Beruflich Dokumente
Kultur Dokumente
I, hereby declare that this Project Report titled FOREIGN EXCHANGE RATE
DETERMINATION AND ANALYSIS submitted by me to the Department of Business
Management M.V.S.R Engineering College, Nadergul, Rangareddy dist. is bonafide work
undertaken by me and it is not submitted to other University or Institution for the award of any
degree/diploma/certificate or published any time before.
I express my grateful thanks to Dr. M SREE RAMA DEVI, Head of Department of Business
Management, M.V.S.R Engineering College, Nadegul, Hyderabad.
I express my hearty thanks to all my respondents for their support in my project and all the
faculty members, librarians, friends, and others who had helped me in completing my project
successfully.
CHAPTER – I
INTRODUCTION
CHAPTER – I
INTRODUCTION
I. Introduction
the foreign exchange market is the market where the currency of one country is exchanged for
that of another country and where the rate of exchange is determined the genesis of foreign
exchange market can be traced to the need for foreign currencies arising from:
1. International trade
2. Foreign investment
3. Lending to and borrowing from foreigners
1.2.i. Objectives
To discuss the process of foreign exchange rate determination and factors affecting the
currency exchange rates.
To analyze the exchange rates between US dollar and Indian rupee for the period 2016-
2018.
To find out reasons for fluctuations in exchange rates of US dollar and Indian rupee for
the period 2016-2018
In this study exchange rates of US dollar and Indian Rupee are considered as US dollar is a
global currency and Indian Rupee was fluctuating highly with regard to US $.The reasons for
fluctuations are discussed in detail.
In this project only macro economic factors such as interest rates, inflation rates, current account
deficit, terms of trade, political stability, recession are considered
This study will be helpful in understanding the spot exchange rate of currencies and their
fluctuations.
.
4. Sources of data collection
5. Techniqes of analysis
The system of Bretton woods worked satisfactorily for many years but difficulties started from
1958 when the trade balances of the USA became highly negative and a very large amount of US
dollars was held outside the USA; it was more than the total gold holdings of the USA.
Anticipating a devaluation of the US dollar, speculators bought gold while other governments
demanded conversion of US dollars into gold.
To remedy this situation, a “gold pool” was established with the cooperation of the UK, France,
Germany, Italy, Belgium, Netherlands, Switzerland .the gold pool was used to sell gold to
maintain its price at $35 per ounce. In return, the USA was expected to improve its external
trade.
But since the US could not reduce its trade deficit, some of the European countries started
demanding again for conversion of their dollar holdings into gold. Finally, the “gold pool”
arrangement broke down. Eventually, a series of devaluations and speculations lead to breaking
down of the fixed rate system of Bretton wood system. On 15 august, 1971 president Nixon of
the USA suspended the system of convertibility of gold and dollar. For some time, the system of
fixed rate with an adjustment margin of ±2.5% was tried but did not work. Finally the fixed rate
system was abandoned and the floating rate system came into effect.
In December, 1971 the Smithsonian agreement was signed at Washington its major features were
Devaluation of the dollar and the revaluation of the other countries currencies; gold
passed from $35 per ounce to $38
New fluctuations margins; changing from ±1% to ±2.25%;
Non convertibility of the dollar.
In 1973 another devaluation of the dollar took place petrol shock added to the
international monetary crisis exchange rates became volatile.
In 1976, Jamaica agreements were signed focusing on the:
Legalization of the floating exchange rate
Demonetization of gold as the currency of reserves.
Thus, the part of quota which was hitherto required to be deposited in the gold could be
deposited in foreign exchange. At the same time, the IMF sold one-third of its gold reserves.
In 1977 and 1978 in the wake of inflation in the USA, the dollar further depreciated. The Federal
Reserve practised a strict monetary policy. Between 1980 and 1985, the dollar appreciated but at
the same time the American BOP situation deteriorated.
Now, the members of G-7 meet from time to time to coordinate the policies so that the exchange
rate stability can be maintained. But, this coordination is not always successful. Nevertheless,
their meeting regularly has an effect of avoiding protectionist tendencies on the part of any one
or more of them.
2.2 DIFFERENT TYPES OF EXCHANGE RATE SYSTEMS
International Monetary Fund (IMF) identified different exchange rate system followed in
different countries across the world. IMF has outlined eight exchange rate system followed by
the countries in the world which are as follows
2. Currency board
5. Crawling peg
6. Crawling band
7. Managed float
Example: Micronesia and San Marino selects other country’s currency as legal tender
2. Currency Board
Central bank of the country assures the conversion of domestic currency into particular foreign
currency for a specified number of units at any time . for this purpose central bank should hold
foreign exchange reserves in the selected foreign currency
When the holders of domestic currency loses confidence in it as a medium of exchange due to
uncontrollable inflation, government debt and recession, then the government decides to adopt a
“Currency Board” which revives faith in the domestic currency
Example:
Face value of the domestic currency is set in accordance with the selected foreign
currency. This face value does not change and remains constant. The exchange rate changes
within a range (i.e., ±1% of the face value) fixed exchange rate is also known as pegged
exchange rate.
Pegged exchange rate with a horizontal base in an exchange rate system in which the
fluctuations in the exchange rates are manufactured by central bank within a specified range or
not specified range. The specified band can be one sided or a narrow range or a broad range.
5. Crawling peg:
The face value of the domestic currency is adjusted in accordance with the selected foreign
currency and is readjusted periodically as per the predetermined criteria like the change inflation.
The main advantage of the crawling peg is that it responses immediately to the market value
of the domestic currency.
6. Crawling band:
Crawling band is the domestic currency which is on crawling peg and is maintained within a
range.
7. Managed float:
Monetary authorities under this system affect the exchange rate either by direct or indirect
intervention without defending the target exchange rate.
8. Independent float:
Independent float is also known as free float or clean float. Market forces determines the flexible
exchange rate that allows faster adjustments and shows changes in the macroeconomic factors
like changes in inflation rate, growth rate and interest rate. There is higher variability in the short
run as well as in long run exchange rate.
The major disadvantage of this system is that the exchange rare risk is increased due to the
floating exchange rate. This makes the forecasting of exchange rates significant and complicated
issue.
A Foreign exchange market is a market in which currencies are bought and sold. It is to be
distinguished from a financial market where currencies are borrowed and lent.
General Features
Foreign exchange market is described as an OTC (Over the counter) market as there is no
physical place where the participants meet to execute their deals. It is more an informal
arrangement among the banks and brokers operating in a financing centre purchasing and selling
currencies, connected to each other by telecommunications like telex, telephone and a satellite
communication network, SWIFT. The term foreign exchange market is used to refer to the
wholesale a segment of the market, where the dealings take place among the banks. The retail
segment refers to the dealings take place between banks and their customers.
The retail segment refers to the dealings take place between banks and their customers. The retail
segment is situated at a large number of places. They can be considered not as foreign exchange
markets, but as the counters of such markets. The leading foreign exchange market in India is
Mumbai, Calcutta, Chennai and Delhi is other centers accounting for bulk of the exchange
dealings in India. The policy of Reserve Bank has been to decentralize exchanges operations and
develop broader based exchange markets. As a result of the efforts of Reserve Bank Cochin,
Bangalore, Ahmadabad and Goa have emerged as new centre of foreign exchange market.
Size of the Market
Foreign exchange market is the largest financial market with a daily turnover of over USD 2
trillion. Foreign exchange markets were primarily developed to facilitate settlement of debts
arising out of international trade. But these markets have developed on their own so much so that
a turnover of about 3 days in the foreign exchange market is equivalent to the magnitude of
world trade in goods and services. The largest foreign exchange market is London followed by
New York, Tokyo, Zurich and Frankfurt. The business in foreign exchange markets in India has
shown a steady increase as a consequence of increase in the volume of foreign trade of the
country, improvement in the communications systems and greater access to the international
exchange markets. Still the volume of transactions in these markets amounting to about USD 2
billion per day does not compete favorably with any well developed foreign exchange market of
international repute. The reasons are not far to seek. Rupee is not an internationally traded
currency and is not in great demand. Much of the external trade of the country is designated in
leading currencies of the world, Viz., US dollar, pound sterling, Euro, Japanese yen and Swiss
franc. Incidentally, these are the currencies that are traded actively in the foreign exchange
market in India.
24 Hours Market
The markets are situated throughout the different time zones of the globe in such a way that
when one market is closing the other is beginning its operations. Thus at any point of time one
market or the other is open. Therefore, it is stated that foreign exchange market is functioning
throughout 24 hours of the day. However, a specific market will function only during the
business hours. Some of the banks having international network and having centralized control
of funds management may keep their foreign exchange department in the key centre open
throughout to keep up with developments at other centers during their normal working hours In
India, the market is open for the time the banks are open for their regular banking business. No
transactions take place on Saturdays.
Efficiency
Developments in communication have largely contributed to the efficiency of the market. The
participants keep abreast of current happenings by access to such services like Dow Jones
Telerate and Teuter. Any significant development in any market is almost instantaneously
received by the other market situated at a far off place and thus has global impact. This makes
the foreign exchange market very efficient as if the functioning under one roof.
Currencies Traded
In most markets, US dollar is the vehicle currency, Viz., the currency used to denominate
international transactions. This is despite the fact that with currencies like Euro and Yen gaining
larger share, the share of US dollar in the total turn over is shrinking.
Physical Markets
In few centers like Paris and Brussels, foreign exchange business takes place at a fixed place,
such as the local stock exchange buildings. At these physical markets, the banks meet and in the
presence of the representative of the central bank and on the basis of bargains, fix rates for a
number of major currencies. This practice is called fixing. The rates thus fixed are used to
execute customer orders previously placed with the banks. An advantage claimed for this
procedure is that exchange rate for commercial transactions will be market determined, not
influenced by any one bank. However, it is observed that the large banks attending such
meetings with large commercial orders backing up, tend to influence the rates
Participants
1. Corporates
The business houses, international investors, and multinational corporations may operate in the
market to meet their genuine trade or investment requirements. They may also buy or sell
currencies with a view to speculate or trade in currencies to the extent permitted by the exchange
control regulations. They operate by placing orders with the commercial banks. The deals
between banks and their clients form the retail segment of foreign exchange market. In India the
foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations,
2000 permits retention, by resident, of foreign currency up to USD 2,000. Foreign Currency
Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000
requires a resident in India who receives foreign exchange to surrender it to an authorized dealer:
(a) Within seven days of receipt in case of receipt by way of remuneration, settlement of lawful
obligations, income on assets held abroad, inheritance, settlement or gift: and
2. Commercial Banks
Commercial Banks are the major players in the market. They buy and sell currencies for their
clients. They may also operate on their own. When a bank enters a market to correct excess or
sale or purchase position in a foreign currency arising from its various deals with its customers, it
is said to do a cover operation. Such transactions constitute hardly 5% of the total transactions
done by a large bank. A major portion of the volume is accounted buy trading in currencies
indulged by the bank to gain from exchange movements. For transactions involving large
volumes, banks may deal directly among themselves. For smaller transactions, the intermediation
of foreign exchange brokers may be sought.
3. Exchange Brokers
Exchange brokers facilitate deal between banks. In the absence of exchange brokers, banks have
to contact each other for quotes. If there are 150 banks at a centre, for obtaining the best quote
for a single currency, a dealer may have to contact 149 banks. Exchange brokers ensure that the
most favorable quotation is obtained and at low cost in terms of time and money. The bank may
leave with the broker the limit up to which and the rate at which it wishes to buy or sell the
foreign currency concerned. From the intends from other banks, the broker will be able to match
the requirements of both. The names of the counter parities are revealed to the banks only when
the deal is acceptable to them. Till then anonymity is maintained. Exchange brokers tend to
specialize in certain exotic currencies, but they also handle all major currencies.
In India, banks may deal directly or through recognized exchange broker. Accredited exchange
broker are permitted to contract exchange business on behalf of authorized dealers in foreign
exchange only upon the understanding that they will confirm to rate, rules and conditions laid
down by the FEDAI .All contracts must bear the clause “subject to the rules and regulations of
the foreign exchange dealers association of India”.
4. Central banks
Central bank may intervene in the market to influence the exchange rate and change it from that
would result only from private supplies and demand the central bank may transact in the market
on its own for the above purpose. Or, it may do so on behalf of the government when it buys or
sell bonds and settles other transactions which may involve foreign payments and receipts.
In India, authorized dealers have recourse to Reserve Bank to sell/buy US dollars to the extent
the latter is prepared to transact in the currency at the given point of time. Reserve Bank will not
ordinarily buy/SELL any other currency from/to authorized dealers. The contract can be entered
into on any working day of the dealing room of Reserve Bank. No transaction is entered into on
Saturdays. The value date for spot as well as forward delivery should be in conformity with the
national and international practice in this regard.
Reserve Bank of India does not enter into the market in the ordinary course, where the
exchanges rates are moving in a detrimental way due to speculative forces, the Reserve Bank
may intervene in the market either directly or through the State Bank of India
5. SPECULATORS
Central banks, commercial banks, corporate and individuals who undertake activity of buying
and selling of foreign currencies for booking short term profits by taking advantage of exchange
rate moments are known as speculators. They play a very important and active role in the foreign
exchange market. In fact a major junk of foreign exchange dealings in the market is due to
speculative activities.
Direct quotes:
The direct quote is one in which the home currency fluctuates and the foreign currency against
which it is quoted remains constant
Note that on one day the exchange rate could be Rs 44/USD, the next day it is Rs 44.30/USD,
and the third day it could be Rs 44.40/USD. The home currency fluctuates each day against the
dollar and denoted by H/F
Indirect quote:
The indirect rate is one in which the foreign currency fluctuates and the home currency remains
constant
Example: consider the POUND/US dollar which is an indirect rate when the pound is the home
currency. The dollar will change from day to day. Thus exchange rate on three successive days
may be
Day1:1£/1.02USD
Day2:1£/1.03USD
Day3:1£/1.04USD
Cross rate:
a cross rate is the exchange rate between two currencies that are each expressed in terms of a
third currency the third currency is called the vehicle currency. Suppose there are three
currencies A, B and C. currency B is expressed in terms of A, and currency C is also expressed
in terms of A. therefore currency A is the vehicle currency. But currency B and C are not
expressed in terms of each other. a cross rate is the exchange rate between currency B and
C,using the exchange rates between currencies A and B and currencies A and C
B/C=B/A*A/C
a two way quote is that specifies the exchange rate at which an authorized dealer stands ready to
buy and sell the foreign currency in a currency pair
Two way quote in direct exchange rate : Consider the following example
The rupee/ Canadian dollar rate (INR/CND) given by bank A is INR 33.77-33.79 /CND. This is
a two way quote and direct quote because domestic currency is quoted against a fixed amount of
foreign currency. The quote can also be expressed as INR 33.77/33.79=1CND. The first rate
(INR 33.77)is the bid rate and second rate (INR 33.79)is the ask rate . the rates are interpreted as
1. Rs 33.77 is the rate at which bank A is ready to buy the CND. For every CND it buys, it is
prepared to give Rs 33.77 in exchange. This is called buying rate or bid rate
2. Rs 33.79 is the rate which bank A is ready to sell the CND. For every CND it sells it wants Rs
33.79 in exchange. This is called the selling or ask rate (or offer rate)
3. The bid –ask spread is ask rate minus bid rate (33.79-33.77=Rs 0.02)
In indirect quote, the home currency remains constant when the exchange rate changes but the
foreign currency varies. In an indirect quote, the bid rate is the rate at which an authorized dealer
is ready to buy the currency that is constant (currency H). The ask rate is the rate at which an
authorized dealer is ready to buy the currency that is constant (currency H)
The bid rate is $1.13/£ and the ask rate is $1.12/£ how is this interpreted?
1. One pound is the rate at which bank A is ready to buy $1.13. or conversely, for every
$1.13 it buys , it is prepared to give one pound in exchange , $1.13is called the buying
rate or bid rate
2. One pound is the rate at which bank A is ready to sell $1.12. or conversely, for every
$1.12 it sells,it is prepared to get one pound in exchange. $1.12 is called the selling rate
or ask rate (or offer rate)
3. Bid ask spread =bid rate –ask rate =1.13-1.12=$0.01
Spot rate:
The spot rate is the single outright transaction involving the exchange of two currencies at a rate
agreed on the date of the contract, for value or delivery (cash settlement) within two business
days. The day that deal is struck is called the ‘Trade date’, and the day that the exchange of
currencies in the currency pair takes place is called the ‘Value Date ‘or Settlement Date.
Forward rate:
The forward rate is a transaction involving the exchange of two currencies at a rate agreed on the
date of the contract for value or delivery at some time in future (more than two business days)
FACTORS INFLUENCING EXCHANGE RATES
Balance of Payments
Balance of Payments represents the demand for and supply of foreign exchange which ultimately
determine the value of the currency. Exports, both visible and invisible, represent the supply side
for foreign exchange. Imports, visible and invisible, create demand for foreign exchange. Put
differently, export from the country creates demand for the currency of the country in the foreign
exchange market. The exporters would offer to the market the foreign currencies they have
acquired and demand in exchange the local currency. Conversely, imports into the country will
increase the supply of the currency of the country in the foreign exchange market. When the
balance of payments of a country is continuously at deficit, it implies that the demand for the
currency of the country is lesser than its supply. Therefore, its value in the market declines. If the
balance of payments is surplus continuously it shows that the demand for the currency in the
exchange market is higher than its supply therefore the currency gains in value
Inflation
Inflation in the country would increase the domestic prices of the commodities. With increase in
prices exports may dwindle because the price may not be competitive. With the decrease in
exports the demand for the currency would also decline; this in turn 17would results in the
decline of external value of the currency. It may be noted that unit is the relative rate of inflation
in the two countries that cause changes in exchange rates. If, for instance, both India and the
USA experience 10% inflation, the exchange rate between rupee and dollar will remain the same.
If inflation in India is 15% and in the USA it is 10%, the increase in prices would be higher in
India than it is in the USA. Therefore, the rupee will depreciate in value relative to US dollar.
Empirical studies have shown that inflation has a definite influence on the exchange rates in the
long run. The trend of exchange rates between two currencies has tended to hover around the
basic rate discounted for the inflation factor. The actual rates have varied from the trend only by
a small margin which is acceptable. However, this is true only where no drastic change in the
economy of the country is. New resources found may upset the trend. Also, in the short run, the
rates fluctuate widely from the trend set by the inflation rate. These fluctuations are accounted
for by causes other than inflation
Interest Rate
The interest rate has a great influence on the short – term movement of capital. When the interest
rate at a centre rises, it attracts short term funds from other centers. This would increase the
demand for the currency at the centre and hence its value. Rising of interest rate may be adopted
by a country due to tight money conditions or as a deliberate attempt to attract foreign
investment. Whatever be the intention, the effect of an increase in interest rate is to strengthen
the currency of the country through larger inflow of investment and reduction in the outflow of
investments by the residents of the country
Money Supply
An increase in money supply in the country will affect the exchange rate through causing
inflation in the country. It can also affect the exchange rate directly. An increase in money
supply in the country relative to its demand will lead to large scale spending on foreign goods
and purchase of foreign investments. Thus the supply of the currency in the foreign exchange
markets is increased and its value declines. The downward pressure on the external value of the
currency then increases the cost of imports and so adds to inflation. The effect of money supply
on exchange rate directly is more immediate than its effect through inflation. While in the long
run inflation seems to correlate exchange rate variations in a better way, in the short runexchange
rates move more in sympathy with changes in money supply. 18 One explanation of how
changes in money supply vary the exchange rate is this; the total money supply in the country
represents the value of total commodities and services in the country. Based on this the outside
world determines the external value of the currency. If the money supply is doubles, the currency
will be valued at half the previous value so as to keep the external value of the total money stock
of the country constant. Another explanation offered is that the excess money supply flows out
of the country and directly exerts a pressure on the exchange rate. The excess money created, the
extent they are in excess of the domestic demand for money, will flow out of the country. This
will increase the supply of the currency and pull down its exchange rate.
National Income
An increase in national income reflects increase in the income of the residents of the country.
This increase in the income increases the demand for goods in the country. If there is
underutilized production capacity in the country, this will lead to increase in production. There is
a chance for growth in exports too. But more often it takes time for the production to adjust to
the increased income. Where the production does not increase in sympathy with income rise, it
leads to increased imports and increased supply of the currency of the country in the foreign
exchange market. The result is similar to that of inflation, viz., and decline in the value of the
currency. Thus an increase in national income will lead to an increase in investment or in
consumption, and accordingly, its effect on the exchange rate will change. Here again it is the
relative increase in national incomes of the countries concerned that is to be considered and not
the absolute increase
Resource Discoveries
When the country is able to discover key resources, its currency gains in value. A good example
can be the have played by oil in exchange rates. When the supply of oil from major suppliers,
such as Middles East, became insecure, the demand fro the currencies of countries self sufficient
in oil arose. Previous oil crisis favored USA, Canada, UK and Norway and adversely affected the
currencies of oil importing countries like Japan and Germany. Similarly, discovery oil by some
countries helped their currencies to gain in value. The discovery of North Sea oil by Britain
helped pound sterling to rise to over USD 2.40 from USD 1.60 in a couple of years. Canadian
dollar also benefited from discoveries of oil and gas off the Canadian East Coast and the Arctic.
Capital Movements
Capital movements there are many factors that influence movement of capital from one country
to another. Short term movement of capital may be influenced buy the offer of higher interest in
a country. If interest rate in a country rises due to increase in bank rate or otherwise, there will be
a flow of short term funds into the country and the exchange rate of the currency will rise.
Reverse will happen in case of fall in interest rates.
Bright investment climate and political stability may encourage portfolio investments in the
country. This leads to higher demand for the currency and upward trend in its rate. Poor
economic outlook may mean repatriation of the investments leading to decreased demand and
lower exchange value for the currency of the country.
Movement of capital is also caused by external borrowing and assistance .Large scale external
borrowing will increase the supply of foreign exchange in the market. This will have a favorable
effect on the exchange rate of the currency of the country. When repatriation of principal and
interest starts the rate may be adversely affected.
Political Factors
Political factors Political stability induced confidence in the investors and encourages capital
inflow into the country. This has the effect of strengthening the currency of the country. On the
other hand, where the political situation in the country is unstable, it makes the investors
withdraw their investments. The outflow of capital from the country would weaken the currency.
Any news about change in the government or political leadership or about the policies of the
government would also have the effect of temporarily throwing out of gear the smooth
functioning of exchange rate mechanism.
Methods Of Forecasting Exchange Forecasting Exchange Rates
Forecasting future exchange rates is virtually necessity for a multinational enterprise , inter alia,
to develop an international financial policy. In, it is useful when the the international firm is to
borrow from or invest abroad. Fore3ign investment decision require forecast pertaining to future
cash flows, which in turn , will need input of host country’s exchange rate. Above all, exchange
rates are decisive in framing hedging policy.
Forecasting the Exchange Rate In Short-Term
Forecasting the exchange rate is one of the moat difficult areas of international finance. The
theories explaining exchange rate variations are not satisfactory to forecast how the rates are
going to evolve. Under the circumstance, therefore, recourse is taken to less than perfect
methods. The following three methods are generally employed for the purpose .
Method of advanced indicators
Use of forward rate as predictor of the future spot rate
Graphical methods
Several indicators are used for prediction of exchange rates. One important indicator widely used
is to determine the ratio of country’s reserve to its imports ,the reserve consists of gold ,foreign
currencies and SDRs. The ratio indicates the number of months(N) imports, covered by the
reserves(R)
N =R/I×12
Let us assume that annual imports of India cost Rs 80 billions and reserves are Rs 30 billions ,the
number of months of imports covered by reserves are
N=(30/80)*12= 4.5months
The general rule that seems to be followed in this regard is that if amounts or reserves is less than
the value of 3 month ‘imports ,the currency is vulnerable and may face devaluation.
RESEARCH METHODOLOGY
Sources of data collection
In 2014, when the BJP came to power, Modi had promised better economic
environment, improved trade and lower inflation. All these promises were met, and
Indian markets saw a fairly good bull run in the following years. But now, the markets
have once again gone bear, coincidently, as BJPs term comes to an end.
On Monday, 21st May, the rupee value hit a 16-month low, opening at 68.12 and is
expected to fall further to 68.35. Analysts at Angel Broking say that this fall and the one
in 2014 can both be attributed to higher oil prices, widening trade deficit, capital
outflows, and the strengthening US economy.
Let’s explore how these factors affect the currency, in detail, and what it spells for the
economy next.
The basic laws of economics state that if demand for the dollar in India exceeds its
supply, then its worth will go up and that of the INR will come down. Clearly, the need
for dollars has risen in India, owing to increased imports for manufacturing. We could, in
part, blame the PM’s ‘Make in India’ policy for this. But the truth is that the rupee
depreciates every few years due to internal and external economic environment. This is
referred to as the economic cycle. see image on left.
The world economy goes through these phases every few years, and the
demand/supply for products, including currency depends on these cycles. Currently, the
world economy is in recession.
The US treasury notes rate at 3.09% is less than half the rate of Indian bonds. Yet, the
former provides safe investments, whereas Indian markets are more volatile and risky.
US investments have thus become more attractive across the world leading.
Capital Outflows:
The effects of the trade deficit and oil prices can be broken if other sections of the
economy are earning dollars. For example, when foreign companies invest in local
companies, it brings in more dollars. Increasing FDIs and FIIs can help the economy
improve India’s balance sheets.
However, Indian capital markets have seen a decrease in investments in the last three
months. Foreign investments stood at one fifth the value of that in the previous year.
The reason for this is the strengthening of US markets and higher bond yields.
Increasing cash flows and reducing the imports are the only ways to improve the value
of our currency. Otherwise, the normal economic cycle will continue and bear runs will
turn into bulls eventually. But who’s to say how much time will that take.
RBI Interference:
When the RBI buys more foreign exchange (FOREX), the rupee’s value depreciates.
This goes in line with the demand/supply point where an increase in the demand for
FOREX leads to lower value of the rupee.
By December 2017, the RBI had bought $5.6 billion in FOREX, the highest purchase
ever. This, of course, led to depreciation of the rupee in 2018. Now the RBI is planning
to sell some of its dollars to prevent the rupee from falling more.
Of course, this will be a profitable sale, as the RBI will get more rupees in return for the
FOREX than it paid when buying them.
The Central Government often indulges in such FOREX policy and it seldom leads to
volatility in the currency.
Now let us understand the reasons behind the depreciation of the Indian rupee against the
dollar currently;
1. Increase in the price of the crude oil: As we all know that India produces just 20%
crude oil of her requirement and rest is imported from the other countries like Iraq, Saudi
Arabia, Iran and other gulf countries. Crude oil is the biggest contributor in the import bill of
India.
According to a January report from energy research and consultancy firm Wood
Mackenzie;The daily fuel demand of India is expected to more than double to 190,000
barrelsin 2018, up from last year’s 93,000 barrels.
As the demand of crude oil is increasing the bill of oil import is also increasing.
Data published by the Petroleum Planning and Analysis Cell (PPAC) points that India’s total
crude oil import bill in the current financial year (2018-2019) is expected to jump 24% to
$109 billion from $88 billion last fiscal year.
Economic survey 2018 estimates that if the price of crude oil increases 10 dollar per
barrel then the GDP of India decreases up to 0.2-0.3 percent.
So increase in the demand of crude oil will be followed by the increasing import bill in the
form of payment of more dollars to oil exporting countries. Hence the demand of dollar will
increase in the Indian market which will reduce the value of Indian rupee.
2. Beginning of trade war between the USA and China: The US President Donald Trump
has initiated the trade war with China and European countries and India and these countries
also retaliated in the same way. So due to this war the price of the imported commodities
will go up which will further increase the outflow of dollar from the Indian market.
As we know that Indian import bill is always greater than its export bill. It means that the
trade war will adversely affect the Indian market and India will also experience the outflow of
US dollar from its domestic market.
3. Increasing Trade Deficit of India: A situation, in which the import bill of a country
exceeds its export bill, is called trade deficit.
Indian merchandise trade deficit of $157 billion in 2017-18 was the widest since 2012-13.
In the FY 2012-13, the country had reported a merchandise trade deficit of $190 billion.
Trade deficit was around was $ 118 billion in the FY 2016.
Its simple mean is; outflow of foreign currency is more from Indian market as compared to
inflow of foreign currency.
As per the law of demand; if the demand of a commodity increases, its price also follows it.
In the same way; when more and more foreign currency i.e. dollar goes out of Indian
market, its domestic price increases and the price of Indian rupee decreases.
4. Out flow of Foreign Currency: It is worth to mention that when the foreign investors find
other attractive markets in the other parts of the world; they pull out their invested money by
selling the equity shares. But they demands the most respected currency or easily accepted
money i.e. dollar. So in such situation the demand of dollar increases which further
increases its price.
Foreign Portfolio Investors (FPIs) have pulled out nearly Rs. 48,000 crore from Indian
capital markets in the first six months of 2018, making it the fastest outflow in a decade.
FPIs withdrew a net sum of Rs. 6,430 crore from equities besides Rs. 41,433 crore from the
debt markets during January-June period of the year, taking the total outflow to Rs 47,836
crore.
5. Atmosphere of Political Uncertainty: As per many surveys; done by the media houses,
the popularity of the current NDA government is decreasing which is creating the
atmosphere of the uncertainty among the foreign investors.
Major point of uncertainty is that whether the current NDA government will retain the
power at centre or not. If the new government comes in the power and changes the FDI
and other policies then the money of investors will trap.
So the foreign investors are pulling out their money from the Indian market to invest in those
markets which can provide them secured return. This is the reason that the demand of
dollar is increasing and the price of Indian rupee of falling.
Hence on the basis of the combined impact of the above mentioned reasons the exchange
rate between the dollar and India rupee is touching its lowest point.
In the conclusion it can be hoped that if the RBI and government of India puts combined
efforts in this directions then depreciation trend in the Indian currency can be checked.
The Indian rupee has witnessed high volatility this year, falling nearly 14 per
cent between April to October, as investors dumped the local currency in wake
of global headwinds coupled with widening current account deficit led by
higher crude oil prices. Adding to it, strong demand for the US currency from
importers and foreign fund outflows also weighed on rupee movement.
The Indian currency had hit its all-time intra-day low of 74.45 against the US
dollar on 11 October, 2018, making it one of the Asia's worst performers.
Still not out of woods
The rupee's recent upward spiral signals that worst might be over for Asia's
third-largest economy (for now) as softening crude oil prices, sustained selling
of the greenback by exporters and banks, and recovery in the Indian equity
markets may give impetus to the local currency.
Movement in
the Rupee
against the US
dollar since 01
Jan 18.
Source:
MCXSX
What
experts say
India Ratings,
in a publication, said that the global developments such as strengthening of
the US dollar, high commodity prices especially of crude oil, tighter monetary
conditions in the US, coupled with domestic factors such as expanding current
account deficit, inflationary pressures and likely fiscal slippage are together
impacting the rupee. The agency expects rupee to average Rs 69.79/$ in FY19
(1HFY19 average: Rs 68.57/$), a depreciation of 8.3 per cent. This is, however,
contingent upon mobilisation of $30 billion from non-resident Indian similar
to 2013. Depreciation in rupee against the US dollar so far is at a five-year
high. However, a longer term view suggests that average depreciation in rupee
versus the dollar during FY15-FY19 will be only 3 per cent, which is at par with
20 years average depreciation (FY09-FY18).
ALSO READ:Gold loan NBFCs and jewellers see gold shining in
2019
According to a CRISIL report, on average basis, the decline in rupee is less
steep at 7.4 per cent on-year, but still much higher than the trend rate of
depreciation, of approximately 2.5 per cent average per year, in the last fifteen
years.
Factors contributing to rupee fall against dollar
Strong demand of US dollar: One of the important factors driving down
the domestic currency has been strong demand of the US currency from
importers and banks and weak condition of regional Asian currencies against
greenback.
Rising crude oil import bill: Weakening rupee makes our import costlier.
Since India depends on imports for large part of crude oil, a weak rupee shoots
up the fuel prices.
Fed rate hike: The rupee came under pressure after the US Federal Reserve
hiked interest rate as it made US treasuries more attractive and also boosted
the dollar. The US Federal Reserve has raised its key interest rate four times
this year, a move that made the greenback a more attractive bet than other
currencies. Fed rate hike impacts India and other emerging economies,
because the US is the world's biggest economy and the world's primary reserve
currency is still the dollar.
Turkey currency crisis: Turmoil in Turkish currency affected Indian
currency during the first half of the year after Turkey's central bank struggled
to contain its local currency 'Turkish Lira'. Rupee fell to record low levels after
Turkey's widening diplomatic spat with the US spooked investors sentiment.
Stock market movement: The rupee has been well supported by Indian
equity market this year. The Sensex and Nifty look set to close on a positive
note despite witnessing volatile phases of trade during the period. The BSE
Sensex has logged over 5 per cent gains this year and the Nifty has gained
nearly 3 per cent during the same period on the back of strong economic
fundamentals and falling crude prices.
Edited by Chitranjan Kumar
Date Price Change %
30-Dec-16 67.955 0.03%
29-Dec-16 67.936 -0.44%
28-Dec-16 68.233 0.38%
27-Dec-16 67.978 0.32%
26-Dec-16 67.76 -0.12%
25-Dec-16 67.841 0.01%
23-Dec-16 67.837 -0.02%
22-Dec-16 67.848 0.02%
21-Dec-16 67.837 -0.12%
20-Dec-16 67.917 0.11%
19-Dec-16 67.844 0.00%
18-Dec-16 67.845 -0.01%
16-Dec-16 67.855 0.00%
15-Dec-16 67.857 0.57%
14-Dec-16 67.475 0.09%
13-Dec-16 67.411 -0.03%
12-Dec-16 67.431 -0.06%
11-Dec-16 67.47 0.00%
9-Dec-16 67.47 -0.11%
8-Dec-16 67.546 0.16%
7-Dec-16 67.438 -0.45%
6-Dec-16 67.742 -0.42%
5-Dec-16 68.025 0.01%
4-Dec-16 68.021 -0.01%
2-Dec-16 68.031 -0.30%
1-Dec-16 68.236 -0.53%
30-Nov-16 68.598 -0.02%
29-Nov-16 68.615 0.05%
28-Nov-16 68.579 0.09%
27-Nov-16 68.519 0.00%
25-Nov-16 68.519 -0.35%
24-Nov-16 68.761 -0.03%
23-Nov-16 68.784 0.57%
22-Nov-16 68.396 0.25%
21-Nov-16 68.228 0.07%
20-Nov-16 68.18 -0.02%
18-Nov-16 68.191 0.25%
17-Nov-16 68.023 0.04%
16-Nov-16 67.999 0.31%
15-Nov-16 67.786 0.00%
14-Nov-16 67.785 0.34%
13-Nov-16 67.557 -0.01%
11-Nov-16 67.565 1.05%
10-Nov-16 66.865 0.53%
9-Nov-16 66.515 0.41%
8-Nov-16 66.246 -0.75%
7-Nov-16 66.745 -0.08%
6-Nov-16 66.795 0.00%
4-Nov-16 66.796 0.19%
3-Nov-16 66.668 -0.14%
2-Nov-16 66.762 0.10%
1-Nov-16 66.696 0.01%
31-Oct-16 66.686 -0.16%
30-Oct-16 66.791 0.02%
28-Oct-16 66.778 -0.15%
27-Oct-16 66.881 0.03%
26-Oct-16 66.863 0.09%
25-Oct-16 66.806 -0.06%
24-Oct-16 66.845 -0.11%
23-Oct-16 66.921 -0.01%
21-Oct-16 66.926 0.14%
20-Oct-16 66.83 0.28%
19-Oct-16 66.645 -0.13%
18-Oct-16 66.733 -0.08%
17-Oct-16 66.789 0.11%
16-Oct-16 66.715 0.00%
14-Oct-16 66.717 -0.12%
13-Oct-16 66.794 -0.03%
12-Oct-16 66.812 -0.03%
11-Oct-16 66.834 0.51%
10-Oct-16 66.492 -0.16%
9-Oct-16 66.601 0.00%
7-Oct-16 66.602 -0.14%
6-Oct-16 66.697 0.19%
5-Oct-16 66.572 -0.06%
4-Oct-16 66.609 0.09%
3-Oct-16 66.546 -0.02%
2-Oct-16 66.557 0.00%
30-Sep-16 66.556 -0.38%
29-Sep-16 66.812 0.70%
28-Sep-16 66.349 -0.11%
27-Sep-16 66.425 -0.28%
26-Sep-16 66.613 -0.14%
25-Sep-16 66.706 0.00%
23-Sep-16 66.707 0.11%
22-Sep-16 66.633 -0.17%
21-Sep-16 66.744 -0.36%
20-Sep-16 66.985 0.01%
19-Sep-16 66.98 -0.14%
18-Sep-16 67.075 0.00%
16-Sep-16 67.075 0.32%
15-Sep-16 66.86 0.09%
14-Sep-16 66.798 -0.51%
13-Sep-16 67.14 0.60%
12-Sep-16 66.738 -0.07%
11-Sep-16 66.785 -0.16%
9-Sep-16 66.895 0.40%
8-Sep-16 66.631 0.23%
7-Sep-16 66.478 0.30%
6-Sep-16 66.28 -0.29%
5-Sep-16 66.47 -0.17%
4-Sep-16 66.583 -0.32%
2-Sep-16 66.795 -0.01%
1-Sep-16 66.801 -0.26%
31-Aug-16 66.973 -0.25%
30-Aug-16 67.144 0.05%
29-Aug-16 67.113 -0.04%
28-Aug-16 67.136 0.00%
26-Aug-16 67.136 0.18%
25-Aug-16 67.016 -0.22%
24-Aug-16 67.167 0.07%
23-Aug-16 67.122 -0.12%
22-Aug-16 67.202 0.10%
21-Aug-16 67.137 0.00%
19-Aug-16 67.137 0.46%
18-Aug-16 66.83 -0.09%
17-Aug-16 66.893 0.03%
16-Aug-16 66.87 0.03%
15-Aug-16 66.853 -0.08%
14-Aug-16 66.91 0.00%
12-Aug-16 66.908 0.24%
11-Aug-16 66.75 -0.02%
10-Aug-16 66.765 -0.01%
9-Aug-16 66.774 -0.05%
8-Aug-16 66.81 -0.05%
7-Aug-16 66.842 0.00%
5-Aug-16 66.842 0.00%
4-Aug-16 66.84 0.11%
3-Aug-16 66.767 0.13%
2-Aug-16 66.682 -0.12%
1-Aug-16 66.764 0.16%
31-Jul-16 66.656 0.00%
29-Jul-16 66.655 -0.54%
28-Jul-16 67.014 -0.09%
27-Jul-16 67.072 -0.37%
26-Jul-16 67.321 -0.13%
25-Jul-16 67.412 0.38%
24-Jul-16 67.154 0.00%
22-Jul-16 67.154 0.00%
21-Jul-16 67.153 -0.01%
20-Jul-16 67.163 -0.06%
19-Jul-16 67.204 0.10%
18-Jul-16 67.137 -0.01%
17-Jul-16 67.141 0.00%
15-Jul-16 67.141 0.45%
14-Jul-16 66.843 -0.26%
13-Jul-16 67.016 0.06%
12-Jul-16 66.975 -0.24%
11-Jul-16 67.138 0.00%
10-Jul-16 67.14 0.00%
8-Jul-16 67.139 -0.53%
7-Jul-16 67.495 0.12%
6-Jul-16 67.411 -0.03%
5-Jul-16 67.434 0.25%
4-Jul-16 67.265 0.11%
3-Jul-16 67.189 0.00%
1-Jul-16 67.19 -0.47%
30-Jun-16 67.504 0.12%
29-Jun-16 67.422 -0.43%
28-Jun-16 67.715 -0.29%
27-Jun-16 67.914 0.04%
26-Jun-16 67.884 0.00%
24-Jun-16 67.885 0.90%
23-Jun-16 67.279 -0.25%
22-Jun-16 67.449 -0.26%
21-Jun-16 67.624 0.11%
20-Jun-16 67.551 0.71%
19-Jun-16 67.074 0.00%
17-Jun-16 67.074 -0.36%
16-Jun-16 67.315 0.35%
15-Jun-16 67.079 -0.32%
14-Jun-16 67.292 0.16%
13-Jun-16 67.187 0.35%
12-Jun-16 66.952 0.00%
10-Jun-16 66.952 0.30%
9-Jun-16 66.753 0.38%
8-Jun-16 66.5 -0.24%
7-Jun-16 66.658 -0.20%
6-Jun-16 66.79 -0.31%
5-Jun-16 66.999 0.00%
3-Jun-16 67 -0.40%
2-Jun-16 67.268 -0.25%
1-Jun-16 67.434 0.33%
31-May-16 67.209 0.06%
30-May-16 67.171 0.21%
29-May-16 67.032 0.00%
27-May-16 67.031 0.16%
26-May-16 66.927 -0.51%
25-May-16 67.273 -0.53%
24-May-16 67.63 0.33%
23-May-16 67.409 -0.03%
22-May-16 67.43 0.03%
20-May-16 67.408 -0.04%
19-May-16 67.436 0.44%
18-May-16 67.14 0.47%
17-May-16 66.825 -0.03%
16-May-16 66.844 -0.12%
15-May-16 66.925 0.10%
13-May-16 66.855 0.15%
12-May-16 66.757 0.29%
11-May-16 66.561 -0.11%
10-May-16 66.631 -0.18%
9-May-16 66.752 0.23%
8-May-16 66.602 0.00%
6-May-16 66.6 0.06%
5-May-16 66.558 -0.10%
4-May-16 66.627 0.10%
3-May-16 66.558 0.32%
2-May-16 66.346 -0.12%
1-May-16 66.425 0.00%
29-Apr-16 66.425 0.04%
28-Apr-16 66.401 0.06%
27-Apr-16 66.362 -0.06%
26-Apr-16 66.404 -0.42%
25-Apr-16 66.685 0.04%
24-Apr-16 66.66 0.00%
22-Apr-16 66.66 0.26%
21-Apr-16 66.489 0.49%
20-Apr-16 66.166 0.02%
19-Apr-16 66.15 -0.40%
18-Apr-16 66.416 -0.37%
15-Apr-16 66.66 0.09%
14-Apr-16 66.597 0.15%
13-Apr-16 66.496 0.32%
12-Apr-16 66.283 -0.01%
11-Apr-16 66.287 -0.40%
8-Apr-16 66.551 -0.31%
7-Apr-16 66.757 0.36%
6-Apr-16 66.517 0.14%
5-Apr-16 66.422 0.48%
4-Apr-16 66.106 -0.39%
1-Apr-16 66.365 0.17%
31-Mar-16 66.255 -0.18%
30-Mar-16 66.375 0.00%
29-Mar-16 66.375 -0.35%
28-Mar-16 66.608 -0.33%
25-Mar-16 66.829 -0.13%
24-Mar-16 66.916 -0.02%
23-Mar-16 66.93 0.26%
22-Mar-16 66.755 0.38%
21-Mar-16 66.5 0.17%
18-Mar-16 66.384 -0.35%
17-Mar-16 66.619 -0.82%
16-Mar-16 67.173 -0.30%
15-Mar-16 67.372 0.35%
14-Mar-16 67.138 0.32%
11-Mar-16 66.921 -0.57%
10-Mar-16 67.302 0.26%
9-Mar-16 67.128 -0.27%
8-Mar-16 67.313 0.48%
7-Mar-16 66.989 0.08%
4-Mar-16 66.938 -0.27%
3-Mar-16 67.122 -0.41%
2-Mar-16 67.395 -0.53%
1-Mar-16 67.753 -0.67%
29-Feb-16 68.208 -0.77%
26-Feb-16 68.737 -0.05%
25-Feb-16 68.768 0.49%
24-Feb-16 68.431 -0.19%
23-Feb-16 68.561 0.04%
22-Feb-16 68.533 -0.02%
19-Feb-16 68.545 0.00%
18-Feb-16 68.542 0.31%
17-Feb-16 68.329 -0.21%
16-Feb-16 68.474 0.50%
15-Feb-16 68.131 0.02%
12-Feb-16 68.118 -0.52%
11-Feb-16 68.471 0.90%
10-Feb-16 67.861 -0.06%
9-Feb-16 67.901 -0.20%
8-Feb-16 68.034 0.33%
5-Feb-16 67.81 0.39%
4-Feb-16 67.544 -0.57%
3-Feb-16 67.934 -0.06%
2-Feb-16 67.975 0.21%
1-Feb-16 67.835 -0.06%
29-Jan-16 67.878 -0.26%
28-Jan-16 68.053 -0.13%
27-Jan-16 68.144 0.60%
26-Jan-16 67.739 -0.02%
25-Jan-16 67.755 0.30%
22-Jan-16 67.549 -0.37%
21-Jan-16 67.799 -0.23%
20-Jan-16 67.958 0.33%
19-Jan-16 67.734 0.11%
18-Jan-16 67.661 -0.17%
15-Jan-16 67.775 0.68%
14-Jan-16 67.316 0.60%
13-Jan-16 66.917 -0.04%
12-Jan-16 66.946 0.28%
11-Jan-16 66.76 -0.13%
8-Jan-16 66.847 -0.07%
7-Jan-16 66.891 0.29%
6-Jan-16 66.698 0.33%
5-Jan-16 66.481 -0.15%
4-Jan-16 66.579 0.52%
1-Jan-16 66.235 0.04%
69
68.5
68
67.5
67
66.5
Series1
66
65.5
65
64.5