Category Money

How is foreign exchange rate determined?

When you visit the U.S. and go shopping, you need dollars to buy things. You can acquire dollars by exchanging your rupees for them. There is a rate at which you can buy the American currency with Indian rupees – for example, you need to give around 71 rupees to buy one dollar.

The exchange rate reflects a country’s economic conditions. It may be controlled by the government for a period of time or be flexible, determined by the market forces of demand and supply. India’s exchange rate was controlled until 1991 after which the government opted for a flexible exchange rate system.

The flexible or floating exchange rate is determined by various factors like inflation, political stability, export-import trade, interest rates etc. These factors determine the demand for a particular currency and its availability around the world. When the demand for a currency rises and supply does not rise correspondingly, then each unit of that currency becomes costlier to buy.

Some governments prefer a controlled exchange rate to create stability in the value of their currencies. In this system, the rate does not fluctuate daily – it may be reset on particular dates known as revaluation dates.


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What is the history of the Pound?

A lot of people think that the British pound is the oldest living currency in the world. There is enough proof they say. The Britishers took their currency across the world when they went looking for new places to trade in and colonise. Strangely, the pound originated in continental Europe. The word “pound” derives from the Latin word Libra for weight or balance. An ancient Roman unit of measure, Libra Pondo together stands for “a pound weight.” The word “Libra” no longer stands for the “pound”, but it has left its indelible mark in the symbol for the pound. You have the  (pound) symbol, an ornate L, and the abbreviation for the unit of mass, lb.

Along with the Roman name, the Anglo-Saxons borrowed the sign, an ornate letter ‘L’. The crossbar came along later, indicating that it is an abbreviation, and a cheque in London’s Bank of England Museum shows that the pound sign had assumed its current form by 1661, even if it took a little longer for it to become universally adopted.

What about the word “sterling” for the pound? The coin was called the joachimsthaler, which was then shortened to thaler, the word then proceeded to spread around the world. Use of the word “sterling” came about after the Norman Conquest, and it originally referred to pennies not pounds. It perhaps came from esterlin, a Norman word for little star, or lesterling, an Arab word for money.

The value

The value of the pound originally was equated to the price of a pound of silver. A pound was divided into 20 shillings and 240 silver pennies. The Anglo-Saxon King Offa is credited with introducing the system of money to central and southern England in the latter half of the 8th Century. He minted the earliest English silver pennies that had his name embossed on them. These 240 pennies varied in weight together. So pounds and shillings were used as units for accounting.

The first pound coin appeared in 1489, under Henry VII. It was called a sovereign. The shilling was first minted in 1540. Banknotes began to circulate in England soon after the establishment of the Bank of England in 1694. They were initially hand-written. Gold coins were minted in 1560, and by 1672 some were made of copper.

The system of dividing the pound into shillings and pence was complex. So the government decimalized it in 1971.

Pound’s value through the ages

One pound could buy 15 head of cattle in the year 980 during the reign of King Aethelraed the Unready. From the 15th century to the year 2000, the pound’s value declined. Its purchasing power fell four-hundred-fold. In 1999, the House of Commons library concluded that between 1750 and 1998, prices had risen by about 118 times. In other words, you could buy more with a penny (decimal) in 1750 than what you could buy with a pound in 1998. The value of the pound came down after 1945.

In modern times, many attempts have been made to manage the pound, including the Gold Standard, the Bretton Woods system and the European Exchange Rate Mechanism. Now the value is determined by supply and demand.

The quality of the coins

King Henry I punished currency officials who did not make good-looking coins. Half minters in England got punishment for producing sub-standard or counterfeit coins in 1124. Henry II improved the quality of coins and in 1282, under Edward I, testing the purity of coinage was formalized in the “Trial of the Pyx”, an annual ceremony which contributes to this day.

The coins’ silver content had been reduced to 92.5% to improve durability. “Sterling silver” tells you how pure the silver is in the coin. Henry VIII drastically reduced the silver content of coins minted in his reign in what became known as the Great Debasement. But Elizabeth I restored its value in 1560. It remained so till the 19th Century.

For centuries, thieves clipped off the edges of the silver coins to make money. “Penny pinchers” really lived! They would pass off the rest of the coins for its original value. In the 1660s, minting of coins was mechanized, and features like edge lettering were introduced to stop the clipping. Today “penny pinching” is an idiom referring to those who cut down essential expenses to save money.

The pound has continued as independent currency, though Europe adopted a single currency, the euro.


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What is the controversy over electoral bonds all about?

As per the HuffPost India articles, the government ignored the objections raised by the RBI and the EC. Only when the EC’s reservations became public knowledge due to an affidavit it field in the Supreme Court in March 2019 did finance minister raised by the EC even before the scheme was passed in the Lok Sabha.

(In 2017, the then RBI Governor wrote to the then Finance Minister that “allowing any entity other than the central bank to issue bearer bonds, which are currency-like instruments, is fraught with considerable risk and unprecedented even with conditions applicable to electoral bonds.” The RBI wanted to be the organisation issuing the bonds. In addition, it wanted the bonds to be digital rather than physical.

The EC wanted that electoral bonds would allow illegal foreign funds to be routed to political parties. Objections by the two independent, constitutional institutions that were consulted on this matter were overruled and the scheme was passed in the Lok Sabha in 2017.)

According to the HuffPost article, the Prime Minister’s Office asked for the rules governing electoral bonds to be bent before the five state Assembly elections in 2018. Electoral bonds were issued outside the stipulated 10-day window that year.

The report states that the PMO forced the banks to accept expired electoral bonds during the special window kept open prior to the elections.

Other sticking points:

Bonds are traceable

While the electoral bonds do not have the name of the donor or the receiving political party, the bond issuing authority, the State Bank of India, says all KYC norms applicable to general bonds will be applicable too electoral bonds too. Besides, it can ask for additional information if needed. The rules allow the information to be given over to investigation agencies or courts if necessary. In turn, the government can easily discover who is buying and donating them. This means there is a possibility of the donor’s anonymity being compromised.

The news website Quint reported that the bonds, the physical papers, carried a secret alphanumeric code visible under ultraviolet light. The Huffing ton Post reports say the State Bank does indeed track who bought the bonds and which party redeems them.

Only encourages black money

Anonymity conferred on the donors would make electoral bonds a convenient channel for black money, say experts. Though the SBI knows the details of the bank accounts from which the electoral bonds are purchased, it is not responsible for looking into the sources of funds of the donor.

Corporate funding

The earlier 7.5% ceiling on political donation by companies has been removed (by amending the Companies Bill 2013). This allows for unlimited donations. Big companies can influence the parties with their huge funding.


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What is the supposed aim of the scheme electoral bonds?

To curb black money: The government claims that electoral bonds are aimed at checking the use of black money for funding parties. Most of the political funding is done in cash often from anonymous sources. But with electoral bonds, as the donations are made through a bank, the money becomes accountable.

To protect the identity of donors: The government claims that electoral bonds allow anonymity, thereby donors from political victimization. This is also important because a central issue in political funding is the question of whether a winning candidate or party will work for the public or for those who have funded them.


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Why is political party funding?

Political party funding is the means which a party raises money for its functioning and campaigns. Party members, individual supporters, organisations which support a party or its ideologies or which could benefit from the party’s victory, contribute to this funding. Political parties can also receive foreign funds.

Parties need money to reach voters, to advertise in print, electronic and social media, to pay party workers and to organise election rallies. (in the 2019 general election, a staggering Rs 55,000-60,000 crore was spent by the political parties on election-related activities, according to a study by the Centre for Media Studies (CMS), a not-for-profit multi-disciplinary development research think-tank. The Bharatiya Janata Party spent about 45% of this total amount!).


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How does Electoral bonds work?

Donors can purchase the bonds from the State Bank of India (SBI) by making payments digitally or through cheque. The SBI is the only bank authorised to issue the bond. An electoral bond can be purchased by any donor with a KTYC-complaint bank account. (KYC: Know Your Customer. It means that the name, address and contact details of the customer are available with the bank.)

The donors are then free to gift/donate the bond to a registered political party.

The political party has to encash the bond only through an account with the authorised bank, which is the SBI. Electoral bonds are essentially like bearer cheques. The issuing bank will remain the custodian of the donar’s funds until the political party redeems the bond.

Political parties which secured at least 1% of the votes in the recent parliamentary or assembly polls are eligible to encash these bonds.

The bonds can be purchased for any value in multiples of Rs. 1000, Rs. 10,000, Rs. 1 lakh, Rs. 10 lakh and Rs. 1 crore.


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What are electoral bonds?

A recent investigation by news website Huffington Post India has revealed that the BJP-led Central government introduced the Electoral Bond Scheme, ignoring the objection of the Reserve Bank of India (RBI) and the Election Commission (EC). It passed a Finance Bill in 2017 and the scheme was launched in January 2018. An electoral bond is an instrument which can be bought by any member of the public or corporate to make donations to political parties anonymously.

Since its introduction, the scheme has come under sharp criticism. Various stakeholders have expressed their objection to the scheme, saying the system has several loopholes. It is alleged that the donation made through electoral bonds are, in effect, not as transparent as it is claimed to be. With the recent articles by HuffPost India, written based on documents furnished by a Right to Information activist, the controversy over electoral bonds are resurfaced.

Electoral bonds are a type of bearer bond instrument in the nature of promissory notes issued by banks through which as Indian citizen or a company established in the country can fund political parties anonymously.

A bearer bond instrument is a type of fixed-income security in which no ownership information is recorded and the security form to the purchaser. Whoever is in possession of the bond is entitled to the coupon payments.

A promissory note is a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand.

When they can be bought?

Electoral bonds are available for purchase for 10 days each in the months of January, April, July and October. An additional period of 30 days would be specified by the Centre in the year of general elections.


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