04/10/23

Presented by:-

Jubin shah

04/10/23

1. how are exchange rates determined ?

Exchange rates between currencies can be either controlled as in the case of India prior to the reforms or left to the market to decide, as is the case now in India.

In the case of controlled exchange rates, it is quite obvious that the government would fix them, so the question really boils down to what is the process by which markets determine rates.

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Contd…

The process is really not different in its essentials from the way any market functions. The supply and demand for different goods determine what their prices are. In this case, substitute currencies for goods. Lets take the case of one foreign currency to understand how this market works.

Thus, the dollar-rupee exchange rate will depend on how the demand-supply balance moves. When the demand for dollars in India rises and supply does not rise correspondingly, each dollar will cost more rupees to buy.

2.Where does the supply of dollars come from?

The supply of dollars comes from several sources. One obvious source is Indian exporters of goods and services who sell their wares in the international market for dollars. Another important source is Indian immigrant workers abroad who repatriate money to their kin at home.

The third major source is investments by foreign individuals, companies or institutions in India. This could be in the form of foreign direct investment where they are using the money to create some assets in India or to buy into the equity of an existing company.

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It could also be in the form of portfolio investments where dollars are being brought in to buy assets in the stock markets, for instance, with the purpose of selling these assets when they appreciate in value to book a profit. While all these forms contribute to the supply of dollars, it should be obvious that the last of them portfolio investment is a relatively uncertain source, since it necessarily implies an exit of dollars at some point.

That explains why such flows of capital from abroad are often described as hot flows, since they can move out very rapidly. Foreign tourists visiting India would also contribute to the inflow of dollars.

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3. What can the RBI do about it ?

With hundreds of billions of dollars in its reserves, the RBI would seem to have the ability to be a major factor in how the dollar moves.

If, for instance, it were to dump a huge amount of dollars in the market, it could dramatically add to the supply and hence reduce the price. There are at least two major reasons why central banks are reluctant to do this.

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Contd…

First, they do not like to interfere too much with market valuation of currencies, though they do try and contain excessive volatility.

Second, every time the RBI sells dollars, it buys up rupees, thus sucking some liquidity out of the system. Given the current liquidity crunch, that is obviously not something it would be very keen to do.

4.What factors determine the demand for dollars?

Just as exporters earn dollars, importers spend them. Imports are thus the most important source of demand for dollars.

Another major source of demand is individuals or companies repatriating incomes or profits to their home countries.

This would include portfolio investors as well as Indian branches of multinationals sending back some of their profits to the parent company as dividends.

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A third source would be Indians investing abroad, whether as firms or as individuals. Besides this, of course, the forex you buy when you travel abroad is also adding to the demand for dollars.

As you can see, the factors that contribute to the demand for dollars are mirror images of those that add to their supply.

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Indian currency v/s other currency

Date American Dollar Euro Japan - Yen British Pound Canadian Dollar Nepalese Rs. Sudans Dinnar Srilankan Rs.

1 -- July 43.23 68.21 0.4048 86.16 42.3 0.6276 0.2143 0.4015

16 -- July 43.05 68.22 0.4088 86.08 42.96 0.6221 0.2135 0.4003

1 -- Aug 42.26 65.79 0.3943 83.44 41.23 0.6205 0.2108 0.3928

16 -- Aug 42.8 64.6 0.3918 79.83 41.02 0.6235 0.216 0.4034

1 -- Spt 43.25 63.44 0.4009 78.67 40.68 0.6277 0.2208 0.4094

16 -- Spt 46.81 66.26 0.4349 83.33 43.6 0.6274 0.2298 0.4323

1 -- Oct 46.47 65.33 0.4448 82.74 43.81 0.6167 0.2318 0.4297

16 -- Oct 48.88 65.58 0.4776 84.29 40.89 0.6291 0.2438 0.4526

1 -- Nov 48.61 61.83 0.5018 77.08 40.97 0.6046 0.2424 0.4421

16 -- Nov 49.19 62.6 0.5113 73.93 40.28 0.6171 0.2433 0.4472

25 -- Nov 49.87 64.98 0.516 76.55 40.83 0.6235 0.2487 0.4539

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Thank you

04/10/23