euro vs INR

8/8/2019 euro vs INR

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Multinational BusinessFinance Project

Submitted by

Priyank KaroorRoll no 19

FS2


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INDEXSr. No. TOPIC Page No.

1 Executive Summary 3

2 India Introduction 4

3 EURO Zone Introduction 5

4 Currency Tracing 9

5 Currency Movement 10

6 Forex Triggers And Impacts 10

7 Purchasing Power Parity 12

8 International Fisher Effect 13

9 Conclusion 14


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Executive Summary

Currency Project gains relevance due to the importance of global economy andits ramifications on the international f inancial sector . The approach has been toIntegrate the theore ti cal aspect s such as PPP Model, Internat ional F isher Effect ,Technical & Fundamental Analysis , and Quanti tat ive applications alongwith the practical developments in Forex/ Multinational Business Finance. Theproject attempts to analyses the information and develop an interpretation of thefacts which is characterized by its brevity in representation.

The f irst part is the snapshot of INR/ Euro. This is followed by a fundamentaloutlook on India & Europen nations which includes information and analysis oneconomi c i nd icat or s s uch as GDP, I nt er es t r at es , i nf la ti on , Bal ance o f Payment /Trade, Equi ty markets . The per iod for which the currencies USD &

Euro have been tracked ranges from 16th May 2010 to 20th July 2010. Analysishas been done on the possible tr iggers and impact to/on INR/ Euro over a periodof 6 weeks. The currency rates have been analyzed by involving technical viewssuch as Avg. True Range, Suppor t & Resis tance Levels . The projections have been made by taking INR/ EURO spot on 16th May 2010 as the base and byusing PPP Model & IFE Model.

Economy of India


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The economy of India is the eleventh largest economy in the world by nominal GDP and

the fourth largestbypurchasing power parity (PPP). Following strong economic reforms from

the socialist inspired economy of a post-independence Indian nation, the country began to

develop a fast-paced economic growth, as free market activities initiated in 1990 for international

competition and foreign investment. India is an emerging economic power with a very large pool

of human and natural resources, and a growing large pool of skilled professionals. Economists

predict that by 2020, India will be among the leading economies of the world.

India was undersocial democratic-based policies from 1947 to 1991. The economy was

characterized by extensive regulation, protectionism, public ownership,pervasive

corruption and slow growth. Since 1991, continuing economic liberalization has moved the

country towards a market-based economy. A revival of economic reforms and better economic

policy in 2000s accelerated India's economic growth rate. In recent years, Indian cities havecontinued to liberalize business regulations. By 2008, India had established itself as the

world's second-fastest growing major economy. However, the year 2009 saw a significant

slowdown in India's GDP growth rate to 6.8% as well as the return of a large projected fiscal

deficit of 6.8% of GDP which would be among the highest in the world.

India's large service industry accounts for 55% of the country's Gross Domestic Product (GDP)

while the industrial and agricultural sector contribute 28% and 17% respectively. Agriculture is

the predominant occupation in India, accounting for about 52% of employment.

The service sector makes up a further 34% and industrial sectoraround 14%. The labor forcetotals half a billion workers. Major

Economy Of Euro Zone
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)http://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Social_democratichttp://en.wikipedia.org/wiki/License_Rajhttp://en.wikipedia.org/wiki/Protectionismhttp://en.wikipedia.org/wiki/Corruption_in_Indiahttp://en.wikipedia.org/wiki/Corruption_in_Indiahttp://en.wikipedia.org/wiki/Hindu_rate_of_growthhttp://en.wikipedia.org/wiki/Economic_liberalisation_in_Indiahttp://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/Economic_development_in_Indiahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(real)_growth_ratehttp://en.wikipedia.org/wiki/Agriculture_in_Indiahttp://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Industrial_sectorhttp://en.wikipedia.org/wiki/Labour_in_Indiahttp://en.wikipedia.org/wiki/Gross_domestic_producthttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)http://en.wikipedia.org/wiki/Economyhttp://en.wikipedia.org/wiki/Free_markethttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Social_democratichttp://en.wikipedia.org/wiki/License_Rajhttp://en.wikipedia.org/wiki/Protectionismhttp://en.wikipedia.org/wiki/Corruption_in_Indiahttp://en.wikipedia.org/wiki/Corruption_in_Indiahttp://en.wikipedia.org/wiki/Hindu_rate_of_growthhttp://en.wikipedia.org/wiki/Economic_liberalisation_in_Indiahttp://en.wikipedia.org/wiki/Market_economyhttp://en.wikipedia.org/wiki/Economic_development_in_Indiahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(real)_growth_ratehttp://en.wikipedia.org/wiki/Agriculture_in_Indiahttp://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Industrial_sectorhttp://en.wikipedia.org/wiki/Labour_in_Indiahttp://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)


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The economy of Europe comprises more than 731 million people in 48 different states. It

contributes 11% of the world's population. Like other continents, the wealth of Europe's states

varies, although the poorest are well above the poorest states of other continents in terms of GDPand living standards. The difference in wealth across Europe can be seen in a rough East-West

divide. Whilst Western European states all have high GDPs and living standards, many of

Eastern Europe's economies are still rising from the collapse of the communist Soviet Union and

former Yugoslavia. Throughout this article "Europe" and derivatives of the word are taken to

include selected states whose territory is only partly in Europe such as Turkey, Azerbaijan, and

the Russian federation and states that are geographically in Asia, bordering Europe such as

Armenia and Cyprus.

Europe was the first continent to industrialize led by the United Kingdom in the 18th century

and as a result, it has become one of the richest continents in the world today. Europe's largest

national economy is that of Germany, which ranks fourth globally in nominal GDP, and fifth inpurchasing power parity (PPP) GDP; followed by France, which ranks fifth globally in nominal

GDP and sixth in PPP GDP; the United Kingdom, ranking sixth globally in nominal GDP,

followed by Italy. The end of World War II has since brought European countries closer

together, culminating in the formation of the European Union (EU) and in 1999, the introduction

of a unified currency the euro. If the European Union was taken as a single country, today it

would be the world's largest economy see List of countries by GDP. In 2009 Europe remained

the wealthiest region. Its $37.1 trillion in assets under management represented one-third of the

worlds wealth. It was one of several regions where wealth surpassed its pre crisis year-end peak

The most common currency within Europe is the euro, the currency of the European Union. Tojoin, each new EU member must meet certain criteria, when these are met their own currencies

will be replaced by the euro. Becoming a member of the EU involves a pledge to work towards

Eurozone membership, (except in the cases of the United Kingdom and Denmark who have opt-

outs). Currently, 15 of the 27 EU member states use the euro. Each EU member's central bank is

part of the European System of Central Banks, and in addition, those that use the euro are part of

the European Union's central bank, the European Central Bank.

There are some non-EU members who have elected to use the euro as their national currency,

either with or without specific agreements with the EU to do so, (those with agreements with the

EU may mint their own euro coins). The French overseas territories and departments of Mayotte

and Runion in the Indian Ocean, Guadeloupe and Martinique in the Caribbean and FrenchGuiana in South America all use the euro, among many other islands in the Pacific, Caribbean

and indeed around the globe that are ruled directly by European countries.

Some countries while maintaining their own national currency have pegged its value to the euro.

In some of these countries, there is a fixed exchange rate between the national currency and the

euro and in this case the currency is actually a submultiple of the euro. In other countries, the

national currency's value fluctuates within a band (generally 15%) around a set rate. Currencies


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pegged to the euro include the currencies of Bulgaria, Estonia, Lithuania, Bosnia and

Herzegovina and Cape Verde. Denmark & Latvia have a foreign exchange band tied to the euro.

The CIS is also planning to introduce a single currency among its members.

The bulk of the EU's external trade is done with the United States, Brazil, China, India, Russia

and non-member European states.EU members are represented by a single official at the WTO.

The EU is involved in a few minor trade disputes. It had a long running dispute with the USA of

allegedly unfair subsidies the US government gives to several companies, such as Boeing. There

is also a dispute with China over textile exports, and the EU has a long running ban prohibiting

arms trade with the Chinese.

In early 2010 fears of a sovereign debt crisis or the 2010 Euro Crisis also known as Aegean

Contagion developed concerning some countries in Europe including: Greece, Spain, and

Portugal. This led to a crisis of confidence as well as the widening of bond yield spreads and risk

insurance on credit default swaps between these countries and other EU members, mostimportantly Germany.

Concern about rising government deficits and debt levels across the globe together with a wave

of downgrading of European Government debt has created alarm in financial markets. The debt

crisis has been mostly centered on recent events in Greece, where there is concern about the

rising cost of financing government debt. On 2 May 2010, the Euro zone countries and the

International Monetary Fund agreed to a 110 billion loan for Greece, conditional on the

implementation of harsh Greek austerity measures. On 9 May 2010, Europe's Finance Ministers

approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring

financial stability across Europe by creating the European Financial Stability Facility.

The Greek economy was one of the fastest growing in the euro zone during the 2000s; from 2000to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong

economy and falling bond yields allowed the government of Greece to run large structural

deficits. According to an editorial published by the Greek newspaper Kathimerini, large public

deficits are one of the features that have marked the Greek social model since the restoration of

democracy in 1974. After the removal of the right leaning military junta, the government wanted

to bring disenfranchised left leaning portions of the population into the economic mainstream. In

order to do so, successive Greek governments have, among other things, run large deficits to

finance public sector jobs, pensions, and other social benefits. Since 1993 debt to GDP has

remained above 100%.

Initially currency devaluation helped finance the borrowing. After the introduction of the euroGreece was initially able to borrow due the lower interest rates government bonds could

command. The global financial crisis that began in 2008 had a particularly large effect on

Greece. Two of the country's largest industries are tourism and shipping, and both were badly

affected by the downturn with revenues falling 15% in 2009.

To keep within the monetary union guidelines, the government of Greece has been found to have

consistently and deliberately misreported the country's official economic statistics. In the


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beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks

hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual

level of borrowing. The purpose of these deals made by several subsequent Greek governments

was to enable them to spend beyond their means, while hiding the actual deficit from the EU

overseers.

In 2009, the government of George Papandreou revised its deficit from an estimated 6% (8% if aspecial tax for building irregularities were not to be applied) to 12.7%. In May 2010, the Greek

government deficit was estimated to be 13.6% which is one of the highest in the world relative to

GDP. Greek government debt was estimated at 216 billion in January 2010.[24] Accumulated

government debt is forecast, according to some estimates, to hit 120% of GDP in 2010. The

Greek government bond market is reliant on foreign investors, with some estimates suggesting

that up to 70%[citation needed] of Greek government bonds are held externally.

Estimated tax evasion costs the Greek government over $20 billion per year. Despite the crisis,

Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January).

According to the Financial Times on 25 January 2010, "Investors placed about 20bn ($28bn,

17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) governmenthad reckoned on." In March, again according to the Financial Times, "Athens sold 5bn (4.5bn)

in 10-year bonds and received orders for three times that amount."

EU emergency measures

On 9 May 2010 the 27 member states of the European Union agree to create the European

Financial Stability Facility (EFSF), a legal instrument aiming at preserving financial stability in

Europe by providing financial assistance to eurozone states in difficulty.In order to reach these

goals the Facility is devised in the form of a special purpose vehicle (SPV) that will sell bonds

and use the money it raises to make loans up to a maximum of 440 billion to eurozone nations


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in need. The bonds will be backed by guarantees given by the European Commission

representing the whole EU, the eurozone member states, and the IMF. The new entity will sell

debt only after an aid request is made by a country. The EFSF will be combined to a 60 billion

loan coming from the European financial stabilisation mechanism (reliant on guarantees given by

the European Commission using the EU budget as collateral) and to a 250 billion loan backed

by the IMF in order to obtain a financial safety net up to 750 billions.[148][149] Theagreement allows the European Central Bank to start buying government debt which is expected

to reduce bond yields. (Greek bond yields fell from over 10% to just over 5%;Asian bonds also

fell with the EU bailout.) The ECB has announced a series measures aimed at reducing volatility

in the financial markets and at improving liquidity.

Stocks worldwide surged after this announcement as fears that the Greek debt crisis would

spread subsided, some rose the most in a year or more. The Euro made its biggest gain in 18

months, before falling to a new four-year low a week later. Commodity prices also rose

following the announcement. The dollar Libor held at a nine-month high. Default swaps also fell.The VIX closed down a record almost 30%, after a record weekly rise the preceding week that

prompted the bailout.

Despite the moves by the EU, the European Commissioner for Economic and Financial Affairs,

Olli Rehn, called for "absolutely necessary" deficit cuts by the heavily indebted countries of

Spain and Portugal.[ Private sector bankers and economists also warned that the threat from a

double dip recession has not faded. Stephen Roach, chairman of Morgan Stanley Asia, warned

about this threat saying "When you have a vulnerable post-crisis economic recovery and crises

reverberating in the aftermath of that, you have some very serious risks to the global business

cycle." Nouriel Roubini said the new credit available to the heavily indebted countries did not

equate to an immediate revival of economic fortunes: "While money is available now on thetable, all this money is conditional on all these countries doing fiscal adjustment and structural

reform."

After initially falling to a four-year low early in the week following the announcement of the EU

guarantee packages, the euro rose as hedge funds and other short-term traders unwound short

positions and carry trades in the currency.

Currency Tracking

DateExchangeRate

11.06.201

0

56.6577

12.06.201

0

56.6551

13.06.201

0

57.3197

14.06.201 57.3365


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0

15.06.201

0

56.8858

16.06.201

0

57.1104

17.06.201

0

57.1678

18.06.201

0

57.233

19.06.201

0

57.1024

20.06.201

0

56.9044

21.06.201

0

58.085

22.06.201

0

56.5937

23.06.201

0

56.663

24.06.201

0

56.7391

25.06.201

0

57.1788

26.06.201

0

57.1867

27.06.201

0

58.1597

28.06.201

0

58.163

29.06.201

0

56.9574

30.06.201

0

56.7444

01.07.201

0

56.9744

02.07.201

0

57.5678

03.07.201

0

58.486

04.07.201

0

59.4608

05.07.201

0

59.4934

06.07.201

0

58.613

07.07.201

0

58.9123

08.07.201

0

59.2811

09.07.201

0

59.2968


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The euros 14.5 percent drop against the dollar this year is pushing up inflation just as risingenergy prices hurt consumers purchasing power. European Central Bank President Jean-ClaudeTrichet said on June 10 that inflation might further accelerate even with the euro regionseconomy seen expanding at only a moderate pace this year.

30/06/2010-Euro-area consumer prices rose 1.4 percent from a year earlier after increasing 1.6percent in May, the European Union statistics office in Luxembourg.

08/07/2010-The European Central Bank left interest rates at a record low as rising marketborrowing costs and the sovereign debt crisis threaten to derail the regions economic recovery.

Eurozone inflation eased in June and remained within the official target range, giving no reasonto change monetary policy.

The consumer price index rose 1.4% year-on-year in June, slower than May's 1.6% increase,final data from Eurostat showed. That confirmed a preliminary figure released on June 30. Ayear earlier, inflation was negative 0.1%. The European Central Bank targets inflation rates of'below, but close to, 2%' over the medium term.

On a monthly basis, the consumer price index, or CPI, was flat in June. The core CPI thatexcludes energy, food, alcohol and tobacco rose 0.9% year-on-year following a 0.8% rise inMay.

Eurozone inflation could increase somewhat further in subsequent months, as energy and foodprice inflation temporarily move higher, ING Bank NV economist Martin van Vliet said. Butwith core inflation set to slow further and to remain low thereafter, the outlook is still for below-target inflation in the medium term. Consequently, ECB rate hikes remain a distant prospect, theeconomist added.

Following the announcement of the interest rate decision earlier last week, ECB President Jean-Claude Trichet had said inflationary pressures over the medium term remain contained. Hence,the current ECB interest rates are appropriate, he noted.

"We expect price stability to be maintained over the medium term, thereby supporting thepurchasing power of euro area households," Trichet had said adding that the firm anchoring ofinflation expectations remains of the essence.

The retreat in Eurozone consumer price inflation in June reinforces belief that any interest ratehike by the ECB is a long way off, IHS Global Insight's economist Howard Archer noted. Assuch, the economist expects the central bank to keep interest rates down at the current level of1% not only through 2010, but deep into 2011.

PURCHASING POWER PARITYTHEORY

Et = [(1+ih) ^t/ (1+if) ^t]*e0


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Et = Exchange rate of foreign country

Eo = Exchange rate of home country

ih = Inflation rate of INR

if = Inflation rate of Euro Zone

t = Time period

As on 16/07/2009, 1 EUR= 68.79 INR, whereEUR is base currency

Et= 68.79 (1 - 0.098)^t/(1 + (- 0.001)^t

Et= 68.79 (0.902)^1/ (0.99)^1

1 EUR= 62.67 INR

But the rate on 16/07/2010 is 59.83 hence the difference is 2.84 INR per EUR

International Fisher EffectEt = Eo (1+rh) t / (1+rf) t

Et = Spot Exchange rate in period t

Eo = value of one unit of home currency at the beginning of the period

rh = interest rate of home country

rf = interest rate of foreign country

t = time period

Interest Rates

INR EURO

3.25% 1%

As on 16/07/2009, 1 EUR= 68.79 INR, where EUR is base currency

Et= 68.79 (1 + 0.0325)^t/(1 + 0.01)^t

Et= 68.79 (1.0325)^1/ (1.01)^1

1 EUR= 70.32 INR

Inflation Rates


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But the rate on 16/07/2010 is 59.83 hence the difference is 10.49 INR per EUR

Conclusion

As per the PPP currency forecast for 16/7/2010 is 62.71 INR 1 EUR while the spot rate on this

date is 59.83 so there is a difference between the spot and forecasted is 2.84 INR that means the

Indian rupee is undervalued.

Following are the reasons for the same.

1. Decline in the European economy.

2. Bailout package given to Greece.

3. Constantly depreciating INR because of higher interest rates in India.

4. High Inflation rates in India.

5. There is a improvement in European Inflation.

Biblography

www.x-rate.com

www.tradingeconomics.com

www.oanda.com
http://www.x-rate.com/http://www.tradingeconomics.com/http://www.oanda.com/http://www.x-rate.com/http://www.tradingeconomics.com/http://www.oanda.com/


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www.economictimes.com
http://www.economictimes.com/http://www.economictimes.com/

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