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In this ppt its shown which all factors affect the indian currency exchange rate with the latest data of 2008-09. Factors like foreign exchange reserve, FII's, bank rates, Sensex, CBLO instrument, slowdown in GDP, market movements, Index of industrial production, Liquidity, REER and NEER, Balance of payment and what are the conclusion and forecast. In this its shown when FII's inflow has increase it has appreciated the exchange rate. Then when inflation has increased it has appreciated the exchange rate. IIP is also one of the factor through which one can determine the rate. when IIP would increase that would show which goods have more scope: consumer goods or industrial good or which area like manufacturing, electricity. THe gilt edge securities also determine the exchange rate.
Citation preview
FACTORS AFFECTING THE VOLATILITY OF FOREIGN EXCHANGE
RATE
Factors affecting Exchange Rate
i
• Slowdown in GDP growth• Balance of Payment•Index of Industrial Production•Market movements•Price Movements•Liquidity•Reer and Neer•Conclusion and Forecast
Slowdown in GDP growth
Economic indicator Q1 Q2 Q3 Total
GDP 783052 773687 873246 2430165
Growth rate in % 7.9 7.6 5.3
The GDP of Indian economy grew by mere 5.3% in the 3rd quarter of financial year 08-09, in sharp contrast to 8.9% growth in the similar period of corresponding year. The slowdown can be directly attributed to negative growth in the manufacturing and agriculture sectors.
Rs In Crore
• What is scary about a shrinking agricultural sector is that, though it contributes to less than 20 percent of GDP, over 70 percent of the population depends on it.
• One of the major reasons for manufacturing falling is the automobile sector, which contracted sharply in the past few months on account of tight credit.
Balance of payment
Item April-June July-September
October- December
2007-08 2008-09 2007-08 2008-09 2007-08 2008-09
1. Exports 34,356 49,120 38,273 47,700 40,985 36,707
2. Imports 56,346 79,637 59,510 86,213 67,038 73,0143. Trade Balance (1-2) -21,990 -30,517 -21,237 -38,513 -26,053 -36,3074. Invisibles, net 15,310 21,521 16,940 25,684 21,522 21,6635. Current Account Balance (3+4) -6,680 -8,996 -4,297 -12,829 -4,531 -14,6446. Capital Account Balance 17,880 11,231 33,533 8,095 31,269 -3,2377. Change in Reserves -11,200 -2,235 -29,236 4,734 -26,738 17,881
US Million dollar
Major Highlights• Export growth turned negative during Q3 of 2008-09 for the first
time after 2001-02 due to global economic slowdown.• The current account deficit at US$ 14.6 billion during Q3 of 2008-09
was the highest quarterly deficit since 1990.• For the first time since Q1 of 1998-99, the capital account balance
turned negative during Q3 of 2008-09 mainly due to net outflows under portfolio investment, banking capital and short-term trade credit.
• The foreign exchange reserves on BoP basis (i.e., excluding valuation) declined due to widening of current account deficit combined with net outflows under the capital account.
Sluggish Export growth remains a major concern
Apr
il
May
June
July
Aug
ust
Sep
tem
ber
Oct
ober
Nov
embe
r
Dec
embe
r
Janu
ary
Feb
ruar
y
Mar
ch
0
5000
10000
15000
20000
25000
30000
35000 -14000
-12000
-10000
-8000
-6000
-4000
-2000
0
Export
import
Trade Deficit
-13140
-2900
India’s merchandise exports during April-November 2008 increased by 18.7 per cent while imports recorded a higher growth of 32.5 per cent, largely due to the rise in petroleum, oil and lubricants (POL) imports. The rise in oil imports was primarily due to the elevated international crude oil prices, while the volume of oil imports was moderate. Merchandise trade deficit during April-November 2008 widened to US $ 84.4 billion from US $ 53.2 billion a year ago.
US Million dollar
Trade Deficit on tips and toes of Crude pricesAP
R
MAY
JUNE
JULY
AUG
SEPT
OCT
NOV
DEC
JAN
FEB
MAR
0
20
40
60
80
100
120
140
160
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
AVG OIL PRICE
TRADE DEFICIT
-2900
-13140
The widening of trade deficit during April-December 2008 could be attributed to higher import payments reflecting high international commodity prices, particularly crude oil prices during the first half of 2008-09. And then when crude oil prices have reduced trade deficit has also reduced.
US Million dollar
Index of Industrial Production
Index of Industrial production
Mining Manufacturing Electricity General
Year 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09
Annual growth 5.40% 2.46% 9.24% 2.45% 9.30% 19.75% 8.73% 2.47%
Industrial growth showing signs of recovery
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Mining Manufacturing Electricity General-5.00%
0.00%5.00%
10.00%15.00%20.00%25.00%30.00%35.00%40.00%
Sectorwise Growth
2007-08 2008-09
Growth started to slacken from the second half of 2007-08, which has continued since then. The slowdown in manufacturing was largely on account of food, textiles and metals. The electricity sector recorded higher growth on account of increase in power generation in nuclear and hydro-plants. Mining growth also decelerated.
Source: http://www.mospi.gov.in
Use based Classification
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Basic goods Capital goods Intermediate goods
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
2007-082008-09
Growth rate of marchBasic goods: 1.4%Capital goods: -8.2%Intermediate goods: -4.4%
Basic goods include mining and electricity sector.The performance of basic goods reflected subdued growth in electricity and a fall in production of phosphates fertilizers, steel and aluminum products, and deceleration in production of caustic soda and structurals.
.
Source: http://www.mospi.gov.in
Use based Classification
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Consumer Goods Consumer durable consumer non
durable
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2008-092007-08
Consumer goods -0.8%Consumer durables 8.3%Consumer Non-Durables -3.6%
The factor that has slightly improved the IIP performance in January are consumer durables; consumer durables were -12.8% for the month of December, they have come in +2.5% for the month of January, so the excise cuts and the small changes in interest rates appear to have improved the output, appear to have improved demand and therefore improved output maybe the de-stocking of inventories was over. So, it’s a consumer goods lead improvement in the IIP. Source: http://www.mospi.gov.in
Market Movement
EQUITY MOVEMENT DIRECT RUPEE’S DIRECTION
Indian stock market posted its biggest historical downfall during the year 2008-09. While Indian rupee depreciated nearly 19 percent during the same period. A major chunk of FII selling of over $3 billion had taken place in October (2008) alone, which saw the Sensex going to its lowest level in the last three years
Date
18-Apr-0
8
9-May
-08
30-May
-08
20-Jun-08
11-Jul-0
8
1-Aug-0
8
22-Aug-0
8
12-Sep-08
3-Oct-
08
24-Oct-
08
14-Nov-0
8
5-Dec-
08
26-Dec-
08
16-Jan-09
6-Feb-09
27-Feb-09
20-Mar-
09
10-Apr-0
9
1-May
-090
5,000
10,000
15,000
20,000
35.00
37.00
39.00
41.00
43.00
45.00
47.00
49.00
51.00
53.00
Sensex
Dollar rupee
17320.4
8400.9
39.8
51.7
42.3
0
50000
100000
150000
200000
250000
300000
350000
35.00
37.00
39.00
41.00
43.00
45.00
47.00
49.00
51.00
53.00
Foreign Ex-change reserve
Dollar rupee
51.71
Foreign Exchange Reserve
India’s Foreign exchange Reserve have peaked during the FY 08 to $316.171 billion due to heavy inflows entering into India. However Since Oct 2008, sudden fall have been seen mainly on account of Central Banks offloading dollars in Spot FX market in order to provide Foreign Portfolio Outflows.
Foreign Capital Inflows- Foremost Step to Study
Date
25-Apr-0
8
23-May
-08
20-Jun-08
18-Jul-0
8
15-Aug-0
8
12-Sep-08
10-Oct-
08
7-Nov-0
8
5-Dec-
08
2-Jan-09
30-Jan-09
27-Feb-09
27-Mar-
09
24-Apr-0
9-1700
-1200
-700
-200
300
800
38.00
39.00
40.00
41.00
42.00
43.00
44.00
45.00
46.00
47.00
48.00
49.00
50.00
51.00
52.00
53.00
Total FII Dollar rupee
Foreign Capital inflows are of prime importance having an immediate impact on India’s Balance of Payment.Government of India has increased the ceiling of FIIs investment in the ‘Corporate Debt’ from the earlier cap at US $ 6.00 billion to now US $ 15.00 billion. This is also called the Corporate Bond (CB) investment. The yields are generally higher in case of CBs vis a vis GoI’s Bonds. The spreads are higher. FIIs flows will increase into Corporate Bonds as the Indian interest rates are still higher than interest rates in USA , UK and EC.
US Million Dollar
Price Movement
Crude Oil Prices and Inflation moves hand in hand
0
20
40
60
80
100
120
140
160
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Crude oil prices WPI index
12.63
Spike
in Cru
de prices
threatened in
flation
to rise to
16 year
high
Corr = 0.74
The increase in inflation during March-August 2008 was mainly on account of some pass-through of high international crude oil prices to domestic prices as well as elevated levels of prices of iron and steel, basic heavy inorganic chemicals, machinery and machine tools, oilseeds/oil cakes, raw cotton and textiles. Inflation decelerated sharply as international energy and commodity prices declined substantially and demand pressures eased following the impact of global financial crisis.
First Stimulus Package
• Govt. of India on 5th December 2008 announced the ‘First Stimulus’ Package.
• RBI cut “Repo Rates” by 100 bpts to 6.50 %.• RBI announced a 100 bpts cut “ Reverse Repo Rates ”
to 5.00 %.
Second Stimulus Package
• The ‘Second Stimulus’ Package was announced by RBI on Friday 2nd January 2009.
• RBI cut key “ Repo Rate ” further by an aggressive 100 bpts to 5.50%. An eight year low and a surprise move by the RBI.
• RBI announced a further 100 bpts cut in “ Reverse Repo ” rates to only 4.00 % now. An eight year low.
• RBI in a surprise move slashed "CRR" by another 50 bpts to now at 5.00 % - a two year low. This adds further liquidity to the financial markets. RBI is worried that due to liquidity crunch the Indian GDP growth should not suffer in this fiscal.
Third Stimulus Package
• Govt. of India announced a surprise third ‘Stimulus Package’ on 24th February’09 cutting ‘excise duty’ and ‘service tax’ by 2.00 % on majority of bulk products and select services.
Results of cut in Rates.• A cut in reverse repo rates will discourage banks from parking
surplus funds with RBI through the liquidity adjustment facility and encourage them to boost lending to the commercial sector.
• The cut in “ Repo Rates ” signals commercial banks in India to lower their PLR for corporate and individual customers. A direction to the economy – Interest rates are going to be lowered by the commercial banks.
• The central bank has also lowered the cash reserve ratio, or the proportion of deposits that banks set aside, by another 400 basis points to inject Rs 1,60,000 crore into the system.
Key Policy Rates
Mar '04
Oct '04
Oct '05
Jun '06
Oct '06
Jan '0
7
Mar '07
May '0
7
Nov '07
Apr '08
Jun '08
Aug '08
Oct '08
Dec '08
Mar '09
0
1
2
3
4
5
6
7
8
9
10
Repo Rate
Reverse repo
CRR
Repo rate- 4.75%Reverse Repo- 3.25%CRR- 5%
Through the cut in rates, RBI has provided Rs 3,88,000 crore of primary liquidity to the system.
Source:http://www.rbi.org.in/home.aspx
Liquidity Indicators
Liquidity Indicators6
th F
eb
09
27
th F
eb
09
6th
Ma
r 0
9
27
th
Ma
r 0
9
3rd
Ap
r 0
9
24
th A
pr
09
1st
Ma
y 0
9
21
st M
ay
090
10000
20000
30000
40000
50000
60000
0.000.501.001.502.002.503.003.504.004.505.00
CALL VOL CBLO VOL REPO VOL
CALL WAR CBLO WAR REPO WAR
The Volumes of CBLO is high mainly because it has less regulation then call market. No CRR has to be kept aside and Mutual funds, Primary dealers, Insurance company and other banks can also participate in CBLO. CBLO is regulated by CCIL whereas Call market depends upon the willingness of borrower and lender.
Source:http://www.ccilcertification.co.in/ocm/
Arbitrage Process
Banks
Borrow at 4.47% in call money market
Park their funds in reverse repo at 4.75%
Spread of 28 basis point RBI
Banks RBICCILLend at 0.38%
Park at 3.5%
Banks make profit by this arbitrage around 3.12%
Government Financing through T Bills12
-Nov
-08
20-N
ov-0
828
-Nov
-08
6-D
ec-0
814
-Dec
-08
22-D
ec-0
830
-Dec
-08
7-Ja
n-09
15-J
an-0
923
-Jan
-09
31-J
an-0
98-
Feb
-09
16-F
eb-0
924
-Feb
-09
4-M
ar-0
912
-Mar
-09
20-M
ar-0
928
-Mar
-09
5-A
pr-0
913
-Apr
-09
21-A
pr-0
929
-Apr
-09
7-M
ay-0
915
-May
-09
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
91-Day T-Bill
182 -Day T-Bill
364 -Day T-Bill
7.21
7.31
7.19
The Central Government borrows funds to finance its 'fiscal deficit'. The market borrowing of the Central Government is raised through the issue of dated securities and 91, 182 or 364 days treasury bills either by auction or by floatation of loans.
Spread shrinks on improved risk appetite
30-Dec-
99
2-Jul-0
5
2-Jan-11
2-Jul-1
6
2-Jan-22
2-Jul-2
7
2-Jan-33
2-Jul-3
8
2-Jan-44
2-Jul-4
9
2-Jan-55
2-Jul-6
0
2-Jan-66
2-Jul-7
1
2-Jan-77
2-Jul-8
2
2-Jan-88
2-Jul-9
3
2-Jan-99
2-Jul-0
44.00
5.00
6.00
7.00
8.00
9.00
10.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Spread 10-yr Corporate Bond Yield 10-yr Government Bond Yield
If market condition is bad,Risk appetite would be low.
Buy at 5
Sell at 1
Buy at 5
Sell at 15
Corporate Government
-4
10
Net gain of 6
6 Currency REER And Nominal Exchange Rate
The 6-currency trade-based REER which stood at 112.16 in April 2008, indicating an overvaluation of 12.2 per cent, gradually declined to 100.07 in February 2009 mainly on account of significant depreciation of the rupee against the US dollar and against other major currencies like the euro, the Japanese yen and the Chinese Yuan during 2008-09.
112.16
100.07
Conclusion And Forecasting
Pros
• Foreign capital inflow from Mar to May is $5.5 billion• India’s foreign exchange reserves went up by $4.24 billion
to $255.94 billion during the week ended May 15, 2009, mainly due to revaluation of currencies.
• Foreign currency assets increased on account of the appreciation of euro, sterling and yen against the US dollar held in the reserve.
• Liquidity is sufficient to pay for imports• As cement, automobiles and steel sectors have improved
so we can say that infrastructure and manufacturing would recover due to increase in demand
Cons
• The Indian rupee has lost close to 25 percent of its value in less than a year, yet its exports have been falling consistently month-on-month since August 2008.
• The slowdown in international demand is forcing exporters to give discounts to buyers denting their profits.
• Also, as most exporters had hedged around 30-40 per cent of their receivables when the rupee was stronger, the recent fall in the rupee may not prove much lucrative.
• Hence, Slowdown in Export resulting in threat to Forex Reserve
Sustaining
• Crude oil prices have remained stable for nearly 2 months ranging between $50 to $65/ barrel, so there is no direct threat to inflation. Oil rose towards $62 on 22nd May 2009.
• Demand for crude oil is moderate
Forecasting
• Hence we have concluded that USD/INR would be stable at Rs 44 for the 1st quarter for 2009-10.