Note when inflation increases in the economy it

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Note: When inflation increases in the economy it erodes the benefit margin of investors. Whereas increasing fiscal deficit and external funding increase the risk factor in the economy due to the dependency of government on borrowing for funding their own project. All these factors thwart investors investing in government bonds. POSSIBLE WAYS OF DEALING WITH THE SLIDE Raising of interest rate by RBI x This will help in preventing an exodus of Foreign Portfolio Investor (FPI) capital . x However, this might squeeze credit for companies as well as lead to some cuts in capital spending by the government — dragging down economic growth. Using forex reserve x Another option is that RBI intervening in the exchange market and selling the dollar in the market to stabilise rupee. x RBI has taken this initiative recently which has caused a decline in forex reserve after reaching a record high of $ 426 billion. Bridging the export- import gap x Large current account deficit is due to high import has caused more demand for dollar leading to depreciation of rupee. This could be bridged by encouraging exports so that supply of dollar increases in the economy and hence rupee get strengthen. x The Cabinet Committee on Economic Affairs has recently approved a capital infusion of Rs. 2,000 crores into the Export Credit Guarantee Corporation (ECGC) to be infused over the three financial years 2017-20. x The infusion would enhance insurance coverage to MSME exports and strengthen India’s exports to emerging and challenging markets like Africa, CIS and Latin American countries. FCNR deposits If need occurs government can also raise funds through Foreign Currency Non-Repatriable (FCNR) deposits , sovereign bonds to increase reserves. This is a Fixed Deposit Foreign Currency account and not a savings account. Non-Resident Indians can invest in such accounts in any of the major currencies like US Dollar, UK Pound, Canadian Dollar, Deutsche Mark, Japanese Yen and Euro. Other routes Apart from that, it is also advised, in the long run, India should diversify its energy basket in order to reduce dependency on oil. A BRIEF SUMMATION Dealing with rupee requires a response from both- monetary and fiscal policy . RBI’s response on three fronts is watched in the market in such situation. These are- Inflation man agement, currency management in exchange market and liquidity management in the bond market to keep government borrowing costs under control. Whereas fiscal policy measures such as incentives to exporters and diversifying energy basket are key to control the depreciation of Rupee. @civilminds
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F OC U S | J u l y 2 01 8 | RA U’ S I A S 48 Economic Development ONE YEAR OF GST # Tax reforms Since its midnight launch on July 1, 2017, India’s Goods and Services Tax regime has evolved significantly. During its launch, the government had given arguments in favour of GST as it would lead to ease of doing business; make markets efficient; yield higher tax collections; and lead to lower prices. With higher tax collection, the government would be able to deliver better services.
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