ASSIGNMENT

DRIVE FALL DRIVE 2013

PROGRAM B.COM GENERAL, SEMESTER III
BCC 303 & MONEY &BANKING

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Q.No1 Discuss about the main propositions of Post-Keynesian theory. 10 marks

Answer: The post-Keynesian theory is an alternative view on money. The assumptions of this theory are
uncertainty, historical time and importance of money. The source of money is demand of businessmen and
households for credits. Money is endogenous and is determined by its demand a pulled by credits.
Endogenous money refers to the theory that money comes into existence as it is needed by the real
economy and that banking system reserves are enlarged or drained as needed to accommodate the demand
for lending at the prevailing interest rates. Basically, so long as the banks can find profitable lending
while borrowing at the discount rate set by the Federal Reserve then the creation of banking system
reserves necessary to support the lending will be automatically supplied by the central bank through Open
market operations. Post Keynesian economists believe that supply of money is credit-driven and
determined endogenously by the demand for bank loans, rather than exogenously by monetary authorities.
Monetary policy operates primarily through interest rates at a fixed rate by monetary authorities, who are
being forced to accommodate any increases in demand for reserves caused by bank lending. Even if the
monetary authority refuses to accommodate any increase in demand for reserves, banks will still be able

to increase in loan demand through their own initiatives. According to Minsky, money supply is strictly
defined as the sum of high-powered money and demand deposits.

2 What are the key drawbacks of commercial banking?

Answer:
Disadvantages
The key disadvantages are as follows:
Excessive bureaucratization.
Red-tapism and disruptive tactics of trade unions of bank employees.
Directed lending has impacted the financial health of the banks in view of considerable increase in the
loan losses.
Erosion of capital base of banks on account of poor asset quality.

3 What are the effects of depreciation on balance of payment? 10 marks

Answer: Exchange depreciation means a reduction in the value of a currency in terms of gold or other
currencies under free market conditions and coming about through a decline in the demand for that
currency in relation to the supply. This is usually applied to floating exchange rates. The purpose of this
method is to depreciate the external exchange value of the home currency, thus cheapening the domestic
goods for the foreigner. Whereas, under fixed-parity system or fixed exchange rate, the reduction of
currency value against the gold or other currencies is official and not market based. This official reduction
of exchange rate is called devaluation. The purpose of both depreciation and devaluation is to
cheapen the domestic goods and boost up the exports. (But the governments regarded devaluation as a
means of correcting a balance of payments deficit only as a measure of last resort. They predominantly
relied on deflation of the home market and international borrowing. Devaluation or depreciation of the
exchange rate can correct a balance of payment deficit because it lowers the price of exports in terms of
foreign currencies and raises the price of imports on the home market. This does not necessarily succeed
in its purpose. For the resources devoted to the production of exports, less foreign exchange is earned
with which to pay for imports. If the level of imports remained the same, more output would have to be
diverted to exports and away from home consumption and investment simply to maintain the status quo.
If a currency is overvalued in terms of foreign currency it can get more imports, for a given value of its

imports and therefore the terms of trade will be favourable. Devaluation or depreciation could lead to a
loss of real income without any benefit to the balance of payments.

4 Explain the functions of RBI.

Answer: FEMA envisages that the RBI will have a key role in the management of foreign exchange. The
main functions of RBI under FEMA are:
a. Control over dealing in foreign exchange by giving general or special permission for dealing in foreign
exchange, excluding those cases where specific provisions have been made into an Act, rules or
regulation Section 3.
b. The RBI cannot impose any restriction on current account transaction.
c. Specifying conditions for payment in respect of capital account transaction Section 6 (2).
d. Regulate/prohibit/restrict the following by issuing regulations (i) Transfer or issue of foreign security to
resident and Indian security to non-resident. (ii) Borrowing and lending in foreign exchange or to a
foreign person (iii) Export/Import of currency or currency notes (iv) Transfer of immovable property
outside India (v) Giving guarantee or surety where foreign exchange transaction is involved Section
6(3).
e. Specify (by regulation) period and manner in which foreign exchange due from export of goods and
services should be received Section 8.
f. To grant exemption from realisation and repatriation in cases specified under Section 9. These cover
provisions in respect of possession of foreign currency or foreign coins, foreign currency accounts,
foreign exchange acquired form employment, business, trade, services etc.
g. Granting authorisation to 'Authorised Person' to deal in foreign exchange to give direction to them and
to inspect the authorised person Section 10, 11 and 12.
h. To make regulation Section 47.
Today, the rupee is convertible on current account. This means all current income (including rent,
dividend, interest, salary, etc.) is repatriable, even in cases where principle amount is not repatriable.
Today many important currencies like Dollars (USA), Pound Sterling, Euro, Yen, etc., are freely
convertible. All this limits the role of FEMA. Now it is no longer cumbersome to deal in Forex and any
authorised person or agency can deal in any currency.

5 Discuss the role of information technology in central banks. 10 marks

Answer: For a long time, the banking sector has been the monopolistic provider of economy-wide
payment and settlement systems. Recent developments in IT, however, suggest that this situation may
change, as evidenced by several attempts to create new types of payment and settlement services using IT;
such as (i) the use of financial assets other than bank deposits for payment and settlement services, (ii)
experiments using various kinds of electronic money, and
(iii) making settlements through B-to-B EDI (Electronic Data Interchange) systems, etc. Information
systems are a foundation for conducting business today. Survival and existence is difficult without
extensive use of IT as all core business processes and relationships with customers, suppliers and
employees are digitally enabled. Businesses today, use information systems to achieve six major
objectives; operational excellence, new products, services, business models, customer/supplier intimacy,
improved decision making, competitive advantage and day to day survival. Information system collects,
stores and disseminates information and also represents a combination of management organization and
technology elements.
Internet banking
Internet banking services is an additional delivery channel just like telebanking, ATM with internet as the
medium of operation. The major advantage of Internet banking is that the user can utilize the services
from anywhere at any time. It simply requires a personal computer and an internet connection. The user
connects to the bank's website through internet and log in to the services by using valid corporate-id, userid and password. These days banks have started extending transactional level services on the internet in
view of which customer is able to get services at electronic speed, cost of every service is drastically
reduced and a lot of time is saved.
Need for internet banking
Internet banking provides faster, accurate, efficient services at the touch of a button and at a very low
cost. The following factors have contributed to the foundation and growth of Internet banking:
Phenomenal growth of customers and branches.
Banks initiating new technological innovations have an edge over other banks.
The Internet offers an avenue to the issue of competitive advantage in the face of redefinition of
financial services industry.
Time has come for banks to bring fundamental change in their strategy to redefine customer-banker
relationship.

Owing, at least partly, to the recent progress of IT, various kinds of screen-based electronic trading
systems have been developed and put into use in many securities (and foreign exchange) markets. There
is also a trend for these securities (and foreign exchange) transactions to be settled via electronic

networks. Since a significant portion of a central banks day-to-day market operations involve
transactions in such securities markets, and efficient and effective implementation of day-to-day market
operations is an essential prerequisite for the proper conduct of monetary policy, how to cope with these
IT-induced changes in securities (and foreign exchange) markets is an important and practical question for
a central bank.
In general we can say that these IT-induced changes in securities transactions and settlements are
expected to enhance the efficiency of these markets. This might mean that a central bank is able to
conduct various operations in such markets more efficiently and effectively. For example, the time needed
for a central bank to conduct operations in government bonds seems to have been significantly reduced,
the reason being developments in electronic trading and settlement systems in the government bond
market. This implies that a central bank is able to conduct operations in a timelier manner than in the
past. The effect of such operations is also likely to appear more quickly since the time needed for
settlements to be completed can be shortened.

6 Discuss the Indias position in IMF. 10 marks

Answer:
India is among one of the developing economies that effectively employed the various Fund programmes
to fortify its fiscal structure. Through productive engagement with the IMF, India formulated a consistent
approach to expand domestic and global assistance for economic reforms. Whenever India underwent
balance of payments crises, it sought the help of IMF and in turn the internationally recognized reserve
willingly helped India to overcome the difficulties. Recently, India purchased IMF gold to lend money to
developing countries. This proves that the fiscal reforms set in motion by the previous finance ministers
have finally started gaining momentum, transforming India from fiscal borrower to major lender.
The speed at which the gold was purchased by India on September 18, 2009 astonished the market
observers. These observers later considered it as a smart move towards shoring its bullion funds and
steadily trying to stake on the US dollar. Some analysts predict that India is purchasing gold to move
forward for higher voting share in the IMF. India is also seeking for a considerable say in global fiscal
affairs and greater account in the IMF. The Reserve Bank of India forfeited USD 1,045/ ounce of yellow
metal paying the amount in hard exchange and not in the IMF's internal division of account.
The history of India's engagement with IMF illustrates that with premeditated planning it is possible to
alleviate a macroeconomic calamity and sustain the rights of reform package without negotiating on
democratic organizations or international policy autonomy.

CONTACT ME TO GET FULLY SOLVED SMU

ASSIGNMENTS/PROJECT/SYNOPSIS/EXAM GUIDE PAPER
Email Id: mrinal833@gmail.com
Contact no- 9706665251/9706665232/
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COST= 100 RS PER SUBJECT