PPT: Continued | Crash Course for UPSC Aspirants PDF Download

 Page 1


Lecture 10 Continued 
Important Terms
Capstone IAS Learning
Page 2


Lecture 10 Continued 
Important Terms
Capstone IAS Learning
Current/Capital Account 
Convertibility
Current Account Convertibility allows free inflows and outflows of foreign currency 
for all purpose including resident Indians buying foreign goods and services 
(imports), Indians selling foreign goods and services (exports), Indians receiving 
and sending remittances, accessing foreign currency for travel, study abroad, 
medical tourism purpose etc.  
Current account today is fully convertible. 
Capital Account Convertibility means the freedom to convert rupee into any foreign 
currency (Euro, Dollar, Yen, Renminbi etc.) and foreign currency back into rupee for 
capital account transactions. 
Capital Account Convertibility is widely regarded as the hallmark of developed 
countries. 
It is also seen as a major comfort factor for foreign investors, since t allows them 
to reconvert local currency back into their own currency and move out. 
India still follows partial Capital Account Convertibility. 
S.S Tarapore committee was formed to make recommendations on full Capital 
Account Convertibility.
Page 3


Lecture 10 Continued 
Important Terms
Capstone IAS Learning
Current/Capital Account 
Convertibility
Current Account Convertibility allows free inflows and outflows of foreign currency 
for all purpose including resident Indians buying foreign goods and services 
(imports), Indians selling foreign goods and services (exports), Indians receiving 
and sending remittances, accessing foreign currency for travel, study abroad, 
medical tourism purpose etc.  
Current account today is fully convertible. 
Capital Account Convertibility means the freedom to convert rupee into any foreign 
currency (Euro, Dollar, Yen, Renminbi etc.) and foreign currency back into rupee for 
capital account transactions. 
Capital Account Convertibility is widely regarded as the hallmark of developed 
countries. 
It is also seen as a major comfort factor for foreign investors, since t allows them 
to reconvert local currency back into their own currency and move out. 
India still follows partial Capital Account Convertibility. 
S.S Tarapore committee was formed to make recommendations on full Capital 
Account Convertibility.
External Commercial Borrowings
These are loans in India made by non-resident lenders in foreign currency to 
Indian borrowers. 
They are used widely in India to facilitate access to foreign money by Indian 
corporations and PSUs. 
Interest rates on ECBs are generally benchmarked to London Inter-Bank Offer 
Rate(LIBOR). 
So ECB interest rate = LIBOR + X% 
X% being the spread, which is generally based on Sovereign Credit Rating of a 
country. 
LIBOR - It is an interest rate average calculated of rates that would be charged by 
international banks in interbank market. 
MIBOR - It is the weighted average of rates that Indian banks would charge for 
interbank market in India. 
Sovereign Credit Rating - it is the credit rating of a sovereign entity, such as 
national government. It indicates the risk level of investing environment of a 
country and is used by investors when looking to invest in a particular jurisdiction.
Page 4


Lecture 10 Continued 
Important Terms
Capstone IAS Learning
Current/Capital Account 
Convertibility
Current Account Convertibility allows free inflows and outflows of foreign currency 
for all purpose including resident Indians buying foreign goods and services 
(imports), Indians selling foreign goods and services (exports), Indians receiving 
and sending remittances, accessing foreign currency for travel, study abroad, 
medical tourism purpose etc.  
Current account today is fully convertible. 
Capital Account Convertibility means the freedom to convert rupee into any foreign 
currency (Euro, Dollar, Yen, Renminbi etc.) and foreign currency back into rupee for 
capital account transactions. 
Capital Account Convertibility is widely regarded as the hallmark of developed 
countries. 
It is also seen as a major comfort factor for foreign investors, since t allows them 
to reconvert local currency back into their own currency and move out. 
India still follows partial Capital Account Convertibility. 
S.S Tarapore committee was formed to make recommendations on full Capital 
Account Convertibility.
External Commercial Borrowings
These are loans in India made by non-resident lenders in foreign currency to 
Indian borrowers. 
They are used widely in India to facilitate access to foreign money by Indian 
corporations and PSUs. 
Interest rates on ECBs are generally benchmarked to London Inter-Bank Offer 
Rate(LIBOR). 
So ECB interest rate = LIBOR + X% 
X% being the spread, which is generally based on Sovereign Credit Rating of a 
country. 
LIBOR - It is an interest rate average calculated of rates that would be charged by 
international banks in interbank market. 
MIBOR - It is the weighted average of rates that Indian banks would charge for 
interbank market in India. 
Sovereign Credit Rating - it is the credit rating of a sovereign entity, such as 
national government. It indicates the risk level of investing environment of a 
country and is used by investors when looking to invest in a particular jurisdiction.
Hard and Soft Currency
A hard currency is a monetary system that is widely accepted around the world as a form of 
payment for goods and services. 
It usually comes from a country that has a strong economic and political situation. 
A hard currency is expected to remain relatively stable through a short period of time, and to 
be highly liquid in the forex or foreign exchange (FX) market. For example USD, Euro, Pound, 
Yen etc. 
A soft currency is one with a value that fluctuates, predominantly lower, as a result of the 
country’s political or economic uncertainty. 
As a result of this currency’s instability, foreign exchange dealers tend to avoid it. In financial 
markets, participants will often refer to it as a “weak currency”. For example Indian Rupee.
Hot Money 
Hot money is currency that moves regularly, and quickly, between financial markets, so 
investors ensure they are getting the highest short-term interest rates available. 
Hot money continuously shifts from countries with low-interest rates to those with higher 
rates.  
These financial transfers affect the exchange rate if there is a high sum and also 
potentially impact a country’s balance of payments.
Page 5


Lecture 10 Continued 
Important Terms
Capstone IAS Learning
Current/Capital Account 
Convertibility
Current Account Convertibility allows free inflows and outflows of foreign currency 
for all purpose including resident Indians buying foreign goods and services 
(imports), Indians selling foreign goods and services (exports), Indians receiving 
and sending remittances, accessing foreign currency for travel, study abroad, 
medical tourism purpose etc.  
Current account today is fully convertible. 
Capital Account Convertibility means the freedom to convert rupee into any foreign 
currency (Euro, Dollar, Yen, Renminbi etc.) and foreign currency back into rupee for 
capital account transactions. 
Capital Account Convertibility is widely regarded as the hallmark of developed 
countries. 
It is also seen as a major comfort factor for foreign investors, since t allows them 
to reconvert local currency back into their own currency and move out. 
India still follows partial Capital Account Convertibility. 
S.S Tarapore committee was formed to make recommendations on full Capital 
Account Convertibility.
External Commercial Borrowings
These are loans in India made by non-resident lenders in foreign currency to 
Indian borrowers. 
They are used widely in India to facilitate access to foreign money by Indian 
corporations and PSUs. 
Interest rates on ECBs are generally benchmarked to London Inter-Bank Offer 
Rate(LIBOR). 
So ECB interest rate = LIBOR + X% 
X% being the spread, which is generally based on Sovereign Credit Rating of a 
country. 
LIBOR - It is an interest rate average calculated of rates that would be charged by 
international banks in interbank market. 
MIBOR - It is the weighted average of rates that Indian banks would charge for 
interbank market in India. 
Sovereign Credit Rating - it is the credit rating of a sovereign entity, such as 
national government. It indicates the risk level of investing environment of a 
country and is used by investors when looking to invest in a particular jurisdiction.
Hard and Soft Currency
A hard currency is a monetary system that is widely accepted around the world as a form of 
payment for goods and services. 
It usually comes from a country that has a strong economic and political situation. 
A hard currency is expected to remain relatively stable through a short period of time, and to 
be highly liquid in the forex or foreign exchange (FX) market. For example USD, Euro, Pound, 
Yen etc. 
A soft currency is one with a value that fluctuates, predominantly lower, as a result of the 
country’s political or economic uncertainty. 
As a result of this currency’s instability, foreign exchange dealers tend to avoid it. In financial 
markets, participants will often refer to it as a “weak currency”. For example Indian Rupee.
Hot Money 
Hot money is currency that moves regularly, and quickly, between financial markets, so 
investors ensure they are getting the highest short-term interest rates available. 
Hot money continuously shifts from countries with low-interest rates to those with higher 
rates.  
These financial transfers affect the exchange rate if there is a high sum and also 
potentially impact a country’s balance of payments.
Foreign Investment
Foreign Direct Investment 
FDI is an investment made by a firm or individual in one country into business interests located in 
another country. 
Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign 
business assets in a foreign company. 
FDI is a more stable form of investment as compared to FPI. 
Foreign Portfolio Investment/Foreign Institutional Investment 
These are different from FDI because in this an investor merely purchases the securities(bonds & equities) 
of a foreign-based company. 
It does not provide the investor with direct ownership of the assets of the company and is relatively 
liquid depending on the volatility of the market. 
It is not a stable form of investment and is pretty volatile. 
Qualified Foreign Investor 
The Qualified Foreign Investor (QFI) is sub-category of Foreign Portfolio Investor and refers to any 
foreign individuals, groups or associations, or resident. 
However, restricted to those from a country that is a member of Financial Action Task Force (FATF) or a 
country that is a member of a group which is a member of FATF and a country that is a signatory 
to International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of 
Understanding (MMOU).