1. What is current account balance?

What is the link between current

account balance national savings and Investments? Are current
account deficits always harmful? Analyze Indias current account
data over the last 5 years?
A. What is current account balance?
Definition: The current account balance is the difference between a
country's savings and its investment. "[If the current account balance is]
positive, it measures the portion of a country's saving invested abroad; if
negative, the portion of domestic investment financed by foreigners'
savings."
The current account balance is defined by the sum of the value of imports
of goods and services plus net returns on investments abroad, minus the
value of exports of goods and services, where all these elements are
measured in the domestic currency.
B. What is the link between current account balance national savings and
Investments?
Firstly, it is worth remembering that in a closed economy, we assume that
saving = investment. (S=I). For a firm to invest, it needs savings to be
able to finance the investment.
Economists have noted that if domestic saving are lower than domestic
investment, we will see a current account deficit. Why?
Before, we look at a more mathematical approach, it is helpful to think of
a country which experienced a rapid fall in savings, but investment levels
stay the same. A fall in savings means people are spending more (higher
consumption) therefore, this would tend to suck in imports as we buy
goods and services from abroad.
But, also, if domestic savings fall how will the domestic investment be
financed? The investment must be financed from capital inflows from
abroad.

A country like Japan has had a glut of saving over investment. This saving
tended to go abroad looking for more profitable investment. Therefore,
Japan has had a deficit on capital flows, and a corresponding surplus on
the current account.
The US by contrast has often had a level of investment greater than
savings. This has been financed by capital inflows and a current account
deficit.
Savings Investment and Current Account

GNP (Gross National Product) = Gross Domestic Product (GDP 0r Y) + Net

income from abroad (R)

GNP = Y+R
Net income from abroad can be negative if foreigners own more assets in
the UK, income from these assets will be sent abroad leading to
negative net income from abroad.
Equilibrium in National Income GDP (Y) involves this formula

GDP (Y) = C+I+G+ (X-M)

(C= consumption, I= Investment, G=government spending) (X-M) = net
demand from abroad.)
The Current account (CA)

is also conventionally defined as (X-M) (value of

exports value of imports) + Net income from abroad. (R)

CA = (X-M) + (R)
Therefore,

CA = GNP (C+I+G)
The difference between GNP and (C+I+G) is the level of savings.
As a result the current account is also equal to the difference between savings
and investment

CA = S-I.
From an accounting perspective it doesnt make any difference whether we see
the current account as

1.

Net exports + net investment incomes

2.

Savings investment
Suppose domestic saving is insufficient to finance Domestic investment.
How will the domestic investment be financed?
It will be financed by investment from abroad. These capital flows are a
credit on the capital account and will be matched by a deficit on the
current account.
Conversely if a country has excess savings, these savings will go abroad
to finance investment in other countries. This will give a negative balance
on the capital account, and enable a current account surplus.

C. Are current account deficits always harmful?

If there is a current account deficit, it means there is a surplus on the
financial / capital account
Why a Current account is considered harmful to the economy
If a current account deficit is financed through borrowing it is said to be more
unsustainable. This is because borrowing is unsustainable in the long term and
countries will be burdened with high interest payments. E.g Russia was unable to
pay its foreign debt back in 1998. Other developing countries have experience
similar repayment problems Brazil, African countries (3rd World debt) Countries
with large interest payments have little left over to spend on investment.
1.

A factor behind the Asian crisis of 1997 was that countries

had run up large current account deficits by attracting capital flows (hot money)
to finance the deficit. But, when confidence fell, these hot money flows dried up,
leading to a rapid devaluation and crisis of confidence.

3.

If you run a current account deficit, it means you need to run a surplus on
the financial / capital account. This means foreigners have an increasing claim
on your assets, which they could desire to be returned at any time. For example,
if you run a current account deficit, it could be financed by foreign multinationals
investing in your country or the purchase of assets. There is a risk that your best
assets could be bought by foreigners, reducing long term income.

4.

A current account deficit, may imply that you are relying on consumer
spending, and are becoming uncompetitive. This leads to lower growth of the
export sector. This is particularly a problem for countries in the Euro who
cannot devalue to restore competitiveness. It caused very large current account
deficits and was a factor behind the EU recession of 2008-13

5.

A Balance of payments deficit may cause a loss of confidence by foreign

investors. Therefore, there is always a risk, that investors will remove their
investments causing a big fall in the value of your currency (devaluation). This
can lead to decline in living standards and lower confidence for investment.

However a current account deficit is not necessarily harmful

1.

Current Account deficit could occur during a period of inward investment

(surplus on financial account). This inward investment can create jobs and
investment. E.g. US ran a current account deficit for a long time as it borrowed
to invest in its economy. This enabled higher growth and so it was able to pay its
debts back and countries had confidence in lending the US money. Japanese
investment has been good for UK economy not only did the economy benefit
from increased investment but the Japanese firms also helped bring new working
practices in which increased labour productivity.

2.

With a floating exchange rate a large current account deficit should cause
a devaluation which will help automatically reduce the level of the deficit.

3.

A current account deficit may just indicate a strong economy, which is

growing rapidly.
Evaluation

It depends on the size of the current account deficit as a % of GDP. For

example, a deficit of over 5% would be cause for greater concern.

It depends on how you are financing the current account deficit. If a

country is borrowing from abroad to finance consumption, this is damaging in
the long-term. If it is financing the current account deficit through attracting
long-term capital investment, this could have positive benefits.

It depends on the country in question. For example, the US probably has

less reason to be concerned about a current account deficit. The US can attract a
lot of capital flows to buy dollar securities. However, a developing economy may
be more vulnerable to a current account deficit. This is because investors may be
quicker to fear an economic downturn and remove their capital.

D. Analyze Indias current account data over the last 5 years?

India Current Account
India recorded a Current Account deficit of 1285.52 USD Million in the first
quarter of 2015. Current Account in India averaged -1705.36 USD Million
from 1949 until 2015, reaching an all time high of 7360 USD Million in the
first quarter of 2004 and a record low of -31857.20 USD Million in the
fourth quarter of 2012. Current Account in India is reported by the
Reserve Bank of India.

Actual

Previous

Highest

Lowest

Dates

Unit

Frequency

-1285.52 -8226.25 7360.00 -31857.20 1949 - 2015 USD Million Quarterly

Current Prices, NSA

Calendar

GMT

Reference

Actual

Previous

Consensus

2014-09-01

12:45 PM

Q2

USD -7.8B

USD -1.2B

-USD 4.6B

2015-03-10

12:00 PM

Q4

$-8.2B

$-10.1B

$-8.8B

2015-06-10

01:05 PM

Q1

$-1.3B

$-8.2B

2015-09-01

12:45 PM

Q2

$2.1B

Forecast

$ -5.3B

$-1.3B

$ -5.1B

E.
India Trade

Last

Previous

Highest

Lowest

Unit

Balance of Trade

-10406.20

-10990.00

258.90

-20210.90

USD Million

[+]

Exports

22346.75

22050.00

30541.44

59.01

USD Million

[+]

Imports

32753.00

33050.00

45281.90

117.40

USD Million

[+]

Current Account

-1285.52

-8226.25

7360.00

-31857.20

USD Million

[+]

Current Account to GDP

-1.40

-1.70

1.50

-4.70

percent

[+]

External Debt

461943.00 455929.00 461943.00 96392.00

USD Million

[+]

Terms of Trade

60.20

60.20

100.00

60.20

Index Points

[+]

Foreign Direct Investment

2721.00

1714.00

5670.00

-60.00

USD Million

[+]

Remittances

11303.87

12293.40

12293.40

5999.10

USD Million

[+]

Tourist Arrivals

511000.00 540000.00 877000.00 129286.00

Gold Reserves

557.74

557.74

557.74

357.75

Tonnes

[+]

Crude Oil Production

766.00

767.00

813.00

526.00

BBL/D/1K

[+]

Capital Flows

-212.67

-45.30

766.96

-271.46

USD Million

[+]

2.

Describe

the

link

between

fiscal

[+]

deficits

and

inflation? According to Keynesian or monetarist theory on matters of demand

management, in times of inflation, deficit spending will increase aggregate
demand, thus adding to inflationary pressures. On the other hand, supply-side
economists tend to argue that the increase in the supply of goods and services
stimulated by tax cuts will counteract any deficit-driven inflationary pressures.
Nevertheless, the empirical work has had little success in establishing a strong

link between fiscal deficits and inflation across a broad range of countries and
inflation rates. A 2002 study using fixed effects in 94 developing and developed
economies estimated that a percentage point improvement in the ratio of the
fiscal balance to GDP typically leads to a 4.5% decline in inflation, all else
remaining constant. The study finds that changes in budgetary balances have
no significant inflationary effects in low-inflation countries, or during lowinflation occurrences in historically high-inflation countries.
A recent IMF study, however, has found empirical evidence in support of the
classical theory. Compared to other studies, it proposes a fresh approach to
testing the theory. Covering 107 countries over 1960-2003, the study models
the deficit-inflation relationship as intrinsically dynamic, explicitly distinguishing
between the short-run and the long-run.
The earlier studies had not allowed for the fact that fiscal dominance varies
widely across countries. For example, fiscal dominance has been very weak in
the US and other advanced countries over the last couple of decades. In
contrast, the fiscal authorities clearly call the shots in several developing
countries. Therefore, the study has separated countries into groups that broadly
differ in their degree of fiscal dominance.
The non-linearity of the relationship between fiscal deficits and inflation was
another constraint the study had to tackle. The higher the inflation rate, the
higher the cost of holding cash or sight deposits. Therefore, the stock of narrow
money (M1) in the economy tends to shrink as inflation rises, reducing the
inflation tax base. As with any other tax, the smaller the base, the higher the tax
rate has to be to maintain the same level of reserves. As people hold less and
less money, inflation has to be higher to finance a given deficit. The higher the
level of inflation, the stronger the impact of fiscal deficits on inflation.
The study proposes a simple way to incorporate this non-linearity in the
estimates by scaling the fiscal deficit by M1 rather than by GDP. It finds a strong
and statistically significant relationship between fiscal deficits and inflation
across a broad range of developing countries. In particular, the relationship is
quite precisely estimated for emerging market economies, where it has been

found that a sustained reduction in the government deficit by 1% of GDP is

associated with a drop in annual inflation of 2-6 percentage points, depending on
private sector holdings of narrow money.
Also, the relationship between deficits and inflation is even stronger if the study
is limited to the 26 sample countries with the highest inflation rates over the
past four decades. The study finds no significant relationship between fiscal
deficits and inflation in advanced and low-inflation economies, which is
consistent with the fiscal dominance theory mentioned earlier.
Fiscal deficits have been shown to matter not only during high and hyperinflations but also under moderate inflation ranges, though the effects are
substantially weaker in the latter case. The more financially developed countries
typically display historically low inflation rates. Half the countries classified as
low inflation economies are also classified as developed. Breaking down by high
versus lower inflation groups, changes in the budget balance have a strong
effect in high inflation economies which, according to the data, comprise several
countries with average inflation rates above 100% during the 1980s and 1990s.
Less strong but still statistically significant was the effect on moderate inflation
countries. As this category comprised nine advanced countries out of 54
comprising the whole group, it raised the question whether a significant
relationship between budget deficits and inflation was also observed for that
sub-group. Re-running the separate regressions for this sub-group, the team
could not reject the existence of a positive relationship between deficits and
inflation at 5% or 1% level of statistical significance. Therefore, the study team
concluded that even among advanced countries with moderate levels of inflation,
budget deficits mattered for long-term inflation performance.
The team found that the impact of oil prices on domestic long-term inflation was
generally modest in developing countries but quite strong among advanced
countries, with a one percentage point increase in oil price inflation estimated to
raise domestic inflation by some 0.2 percentage points. With or without oil price
inflation, fiscal deficits continue to display a powerful effect on inflation in

developing countries, emerging markets, and high inflation and a much smaller
effect among moderate inflation countries.
The study found that the significance of the deficit-inflation relationship in
developing and high inflation countries also appeared to be robust to the
potential omission of two other explanatory variables. One was openness to
foreign trade.
According to some earlier studies, the benefits of an expansionary monetary
policy tend to be smaller in an economy with a larger share of trade in GDP
because: (i) the weight of the home goods sector will be smaller, implying that
the impact of monetary expansion on domestic employment will be reduced; and
(ii) the currency depreciation resulting from the monetary expansion will raise
domestic inflation in a closed economy. Hence, the more open the economy, the
less time-inconsistent the monetary policy, implying a negative relationship
between openness and inflation, other factors being constant.
Another explanatory variable the study considered was the exchange rate
regime. By tying domestic inflation to that of a low inflation country and being
more conducive to fiscal and monetary discipline, fixed exchange could be
expected to contribute to lower inflation. Still, it has also been argued that in
allowing policy markets to temporarily lower inflation without a concomitant
fiscal adjustment, fixed exchange rates can actually detract from fiscal discipline
and give rise to a peso problem. If so, no positive relationship between flexible
exchange rates and inflation should be expected, at least in the medium- to
long-run. The study shows no evidence of a statistically significant relationship
between exchange rate flexibility and inflation.
Finally, the team tested the robustness of its results to the use of a broader
measure of the fiscal balance. The results showed that budget deficits remained
a statistically significant driver of inflation for the whole sample as well as for
developing and inflation country groups. At the same time, the study showed
that the measured strength of the effect is not;??? the dynamic panel estimators
and the econometric specification proposed in the study yield considerably
higher elasticities and seem to fit the data better than the standard

specifications using static fixed effects. This suggests that earlier failures in
establishing a strong link between budget deficits and inflation stem partly from
using a model specification and/or econometric techniques which do not
accommodate key features of the theory.
In sum, the findings of the study indicate that the fiscal-based theories of
inflation are not totally unjustified. The most obvious lesson is that fiscal
rectitude helps keep inflation at bay, especially in developing countries with
histories of chronic inflation. Devices like exchange rate pegs are not magic
bullets and, as recent developments have shown, could have disastrous
consequences. Though trade openness and participation in regional trade
arrangements are beneficial in many respects, they are not substitutes for fiscal
discipline. History has shown that fiscally-dominant governments with sizable
debts and shaky fiscal positions are a sure recipe for inflation, even if not
immediately. Another important lesson is that the success of new monetary
arrangements like inflation targeting hinges partly on the stance of fiscal policy.
This is a direct consequence of the strong interlinkages between monetary and
fiscal policies resulting from the governments budget constraint. Accordingly,
the success of institutions and of relatively new arrangements, such as central
bank independence in many developing countries, depends not only on welldrafted laws but, more importantly, on firm political commitment to fiscal
discipline.

How could fiscal deficits potentially affect private investment?

A identity is a equation that is true because of the way the terms are defined.
Thus, when an economist says that "gross national product is equal to the sum
of consumption plus investment plus government spending on goods and
services plus exports minus imports," that statement is actually just one

definition

of

how

to

measure

GDP.

When thinking about how budget deficits affect the economy, a different identity
is typically used. This identity points out that for an economy at any given time,
the total quantity of funds being saved must be equal to the total quantity of
funds being invested. Or to spell it out a little more fully, the U.S. economy has
two sources of savings: domestic saving, and the saving that flows in from other
countries. The U.S. economy also has two sources of demand for those funds:
private sector investment and government borrowing. Thus, it must hold true
that when government budget deficits increase, some combination of three
things will happen: 1) domestic saving will rise, to supply some of the funds
needed for the rise in government borrowing; 2) the inflow of savings from
foreign investors will rise, to supply some of the funds needed for the rise in
government borrowing; or 3) private investment will decline, because the rise in
government borrowing will "crowd out" some of the funds that would otherwise
have

gone

to

the

private

sector.

Again, this statement is not one where different schools of economics disagree;
it holds true by definition, based on the meaning of these terms. Among
professional economists, those who think budget deficits should be larger, or
smaller, or about the same will all agree that if deficits rise, some combination of
these

three

consequences

must

But how much of each will happen?

and

will

happen--by

definition.

Jonathan Huntley of the Congressional

Budget Ofce lays out some evidence in "The Long-Run Effects of Federal Budget
Deficits on National Saving and Private Domestic Investment," published as a
working paper by the Congressional Budget Office in February. As one might
expect, the question of how more government borrowing affects these three
other factors is not written in stone: it will vary both according to the specific
situation of the economy and according to the econometric methods being used.
That said, Huntley describes the central estimate about the long-run effects of
more government borrowing based on the review of the evidence like this: For
each additional dollar of government budget deficit, private saving rises by 43
cents, and the inflow of foreign capital rises by 24 cents. Thus, [e]ach additional

dollar

of

deficit

leads

to

33

cent

decline

in

domestic

investment.

The lower range of estimates is that for each additional dollar of government
borrowing, private saving rises by 61 cents and the inflow of foreign capital rises
by 24 cents, so private sector investment falls by 15 cents. The higher range of
estimates is that for each additional dollar of government borrowing, private
saving rises by 29 cents, inflows of foreign capital rise by 21 cents, and private
sector

investment

falls

by

50

cents.

It's perhaps useful to put these investment totals in context. Here's a figure on
U.S. investment levels created with the ever-useful FRED website maintained by
the Federal Reserve Bank of St. Louis. The blue line on the top shows gross
private domestic investment (quarterly data, seasonally adjusted annual rate).
The red line shows net private domestic investment. The difference between the
two lines is that a certain amount of U.S. capital wears out every year, and
machinery, vehicles, computers, phone systems, and so on need to be replaced.
A lot of gross investment goes to replacing existing capital, and the red "net"
line thus shows the addition to the capital stock each year. Notice that for a
couple of quarters toward the tail end of the Great Recession, net investment
turned negative--that is, gross investment wasn't high enough even to replace
the existing capital.

Analyze Indias fiscal deficit numbers over the last 5 years? Has
there been the so called crowding out effect. Use data to back
your answers

A government's budget balance is the difference in government revenues

(primarily from taxes) and spending. If spending is greater than revenue, there
is a deficit. If revenue is greater than spending, there is a surplus.

A government deficit can be thought of as consisting of two elements,

structural and cyclical. At the lowest point in the business cycle, there is a high

level of unemployment. This means that tax revenues are low and expenditures
are high, leading naturally to a budget deficit.
The additional borrowing required at the low point of the cycle is the cyclical
deficit. The cyclical deficit will be entirely repaid by a cyclical surplus at the peak
of the cycle. This type of deficit serves as an automatic stabilizer.

The structural deficit is the deficit that remains across the business cycle

because the general level of government spending exceeds prevailing tax levels.
Structural deficits are the result of discretionary fiscal policy and can shift the
aggregate demand curve to the right.

Crowding out is a negative consequence of budget deficits in which higher

interest rates lead to less private investment, higher exchange rates, and fewer
exports.

Crowding out is a negative consequence of budget deficits in which higher

interest rates lead to less private investment, higher exchange rates, and fewer
exports.

Why economic growth is important

India is part of the BRICS (Brazil, Russia, India, China and South Africa) nations.
This is a group of major and high-potential emerging countries. The countries
are distinguished by their large economic size, population size, and political
influence. As a result, tracking their economic growth is important. You
should also note that these countries represent large and growing economies in
five of the seven continents.
According to IMF (International Monetary Fund) data, India is the tenth largest

economy in the world. Its gross domestic product, or GDP, was $1.876 trillion in
fiscal year 20132014. In India, a fiscal year begins in April and ends in March of
the following year. The reading above is for the period from April 2013 to March
2014.
Economic growth over the years
Indias growth rate averaged 7.5% in the past decade. However, growth has
slowed down in the past three years due to the global economic slowdown.

Growth was only 4.5% in fiscal year 2013. It set a slightly faster pace of 4.7% in
fiscal year 2014.

Indias place among BRICS

Among the BRICS nations, Indias economy grew at the second fastest pace
behind China. It had 4.7% growth in fiscal year 20132014.
ETFs that invest across the BRICS nations include the Vanguard FTSE Emerging
Markets ETF (VWO), the iShares MSCI Emerging Markets Index Fund (EEM), the
iShares Core MSCI Emerging Markets ETF (IEMG), the iShares MSCI Emerging
Markets Minimum Volatility Index Fund (EEMV), and the Schwab Emerging
Markets Equity ETF (SCHE).

In 2015
2015 will be a crucial year for Indias economy. With a strong public mandate,
expectations from the government are very high. Structural reforms and
developments can make this a turnaround year for India. There are low fuel
prices in the medium term. This can keep inflation in check. Support from
monetary policy can help India get back on a high-growth path.
However, weak decision making on reforms, or a re-ignition of the inflation
flame, will deter Indias central bank from loosening monetary policy. This would
be negative for Indias economic growth. India could fall off investors radar
again.
Indias fiscal situation

India

is

developing

country. As

result,

fiscal

deficit

is

expected.

The government is expected to spend in order to provide infrastructure.

Although

the

handles some

government

uses businesses

individual projects.

Some

of

for
the

some

projects,

governments

it

still

projects

are sensitivelike defense and nuclear energy. The government can also take on
a project due to the amount of resources required.Enlarge Graph
For financial year 20132014, from April to March, Indias fiscal deficit was 4.5%
of the gross domestic product, or GDP. It was 5.08 trillion rupees. For the
current financial year ending in March 2015, the government aims to bring the
fiscal deficit down to 4.1% of the GDP.
Why its important
Fiscal balance is a long-term goal for any government. A sustained and high
fiscal deficit reflects poorly on a governments ability to reduce expenditure and
boost revenue. To learn more about Indias earning and spending

Tax revenue is the governments main earning source. Tax revenue has been
low. For financial year 2014, the government had to revise its net tax revenue
down from 8.84 trillion rupees to 8.36 trillion rupees. In the current financial
year, the government only received 42.3% of the estimated net tax revenue of
9.77 trillion rupees until November 2014. Any shortfall in tax revenues puts
upward pressure on the fiscal deficit.
Current state
Even after crude oil prices softened, Indias fiscal deficit reached 98.9% of its
budget estimate in November 2014. From April to November 2014, the fiscal gap
was 5.25 trillion rupees. There are four more months until the financial year
ends. This release shows that its difficult contain the deficit to 5.31 trillion
rupees for the entire period.
In the next part of this series, well see how the fiscal deficit situation can evolve
in 2015. Well discuss whether it will affect India-focused ETFslike the
WisdomTree India Earnings Fund (EPI), the PowerShares India Portfolio (PIN),
and the iShares MSCI India ETF (INDA). Also, well see why domestic bankslike
ICICI Bank (IBN) and HDFC Bank (HDB)arent willing to lend.

3.What is quantitative easing in the US and Europe?

How does it work?
The ECB, and national central banks in the eurozone, are creating new money to
buy bonds at a monthly rate of 60 billion euros. The purchases are intended to
continue until the end of September 2016 but could run longer if necessary to
restore inflation to the ECB's target of just below 2%.
The central banks are buying government bonds in the secondary market. Under
EU law, they can't buy directly from the issuer.
With interest rates effectively at zero, the ECB hopes that its big bazooka will
push down bond yields -- which move in the opposite direction to prices. The
idea is to lower borrowing costs across Europe, not just for governments but
households and businesses too.

Will it make a difference?

It already has. Bonds have surged in anticipation of the ECB's arrival in the
market. Benchmark 10-year government bonds in Germany now yield just 0.3%
-- that's nearly 2% less than the equivalent U.S. Treasury. Yields on five-year
German bonds have even dipped into negative territory. That eases the budget
pressure on governments across Europe. Ireland, which emerged from its
international bailout just over a year ago, can borrow at 0.8%.
The prospect of a flood of new euros has helped in other ways, too. The currency
has slumped 10% against the dollar in 2015 to trade at an 11-year low of $1.09,
and may be heading for parity. That has the twin benefits of making European
exports cheaper on world markets, and driving up the cost of imports -- giving a
kick to eurozone prices, which have been falling for three months.
Cheap money is also pushing investors into stock markets in search of better
returns. European markets have surged so far this year: Germany's DAX has
soared nearly 11% since the ECB announced QE on January 22. By comparison,
the S&P 500 has been treading water.

How has it impacted emerging markets? Use data to back your

analysis.
The Impact on Emerging Economies
Emerging nations are being dealt a blow as U.S. monetary policy continues to
shift.

In addition, Moodys notes that recent events also confirm previous

expectations that the tapering process and its associated increase in U.S. and
global financing costs will, on average, have a considerably greater impact on
countries in emerging markets than on advanced countries. The agency now
estimates that emerging market economies could face a cumulative 2013-2016
GDP growth loss of between 2.8 percent 3.1 percent depending on the speed
of the tightening. This is nearly double that of advanced economies. However,
Moodys explains, these negative effects will be relatively limited and temporary
in nature.
Among nations most exposed to a reduction or reversal of financial flows,
emerging markets rank high, given that they were the recipients of large
amounts of capital inflows during the quantitative easing period in the U.S. The

historically low interest rates and ample liquidity in developed economies,

particularly in the U.S., has helped to drive capital flows into many fast-growing
emerging countries over the past few years. Bond market inflows are one good
example. But as widely reported, global growth took a turn in 2013 leading the
emerging economies on the whole to experience a major unwinding.
This reversal in growth prospects and the ongoing reduction of excessive
liquidity led to a fall in the differential return on assets in advanced and
emerging economies. This led to capital outflows, which in turn triggered falls in
equity and bond indices as well as currency depreciations in the very same
emerging markets that had benefited from the original inflows, the comment
states.
In a separate note published in February, Moodys: QE tapering could further
weaken liquidity of some EMEA emerging market companies, emerging market
companies were also examined in light of tapering plans and ambitions of the
Fed.
One main threat to liquidity of some emerging market companies as a
consequence of U.S. government tapering may lie in policy responses that
impact the domestic macroeconomic environment and financial systems,
including local banks, it reads.
Citing government and monetary policy decisions that could potentially raise
interest rates as a key factor that could pressure corporate cash flows and also
reduce headroom under financial covenants or credit availability where reliance
is on uncommitted facilities, Moodys also notes the reading of the EMEA
Liquidity Stress Index, which rises if liquidity weakens. The index saw a slight
increase to 14.7 percent in December 2013, primarily pointing to weaker
operating performance for a few companies, despite the overall trend of credit
stabilization.

4.Describe trends in Indias inflation over the last 5 years using both
CPI and WPI data?

Shaded cells indicate IMF staff estimates

Country

Subject Descriptor

Country/S
eriesScale
specific
Notes

Units

2010

2011

2012

2013

2014

2015

India

Inflation, average
consumer prices

Index

175.5 192.1 211.8

246.99 262.02
233.028
85
65
61
4
8

India

Inflation, average
consumer prices

Percent
change

9.534 9.443

India

Inflation, end of
period consumer
prices

Index

181.3 198.3 219.1

251.49 266.13
237.182
14
44
13
5
1

India

Inflation, end of
period consumer
prices

Percent
change

9.673 9.393

10.24
9

10.47
1

9.991 5.993 6.087

8.246 6.035 5.819

Month/Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2010

135.2

135.2

136.3

138.6

139.1

139.8

141

141.1

142

142.9

143.8

146

Month/Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2011

148

148.1

149.5

152.1

152.4

153.1

154.2

154.9

156.2

157

157.4

157.3

Month/Year

Jan*

Feb**

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2012

158.7

159.3

161

163.5

163.9

164.7

165.8

167.3

168.8

168.5

168.8

168.8

Month/Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2013

170.3

170.9

170.1

171.3

171.4

173.2

175.5

179

180.7

180.7

181.5

179.6

Month/Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2014

179

179.5

180.3

180.8

182

183

185

185.9

185

183.7

181.2

178.7

Month/Year

Jan

Feb

Mar

Apr

May

2015

177.3

175.6

176.1

176

177.7

Jun

Jul

Aug

Sep

Oct

Nov

Comment on Indias monetary policy stance in this context?

From 2010 to 2014 we have been living into a high inflation zone in terms of
both CPI and WPI, where we can see from above graphical presentation that WPI
which was around 135 on index level in 2010 went upto 185.9 in August 2015
which is around 60 percent of price rise in 5 years with a good CAGR. During this

Dec

high inflation time RBIs stance has been moreover Hawakish and the rates have
been stagnant if not tightened further. REPO Rate went upto 8 percent in 2012
and RBI could reduce it further before recent time when inflation started cooling
down, largely because of base effect