Economic Survey 2015-16 doubts

Chomuphilosopher

Please clear my doubt.

1.23 The risks merit serious attention not least because major financial crises seem to be occurring more frequently. The Latin American debt crisis of 1982, the Asian Financial crisis of the late 1990s, and the Eastern European crisis of 2008 suggested that crises might be occurring once a decade. But then the rapid succession of crises, starting with Global Financial Crisis of 2008 and proceeding to the prolonged European crisis, the mini-crises of 2013, and the China provoked turbulence in 2015 all hinted that the intervals between events are becoming shorter.
1.24 This hypothesis could be validated in the immediate future, since identifiable vulnerabilities exist in at least three large emerging economies—China, Brazil, Saudi Arabia—at a time when underlying growth and productivity developments in the advanced economies are soft (see Box 1.2). More flexible exchange rates, however, could moderate full-blown eruptions into less disruptive but more prolonged volatility.

Please explain this mechanism. Thanks.

IWRA12

Please clear my doubt.

1.23 The risks merit serious attention not least because major financial crises seem to be occurring more frequently. The Latin American debt crisis of 1982, the Asian Financial crisis of the late 1990s, and the Eastern European crisis of 2008 suggested that crises might be occurring once a decade. But then the rapid succession of crises, starting with Global Financial Crisis of 2008 and proceeding to the prolonged European crisis, the mini-crises of 2013, and the China provoked turbulence in 2015 all hinted that the intervals between events are becoming shorter.
1.24 This hypothesis could be validated in the immediate future, since identifiable vulnerabilities exist in at least three large emerging economies—China, Brazil, Saudi Arabia—at a time when underlying growth and productivity developments in the advanced economies are soft (see Box 1.2). More flexible exchange rates, however, could moderate full-blown eruptions into less disruptive but more prolonged volatility.

Please explain this mechanism. Thanks.

Containing the devaluation/ appreciation of domestic currency only delays the "eruptions"(market crash, depression, volatility etc), flexible exchange rate will align it with market forces, it will prevent a full blown eruption.

Chomuphilosopher

@Captain_Peroxide @IWRA Thanks

PurpleIce

http://www.treasury.gov.au/PublicationsAndMedia/Publications/2010/Monetary-and-exchange-rate-policy/working-paper-2010-05/External-shocks-and-flexible-exchange-rates

manish gupta1

If anyone could throw some light on Volume 1 Chapter 1
1.71 For a start, a reduction in the fiscal deficit – even to one somewhat higher than 3.5 percent of GDP – implies a lower net bond issue, relative to GDP. And banks might actually be eager to purchase additional G-secs, since falling oil prices could lead to lower inflation, which could then lead to lower interest rates and capital gains on their holdings. At the same time, foreign portfolio investors might also increase their purchases, since the RBI has been relaxing the limits on their G-sec investments. Conversely, if foreign inflows prove small, the RBI itself may need to buy G-secs to assure an adequate increase in money supply. Finally, if demand proves weak the government can always scale back its bond issues and instead run down its ample cash balances.

My doubts:
1. Only in the above paragraph i.e. 1.70 it is mentioned that banks’ appetite for additional bond issues might seem to be limited. So why would they eager to be buy additional gsecs? I didnt get the explanation they provided.
2. if foreign inflows prove small then RBI would have to buy - how is fiscal consolidation getting done in this?
3. Govt. can anytime run down its ample cash balances - what does that mean?