Currency Regime: Classification

Currency Regimes is nothing but the system adopted by any country to manage its currency exchange rate. No single currency is regime is good for all countries, at all time. Fixed vs. Floating is oversimplified dichotomy, there is in fact a continuum of flexibility along which it is possible to place most currency regimes.

Currency Union / common currency system:

·         Currency Union means two or more nations sharing same currency.

·         One of the main goal of currency union is to synchronize and manage each county’s monetary policy.

·         It helps in reducing transaction cost in cross-border trade

·         The theory of optimum currency region (OCR) published by Mundell in 1961 describes which region should form currency union.

Example include European Monetary Union (Euro).

  

Currency Board:

·         Currency board is monetary authority which act as a regulator of nation’s exchange rate and makes decision about valuation of nation’s currency.

·         Three major elements of currency board are:

a)      exchange rate that is fixed to an anchor currency

b)      Automatic convertibility, that is right to exchange domestic currency at fixed rate decided by currency board whenever desired

c)      Long term commitment to system

·         Currency board system can be credible only if central bank holds sufficient official foreign exchange reserves to at least cover the entire narrow money supply.

·         Economic credibility, low inflation and lower interest rates are some advantages of this system.

·         Limitation of currency board system is it brings some restrictions on the central banks role.

·         By using a currency board a country is no longer in control of its monetary policy.

Example: Bulgaria in 1997 adopted currency board system to successfully recover from banking crisis in the country.

Truly fixed:

·         Fixed Exchange rate system is a system wherein the central bank interferes with the exchange rates with a view to keep it fixed.

·         There is a necessity for the country to keep a lot of foreign exchange reserves because whenever it makes use of these reserves to keep the exchange rate fixed.

·         Since the exchange rates are fixed, a trader of this country need not resort to hedging in order to protect itself from exchange rate risks.

·         The importer and exporters of this country know that the exchange rate is fixed so they don’t need to worry about it and can concentrate on their business.

·         Since the exchange rate is fixed, there is no speculation involved in it.

Adjustable peg:

·         It’s a currency regime in which the authorities declare the regime as a fixed currency regime but keep an option of adjustment if considerable changes in the economic fundamentals.

·         Most countries declare their regime as fixed but periodically undergo realignment to balance the economy.

·         Periodic adjustments are done to improve country’s competitive advantage in export market.

·         Klein & Marion 1994 report that mean duration of pegs among world economies is about 10 months.

·         When exchange rate has been fixed for several years it generates sense of complacency about the currency risk leading to large, unhedged currency positions that can greatly increase the cost of depreciation.

Example: Chinese Yuan

Crawling peg:

·         A system of exchange rate adjustment in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates.

·         The par value of the stated currency is also adjusted frequently due to market factors such as inflation. This gradual shift of the currency's par value is done as an alternative to a sudden and significant devaluation of the currency.

·         This system helps in avoiding instability which may occur due to discrete and infrequent adjustments

·         It also Minimizes the rate of uncertainty and volatility since the fluctuation in the exchange rate is kept minimal

Example: In the 1990s, Mexico had fixed its peso with the U.S. dollar. However, due to the significant inflation in Mexico, as compared to the U.S., it was evident that the peso would need to be severely devalued. Because a rapid devaluation would create instability, Mexico put into place a crawling peg exchange rate adjustment system, and the peso was slowly devalued toward a more appropriate exchange rate.

Basket peg:

·         The exchange rate is fixe in terms of weighted basket of currencies instead of any one major currency.

·         This approach makes sense for countries with trade patterns that are highly diversified geographically.

·         In most countries which use this system keep weights secrete and adjust the weights or levels whenever situation arises.

·         The benefits of this regime include stabilizing trade balances, capital flows, and gross domestic product (GDP) for countries that trade with diverse countries.

·         This currency regime suffers from the issues like complexity, no transparency, and no verifiability.

Managed float:

·         It is a system wherein the exchange rates fluctuate but the central bank of the country attempts to influence the exchange rate by buying and selling of currencies.

·         It is a hybrid of Fixed and Floating exchange rate regimes.

·         Generally the central bank may set a range between which it will not interfere with the exchange rates. Only if the exchange rates vary beyond this range then the central bank responds to bring the value back within the range.

·         In managed floating exchange regime, if a currency is valued above its range, then the central bank will sell some of its currency from the reserve so by increasing the supply of their currency in the foreign market, the value of the currency will decrease.

·         In Managed floating regime, there is sterilized intervention. Consider the case of India- suppose Rupee is appreciating, then the central bank i.e. RBI would intervene in the market and buy USD from the foreign exchange thus strengthening the dollar and weakening the rupee. This is done mainly so that the exporter does not suffer loss because of the change in the exchange rate. In doing this, RBI has increased the rupee supply leading to inflation. In order to contain that, RBI will suck out the liquidity it infused due to its dollar buying by issuing government bond, raising CRR, etc. This is sterilized intervention by the RBI. It is observed in economies adopting managed floating exchange rates

Free Float:

·         Free Floating exchange rate regime is a system where the central bank of the country does not interfere with the exchange rate and allows the foreign exchange market to affect the exchange rates.

·         The supply and demand for the particular currency in the foreign exchange market will decide the exchange rate.

·         In a floating regime, central banks are extremely reluctant to interfere with the exchange rate unless and until it is absolutely necessary.

·         The exchange rate will show a lot of short-run volatility with ups and downs from day to day.

·         The free floating nature of the exchange rate acts as an economic stabilizer in response to market forces. For example: Consider that the currency of a country depreciates because their imports are more than their exports. On account of the depreciating currency, the exports of this country will become cheaper and import will become costlier. Since the exports have become cheaper, the quantity demanded for exported products will increase. Also due to costlier imports, the quantity of imported products demanded will decrease.

·         The country requires lesser foreign exchange reserves as compared to a country following fixed exchange rate system. It is mainly because the central bank does not interfere with the foreign exchange rates using their reserves.

·         The negative point for this kind of exchange rate system is that the exporters and importers of the country need to indulge in hedging in order to protect their investments from the changes in the foreign exchange rates.

·         Floating rate systems will give rise to speculations. So speculations will be an inherent part of the floating exchange rate systems.

Example: Germany, France and UK are some of the economies following free floating exchange rate regime.

Marketing to Millennials

Investopedia defines marketing as “the activities of the company associated with buying and selling of a product or service” and then there are thousand other ways of defining the term. So even I decided to develop my own definition of marketing, I define it as “a science of transforming ideas into a product or a service and art of pricing, distributing and promoting product”.

Each generation of consumer has their Generational characteristics and these characteristics have substantial effect on market. Millennials is the termed coined to refer to the generation which will form half of the consumer base of the world over next ten years. Generally generation of people born between early 1980 to early 2000 are referred as ‘Millennials’, also known as ‘Gen Y’. According to research conducted by Boston Consulting Group, Millennials engage with brands far more extensively than the any previous generation. Technology and social media allows this generation to interact with brands and each other in entirely different way than that of ‘Boomer’ and ‘Gen-Xers’.

Millennials are expected to have direct annual spending capacity of around $1.3 trillion, which suggest brands must focus on them. They are highly engaged in digital world and social media, hence can influence purchasing decisions of others. This makes it must for marketers to develop millennial-focused marketing strategy. Like other generations, Millennials too have unique generational characteristics which can be utilized to target them more effectively.

Me being millennial myself, here is my advice for effective marketing to Millennials:

Effective use of social media

Millennials are considered as social media addict and digital generation. They have embraced the concept of liking and sharing. Hence social media platform is considered as safe bet to market your product in today’s scenario. But more insightful research on Millennials social media behavior suggests that they tend to ignore ads that they encounter while using social media platforms like Twitter and Facebook. According to one of the research conducted by SocialChorus, an American media agency, only 6% people trust the online ads that they encounter on social media platform. Then the questions arises how to utilize this platform for marketers advantage. Unfortunately many of the brands around the world are still struggling to utilize this platform for effective and efficient marketing.

While using social media platform for marketing one must keep in mind that this generation desires privacy and they do like to share their experiences. Marketer must not do anything which will interfere with consumer’s privacy at the same time must utilize their habit of sharing by giving them the best possible experience with your products and services so that they would share their stories about the product with the world. A post about your company’s product or service can inspire user’s friends to give a try to your product or services. This is really important aspect of marketing these days as there is no better marketing than word of mouth.

Engage your customers

Having their own Facebook pages, Twitter accounts is must for brands these days. Also it is necessary that companies have market specific social media platform pages to target specific market at specific time. These accounts plays important role in engaging consumers. Successful brands don’t just focus on bottom lines but they intend to build relationship with their consumers and social media platform helps them build relationship effortlessly.

Millennials wants to have their say right from product development stage, till how it is delivered to them and how they want to get serviced. This is the unique trait which is been seen in the Millennials around the world. If you engage them in the product development stage this will generate affection towards your product and help you get that extra attention and free publicity. The successful brands are those who listen to their consumers hence listening to your consumer right from the development stage will surely give companies an edge over the competitors.   

Reviews, feed-backs and prompt action on issues

Millennials trust personal recommendation more over any exciting advertisement or great marketing campaign. They tend to believe more in review written on social media sites or e-commerce sites where purchase is made. This provides great opportunity for companies to utilize this trait of millennial by encouraging customers to share product purchase and product reviews on social media. Make sure you address their queries promptly or they will use same platform to scrutinize you and it may damage brand image.

In today’s scenario brands must seek inputs from the customers and as it makes them feel valued. Companies must provide platform to customers to share their product purchase and reviews, integrate such platforms with social media to make the process of receiving feed-backs and reviews user friendly and effortless. The brand which manages to engage with customers frequently, can transform them into effective brand ambassadors.

Be a brand Millennials love to associate with

Research has shown that Millennials are typically socially conscious generation and they are philanthropic in nature. Basically they love and appreciate the idea of giving back to society and seek to associate with people or brands that shares the same views or values. They care for environment and social issues and look for opportunities to involve in such activities. So if brands is involved in social activities and projecting similar image, then there is a good chance that Millennials will love to engage with your brand and support it. This activity is going to affect the bottom line of the company in long term.

Be Transparent

Trust is the key for any successful relationship, same principle applies to business and customer relationship. Millennials are not just expecting you to deliver them what they want but they expect transparency in the entire product life-cycle. Company trying to be secretive about their activities would find it difficult to gain trust of Millennials. Companies must engage them on social media and share companies news, company values with the customers. This create good brand image and sense of trust among the customers towards the organization. So to gain their confidence companies must engage with them on directly.

Viral marketing content

Create viral and intriguing content that consumer can relate to and utilize that social sharing urge of Millennials to spread it. This is the most cost effective way of marketing. This generates curiosity about your brand among masses.

Be creative

Millennials are being judged on their creativity so they will judge the others on the same line. Companies need to be more creative to be relevant in the market. Creativity is something which each generation is expecting from the brands, but Millennials needs creativity on regular basis, even if innovations are frugal that’s fine but has to be there or within short span of time, your brand may become irrelevant. It is basically “be innovative or be ignored”.

Hence to thrive and grow as the next generation of consumers comes of age, marketers must harness social media, create and project a positive brand image and catch their attention. Marketers must make efforts to turn next generation of consumers into their brand ambassadors.

Customer Service – a tool to build a sustainable brand

Jeff Bezos referred to as ‘The Everything Man’ of Amazon has famously said that” your brand is what other people say about you when you are not in a room”. This is the most lucid way to define “Brand”. Markets today are extremely competitive, customers have thousands of offering in same product category, and it is hard to differentiate a product among several others. Then how customers decide on, what to choose among hundreds of products, how to reduce the problem of plenty, that is where concept of “Brand” comes into the picture. Brand helps companies to stand out among competitors.

There is a misconception that branding or stigmatization is result of extensive and excellent marketing, but it isn’t. Marketing is one facet which helps you create a brand but to build an aura around your brand and to sustain it all that is required is a good quality product. The real brand has its heart and soul in quality product if you spend too much on marketing of a not so up to the mark product it won’t yield you desired result. Hence a right product, at right price at right place is necessary for creation of a brand.

Consumer behavior has modified dramatically over past pair of decades, Consumers have become more demanding & exacting and are making well researched buying decisions. To adapt to present modifications in market, corporations must spend strategically on advertisement of the product and concentrate more on product itself. In today’s scenario creating a great product can help you minimize your advertisement cost. This is the era of social media, where ‘word of mouth’ is best way to market your product. Customers don’t simply expect nice product from corporations however they expect nice pre-sales and post sales service from the businesses. It’s not just a great product but all these factors like how you service your customers, how you value them, creates a protracted brand image. Customer service has always been integral part of brand building.

Over last one decade this generation has experienced a wave of digitization. Social media has become integral part of life of current generation. Research has shown that this generation has a unique trait of sharing most of their life events on social media and this trait presents a great opportunity to marketers. Rise of Social media has been instrumental in providing platform for everyone to be a broadcaster. Everyone today has internet connection, mobile and social media account. A person can broadcast any event that he or she is experiencing in flick of a second, and it can be viewed by all of his social media followers, posted- reposted on other social platforms and may go viral. This is why quality product and excellent customer service holds the key for success in current market.

While writing about this article, I just happen to google about the greatest of customer service examples or how customer service can affect the image of the brand and there I found one very fascinating story about “Morton’s- The Steak House”. This story is about the amazing experience of an American author/ blogger Peter Shankman, which he posted on his official website shankman.com. As a regular day in his life, Mr. Peter Shankman has had terribly busy day, he was scheduled to travel during dinner time and was feeling damn hungry so while plane was about to take off, he jokingly twitted “Hey @Morton’s can you meet me airport with porterhouse when I land in two hours? K, thanks. J”. But to his surprise when he landed at Newark airport, a man from Morton’s dressed in tuxedos was awaiting Mr. Shankman with porterhouse that Mr. Shankman had just wished for. This was so thrilling experience for the Peter, that he went on to share his experience on his official website and end up receiving thousands of replies on his twitter. Mr. Shankman was Morton’s fairly regular customer, and he had more than 10K followers on twitter. May be Morton’s did it deliberately knowing about the influence that Mr. Shankman had on social media or maybe they just did it because they care for their customers whatever may be the reason, but at the end of the day Morton’s managed to gain on life time customer and more importantly an influential brand ambassador. When Mr. Shankman shared his story with the world, in the comment section of the same post there were many others who shared their experiences regarding Morton’s. One can imagine what kind of efforts Morton’s might have put forward to cater to the need of their customer, it definitely involves great efforts of Morton’s alert & energetic social media team and complex logistics.

Now after reading this, if you happen to visit United States of America, there are good chances that out of curiosity you might love to check out Morton’s steak house. This is what a great customer service can do for a brand. Morton’s twitter activeness and customer service went viral and generated large amount of name substance. Morton’s is a great example how social media or viral content can build up a brand in short time. However same social media tools can knock down any brand in even shorter time. Social media combined with ‘experience sharing’ traits of this generation can act as a double edge sword for any brand.

The very successful businesses acquire customers ‘organically’ without much advertising. In this digital era, Quality product and word of mouth drives the sales at all the best businesses around the world. Businesses concentrating more on advertising are losing the edge these days. Customer service has become essential part of all the businesses around the world and it must be treated as core competence in every business. It is cumbersome and costly affair to acquire new customer but relatively easy to maintain existing customer and in the process of retaining the existing customer if you manage to satisfy them efficiently there are bright chances that, existing customer might refer your brand to someone and bring in new customers to you. Actually good customer service is an art of making your customer feel valued and who on earth don’t love being valued. So it is always advisable to have outstanding customer service to stay in the competition as it simply makes transition from good company to a great one a lot smoother.

Musing On Inflation

Hola amigos, I am Suraj here with my bestie Roshni. She is a first year management student who wants to specialize in finance. She is very curious about finance, economics and hundred other things. When we were sipping up coffee in the café, she suddenly popped up with a question “what is inflation?” Being from an engineering background Roshni is very good with technical and technological stuff, but she wasn’t so clear with the concept of inflation but fortunately I had some idea about the topic and so I started sharing what I knew.

Firstly I gave her the basic definition of inflation which goes as follows,

Inflation is a general rise in the price levels of the goods and services. Example: consider you were buying 1 kg of sugar for ₹40 last year, and this year you are paying ₹45 for 1 kg of sugar then there is a rise in the price level of sugar, this is nothing but inflation.

After explaining, I took a great sigh of relief as I thought I had managed to quench her thirst for knowledge. After understanding the definition, my innocent friend nodded her head and said confidently “Oh so inflation is not good for an economy”. And I corrected her “No, not really”.  She asked me “Why not, Can you elaborate dear?” I looked at her, smiled and continued…. moderate inflation is actually boon for an economy…

There is positive correlation between inflation and interest rates. If inflation is moderate between 3-4 % then it incentivizes the people who are hoarding money to purchase goods or services or to invest in assets, as moderate inflation signifies moderate rise in the prices of goods, services and assets. Generally banks have savings interest rates slightly above inflation, so if inflation is moderate, say between 2-4% then banks may give interest of 5-6% to its customers who are depositing money in the banks. Through banks this deposited money can be lent to entrepreneurs or businesses to invest in businesses or to households for their personal needs, this in turn gives a necessary push to the economy and money keeps flowing in the economy itself. As businesses invest more money in their business, it creates more jobs and helps in raising the wages and salaries of existing employees. This helps to increase the buying power of consumers, which causes demand to increase and as the demand increases, there is rise in the prices of the commodities and the cycle continues. Hence moderate inflation is a necessary catalyst which is essential for sustained growth of economy.

Note:  Currently inflation in Europe and USA is nearly zero, hence interest rates in those economies is also nearly zero. So there is no incentive as such for the people there to keep money in the banks, which creates problem in the smooth flow of money in the economy and ultimately results in slow growth.