INDIAN FOREIGN EXCHANGE MARKET &

RUPEE EXCHANGE RATE

CONTENTSSR. NO. PARTICULARS

1 Introduction

2 Instruments Of Foreign Exchange Market

3 Foreign Exchange Rate & Fluctuations in Exchange Rate

4 Types of Exchange Rates

5 Determinants of Exchange Rates

6 Appreciation & Depreciation of Indian Rupee

7 Rupee Exchange Rate

What??

Price of a currency in respect to other country’s currency is called as exchange rates.

If a demand for a currency rises its price rises and it is called as appreciation

If demand of other country’s currency increases the home currency’s price falls and it is called depreciation

Forex markets functions as anchors of trading between different types of buyers & sellers around the world.

The gradual liberalization of Indian economy has resulted in a substantial inflow of foreign currency capital into India.

dismantling of trade barriers has also facilitated the integration of domestic economy with the world economy.

The foreign exchange market comprises: CorporateCommercial Banks (e.g. SBI, Kotak, ICICI etc.)Exchange Brokers (e.g. FX Pro, Nord FX etc.)Central Banks (e.g. Reserve Bank of India)

Why Not??Leads to imports getting costlier

which is a worry for India as we

meet most of our oil demand via

imports

Apart from oil, prices of imported

commodities like metals, gold etc

will also rise pushing overall inflation higher.

Exchange rate risk also drives away foreign

investors which in turn

depreciates the local currency.

The total external debt has

increased by from US$ 365.3 billion to US$

400.3 billion by the end of

September 2013

Affect...• Only exporters

will be happy like IT companies

• Importers will feel the heat

Importers & exporters

• CAD will grow more which in turn force the Indian govt. To go for international borrowing

Country’s fiscal health

• 3rd highest importer of crude oil increase in fuel prices after the new policy

Fuel price

• Expenses for the college fees as well as living will shoot up

Students studying abroad

• The depreciating rupee price will hamper the people planning their holiday abroad.

tourism

How??

Measures by RBI

• Using FOREX reserves: RBI can sell forex reserves and buy leading Indian Rupees leading to demand for rupee

• Raising interest rates: to prevent sudden capital outflows and ultimately lead to higher capital inflows

• Make investments attractive: RBI can increase the FII limit on investment in government and corporate debt investments.

Measures by government

•Government should take some efforts to bring FDI and create a healthy environment for economic growth.

Instruments for foreign exchange marketForeign Exchange Forwards

•A buyer & seller agree on an exchange rate for any date in the future & the transaction occurs on that date regardless of the market rates.

Currenc

y Futures

•It is a future contract to exchange one currency for another at a specified date in the future at a future exchange rate

Currenc

y S

wa

ps

•A foreign currency swap is an exchange of borrowings, where the principal & interest payments in one currency are exchanged for the principal & interest payments of another currency

Curr

ency O

ption

s

•The seller of the option grants the buyer the right to either purchase from or sell to the seller the currency at a specified price within a specified period of time.

Foreign exchange rates

• Foreign Exchange rate (aka Forex Rate) between two countries is the rate at which one currency

would be exchanged for the other. E.g. US$1= ₹62

Fluctuations in exchange rates• A market-based exchange rate will change

whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply.

• Increased demand for a currency can be due to either an increased transaction demand for money or an increased speculative demand for money. The transaction demand is highly correlated to a country's level of business activity, gross domestic product (GDP), and employment levels.

Types of exchange rates• Floating rates are the most common exchange

rate regime today• since central banks frequently intervene to avoid

excessive appreciation or depreciation, these regimes are often called managed float or a dirty float.

float• Pegged floating currencies are pegged to some band or value,

either fixed or periodically adjusted. Pegged floats are:• Crawling bands: The rate is allowed to fluctuate in a

band around a central value, which is adjusted periodically. This is done at a preannounced rate or in a controlled way following economic indicators.

• Crawling pegs: Crawling peg is an exchange rate regime usually seen as a part of fixed exchange rate regimes that allows depreciation or appreciation in an exchange rate gradually. The system is a method to fully utilize the key under the fixed exchange regimes as well as the flexibility under the floating exchange rate regime.

Pegged float

• Fixed rates are those that have direct convertibility towards another currency. In case of a separate currency, also known as a currency board arrangement, the domestic currency is backed one to one by foreign reserves

fixed

Determinants of exchange rates

• Differentials in inflation• Differentials in interest rates• Current-account deficits• Public debt• Terms of trade• Political stability & economic

performance

Appreciation & depreciation on Indian Rupee

Currency appreciation is the increase in the value of domestic currency with respect to the foreign currency.

Appreciation occurs because of a change in exchange rates, a unit of one currency buys more units of another currency.

Importers gain from Appreciation of Domestic currency and loose when it depreciates.

Currency appreciatio

n

is the loss in value of the domestic country's currency with respect to the foreign currency.

Exporters loose from appreciation and gain from depreciation. Currency

depreciation

Why appreciating currencies rate as a concern?

When your home currency gains in value against other currencies it appreciates meaning that the

same amount of it is able to purchase a larger amount of a

particular foreign currency.

Reasons for depreciation of rupee

• Current account deficit• Inflation• Political paralysis• Recession in Euro zone• Negative remarks of credit agencies

Effects of Depreciation in Rupee in India

• Value of imported items such as laptops, mobile phones crude oil, motor cars etc. will increase as imports become dearer.

• The current account deficit will increase due to the reduction in exports and an increase in imports.

• Depletion in Forex reserves.• The borrowing cost for the companies will increase.• Studying and travel abroad will cost more.• Deprecation in rupee is good for companies which are

billing to its customers in dollars.• It is good for employees who are abroad and getting

salary in dollars.

Measures to Control Fall in Rupee: • 1. Allowing sovereign wealth funds, endowment

funds and foreign central banks to invest in government bonds.2. Raising the foreign investment cap.3. Boost the slowing industrial growth.4. More exports incentives and reduce imports.5. Limit the foreign currency expenditure.6. The RBI could persuade banks and financial institutions to raise funds in dollars abroad and lend them locally.7. The government could review sectors such as defense, or revive pension and insurance reforms.

Rupee exchange rateThe rupee exchange rate is the

rate at which rupees are exchanged for foreign currencies.

The following is the last 5 days value of:• Dollar-Rupee Rate (1US$=

₹?):• 27th Dec 2013 (Fri): ₹61.98• 30th Dec 2013 (Mon):

₹61.89• 31st Dec 2013 (Tue):

₹61.90• 2nd Jan 2014 (Thu): ₹62.26• 3rd Jan 2014 (Fri): ₹62.19

• Pound-Rupee Rate (1£= ₹?):• 27th Dec 2013 (Fri): ₹102.03• 30th Dec 2013 (Mon): ₹102.16• 31st Dec 2013 (Tue): ₹102.00• 2nd Jan 2014 (Thu): ₹102.74• 3rd Jan 2014 (Fri): ₹102.53

• Euro-Rupee Rate (1€= ₹?):• 27th Dec 2013 (Fri): ₹85.27• 30th Dec 2013 (Mon): ₹85.18• 31st Dec 2013 (Tue): ₹85.36• 2nd Jan 2014 (Thu): ₹85.15• 3rd Jan 2014 (Fri): ₹85.19

• Yen-Rupee Rate (1¥= ₹?):• 27th Dec 2013 (Fri): ₹0.59• 30th Dec 2013 (Mon): ₹0.588• 31st Dec 2013 (Tue): ₹0.587• 2nd Jan 2014 (Thu): ₹0.587• 3rd Jan 2014 (Fri): ₹0.599