The document summarizes key developments in Brazil's economy that led to the devaluation of the Brazilian real in 2013. It discusses Brazil's weakening current account deficit, reliance on foreign capital inflows, and slowing economic growth among its major trading partners like China. The Brazilian Central Bank employed various strategies from 2009 to 2013 to devalue the real such as currency swap operations, increasing taxes on foreign investments, and intervening in foreign exchange markets. However, Brazil's weak fundamentals like a worsening fiscal situation and lack of consistent government programs posed challenges. The expected tapering of US monetary stimulus also contributed to capital outflows from Brazil.

1. Celine Yeo . Harvard Chan . Jonathan Ang . Nicholas Teo . Yeo Ding Run
G3

2. Flow of Presentation
Pre 2013
Pre-2013: A strong
real & currency wars
NicholasCelineDing RunJonathanHarvard
PartA
Key Developments that
led to the devaluation
PartB
The actions taken by the
BCB to manage the ER
PartC
India and it’s
economy
PartC
Measures taken to
prevent deflation in India

3. 0
5E+11
1E+12
1.5E+12
2E+12
2.5E+12
3E+12
1980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013
Brazil GDP(US$)
1980 - 1984
Oil Shock doubles
price of imported
oil. Lowered terms
of trade, high debt
and faced austerity
from IMF
Cruzado Plan
(1986)
Readjust wages,
freeze prices, rents
and exchange rate.
Inflation resumed
at end of year.
Summer Plan (1989)
Avoid inflation in election year. Less
revenue for federal governments
New president
(1990)
Stabilization
plan, 18 month
freeze to most
of private
sector assets,
liquidity freeze,
reduce
inflation
Plano Real
(1994)
New
stabilization
plan.
1) Introduction
of
equilibrium
budget
2) Introduction
of BZL
3) Monetary
Reform
Asian Financial Crisis (1997)
Risk adverse as a result of EM
exposure, large current
account deficits
Luis Re-elected
(2006)
Strong economic
growth under his
stewardship
IMF support
(1998)
$41.5 bn support
after crafting fiscal
adjustment and
structural reform
Slowing Economic
Growth (2006)
Sluggishconsumer
spending
contributed to
lower GDP growth

4. Govt Consumption
Imports
Household
Consumption
Investments
Exports
12.4%
62.5%
-14.9%
18.7%
21.7%
GDP
Household Consumption 62.5%
Investments 18.7%
Imports 14.9%
Govt Consumption 21.7%
Exports 12.4%
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
GDP Composition 2013

5. 48%
11%
24%
17%
United States
Others
China
Europe
Exports Destinations 2013
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

6. Top Exports of Brazil
5.3%
7%
8.4%
13%
Raw Sugar
Soybeans
Crude Petroleum
Iron Ore
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

7. The Strong Real
Before
2013

8. Strengthof thereal (2010 to2012)
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

9. Aim #1
Rebalance the economy to reduce
dependence on consumption
Aim #2
Aim #3
Keep exports competitive
Control inflation within 2.5% to 6.5%
Why did Brazil Attempt to Devalue the Real from 2010-2012
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

10. Why did Brazil Attempt to Devalue the Real from 2010-2012
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Demand affected the real
BCB decreased Selic rates 2011-
2012 before maintaining a
constant rate of 7.25%. However,
it was comparatively higher to
other countries, causing hot
money inflow.
High Demand for Brazilian
Debt
The strong real is due to investors
buying up high yielding Brazilian debt,
and this may make exports more
expensive, hurting the exports.
Brazilian Central Bank (BCB) imposes
extra IOF taxes on foreign investors to
reduce buyers and weaken the real.
BCB also wants to devalue the real so
that it will not hurt exports.
Strong Real Hurting Exports
The strong real is hurting the
exports of price-sensitive
commodities, the bedrock of
Brazil’s economy. BCB has to
devalues its currency to keep
exports competitive
Protectionist Policies
Due to years of protectionist
policies, Brazilian
manufacturing becomes
inefficient and overpriced,
losing export competitiveness
Port Bureaucracy
Inefficient port bureaucracy and
port infrastructure: turn-around
time for containers of 21 days at
Santos, compared to 1 or 2 days
internationally. This has affected
Brazil’s trade.
Reduce Dependence on
Consumption
Since Brazil has current account
deficit, it shows that Brazil is
dependent on consumption for
growth and the source of
inflation is from imports.
The govt believes that devaluing
the real can reduce consumption
and reduce inflation.

11. Competitive devaluation(2009 2013)
1. Competitive devaluation from 2009
– 2013 which became prominent in
Sept 2010
2. Fed, BoJ introduced loose
monetary policies (i.e. QE) post
2008
3. Coined by Brazil finance minster
Guido Mantega
4. Mercantilist approach to support
cheaper exports
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

12. Nov 2009
Goldman
Sachs
declares
real most
overvalued
currency in
the world
Oct 2010
Brazil increases capital
controls. Doubles
taxes on fixed income
assets to 4%.
Taxed capital inflows
from 2% to 6%
Dec 2009
QE1 is
announced
Sept 2012
QE3 is
announced
June 2013
Tapering is
announced
Nov 2010
QE 2 announced
Competitive devaluation (2009 2013)- Timeline
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

13. WhatisQE?
Whathappens
inQE?
Unconventional form
of monetary policy
Central Bank prints “new”
money or use
electronically created
money to buy government
securities and other assets
from banks
• Aimed at lowering interest
rates
• Banks use these money and
lend to
consumers/businesses and
buy other assets like bonds
• Creates a virtuous cycle of
spending and investment
Competitivedevaluation(2009 2013)- QuantitativeEasing (QE)
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

14. Competitivedevaluation (2009 2013) USA
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

15. -2013
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

16. Strategiesusedto devaluecurrency
1. Use of interest rates – high interest
rates mean constrained economic
growth but higher foreign capital
inflow
2. Foreign currency trades –
international reserves used as
insurance against crisis to smooth
forex rates
3. Intervene with swap operations – To
prevent depreciation of domestic
currency (BZL to USD)
4. Reverse swap – Selling contacts to
limit appreciation of currency (USD to
BZL)
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

17. Government carried out 36 currency swap operations between
July 2011 to Dec 2012
Does not directly affect supply of foreign currency, affects the
exchange rate as to alter demand for forex (short term)
FX purchases of real decreased
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Strategiesusedto devaluecurrency CurrencySwapOperations

18. In 2012, BRL sales outweighed U.S dollar purchases inflow
BCB auctions swaps and shorts the USD
Contrato de Swap Cambial com Ajuste Periódico – the swap
contracts
When the BCB believes the BRL is too cheap (undervalued) it
auctions swaps and effectively goes short the USD, when it
believes the real is overvalued
It auctions reverse swaps and goes long the USD– short its own
currency.
Foreign reserves do not need to come into play
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Strategiesusedto devaluecurrency CurrencySwapOperations

19. 2006 – BCB bet on appreciation on USD to contain BRL rise
Flat line – represented no use of swaps
“Free floating” but actually managed currency
Adjusted with swaps
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Strategiesusedto devaluecurrency CurrencySwapOperations

20. 1. Raised IOF tax in fixed income securities from 4% to 6%
2. Boosted levy on money for margin deposits for futures
trades from 0.38% to 6%
3. Measures taken to erode foreigner’s short term demand
for investments
4. Between May 2009 to Dec 2012, BCB intervened 62% of
all trading days
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Strategiesusedto devaluecurrency IOFTax

21. Other
Considerations
BCB fails to take these factors into
careful consideration before
devaluing the currency
Opinion: A Wrong Move by BCB?
Pace of US economic recovery
China’s economic slowdown
Bleak state of Europe
Deterioration of BrazilianFundamentals
Brazil has these fundamental problems:
Worsening Fiscal Account
Large Current Account Deficit
Lack of Consistent Long-Term Govt Program
But devaluing the currency may be the solution to
only the current account deficit, it did not resolve
these fundamental problems.
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Brazil’s
Fundamentals

22. Key economic &financialdevelopments
Leading to
Devaluation
Part A

23. • Stagnant growth
• Fiscal shocks
(Govt budget cut
and Tax increases)
1.7%
7.7%
2.9%
Europe
Stagnating
• Experiencing slowing growth, well below
the double-digit growth it chalked up
over the past 30 years.
• Slow growth as China begins to address
the costs of the rapid growth that include
pollution, wasted spending, corruption
and finacial frugality.
• China wants to restructure the economy
to rely less on heavy investments in real
estate, infrastructure, capital-intesive
industries and exports abroad.
China’s Slowing
Growth
US Gradual
Recovery
Gradually recovering
from recession
Major Economies 2013
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

24. Key developments thatled todevaluation
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

25. Key developments that led to devaluation
Balance of
Payments
Current
Account
Capital
Account
Asset Market
Approach
i*
ee

26. Balance of Payments

27. Commodity Prices
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Current
Account

28. CommodityExports
ImageSource: MarketLine
Data Source: IMF, MarketLine
Dependence on commodity exports (Risks)
• Manufactured exports declined
from close to 60% to 40% of total
exports
• Rising prominence of iron ore and
soybeans among exports,
economy is more vulnerable to
price shocks
• China is Brazil’s main trading
partner since 2012; major
importer of iron ore
• With slowing growth from china,
china demands less imports from
brazil. Causing Brazil’s Export to fall
further
Current
Account

29. Current AccountDeficit
• Current Account Deficit increased
• Reasons for the deficit: Fall in trade
surplus
• Import still continued to increase,
especially fuel import
• Widening deficit( 4.17% of GDP)
weaken currency additional inflation
pressure as imports more costly (serious
challenge for Brazil, struggling with
subdued global economy and
productivity shortcomings at home.)
• X-M <0  Current Account Deficit
0
5E+10
1E+11
1.5E+11
2E+11
2.5E+11
3E+11
3.5E+11
Exports of goods and
services (BoP, current
US$)
Imports of goods and
services (BoP, current
US$)
ImageSource: RabobankandWorldBank
Data Source: Rabobank
Current
Account

30. Current AccountDeficit
ImageSource: Rabobank
• Increase in deficits in the Services
Account (High increase of
international travelling expenditure)
• Increase in deficits in Income
Accounts
Although FDI remained consistentin 2013 atUSD64
billion,because ofthe increasein CA deficit, it can
no longercoverthe deficit
Current
Account

31. WeakCapital Account
Gross fixed capital formation stood at 5% lower than peak 2011 level
Most other EMs had investment growth, however Brazil has contracted
Investment in Brazil islowerthan average compared tootherEMs
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Capital
Account

32. Whyare there low investmentsratein Brazil?
Reliance on FDI
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Poor legal rights, ease of doing business
Poor ratings in time to open a business and prepare and pay taxes
Difficulty in doingbusinessdetersFDI
Capital
Account

33. Reliance on FDI Capital
Account
In May 2013, there was a riot due to public outcry due to the large
sum spent on building stadiums when transportation, healthcare and
education require funds more urgently.
Brazil govt was slow in its response to the protests and this has
severely affected investors’ confidence and decapitated FDI in Brazil
With the US signaling a tapering of its monetary policy, the FDI in Brazil
has been severely affected.

34. Reliance on FDI
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Balance of payments has mainly been funded via capital account
FDIs have been remaining constant but portfolio investment fluctuates greatly
Massive and rapid change in capital inflows affects export competitiveness
Brazil relies on itscapital account to finance itsBOP. The fluctuations may lead to deeperCA deficit&
speculative attacks may occur.
Capital
Account

35. Large CommercialOutflows
Extremely open capital account – short
term capital flows bring instability to economy
Ineffective elimination of capital outflows –
reduction of Financial Transactions Tax on
fixed income securities from 6% to 0%
These shortterm portfolioinvestments lead to instability of
the BOP and may lead tocurrency crisis.
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Capital
Account

36. Balance of Payments-Conclusion
The BOP in Brazil is mainly funded through the capital account
Commodity prices have affect exports and CA is in deficit
The capital account is also contributed to by “hot money” or
short term portfolio investments
Thesefactorsmayleadto aninstability oftheBOP andapersistentcurrentaccount
deficit.Ultimately,thesecouldleadtoacurrencycrisis.
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Balance of
Payments

37. Asset Market
Approach

38. Asset market approach -Interest Rates i*
• US Fed Funds rates remained constant
• 2013, Federal Reserve has considered tapering its QE Program – Market has expectation
of an increase in interest rates
An expectation of the rise in US interestratesalso led toa devaluation in Brazilian Real, as
brazilexperiencescapitaloutflow toUS.

39. Asset market approach -Interest Rates
Brazilianexchangerateexpectation
ee
• Brazil’s relys on its capital account, particularly short term portfolio investment
• This “hot money” is expected to flow out with the backdrop of an improving US economy
Thereis anexpectation for the Brazilian realto depreciatedue to projectedtradeaccount
deficit

40. Asset markettheory - Conclusion
Interest rates in USA are expected to rise due to the taper
The trade deficit has created expectations of devaluation
Thesefactorssupportthedevaluationofthereal.
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Asset Market

41. • Brazil has faced persistent high
inflation in recent years and this has
led to an increase in Selic rate to curb
inflation
• Central Bank’s Inflation target is 4.5%
with a ± 2% expectation
• Central only managed to hit the high
side of 6.5% with interest rate of
more than 10%
To curbthe high inflation, BCB raised the high Selic rate, this in-turn increase
the costof borrowing,hurtingthe consumptionin the Brazil.
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

42. The BrazilianLifestyle

43. Installment plans on anything
R$ 1000 TV Set
24 monthly installment of R$ 41.70
R$ 54 Toy Robot
5 monthly installment of R$ 10.80
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

44. • Steady credit
growth in Brazil
from the consumer
and companies.
• This shows a culture
and reliance of
credit for
consumption.
• At some point, the
interest charged will
be too much and
there will be
defaults which will
affect consumption
in brazil, worsening
its economic state.
A Culture of Credit
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

45. • One of highest Govt Debt in the world and financed with a deficit
• Brazil Govt reliance on debt to finance policies
A Culture of Credit in Govt
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

46. Managing
the
ER
Managing the ERPart B

47. PolicyInstruments To Manage the Exchange Rate
Brazilian Central Bank
(BCB)
Deepening of
Financial Markets
Monetary Policy
- Interest Rate Policy
Macro-Prudential Policy
- Eliminates Reserve
Requirement Ratio
Capital Control
Management
- Eliminate IOF Tax on
Fixed-Income Instruments
Government Fiscal
Policies
IPI Tax on
Automobiles
*Will not be covered in
details

48. Brazilian
Central Bank
(BCB)
Deepening of
Financial Markets
Monetary Policy
- Interest Rate Policy
Capital Control
Management
- Eliminate IOF Tax on
Fixed-Income
Instruments
PolicyInstruments To Manage the Exchange Rate
Stabilization of
the Real
Price Stability Objectives
Maintain Financial
Market Stability
Macro-Prudential
Policy
- Eliminates Reserve
Requirement Ratio
Mitigate Reversal
of Short-Term
Capital Flows

49. Inflation Rate Targeting
When planning monetary policy: BCB
sets Selic rate to target inflation at 4.5%,
with tolerance range between 2.5% and
6.5%
Set direction and focus for monetary
policy
Improves investors’ confidence in Brazil
Achieve stability in exchange rate
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

50. On 22 Aug 2013, BCB announced $60 billion currency intervention program:
o $500 million worth of currency swap auctions and derivative contracts auctions
from Mon-Thu
o $1 billion on spot market through repurchase agreements on Fri
Currency InterventionProgram
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

51. $500 million worth of currency swaps auctions and derivative contracts auctions from
Mon-Thu
o Daily auctions of derivative contracts that investors use to place future bets against the Brazilian
real.
o These derivative contracts are seen as a method to protect investors' holdings of the local
currency, so that they do not rush to sell at the first sign of weakness.
This widens the range of money market instruments, build financial market external
resilience and stabilizes the real
Ensure both the stability in exchange rate and Brazilian real liquidity
1. Deepeningof Financial Markets via
CurrencySwap Auctions
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Deepening
of Financial
Markets

52. 2. Monetary Policy- Interest Rate Policy
Brazil’s interest rate is known as SELIC (Sistema Especial de
Liquidação e de Custódia)
FIs participate with SELIC as custody account holders
Selic – the overnight rate
Selic transaction process through repurchase agreements (Repos)
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Monetary
Policy

53. • Gradual increases as a result of Fed tapering & repatriation of capital
• BCB pressured into defending the real through increase of interest rates and the selling of foreign
reserves
• Brazil’s vehicle for undertaking OMO – like the FOMC
• Objectives:
o Price stability
o Reduce inflation effects
o Guide inflation to its target of 4.5% ± 2%
2
4
6
8
10
12
14
16
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
Selic Rates
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Monetary
Policy

54. How does it works?
• When Selic rate increase, it is more
attractive for international investors who are
seeking for high returns.
• This leads to more portfolio capital inflows
into Brazil.
• Increasing the demand for real.
• Strengthening the real against other
currency.
Increasing Selic Rate via Repo
BCB offer $1 billion repos every Friday to pull short-
term funds from the financial system. This means that
money supply is reduced, in-turn pushing up the Selic
rate as a monetary policy instrument to mange its
currency stability and at the same time, meet its
economic goals.
2. Increasing Selic Rate
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Portfolio
Capital
Inflows
Valueof
Real
Selic RateMoneySS
Monetary
Policy

55. 3.Macro-PrudentialPolicy
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Eliminated the local banks reserve requirement on short
dollar positions against the real
• This increases lending to the economy, increasing the
returns on domestic and forex deposits, resulting in
an appreciation of the real
• Objective:
o Address financial market instability
Macro-
Prudential
Policy
Monetary
Policy
Macro-
Prudential
Policy
Price Stability
Financial
Market Stability

56. • Introduced in June 2013
• By lifting the IOF tax on fixed-income, BCB is aiming to attract more investments and capital inflow into Brazil.
• This will attract more investors seeking higher returns, given that the Selic rate has increase after that.
• The demand for real will increase and the real will strengthen against the USD.
o However, the removal of fixed-income IOF can be a double-edged sword.
o While the removal of fixed-income IOF is aimed at attracting investments and portfolio capital inflow, it can
actually increase volatility in the market.
o The initial high IOF of 6% had initially “locked” investors’ capital in Brazil as they are unwilling to withdraw
capital out of Brazil’s fixed-income market as they have to fork out 6% to bring it back in again.
o However, with the IOF reduced to 0%, coupled with the US signaling a tightening of the monetary policy, this
has led to capital flight from Brazil into US which has better near-term prospects.
Reducing Fixed-Income IOF from 6% to 0%
IOF is the Brazilian tax on fixed-income foreign portfolio investments
4. Capital Control Management
How does it works?
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Capital
Control
Management

57. Effectiveness of Policy Instruments
Ensuring Price Stability
• Inflation of 6% to 6.5% in 2013
• Targeted inflation of 4.5% ± 2%
achieved in 2013
Worsening Current Account Deficit
• CAD worsened from -3% in Q3
2013 to -3.7% in Q1 2014
• Resulted from declining demand
for its exports
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

58. Effectiveness of Policy Instruments
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
Improving Capital Account
• The initial fall in capital flows in Aug 2013
could be attributed to the removal of IOF
tax on fixed-income instruments. The initial
high IOF could have “locked” investors’
capital in Brazil. With the removal of IOF
tax on fixed-income instruments, coupled
with US signaling a tightening of its
monetary policy, this could have led to the
capital flight from Brazil in late Q3 2013.
• Eventually, capital flows increased from
from Q4 2013 to Q1 2014, posting an
overall increase trend in the capital
account.
Stabilization of Brazilian real
• Achieved through improving its
capital account via increasing
Selic rate, currency swap auctions

59. Comparison
with
India
India Vs BrazilPart C

60. Nominal GDP of
US$1.876Trillion
G IX-M C
16.47%
-3.6%
30.02%
57.11%
Net Importer
High Dependence
on Investments
India’s Current
Account Deficit (CAD)
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

61. 61
Causes of Downward Pressure on Rupee
High
Dependency
on
Investments
US Economy
Gradual
Recovery
Weak
Balance of
Payments
Rising Oil
Prices
India’s
Low
Foreign
Reserves

62. WEAKBALANCE
OFPAYMENTS
• Large Current Account Deficit (CAD) since 2003, with
a negative growth of 2293% in the last 10 years
• CAD of US$75.8 billion as at 2013
• Global Rank of 192, just above Brazil
• Large and Persistent CAD implies higher vulnerability
to sudden capital flow reversal, resulting in currency
collapse
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

63. WEAKBALANCE
OFPAYMENTS
• Persistent Fiscal Deficit since 1991
• Implies Government is spending more than it is receiving
• Increase chances of speculative attacks as it is assumed that
the government do not have enough reserves to protect its
economy
• Large and persistent twin deficits makes India very
susceptible to pressure on its rupee
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

64. RISING OILPRICES
• Brent crude oil has rose to a 6-month high of
US$115.59 in August 2013
• Almost 79% of India’s crude oil needs are
imported
• The rise in oil prices implies that India has to pay
an increased amount of USD for the same
quantity of oil
• India has to sell more rupees to buy more USD
Value of
Rupee
Domestic
Money
Supply
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

65. HIGH DEPENDENCY
ONINVESTMENTS
• 30% of India’s GDP is on investments
• After 2008 Global Financial Crisis, Federal Reserve
cut interest rate
o Lower cost of borrowings causes investors to borrow
from US and invest in higher yielding assets in
emerging markets like India, strengthening the rupee
o This is how India is able to finance its CAD
• However, speculations of QE tapering caused
investors to pull out a record US$10 billion from
Indian debt & equity markets
Foreign
Capital
Outflow
Domestic
Money
Supply
Value of
Rupee
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

66. US Economy
GradualRecovery
• Signs of recovery from the impact of Global Financial
Crisis gave rise to expectations of a stronger US dollar
• Resulted in capital inflow into the US Economy
• Some of these capital flows out from India to US
Domestic
Money
Supply
Value of
Rupee
Foreign
Capital
OutflowIntroduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

67. Foreign
Reserves
• Foreign Reserves grown by a little over 2 times
(from US$138 billion in 2005 to US$295 billion in
2013)
• However, CAD have grown by more than 5 times in
the same period(from US$12.95 billion to US$74.8
billion)
• Foreign reserves are able to cover CAD from more
than 10 times in 2005 to less than 4 times in 2013
o India is unable to intervene in its foreign currency
markets as aggressively as before
o Declining ability to protect its currency from
currency shocks, making it more susceptible to
speculative attacks
0
5
10
15
20
25
30
2005 2006 2007 2008 2009 2010 2011 2012 2013
Number of times Foreign Reserves can cover
CAD
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

68. 68
OTHER POLICIES
MACRO-
PRUDENTIAL
POLICIES
MONETARY
POLICIES
FISCAL
POLICIES
Measures Taken to Prevent Devaluation

69. 1. FISCAL POLICIES
• The government imposed
higher import tax on gold and
silver, the largest luxury import,
from 6%to 10%
• 20% of every lot of import of
gold must be for export
purposes
Increased Tax on Silver
and Gold Imports
• Increased deposit rates for Non-
Resident Indians (NRIs)
• Relaxed FDI’s routes for investments
in India (changed from government
to automatic) for various sectors
such as commodity and retail
Encouraging Capital Inflows
Healthier
BOP
Current
Account
Deficit
Foreign
Capital
Inflows
More Resistant
toCurrency
Shocks

70. 2. MONETARY POLICIES
• Reserve Bank of India (RBI) have
increased the MSF (interest) rate
from 8.25% to 10.25%
• Aim at influencing the multiplier
effect, reducing the money creation
process and hence reducing money
supply
Increasing Marginal
Standing Facility (MSF)
Rate
Value of
Rupee
Domestic
Money
Supply
Open Market Sales of
Government Securities
• RBI announced the sale of
government securities worth
Rs 12,000 crore via Open
Market Operations to reduce
liquidity via reducing money
supply

71. 3. CAPITAL CONTROLS
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
• Amount of money Indians can take
out of the country reduced from
$200,000 to $75,000 per financial
year
Reduction of Outward
Remittance
• RBI have reduced LAF (the amount of
money that banks are able to borrow from
RBI through repos), to a maximum of 1%
of its deposits, which amounts to an
estimated Rs 75,000 crore
Restricting Liquidity
Adjusting Facility (LAF)
Aim to keep the money within the country to
avoid volatility

72. 4. OTHER POLICIES
• RBI provided US dollars directly to 3 state-owned oil
companies (Indian Oil Pte Ltd, Hindustan Pentroleum Corp,
Bharat Petroleum Corp), which have the biggest demand for
USD of $400 to $500 million daily
Dollar Aid to State-Owned Oil
Companies
Value of
Rupee
Domestic
Money
SupplyIntroduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India
This is to isolate these demands from the
market, hence reducing pressure on the rupee

73. VSBRAZIL INDIA
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

74. India stabilizeditsdevaluationfroma high
of 67.39 RupeeperUSDto acurrentvalueof
62.36 rupeeperUSD
VALUE OF CURRENCY
Realcontinueditsdevaluationfrom2.433
to acurrentvalueof 3.117 perUSDinthe
sameperiod
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

75. July 2013to5.37% currently
INFLATION RATE
July2013to7.7%currently
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

76. India achieveda healthierCAD,narrowing
thedeficitfromUS$12billion inJuly2013to
US$6.84billion currently
CURRENT ACCOUNT DEFICIT
US$2.84billion currently
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

77. India FDIincreasedfromUS$2billion from
July 2013toUS$5.5billion currently
FOREIGN DIRECT INVESTMENTS
Brazil FDIdecreasedfromUS$6billion to
US$2.76billion currently
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

78. HOW MUCH OF THE DIFFERENT
OUTCOMESARE ATTRIBUTED TO
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

79. However external effects like the decrease in oil prices could have improve its current
account deficit, leading to an improvement in India’s economy
FDI liberalization &
restrictionof outward
remittance& cuts in MSF
and LAF
Tax on luxury
imports & currency
swaps with oil
companies
economy ina bidto supportthe rupee
These policiesaim at C and I
component ofits GDP
Tax ofluxury imports reduceM component
ofGDP
Currency swaps allowthe costofoil
imports tobe keptlow,reducing the
pressureon inflation
India’s policies are well
rounded because it
addresses its currency
pressure issues by targeting
both domestic and foreign
factors, hence India did not
suffer from the side effects
by emphasizing too much on
one policy.
Introduction Before 2013
Part A: After
2013
Part B:
BCB Policies
Part C:
Comparison
with India

80. However external effects such as the recent slow growth in China and
Europe crisis could have contributed to its economy worsening, which is
largely uncontrollable by Brazil.
capital outflow
Selic rate hike
& reducing IOF
These policies aim at I
component of its GDP
Brazil’s policies are too focused on trying to keep capital
from flowing out of the country. This has actually caused its
economy to worsen due to conflicting effects
• Increasing SELIC rate & reducing fixed-income IOF tax
aim to attract hot money and this should have
strengthen the real.
• However, with the gradual recovery of the US
economy, the reduction of fixed-income IOF actually
backfired and led to more outflow of portfolio capital
from Brazil. This further weakens the real.
• The increasing selic rate also increased the cost of
borrowings for both consumers and businesses,
impeding domestic growth in Brazil.

81. India is able to lessen the external effects on its economy more
than that of Brazil.
• India, being a net importer, is able to directly control demands
for imports by raising taxes.
• Brazil on the other hand, are not able to increase demands
from its exports apart from depreciating its currency.
However, we cannot deny that the policies implemented indeed
have an impact on its currencies.
Our group feels that in terms of managing its exchange rate,
India’s policies have managed it better than Brazil’s policies.
Conclusion

82. References
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•
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https://www.itau.com.br/_arquivosestaticos/itauBBA/contents/common/docs/Itau_WP9_FX_may13.pdf
•
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•
Tabak, B. (2013, July 1). Official Intervention through Derivatives: Affecting the foreign exchange demand. Retrieved March 28, 2015, from http://www.bcb.gov.br/pec/wps/ingl/wps317.pdf
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helen-joyce-explains
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manoeuvre-more
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85. Getting Real
With
The REAL
History& Backdrop

86. Short term fiscal adjustment
Introduction of new currency
De-indexation of economy
Floating of currency with floor value
The Real Plan

87. Shorttermfiscal austerity implemented
Cut expenditureswhile creating tax overfinancial transactionsto
increase revenue
In June 1994, fiscal surpluswas 2.6%
(i) Short term fiscal adjustment

88. Unit of realvalue (URV) was introduced,whilecruzerioreal
continuedto be used as legal tender
The URV was an average of inflationindexesin Brazil
Pushed to find asustainable priceset
Market mechanisms wererespected
(ii) Introduction of Real

89. June 1994, 5150%
Dec 2000, 10%
Fighting inflation

90. Conjunction of bringing inflation down + short run
demand in durable goods forcedgovernment to slow down
economy
Controlleddomestic credit& increased interest rates
ER thus became overvalued
Current account deficit due to high ER
Net ST capital inflows financed BOP
Current account deficit increased by 958.85% between
1994 to 1995
Effects of the Real Plan Demand Expansion

91. Eliminated inflation
ExchangeratetrapbroughtSR macroeconomicinconsistency
BOBkeepsinflationtarget,letslevels of outputandunemploymentbe
determinedbysupplyside
Hightradeopennesswhichaffects importinputs
MustholdeconomicgrowthtargetwhilestabilizationofER
Manage ER against speculators(dirty floating)
Bring FDIs that can impact future exports
OverallEffectiveness