Purchasing Power Parity (PPP)
It states that the exchange rate of a currency with another (currency) is in equilibrium when their domestic purchasing power are equivalent at that exchange rate.
It means that a good should cost same in India and USA after considering the exchange rate of Indian Rupee (INR) and US Dollar (USD).
Suppose, the current exchange rate of Indian rupee to US Dollar is Rs. 60 perUSD (i.e., 1 USD = Rs. 60). Now suppose a laptop costs Rs. 60,000 in India.
According to the PPP theory, the laptop should cost USD (60,000 / 60) = USD 1,000 (considering the current exchange rate of these two currencies) to maintain parity in purchasing power of these two currencies.
But, it may happen that the actual market price of the laptop in USA is USD 800 (say) (equivalent to Rs. 48,000 in India). Therefore, there is an advantage of buying the laptop in USA at much less price than India (Rs. 12,000 less) (it means that the purchasing power is not in parity between these two currencies)
Indian consumers will go to the exchange office and sell their INR and buy USD, and then buy the laptop from USA. It will cause the Indian currency less valuablethan the US dollar.
The demand of laptop sold in India will decrease (since high price), and the priceof laptop will go down. In contrast, the demand of laptop in USA will increase, and the price will rise accordingly.
These factors will cause the exchange rate (of the currencies) and the prices (of laptops) to change such that there is purchasing power parity in both the currencies.
PPP theory tells us that the price differences between countries are not sustainable in the long run, as market forces will equalize prices between the countries and change the exchange rates accordingly.
(Relate the above example with companies that can buy goods in much less price from foreign countries and sell in much less price in India than its counterparts. For this reason, there are several laws or restrictions on imports and a provision of levying customs duty, etc.)
ONE-TIME RESTRUCTURING OF MSME
Considering the importance of MSMEs in the Indian economy, it is considered necessary at this juncture to take certain measures for creating an enabling environment for the sector.
With a view to facilitate meaningful restructuring of MSME accounts that have become stressed, RBI has been decided to permit a one-time restructuring of MSME existing loans classified as ‘standard.
RBI has decided to permit a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification, subject to the following conditions:
- The aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed Rs 250 million as on January 1, 2019.
- The borrower’s account is in default but is a ‘standard asset’ as on January 1, 2019 and continues to be classified as a ‘standard asset’ till the date of implementation of the restructuring.
- The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration.
- The restructuring of the borrower account is implemented on or before March 31, 2020. A restructuring would be treated as implemented if the following conditions are met:
- All related documentation, including execution of necessary agreements between lenders and borrower / creation of security charge / perfection of securities are completed by all lenders; and
- The new capital structure and / or changes in the terms and conditions of the existing loans get duly reflected in the books of all the lenders and the borrower.
- A provision of 5% in addition to the provisions already held, shall be made in respect of accounts restructured under these instructions.
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