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BUSINESS ETHICS AND CORPORATE GOVERNANCE

ASSIGNMENT 1

TOPIC: Ethics of RBIs Recent Stance on Curbing Indian Rupee Volatility

SUBMITTED TO: Rev. Fr. Ozzie Mascarenhas S.J Chairman, MBA Department

SUBMITTED BY:
ASIF A. (1216001)

FRANCIS MIRANDA (1216036) JAYARAMA SHETTY (1216043) KOUSHIK B K (1216056) AREN DSOUZA (1216017)

DATE OF SUBMISSION: 26-9-2013

1. Discuss the ethicality (e.g., based on teleology, distributive and corrective justice theories) of the tough RBI stand on liquidity squeeze in order to control the rupee volatility, even at the expense of its negative effects on major sectors of the economy? Reserve Bank Governor Duvvuri Subbarao left rates unchanged as expected and scaled down economic growth projections in his swan song monetary policy announcement whose hard-line tone presaged more pain for the economy and, in the process, roiled markets. Subbarao, who retires in September after five years at the helm of the central bank, on Tuesday refused to signal a timeline for rolling back the recent liquidity squeeze undertaken to defend a sliding rupee, and warned that these actions had consequences. "We are determined to control volatility in the exchange rate," he told a news conference after unveiling the monetary policy review "There will be consequences for this. There will be pain in the economy. Somebody will have to bear the cost for this. Those costs are inevitable and unavoidable." Pushing two years of growth in flatiron rhetoric to the back seat, the governor forecast a grim picture for the economy if measures to correct external imbalances did not come forth. Investors reacted with the wallets, sending bond and stock prices down. The rupee too ended lower than what it was on July 15, the day RBI tightened liquidity by stealth and raised interest rates. The central bank lowered its economic growth rate forecast to 5.5% and warned that inflation could rear its head again as producers pass on higher costs due to the sliding rupee. International financial markets are also a threat to financial stability, it said. Subbarao's20th quarterly monetary policy review saw no change in key rates the repo rate, or the rate at which RBI lends to banks was left unchanged as were banks' cash reserve requirement, statutory liquidity ratio and marginal standing facility. In the past two weeks, RBI has capped banks' borrowing at Rs 37,000 core and raised penal lending rates under the marginal lending facility to 10.25% as part of its attempt to arrest a steep slide in the currency. Although repo rate has been left untouched at 7.25%, RBI's actions have led to short-term rates on commercial paper and bonds surging, raising borrowing costs for companies. The governor, who has been cautioning about the unmanageable level of current account deficit the excess of spending overseas than earnings and lack of reforms by the government to ease supply-side pressures, again hinted that the government has to do more. But he offered little by way of comfort on when the tight measures would be rolled back. "We will persist with these measures and implement them consistently in order to achieve the intended results," said Subbarao. "Rates will come down in future but not until such time as volatility in the exchange rate is contained." The rupee fell 1.8% to 60.48 to the US dollar and the yield on 10-year benchmark government bonds raised 9 basis points to 8.25%. Bond prices and yields move in opposite direction. The BSE Sensex fell 1.25% to 19,384. Analysts said the economy faced headwinds and the months ahead looked tough. "There is a non-trivial risk that the concerns related to Fed tapering could continue to weigh on emerging market capital flows for the remainder of the year," said Leif Eskesen, chief economist for India & ASEAN at HSBC. "This would make it difficult for RBI to roll back the liquidity measures as quickly as it may hope, especially if the current account deficit has not moved in the right direction in the meantime." The negative effects on major sectors of the economy in

rupee volatility: Rattled by the steep fall in the rupee against the dollar, the RBI has taken a series of measures in quick succession in the past fortnight to help it recover some of the lost ground. Beginning with a hike in key interest rates, it has now asked the banks to park more funds under the cash reserve ratio and has limited their access to overnight borrowings. These measures are important not only to stabilize the country's economy, but also reduce the negative impact for the ordinary man this is because living costs increase substantially with the depreciation in the rupee as the overall import costs of raw materials and commodities rise, thereby leading to an increase in inflation. Food articles become costlier, leading to an increase in the monthly expenses. The higher cost of petrol and diesel result in a hike in transportation costs, thereby leading to a hike in prices of fruits and vegetables. Even the fast moving consumer goods witness a jump in prices due to the rise in input costs of these products. For a household, the monthly budget is shaken, leading to lower savings and investments. Though for Indians work abroad or NRI's remitting foreign currency in India, a weaker rupee translates into gains, the people exposed directly to currency risk are impacted the moststudents studying abroad, foreign travelers and expatriates earning in rupees. Another major sector that can affect the common man is the increase in prices of automobiles. With a rise in input costs of cars and with an overall rise in prices of petroleum products, car sales drop. The weakness in the rupee also has an adverse impact on those working in firms associated with import related businesses. This is because the cost of an import dependent firm will increase when the rupee depreciates, leading to a rise in costs and fall in profit margins. It is at times like these that the importance of creating a hedge for the currency exposure is highlighted. With the Indian markets now offering the option of hedging on the futures platform, the individuals exposed to foreign currency risks must make the most of it to mitigate the impact of volatility in currency movement. The currency futures is attractive for investors in all asset classes, with different hedging requirements and varying sizes of trade

3. Discuss the efficiency, legality, ethicality and morality of too many government interventions (e.g., RBI policy rates, tax policy, excise duty, import duty, and numerous other license requirements) in the Indian economy, thus expanding scope for political and corporate fraud, corruption and bribery. Political and corporate fraud is a complex phenomenon. Its roots lie deep in bureaucratic and political institutions, and its effect on development varies with country conditions. But while costs may vary and systemic frauds may coexist with strong economic performance, experience suggests that political frauds like corruption are bad for development. It leads governments to intervene where they need not, and it undermines their ability to enact and implement policies in areas in which government intervention is clearly neededwhether environmental regulation, health and safety regulation, social safety nets, macroeconomic stabilization, or contract enforcement. This chapter looks at the complex nature of corruption, its causes, and its effects on development. Political and bureaucratic corruption: Corruption within government can take place at both the political and the bureaucratic levels. The first may be independent of the second, or there may be collusion. At one level, controlling political corruption involves election laws, campaign finance regulations, and conflict of interest rules for parliamentarians. These types of laws and regulations lie beyond the mandate and expertise of the Bank but nevertheless are part of what a country needs to control corruption.2 At another level corruption may be intrinsic to the way power is exercised and may be impossible to reduce through lawmaking alone. In the extreme case state institutions may be infiltrated by criminal elements and turned into instruments of individual enrichment. The government benefits purchased with bribes vary by type and size. Contracts and other benefits can be enormous (grand or wholesale corruption) or very small (petty or retail corruption), and the impact of misinterpretation of laws can be dramatic or minor. Grand corruption is often associated with international business transactions and usually involves politicians as well as bureaucrats. The bribery transaction may take place entirely outside the country. Petty corruption may be pervasive throughout the public sector if firms and individuals regularly experience it when they seek a license or a service from government. The bribes may be retained by individual recipients or pooled in an elaborate sharing arrangement. The sums involved in grand corruption may make newspaper headlines around the world, but the aggregate costs of petty corruption, in terms of both money and economic distortions, may be as great if not greater.

4) Rupee and liquidity instability affects all industries, especially the banks, FIIs and FDI in India, and because of the latter, several industries fail (e.g. banking, auto, housing, construction) that depend upon bank loans. In this context, argue which stance is more ethical and moral: government interventions or free market determinations. As per the indian economy andindian system I found that the market determinations is more MORAL and government interventions is more ETHICAL because the as follows. What are the main reasons for government intervention? The main reasons for policy intervention are:

To correct for market failure To achieve a more equitable distribution of income and wealth To improve the performance of the economy

Options for government intervention in markets There are many ways in which intervention can take place some examples are given below Government Legislation and Regulation Parliament can pass laws that for example prohibit the sale of cigarettes to children, or ban smoking in the workplace. The laws of competition policy act against examples of price-fixing cartels or other forms of anti-competitive behaviour by firms within markets. Employment laws may offer some legal protection for workers by setting maximum working hours or by providing a price-floor in the labour market through the setting of a minimum wage. Regulation may be used to introduce fresh competition into a market for example breaking up the existing monopoly power of a service provider. A good example of this is the attempt to introduce more competition for British Telecom. This is known as market liberalisation.

Fiscal Policy Intervention Fiscal policy can be used to alter the level of demand for different products and also the pattern of demand within the economy.

(a) Indirect taxes: can be used to raise the price of de-merit goods and products with negative externalities designed to increase the opportunity cost of consumption and thereby reduce consumer demand towards a socially optimal level (b) Subsidies: to consumers will lower the price of merit goods. They are designed to boost consumption and output of products with positive externalities remember that a subsidy causes an increase in market supply and leads to a lower equilibrium price (c) Tax relief: The government may offer financial assistance such as tax credits for business investment in research and development. Or a reduction in corporation tax (a tax on company profits) designed to promote new capital investment and extra employment (d) Changes to taxation and welfare payments: can be used to influence the overall distribution of income and wealth for example higher direct tax rates on rich households or an increase in the value of welfare benefits for the poor to make the tax and benefit system more progressive The effects of government intervention One important point to bear in mind is that the effects of different forms of government intervention in markets are never neutral financial support given by the government to one set of producers rather than another will always create winners and losers. Taxing one product more than another will similarly have different effects on different groups of consumers. Efficiency of a policy: i.e. does a particular intervention lead to a better use of scarce resources among competing ends? E.g. does it improve allocative, productive and dynamic efficiency? For example - would introducing indirect taxes on high fat foods be an efficient way of reducing some of the external costs linked to the growing problem of obesity? Effectiveness of a policy: i.e. which government policy is most likely to meet a specific economic or social objective? For example which policies are likely to be most effective in reducing road congestion? Which policies are more effective in preventing firms from exploiting their monopoly power and damaging consumer welfare? Evaluation can also consider which policies are likely to have an impact in the short term when a quick response from consumers and producers is desired. And which policies will be most cost-effective in the longer term? Equity effects of intervention: i.e. is a policy thought of as fair or does one group in society gain more than another? For example it is equitable for the government to offer educational maintenance allowances (payments) for 16-18 year olds in low income households to stay on in education after GCSEs? Would it be equitable for the government to increase the top rate of income tax to 50 per cent in a bid to make the distribution of income more equal?

Sustainability of a policy: i.e. does a policy reduce the ability of future generations to engage in economic activity? Inter-generational equity is an important issue in many current policy topics for example decisions on which sources of energy we rely on in future years.

Market determinations 1. The Reserve Bank of India (RBI) will provide dollars directly to state oil companies in attempt to support the rupee that has slumped over 20 percent this year. State-run companies are the biggest source of dollar demand in markets - worth $400 million to $500 million daily - and directing them to a special window is meant to reduce pressure on the rupee. 2. The government will soon issue quasi-sovereign bonds to help bring more dollar inflows into the country. Under the scheme, state finance companies will sell these bonds to fund infrastructure development. 3. The RBI will sell Rs. 22,000 crore bonds every week to check the volatility in forex market. 4. The government has hiked the import duty on gold and silver to 10 percent to rein in the imports. The RBI has tightened the norms for gold imports by linking them to exports. Also, credit availability for gold imports has also been tightened. 5. The RBI has reduced the amount of dollar resident Indians can take out of the country from $2,00,000 to $75,000 in a financial year. Indian companies have to seek RBI's permission if they want to invest any amount beyond their net worth abroad. Earlier, a company could invest as much as four times its net worth in an overseas venture. 6. PSU oil companies would be allowed to raise additional funds - $4 billion - through external commercial borrowings (ECBs). 7. In a bid to attract NRI deposits, the RBI liberalised bank deposit schemes and some banks raised rates for overseas Indians this month. 8. To spur banks to attract more dollar deposits from NRIs, the RBI has exempted these deposits from cash reserve ratio and statutory liquidity ratio requirements. 9. The RBI has tightened liquidity to reduce the availability of rupee in the banking system to reduce rupee volatility. However, these measures have led to an increase in the short-term interest rates. 10. The government has banned the duty-free import of flat-screen televisions to stem the flow of foreign currency out of the country. It is estimated that more than 1 million television sets were brought into the country last year. Under the new rules, airline passengers will have to pay a 35 percent duty and other charges.