After policy shift, EU countries seek open skies pact with India

NEW DELHI: Several European countries now want to sign open skies agreement with India after the government announced a change of rules in the National Civil Aviation Policy (NCAP). An open skies agreement between two nations allows carriers to operate any number of flights to any city there.

Under the policy, India has decided to sign open skies agreement with SAARC countries and those beyond a 5,000-km radius from Delhi. But the aviation ministry has restricted the number of cities a foreign airline can fly to.

“The first request came from Greece, with which we have already signed a pact. We are in talks with Netherlands, and Sweden. We have also received a request from Georgia,” said a senior aviation ministry official.

Under the pact with Greece, Indian carriers can fly any number of times to any city in Greece, but Greek airlines can fly to only six Indian cities. Experts say open skies agreement with countries beyond 5,000-km radius, a brainchild of aviation secretary RN Choubey, should enhance India’s international connectivity. “There are many Indians in the West and Indian carriers have limited international operations,” said an expert.

EXCHANGE RATE

To understand currency fluctuations, we must first know that ours is a managed floating currency. The government doesn’t set the exchange rate but doesn’t let it fluctuate freely either.

In order to find out how an exchange rate is determined, we must first know what determines the demand for foreign currency deposits.

Noted economist Paul Krugman says the demand for foreign currency bank deposits is influenced by considerations that influence the demand for any other asset. Among these, the most important factor is our view on what the deposit will be worth in the future.

Moreover, a foreign currency deposit’s future value depends on the interest rate it offers and the expected change in the currency’s exchange rate against other currencies.

In other words, the rupee rate of return on dollar deposits is approximately the dollar interest rate plus the rate of depreciation of the rupee against the dollar. So if the rupee depreciates by 5% against the dollar in a year and the interest rate on dollar deposits is 5%, your expected rupee rate of return on dollar deposits will be 10%. And if the rupee interest rate is 7%, you will get a return of only 7% on rupee deposits.

So we can now understand that investors are buying the dollar as US interest rates are expected to rise with US President-elect Donald Trump planning to adopt a fiscal expansionary policy. With more people buying the dollar, it becomes more expensive, and rupee supply increases in the market. This then leads to disequilibrium as investors won’t be willing to hold rupee deposits.

Rupee holders then try to entice the dollar holders by offering them a better price, resulting in a fall in the rupee. The dollar/ rupee exchange rate falls till the time dollar and rupee deposits offer equal returns or achieve interest parity condition.

RBI’S ROLE

As the currency falls, importers and Indian businesses suffer and the government’s cost to service

BALANCE SHEET

This leads us to the next question as to how much money the RBI can supply in the market. The central bank has a balance sheet of assets and liabilities. Its assets are either domestic or foreign.

Its foreign assets are mainly foreign currency bonds or gold that it owns. Its domestic assets include loans and bonds issued to citizens and domestic private banks. Its liabilities are the deposits of private banks and currency in circulation. So the currency in circulation is decided by the amount of assets that the central bank possesses

NOTE BAN LINK

The rupee’s fall is also testament to the pernicious effects of the note ban. It has weakened out put, which has lowered the rupee demand, and ultimately led to the depreciation of rupee.