Category Commerce

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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HOW ARE BANKNOTES PRINTED?

Paper money needs to he designed and made in such a way that it is very difficult to forge. Banknotes have extremely complicated designs, with pictures and backgrounds made up of very fine lines and patterns. These are printed from hand-engraved steel plates. The notes are also printed on a special type of paper, which is hardwearing and has a strip of plastic or metal embedded in it.

Banknote Design

The banknote design typically starts with the compiling and reviewing of historical information, images, Thai patterns, and other elements related to the main theme to be depicted on a banknote. In early days, due to the limited availability of equipment and tools, each new banknote design was to be hand – drawn elaborately in color. To this day, banknote designers still need to possess both artistic skillfulness and computer expertise to create the best design and origination for a banknote. In designing banknote, factors to be considered are:

  • Gracefulness 
  • Convenience
  • Cultural identity 
  • Technical limits 
  • Counterfeit deterrence feature

Platemaking 

Having obtained the design, hand engraving of metallic plates and drawing of design of the original plate is performed by highly skilled and experienced specialists so as to achieve the high degree of precision, tonal variation and perspective requirements for banknotes. The background patterns, formerly etched by machine, are now created by computer programs.

Platemaking 

    1)  Offset Printing?

The background design is printed first by dry offset on a specially designed printing press that is able to print high-precision color patterns on both sides of the sheets simultaneously.  This makes it possible to produce perfect front and back registered designs or see through designs when viewed against transmitted light, one of efficient techniques to discourage counterfeiting.? 

    2)  Intaglio Printing?

This process is used to add the portrait of H.M. the King and other raised prints on the front of the note. The image to be printed is inscribed into the plates. The inscriptions are filled with ink, and excess ink is wiped from the plates. Heavy pressure is applied to transfer the ink from the plates to the pager, leaving the surface slightly raised. This process gives banknotes a tactile feel to the touch, proven to be very effective in counterfeit deterrence.?

   3) Letterpress Printing ?

Every printed sheet is carefully inspected. The good sheets are sent to printed serial number and signature by letterpress method, while imperfect or bad sheets are taken out of the system to be duly destroyed. The printing machine also has electronic numbering control to protect from miss – printing the numbering. This type of control helps prevent the repeat of numbering printed on each banknote of the same category.

Printed Sheet Inspection ??

The bank sheet then passes through a quality inspection and verification process that is one of the most important steps of the entire banknote production process. The inspection process is a process that screens good quality, partially damaged and mis-printed bank sheets from each other.  Also, the quantity of sheets produced is assured by counting and verifying after finishing the inspection process.    

The inspection and verification process is a process of screening the bank sheets into 3 categories;            

1. Good quality sheet are those where every individual banknote has met the quality standard, which are then separated into the “good numbering” printing category.

2. Partially damaged sheets are those that most parts pass the quality standard. This set will be separated into the “partial numbering” printing category.

3. Bad sheets are those that do not pass the quality standard. This set of banknotes is sent to be destroyed and the number of replacement sheet is carefully matched to the number destroyed. 

After serial numbering, the 100 % good sheets move on to cutting and packaging. Partially good sheets are cut, and defective notes are sorted out and replaced by special notes before being shrink – wrapped for delivery.

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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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