported goods, potentially increasing imports.
It's important to note that the impact of exchange rate changes on a country's BOP position
is influenced by various factors, including the country's economic structure, trading
partners, policy responses, and market sentiment. The effects described above can interact
in complex ways, shaping the overall impact on the BOP.