International Finance Management - What Are the Risks in Capital Account Convertibility in Indian Context

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INTERNATIONAL FINANCE MANAGEMENT

CASE STUDY : 1

Latvia has become the second European Union country to seek the International Monetary Fund’s (IMF) help to stabilize its financial system. It is also asking for help from the European Union. The Latvian Prime Minister said the sum needed would be decided by talks with the IMF and EU. Latvia has fallen into recession and recently nationalized the country’s second largest bank. The government invested $ 353 m into the parex bank to help it survive after a run on its deposits. It also offered $ 877 m in guarantees to its creditors. Latvia’s economy, which grew by 50% between 2004 & 2007, Shrank 4.2% in the third quarter of this year, the sharpest economic contraction in the European Union. The Latvian Government has already started talks with the European Commission, the executive branch of the EU, on a possible rescue package for its economy. The IMF has said it has $ 200 bn set aside to help out countries facing turmoil because of the current global financial crisis. It has also said it expects to provide help for some 24 countries.

Question :

1) What measures can the European Union take in order to undo the economic contraction?

2) What is the role of IMF towards the countries that have fallen into recession?

3) In what ways can Latvia use the financial aid from IMF to stabilize its financial system?

4) Explain the term Economic Recession in detail.

CASE STUDY : 2

Prime Minister Dr Singh is right in advocating a phased movement to fall convertibility starting with Special Economic Zones (SEZs), we need to move along the convertibility highway, even if slowly. Our Economy is in take off stage and needs timely infusions of fixed and working capital. Since India is now an enterprise driven economy like most others, the Rupee needs to become...