INTERNATIONAL

MONETARY SYSTEMS
Unit 3

International monetary systems are sets of internationally

agreed rules, principles and supporting institutions, that
facilitate
International trade,
Cross border investment and
Generally the reallocation of capital between nation
states.
They provide means of payment acceptable between
buyers and sellers of different nationality, including
deferred payment.
To operate successfully, they need to inspire confidence, to
provide sufficient liquidity for fluctuating levels of trade and to
provide means by which global imbalances can be corrected.
The systems can grow organically as the collective result of
numerous individual agreements between international
economic factors spread over several decades.
Alternatively, they can arise from a single architectural vision as
happened at Bretton Woods in 1944

INTERNATIONAL MONETARY
SYSTEMS
3 PHASES

The pre WWI

financial
order: 1870
1914

First age of
globalization
Money
unions
Gold
standard

Between the
World Wars:
19191939

De-globalisation
Abandoned
the
gold standard

The Bretton
Woods Era:
19451971

THE PRE WWI FINANCIAL ORDER: 18701914

First age of Globalisation.

Money unions were operating which effectively allowed members

to accept each other's currency as legal tender including the
Latin Monetary Union (Belgium, Italy, Switzerland, France)
and
Scandinavian monetary union (Denmark, Norway and
Sweden).
In the absence of shared membership of a union, transactions
were facilitated by widespread participation in the gold standard,
by both independent nations and their colonies.
Great Britain was at the time the world's pre-eminent financial,
imperial, and industrial power, ruling more of the world and
exporting more capital as a percentage of her national income
than any other creditor nation has since.[6]

Between the World Wars: 19191939

A period of de-globalisation
Countries had abandoned the gold standard except
for the united states.
By the early 30's the prevailing order was essentially
a fragmented system of floating exchange rates .

The Bretton Woods Era: 19451971

Very Important

In July 1944, representatives from 45 nations met in

Bretton Woods, New Hampshire to discuss the
recovery of Europe from World War and to resolve
international trade and monetary issues. The resulting
Bretton Woods Agreement established the:

International Bank for

Reconstruction
and
Development (the World
Bank) to provide longterm
loans
to
assist
Europe's recovery.

International
Monetary
Fund (IMF) to manage the
international
monetary
system of fixed exchange
rates.

INTERNATIONAL MONETARY
FUND

To resolve monetary problem

To enhance flow of international liquidity
IMF began operations on march, 1947
First drawings made by France on 8th May, 1947
An organization of 188 countries,
Working to foster :
global monetary cooperation,
secure financial stability,
facilitate international trade,
promote high employment and
sustainable economic growth, and
reduce poverty around the world.
Governed by and accountable to the 188 countries that
make up its near-global membership.

RESOLVE
MONETARY
PROBLEM

Enhance flow of
international
liquidity

International
monetary
fund

Working to foster :
Global monetary cooperation,
Secure financial stability,
Facilitate international trade,
Promote high employment and
Sustainable economic growth,
and
Reduce poverty around the world.

Began operations
on march, 1947

First drawings
made by France
on 8th may, 1947
An organization
of 188 countries

Membership: 188 countries

Headquarters: washington, D.C.
Executive board: 24 directors each representing a single
country or a group of countries
Biggest borrowers (amounts outstanding as of 3/13/15):
portugal, greece, ireland, ukraine
Biggest precautionary loans (amount agreed as of
3/13/15): mexico, poland, colombia, morocco
Original aims:
Promote international monetary cooperation;
Facilitate the expansion and balanced growth of
international trade;
Promote exchange stability;
Assist in the establishment of a multilateral system of
payments; and
Make resources available (with adequate safeguards) to
members experiencing balance of payments difficulties.

THE IMFS RESPONSIBILITIES

Surveillance:
To

maintain stability and prevent crises in the international

monetary system, the IMF reviews country policies and
national, regional, and global economic and financial
developments through a formal system known as surveillance.

Financial assistance
Technical assistance:

tax

policy and administration, expenditure management,

monetary and exchange rate policies, banking and financial
system supervision and regulation, legislative frameworks, and
statistics.

SDRs : an international reserve asset

Resources
Governance and organization

IMF ORGANIZATIONAL CHART

SDRS

An international reserve asset, created by the IMF in

1969 to supplement the existing official reserves of
member countries.
It is neither a currency, nor a claim on the IMF.
An interest-bearing international reserve asset created
by the IMF in 1969 to supplement other reserve assets
of member countries.
Holders of SDRs can obtain these currencies in
exchange for their SDRs in two ways:
first, through the arrangement of voluntary
exchanges between members; and
second, by the IMF designating members with
strong external positions to purchase SDRs from
members with weak external positions.
In addition to its role as a supplementary reserve
asset, the SDR serves as the unit of account of the IMF
and some other international organizations.

SDRS VALUE BASED ON A BASKET

OF KEY INTERNATIONAL
CURRENCIES

The euro, Japanese yen, pound

sterling, and U.S. Dollar

1945
IBRD: The International
Bank for Reconstruction
and Development

1960

IDA : The International

Development Association

1966

The International Centre for

Settlement of Investment Disputes

1956 IFC: The International Finance

Corporation

1988

MIGA : The Multilateral Investment

Guarantee Agency

IBRD

IDA

IFC

Establish

1944

1960

1956

Members:

188

172

184

Mission:

Broad poverty

Broad poverty
reduction

Promote private

sector investment

Clients:

Middle-income

Poorest countries

Businesses in

ed:

reduction

and creditworthy
low-income

countries where

countries

Tools:

Loans,

guarantees,

analytical and

developing

there is limited

access to capital
Interest-free

Commercial-rate

analytical and

investments,

loans, grants,

loans, equity

IBRD
Objectives and
Functions

To

n and

development finance

private

Poverty alleviation in

enterprises

Eradicate

poorest countries of

Seeks to bring

poverty

world

together

Universal

Burundi, Niger

primary

Promote
private
foreign
investment

Organizational
structure

Raise

provide

like

Malawi,

standard

and

economic growth in
less
nations.

developed

invest

in

opportunities.

Productivity

To

investment

of

living

education

IFC

Reconstructio
development

IDA

Flow of capital

IBRD

IDA

Resources 2% of share

IFC

Capital

Mainly

capital in form of

contribute by

dollars.(available

nations

gold and US

for lending )

18%

of

share

members

accumulated
reserves

capital in form of Can

own currency

80% is kept in
reserves (Not
available for
lending )

and

borrow

also

from

world bank

from

developed
nations.

BOARD OF GOVERNORS

Executive directors
President
Staff
Law
Finance Operations
Economics
departmentSecretariat
departme departmen departmen
research
t
t
nt

SOURCE : IMF

Basis

IMF

Objectives

World bank
international Seeks to promote economic

Oversees

monetary system and promotes development

international
cooperation
Areas
concern

structural

monetary reforms in developing nations

of Promotes exchange stability and Assists developing countries

orderly

exchange

among it members
BOP

and

relations by providing long term finance

for developmental projects

Assist members in temporary BOP Provides

special

financial

difficulties by providing them with assistance

to
poorest
the opportunity to correct it
developing countries through
IDA
Financing

Supplements the reserves of its Stimulates

members by allocating SDRs if enterprises
there is a long term global need.

Mode

of Draw its
transaction principally
s

financial
from

the

private
in

developing

countries through IFC

resources Acquires most of its financial

quota resources by borrowing on the

subscriptions of its members .

international bond market

WORLD BANK FUNCTIONS

Construction and development of the territories
Promote
private investment and long run
balanced growth of international trade and BOP
Arrange loans made or guaranteed by it. So that
more useful and urgent projects receive
preference.
Provide finance to projects from its own capital,
funds raised by it and by participating with other
members.

WORLD BANK OBJECTIVES

(i) Investing in people, particularly through basic health
and education;
(ii) Focusing on social development, governance and
institution-building as the major elements of poverty
alleviation;
(iii) Strengthening the ability of the governments to
deliver quality services with greater efficiency and
transparency;
(iv) Protecting the environment;
(v) Supporting and encouraging private business
development and long-term planning.

Jim Yong Kim MD, PhD, also known as Kim Yong, is a South Korean
and American physician and anthropologist who has served as the 12th
President of the World Bank since July 1, 2012

BRICS
FACT
FILE
Coined by Jim O'Neill, then chairman of Goldman Sachs in

2001

An alliance formed in 2006

BRICSis the acronym for an association of five majoremerging
economies:
Brazil
Russia
India
China
South Africa
Inaugural BRIC summit took place in Russiaon June 16,
2009.
BRICS members are developing or newly industrializedcountries.
They all are deemed to be at a similar stage of newly advanced
economic development.
Goldman Sachs expects the BRICS to account for close to 40 % of
global GDP by 2050 and to have become worlds top five economies.

OBJECTIVES
OF

Comparative advantages of BRICS nations :

Brazil : Healthy export trade in coffee, sugar, soya beans,
textiles and electrical equipment.
Russia : World's richest countries in raw materials, around
20 percent of the world's production of oil and natural gas
India : Democracy , Demographic dividend and Demand
China : Manufactured goods such as consumer electronics
etc.
South Africa : Gold, diamonds, platinum, 40 per cent of the
world's gold reserves
These countries encompass over 25% of the world's land coverage
and
40%
of
the
world's
population
and
hold
a
combinedGDP(PPP) of $20 trillion.
Could become among the five most dominant economies by the year
2050.
Working together, the BRICS countries can carve out the future
economic order between themselves.

BRICS VS. ROW :

STANDING IN WORLD ECONOMY

SOURCE : IMF

BRICS MILESTONES
Global financial crisis and strengthening group
Called for greater representation at international
level
MoUs on cooperation among BRICS export credit
and guaranteed agencies.
Explore avenues of cooperation in insurance and
reinsurance market
Broad vision and shared prosperity
Contingency reserve arrangement
New development bank

6th BRICS summit

(14th July2014 16th July2014)
Theme - Inclusive Growth: Sustainable
Solutions

HIGHLIGHTS OF SUMMIT

Hosted by Brazil at Fortaleza

Sustainable solutions for inclusive growth
New Development Bank (NDB)
Contingent
Reserve Arrangement, or currency
reserve pool

WHY NEW DEVELOPMENT BANK

(NDB) ?

SOURCE : IMF

NEW DEVELOPMENT BANK (NDB)

TheNew Development Bank (NDB), is multilateral

development bankoperated by theBRICS statesas an
alternative to the existingUS -dominated World Bankand
International Monetary Fund.
$100 billion BRICS Development Bank and a reserve
currency pool worth over another $100 billion
(contingent reserve arrangement) a deal that gives
each countrys central bank access to emergency supplies of
foreign currency.
Initial capital of $50 billion.
Each member country will contribute an equal share and
have equal voting rights.
The first president will be from India.
It will be headquartered inShanghai, China.

 The

Bank is set up to foster greater financial and

development cooperation among the five emerging
markets.

Unlike

theWorld Bank, which assigns votes

based on capital share, in the New Development
Bank each participant country will be
assigned one vote, and no countries will
haveveto power.

PURPOSE AND FUNCTIONS OF

NDB
Mobilize resources for infrastructure and
sustainable development projects in BRICS and
other emerging economies and developing countries.
Will support public or private projects through
loans, guarantees, equity participation and other
financial instruments.
It
shall also cooperate with international
organizations and other financial entities, and provide
technical assistance for projects to be supported by the
Bank.
Initial authorized capital of USD 100 billion.
The initial subscribed capital shall be of USD 50
billion to be equally shared by the foundingmembers.

The World Bank Group has set twogoalsfor the world to

achieve by 2030:
End extreme poverty by decreasing the percentage of
people living on less than $1.90 a day to no more than
3%
Promote shared prosperity by fostering the income
growth of the bottom 40% for every country
The World Bank is a vital source of financial and technical
assistance to developing countries around the world.
Established in 1944, the World Bank Group is
headquartered in Washington, D.C. and have more than
10,000 employees in more than 120 offices worldwide.

FINANCIAL PRODUCTS AND

SERVICES
Provides low-interest loans, zero to low-interest
credits, and grants to developing countries.
These support a wide array of investments in such
areas as education, health, public administration,
infrastructure, financial and private sector
development, agriculture, and environmental and
natural resource management.
Also provide or facilitate financing through trust
fund partnerships with bilateral and multilateral
donors.
Manypartners have asked the Bank to help manage
initiatives that address needs across a wide range of
sectors and developing regions.

INTERNATIONAL BANK FOR RECONSTRUCTION AND

1945
DEVELOPMENT (IBRD)

An international financial institution that offers loans to middle-income

developing countries.
The IBRD is the first of five member institutions that compose the world
bank group and is headquartered in Washington, D.C., United states.
It was established in 1944 with the mission of financing the
reconstruction of European nations devastated by world war.
The IBRD and its concessional lending arm, the international
development association, are collectively known as the world bank as
they share the same leadership and staff.
Following the reconstruction of Europe, the bank's mandate expanded
to advancing worldwide economic development and eradicating poverty.
The IBRD provides commercial-grade or concessional financing to
states to fund projects that seek to improve:
Transportation and infrastructure,
Education, domestic policy,
Environmental consciousness, energy investments, healthcare,
access to food and potable water, and access to improved sanitation.

ORGANIZATIONAL STRUCTURE

1956
An international financial institution that offers
investment, advisory, and asset management
services to encourage private sector development
in developing countries.
IFC's stated aim is to create opportunities for
people to escape poverty and achieve better living
standards by mobilizing financial resources for
private enterprise, promoting accessible and
competitive markets, supporting businesses and
other private sector entities, and creating jobs
and delivering necessary services to those who
are poverty-stricken or otherwise vulnerable.

INTERNATIONAL DEVELOPMENT
ASSOCIATION

1960

An international financial institution which

offers concessional loans and grants to the
world's poorest developing countries.
The IDA is a member of the World Bank Group
and is headquartered in Washington, D.C.,
United States.
Objectives of IDA:

To

provide development finance

To provide assistance for poverty alleviations
Raise standard of living, productivity and
economic growth

INTERNATIONAL DEVELOPMENT
ASSOCIATION

1960

All members of IDA can become members of IDA

There
are two types of members
:

Part

1 : Developed nations
Part 2 : Developing nations

The board of governors and executive directors of

IBRD are also that of IDA
Staff of IBRD from president to officers manage
the IDA
Lending criteria of IDA:

Poverty

criteria
Performance criteria

GLOBALIZATION AND
FOREIGN INVESTMENT

Globalisation is the process by which the world

is becoming increasingly interconnected as a
result of massively increased trade and cultural
exchange.
Globalisation has increased the production of
goods and services.

FOREIGN DIRECT INVESTMENT

(FDI)
A foreign direct investment (FDI) is an
investment made by a company or entity based in
one country, into a company or entity based in
another country.
foreign direct investment (FDI) is a
controlling ownership in a business enterprise in
one country by an entity based in another
country.

ROUTES OF
FDI
L
A
V
O
R
P
S
AP TE
O OU
W
R
T

ONLY
INFORMATIO
N TO RBI
WITHIN 30
DAYS OF
INFLOW/
ISSUE OF
SHARES

DECISION
GENERALLY
WITHIN
4 TO 6
WEEKS

ROUTES FOR FOREIGN DIRECT INVESTMENT

Automatic Route
No prior Government approval is required if the investment
to be made falls within the sectoral caps specified for the
listed activities. Only filings have to be made by the Indian
company with the concerned regional office of the Reserve
Bank of India (RBI) within 30 days of receipt of remittance
and within 30 days of issuance of shares
FIPB Route
Investment proposals falling outside the automatic route
would require prior Government approval. Foreign
Investment requiring Government approvals are considered
and approved by the Foreign Investment Promotion Board
(FIPB). Decision of the FIPB usually conveyed in 4-6 weeks.
Thereafter, filings have to be made by the Indian company
with the RBI
58

ILLUSTRATIVE LIST OF SECTORS

UNDER AUTOMATIC ROUTE FOR
FDI UP TO 100%
Advertising and Films
Computer related Services
Research and Development Services
Construction and related Engineering Services
Pollution Control and Management Services
Urban Planning and Landscape Services
Architectural Services
Health related & Social Services
Travel related services
Road Transport Services
Maritime Transport Services
Internal Waterways Transport Services
Electricity Generation (except Atomic energy)
Electricity Transmission
Electricity Distribution
Mass Rapid Transport System
Roads & Highways
Toll Roads
Vehicular Bridges
Ports & Harbours
Hotel & Tourism
Townships, Housing, Built-up Infrastructure and Construction Development
Project

FDI PROHIBITED SECTORS

FDI - SECTORAL GUIDELINES

UNDER FIPB ROUTE

AIRPORTS
Foreign Investment upto 100% is allowed in green field
projects under automatic route
Foreign Direct Investment is allowed in existing projects
- upto 74% under automatic route
- beyond 74% and upto 100% subject to Government
approval

TELECOM

- Automatic upto 49%

- FIPB beyond 49% but upto 74%

FDI - SECTORAL GUIDELINES

UNDER FIPB ROUTE

INSURANCE
FDI upto 26% allowed on the automatic route

However, license from the Insurance Regulatory &

Development Authority (IRDA) has to be obtained
PETROLEUM
For petroleum refining activity 100% FDI is
permitted in Indian Private Companies under
automatic route and upto 26% FDI is permitted in
Public Sector Undertakings with Government
approval

FDI - SECTORAL GUIDELINES

UNDER FIPB ROUTE

PRIVATE SECTOR BANKING

Foreign Investment upto 74% is permitted from all
sources (FDI +FII) under the automatic route subject to
guidelines for setting up of branches/subsidiaries of
foreign banks issued by RBI from time to time.

PRINT MEDIA
FDI upto 26% in publishing news papers and periodicals
dealing in news and current affairs subject to
verification of antecedents of foreign investor and
keeping editorial and management control in the hands
of resident Indians

July 17, 2015

ADVANTAGES OF FDI

Large and growing market

World class scientific, technical and managerial
manpower
Cost-effective and highly skilled labor
Access to global market place for domestic players
Contribution to exports growth
Large availability of capital
Increase domestic savings and investments
Increase in Forex Reserves

DISADVANTAGE OF
FDI

Crowding of local industry

Loss of control

Repatriation of profits ( dividends by

investor)
Effects on local culture / sentiments socio
cultural effects

Foreign Institutional Investor

(FII)
Foreign Institutional Investment is used to denote
aninvestor- mostly of the form of aninstitution or
entity, which invests money in thefinancial marketsof
a country different from the one where in the
institution or entity was originally incorporated.
FII investment is frequently referred to ashot
moneyfor the reason that it can leave the country at the
same speed at which it comes in.
Agencies Regulating FII in India

RBI: the apex bank

FIPB: reviews all foreign investment proposals

SEBI: which regulates India's capital markets

DIFFERENCE BETWEEN FDI AND FII

FDI

FII

1.

FDI is when a foreign company

brings capital into a country or an
economy to set up a production or
some other facility. FDI gives the
foreign company some control in
the operations of the company

FII is when a foreign company buys

equity in a company through the
stock markets. Therefore, in this
case, FII would not give the foreign
company any control in the
company.

2.

Foreign direct investment involves

in the direct production activity
and also of medium to long-term
nature

Foreign portfolio investment is a

short-term investment mostly in the
financial markets and it consists of
Foreign Institutional Investment
(FII).

3.

It enables a degree of control in the

company.

It does not involve obtaining a

degree of control in a company.

4.

FDI brings long-term capital,

The FII brings short-term one

ADVANTAGES OF FII

Trading and delivery volume raises

Volatility will be curtailed

More liquidity will created

Standard will be improved because of

investors quality

Disadvantages of FII

Problems of Inflation.

Hot Money.

False representation of economy.

Cannot be utilized for long term.

Problem for small investor.

AREAS AFFECTED BY FII

Stock market
The FIIs profit from investing in emerging financial stock
markets, say the Indian stock Exchange. If the cap on FII is high
then they can bring in lot of funds in the countries stock markets
and thus have great influenceon the way the stock markets
behaves, going up or down. The FII buying pushes the stocks up
and their selling shows the stock market the downward path. So
this is how influencing FII can be, as is seen in the present
downtrend of the stock markets in India courtesy heavy FII
selling.

Exchange Rates

The simple way of understanding is throughDemand and Supply.

If say US imports from India it is creating a demand for Rupee
thus the Indian rupee appreciates w.r.t the dollar. If India
imports then the dollar appreciates w.r.t the Indian rupee.

AREAS AFFECTED BY FII

Exports & Imports

The FII lead to appreciation of the currency, they lead to the exports
industry becoming uncompetitive due to the appreciation of the rupee.
For e.g. if 1 USD = Rs.40 and a soap costs 1 USD. Now when the rupee
appreciates 1 USD = Rs. 20, I will have to sell the same soap to the US
for 2 US Dollars in order to sustain the same income that I have been
making i.e. Rs.40. Thus excess FII fund inflow in the country can also
make a negative impact on the economy of the country.

Inflation
The huge amount of FII fund inflow into the country creates a lot of
demand for rupee, and the RBI pumps the amount of Rupee in the
market as a result of demand created by the FIIs. This situation could
lead to excess liquidity
Thus there should be a limit to the FII inflow in the country.

IMPACT OF GLOBALIZATION IN
INDIA