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DefinitionDefinition

Foreign exchange is the process of Foreign exchange is the process of conversion of one currency into another conversion of one currency into another currency. For a country its currency currency. For a country its currency becomes money and legal tender. For a becomes money and legal tender. For a foreign country it becomes the value as a foreign country it becomes the value as a commodity. This commodity character can commodity. This commodity character can be understood when we study about be understood when we study about ‘Exchange Rate’ mechanism. ‘Exchange Rate’ mechanism.

AUTHORISED AUTHORISED DEALERS DEALERS

IN FOREIGN EXCHANGEIN FOREIGN EXCHANGE

FLOATING EXCHANGE FLOATING EXCHANGE RATESRATES

Its mainly a Demand-Supply Game.Its mainly a Demand-Supply Game.

A currency appreciates when institutions buys more A currency appreciates when institutions buys more units of another currency & vice versa.units of another currency & vice versa.

In short-run, due to Increases/Decrease in Nominal In short-run, due to Increases/Decrease in Nominal Interest rate.Interest rate.

In long run, due to Inflation, Productivity, Reserves In long run, due to Inflation, Productivity, Reserves and Current Asset.and Current Asset.

Central banks interest rates cutting (appreciate) or Central banks interest rates cutting (appreciate) or hiking (depreciate) hiking (depreciate)

Trade surpluses - currency appreciate or Trade Trade surpluses - currency appreciate or Trade deficits - currency depreciate.deficits - currency depreciate.

Differences in real interest rates will define the flow Differences in real interest rates will define the flow of capital between countries.of capital between countries.

Flow of foreign currencies ( FII’s and FDI’s )Flow of foreign currencies ( FII’s and FDI’s )

Isolating the exchange rate Isolating the exchange rate effect of exportseffect of exports

Isolating the Influence of Isolating the Influence of the Exchange Rate of the Exchange Rate of

importsimports

Why the Indian rupee appreciated?Why the Indian rupee appreciated?

Foreign Direct Investment (FDI) Foreign Direct Investment (FDI)

External Commercial Borrowings (ECBs)External Commercial Borrowings (ECBs)

Foreign portfolio inflowsForeign portfolio inflows

Remittances from Indians working overseasRemittances from Indians working overseas

RBI had raised cash reserve ratio to control inflation.

Export

Transportation Services.

Strengthening RupeeStrengthening RupeeThe rupee has appreciated about 8.4% in 2007The rupee has appreciated about 8.4% in 2007

Ru

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US

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Exchange Rate - INR vs USD

40.5

Painful Squeeze – Non IT FirmsPainful Squeeze – Non IT Firms

The smaller firms, including those that rely on the U.S. market are clearly hurting.

Some 65% of our exports come from the SME segment. There are 15 million workers in this sector. The SMEs have profit margins of barely 5-10%. If the rupee rises, as it has, their entire profit gets wiped out

The Confederation of Indian Industry (CII) says that the worst hit are the textile and leather sectors

Garments exporter and auto-part suppliers are hurting even more. Many of them banked on the dollar appreciating routinely after signing a contract & these companies will be affected more than IT companies.“

While the market should determine the exchange rate in the long run, sharp fluctuations in the short term create problems of adjustment for domestic industry.

What Kamal Nath says?What Kamal Nath says? Interestingly Rupees is rising faster than Yuan. As India complies with fair

trade and China does not - what is the ultimate ramification?

"The rupee appreciation is a cause of concern for exporters and manufacturing firms... we are looking at framing a scheme for labor-intensive industries with no or very little import content to refund the local taxes and levies," Minister of Commerce and Industries Kamal Nath said in Mumbai on the sidelines of the 3rd India-GCC Industrial Forum.

"The rupee rise is a concern and the Ministry of Commerce is in

discussions with the RBI... the rise is also connected with international factors like fall in the dollar. We are also in discussion with the export council on what should be the way forward," Nath said.

The minister said the industry had built up resilience and become very competitive, and could digest the rupee appreciation.

Arithmetic of the next trillionArithmetic of the next trillion

The current market cap of the Indian bourses is $1.4 trillion.The current market cap of the Indian bourses is $1.4 trillion.

A real GDP growth of 9.4% and inflation of 4.5%, the GDP should A real GDP growth of 9.4% and inflation of 4.5%, the GDP should double in the next 5-6 years at a nominal GDP growth of 13%.double in the next 5-6 years at a nominal GDP growth of 13%.

With market likely to sustain at around 120-130% of GDP, it is With market likely to sustain at around 120-130% of GDP, it is possible to envisage a doubling of market cap to around $3 trillion possible to envisage a doubling of market cap to around $3 trillion in the next 5 years.in the next 5 years.

This is a distinct possibility even without any major upward re-This is a distinct possibility even without any major upward re-rating of India valuations and without further depreciation of the rating of India valuations and without further depreciation of the dollar vis-à-vis the rupee.dollar vis-à-vis the rupee.

BenefitBenefit The appreciation of Rupee not only has softened the impact of higher oil prices and The appreciation of Rupee not only has softened the impact of higher oil prices and

made capital goods cheaper made capital goods cheaper

Encouraged Indian tourists to travel abroad. Encouraged Indian tourists to travel abroad.

Students who want to study abroad has to spend less money as US dollar is now Students who want to study abroad has to spend less money as US dollar is now cheaper by a similar quantum in rupee terms. cheaper by a similar quantum in rupee terms.

Importers are also benefited by paying less money Importers are also benefited by paying less money

Will affect employment creation in BPOs in a big way.Will affect employment creation in BPOs in a big way.

Customer will get more option to select. Customer will get more option to select.

Though the strengthening of the rupee will benefit certain industries, others might face Though the strengthening of the rupee will benefit certain industries, others might face the burnt. But the gain will be to the entire Indian economy. For the development of the burnt. But the gain will be to the entire Indian economy. For the development of any country, strong infrastructure is required and that need huge investments. Foreign any country, strong infrastructure is required and that need huge investments. Foreign Direct Investments would truly help India to stay as a strong economy in the world.Direct Investments would truly help India to stay as a strong economy in the world.

Challenges of rupee appreciationChallenges of rupee appreciation A one per cent rise in the rupee against the dollar will have a 75-80 basis A one per cent rise in the rupee against the dollar will have a 75-80 basis

points impact on the operating margins for IT companies.points impact on the operating margins for IT companies.

Exports will be badly effected.Exports will be badly effected.

Salaries of people working in MNC's would come down drastically.Salaries of people working in MNC's would come down drastically.

If the rupee appreciation continues, we have to go out and look for people in If the rupee appreciation continues, we have to go out and look for people in low-cost areaslow-cost areas

Should look out for other countries other than US.Should look out for other countries other than US.

Controlling inflation’s.Controlling inflation’s.

Protection of domestic market.Protection of domestic market.

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