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PRESENTED BY:
91 SOBIYA KHAN
92 DHANANJAY KHANVILKAR
93 CLETUS LOPES94 ASHISH MATAI
95 SUMIT MEHTA
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I would like to express my special thanks of gratitude to
Professor Ajgoankar who gave us golden opportunity to do
this wonderful project on an interesting topic INDIAS
EXCHANGE RATE POLICY, which also helped me to dolot of research and I came to know about many new things.
I am really thankful to them.
Secondly I would also like to thank my parents and friends
who helped me a lot in finishing this project on time. I am
making this project not only for marks but to also increase my
knowledge .
THANKS AGAIN TO ALL WHO HELPED ME.
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It is rate between two currencies specifieshow much one currency is worth in terms of
the other. It is the value of a foreign nations currency in
terms of the home nations currency.
USD $ V/s Rs.
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Exchange rate is also known as Foreign
exchange rate or Forex rate.
The foreign exchange market is one of the
largest markets in the world.
By April2007, daily turnoverwas reported to be over
US $ 3.2 trillion.
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Spot exchange rateIt refers to the current exchange rate and quoted forimmediate delivery of foreign exchange .
Forward exchange rateIt refers to an exchange rate that is quoted and traded
today but for delivery and payment on a specific futuredate. Premium on currency
Discount on currency
Buying rate Selling rate
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Nominal exchange rate the rate at which we can
trade the currency of one country for the currency
of another Real exchange rate the rate at which we can
trade the goods and services of one country withthe goods and services of another.
Real exchange rate = (nominal exchange rate Xdomestic price) /(foreign price).
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It is the record of all transactions of theresidents with the rest of the world and viceversa.
Equilibrium exchange rate depends on
Demand for and supply of currency in forex
market. And demand and supply of foreign
exchange arise from debit and credit item inBOP.
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Measures the price of a basket of goods and
services available domestically relative to the
same basket available abroad
purchasing power parity.
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Prices of a Big Mac burger in McDonald'srestaurants in different countries.
If a BigM
ac costs US$4 in the United Statesand GBP 3 in the United Kingdom, the PPP
exchange rate would be 3 for $4.
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Devaluation the price of foreign currenciesunder a fixed exchange rate regime is increasedby official action
Revaluation-
the price of foreign currenciesunder a fixed exchange rate regime is decreasedby official action
Depreciation under a floating rate system, priceof foreign currencies increases because of market
adjustmentAppreciation - under a floating rate system, price
of foreign currencies decreases because of marketadjustment
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The devaluation of rupee in September 1949 and June 1966
HISTORICAL PERSPECTIVE
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Currency's value is matched to the value of anothersingle currency or to a basket of other currencies, orto another measure of value, such as gold
It is a rate that the central bank sets and maintainsas the official exchange rate.
To maintain exchange rate,the central bank buys and sellsits own currency on theforeign exchange market inreturn for the currency towhich it is pegged.
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y If, for example, it is determined that the value of asingle unit of local currency is equal to US$3, the
central bank will have to ensure that it can supplythe market with those dollars. In order to maintainthe rate, the central bank must keep a high level offoreign reserves.
yHowever, if the country persistently runs deficits inthe BOP, the central bank eventually runs out offoreign currencies, and will not be able to carry out
the interventions.
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Stabilizes the value of a currency
Makes trade and investments between the twocountries easier and predictable
Means to control inflation
Helps keep businesses competitive in foreignmarkets
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Heavy burden on exchange reserve
Country must have sufficient reserve
Fails to solve the balance of payment disequilibrium It is not a long term solution if the underlying
economy is weak.
International disagreement might be created whena country sets its exchange rate on a too low level
Fixing the exchange rate is not easy
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The rate is determined by the private market through supplyand demand.
It is in effect since 1973
C
lean floating
the central bank stands aside completely andallows the exchange rate to be freely determined in the forexmarket official reserve transactions are zero
Managed floating-the central bank intervenes to buy or sellforeign currencies periodically in an attempt to influence the
ex
change rates
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Simple operation, smoother, more fluidadjustment
Brings realism in forex transactions Disequilibrium in balance of payment is auto
stabilized
No need to maintain large fore
x
reserve
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Tends to create uncertainty on theinternational markets.
Encourages inflation Floating exchange rates are affected by more
factors than only demand and supply, such asgovernment intervention
Adverse effect of speculation
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yBalance of trade and investmentyPoliticsyOtherCountries
yEconomic Theoryy Interest RateyConsumersyHousing
y Industrial and Economic IndicatoryCapital MarketyEconomyy Inflation
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More import and less export
Less Import and more export
Balance of investment
Budget deficit and national debt
Presidents popularity
Terrorist attacks and war
Elections
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OTHERCOUNTRIES
Turmoil in other countries
A change in foreign reserves
Acceptance of commodities in dollars
Strong foreign economies
ECONOMICTHEORY
Demand for currency
Increase in money supply
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INTEREST RATES
CONSUMER BEHAVIOR
Savings
Spending
HOUSING
Slow housing market
Overinflated housing market
INFLATION RATE
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INDUSTRYAND ECONOMIC
INDICATORS
Growth inMfg/ Employment
Outsourcing
Entrepreneurship
CAPITALMARKET
Bear marketsBull markets
Accounting scandals
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ECONOMY
Economic growth and stability
Economic recession
Outperforming other economies
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CurrentAccountConvertibility:Convertibility required in the case oftransactions relating to exchange of goods and services, money transfers,income and current transfers and all those transactions are classified asCurrent AccountConvertibility
E.g.: If an Indian citizen needs foreign exchange of smaller amounts, say$1,000, for going abroad or for educational purposes, she/he can obtainthe same from a bank or a money-changer. This is a current accounttransaction
CapitalAccount convertibility: A capital account refers to capitaltransfers and acquisition or disposal of non-produced, non-financialassets
E.g.: Suppose, one wants to import plant and machinery or investabroad, and needs a large amount of foreign exchange, say $2 million, theimporter will have to first obtain the permission of the Reserve Bank of
India (RBI). If approved, this becomes a capital account transaction
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There are restrictions on either residents orforeigners converting currency for transactionsbut no ban on at least one side resorting to
such conversion. There are ceilings on the amount of foreign
exchange that can be purchased by residentsor firms registered in the country foracquisition of assets abroad.
Rupee is not convertible for all transactions oncapital account or inflows and outflows ofcapital.
Also known as external convertibility.
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In March 1992, under dual exchange rate system,60% of all the receipts foreign exchange wereexchanged at the market rate, remaining 40% of thereceipts were converted at the official rate of
exchange.
It is available for some transactions like for goods,services, capital movements, some selected itemsof goods, services and capital.
Restrictions on the amounts of the currencies thatcan be exchanged.
It is applicable for the transactions on capital
account.
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Controls on capital movementsinclude prohibitions
Reduces the uncertainty ofoutflow of foreign funds with
short term maturity .
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In 1991, India pawned 67 tons of gold to tide overa balance of payments crisis.
18 years later, the Reserve Bank of India hasbought thrice that amount of gold from the IMFto diversify its assets.
In other words, it is a hedge
against a falling dollar.
The exchange rate of the
dollar against the rupee will
decline as many countries
are following suit.INDIAN FINANCE MINISTER
PALANIAPPAN CHIDAMBARAM
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The dollar continues to dominate global currency
reserves nearly 64 per cent, against 27 per cent
held in Euros.
Some countries prefer to price all petroleum
products only in the US dollar. Many of the worlds currencies are pegged against
the dollar.
Some countries have dispensed with their owncurrencies and adopted the US dollar as their
currency Dr. Manmohan Singh :As far as I can see right
now, there is no substitute for the dollar.China holds about $2.5 trillion of reserve assets and have notdisposed of even a fraction of them. This shows their confidence
in the US dollar.
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The Indian economy has the competence of bearing the strains of freecapital mobility given its fantastic growth rate and investor confidence.
The FOREX reserves provide enough buffer to bear the immediate
flight of capital which although seems unlikely given themacroeconomic variables of the economy alongside the confidencethat international investors have leveraged on India.
However it must not be forgotten thatCAC is a big step and integrates
the economy with the global economy completely thereby subjecting itto international fluctuations and business cycles.
Thus due caution must be incorporated while taking this decision inorder to avoid any situation that results in economic downfall instead of
rise in the economy.
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THANK