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FACTORS AFFECTING THEVOLATILITY OF FOREIGN EXCHANGE
RATE
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Factors affecting Exchange Rate
Slowdown in GDP growth
Balance of Payment
Index of Industrial Production
Market movements
Price Movements
Liquidity
Reer and Neer
Conclusion and Forecast
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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. Theslowdown can be directly attributed to negative growth in the manufacturing and
agriculture sectors.
Rs In Crore
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What is scary about a shrinking agricultural sector is
that, though it contributes to less than 20 percent ofGDP, 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.
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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 -36,307
4. Invisibles,
net 15,310 21,521 16,940 25,684 21,522 21,663
5. Current
Account
Balance (3+4) -6,680 -8,996 -4,297 -12,829 -4,531 -14,644
6. Capital
Account
Balance 17,880 11,231 33,533 8,095 31,269 -3,237
7. Change in
Reserves -11,200 -2,235 -29,236 4,734 -26,738 17,881
US Million dollar
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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., excludingvaluation) declined due to widening of current account deficit
combined with net outflows under the capital account.
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Sluggish Export growth remains a
major concern
-14000
-12000
-10000
-8000
-6000
-4000
-2000
00
5000
10000
15000
20000
25000
30000
35000
April
Ma
y
Jun
e
July
August
September
October
November
December
January
February
Marc
h
Export
import
TradeDeficit
-13140
-2900
Indias 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 inpetroleum, 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 wasmoderate. Merchandise trade
deficit during April-November
2008 widened to US $ 84.4
billion from US $ 53.2 billion a
year ago.
US Million dollar
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Trade Deficit on tips and toes of Crude prices
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
0
20
40
60
80
100
120
140
160
APR
MAY
JUNE
JULY
AUG
SEPT
OCT
NOV
DEC
JAN
FEB
MAR
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 commodityprices, 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
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Index of Industrial
Production
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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%
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Industrial growth showing signs of
recovery
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Mining Manufacturing Electricity General
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
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Use based Classification
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Basic goods Capital goods Intermediate goods
2007-08
2008-09
Growth rate of march
Basic 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
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Use based Classification
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Consumer Goods Consumer durable consumer non
durable
2008-09
2007-08
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 improveddemand and therefore improved
output maybe the de-stocking of
inventories was over. So, its a
consumer goods lead
improvement in the IIP.Source: http://www.mospi.gov.in
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Market Movement
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EQUITY MOVEMENT DIRECT RUPEES DIRECTION
Indian stock marketposted its biggest
historical downfall
during the year 2008-
09. While Indian rupee
depreciated nearly 19
percent during thesame 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
35.00
37.00
39.00
41.00
43.00
45.00
47.00
49.00
51.00
53.00
0
5,000
10,000
15,000
20,000
Date
18-Apr-08
9-May-08
30-May-08
20-Jun-08
11-Jul-08
1-Aug-08
22-Aug-08
12-Sep-08
3-Oct-08
24-Oct-08
14-Nov-08
5-Dec-08
26-Dec-08
16-Jan-09
6-Feb-09
27-Feb-09
20-Mar-09
10-Apr-09
1-May-09
Sensex
Dollar
rupee
17320.4
8400.9
39.8
51.7
42.3
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35.00
37.00
39.00
41.00
43.00
45.00
47.00
49.00
51.00
53.00
0
50000
100000
150000
200000
250000
300000
350000
Date
18-Apr-08
9-May-08
30-May-08
20-Jun-08
11
-Jul-08
1-
Aug-08
22-
Aug-08
12-Sep-08
3-Oct-08
24-Oct-08
14-Nov-08
5-
Dec-08
26-
Dec-08
16-Jan-09
6-Feb-09
27-Feb-09
20-Mar-09
10-Apr-09
1-May-09
ForeignExchange
reserve
Dollar rupee
51.71
Foreign Exchange Reserve
Indias Foreign
exchange Reserve
have peaked during
the FY 08 to $316.171
billion due to heavy
inflows entering into
India. However SinceOct 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.
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Foreign Capital Inflows- Foremost Step to Study
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
-1700
-1200
-700
-200
300
800
Date
18-Apr-08
9-May-08
30-May-08
20-Jun-08
11-Jul-08
1-Aug-08
22-Aug-08
12-Sep-08
3-Oct-08
24-Oct-08
14-Nov-08
5-Dec-08
26-Dec-08
16-Jan-09
6-Feb-09
27-Feb-09
20-Mar-09
10-Apr-09
1-May-09
Total FII Dollar rupee
Foreign Capital inflows are of primeimportance having an immediate
impact on Indias 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 GoIsBonds. 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
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Price Movement
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Crude Oil Prices and Inflation moves hand in hand
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
0
20
40
60
80
100
120
140
160
Date
18-Jan-08
8-Feb-08
29-Feb-08
21-Mar-08
11-Apr-08
2-May-08
23-May-08
13-Jun-08
4-Jul-08
25-Jul-08
15-Aug-08
5-Sep-08
26-Sep-08
17-Oct-08
7-Nov-08
28-Nov-08
19-Dec-08
9-Jan-09
30-Jan-09
20-Feb-09
13-Mar-09
3-Apr-09
24-Apr-09
Crude oil prices WPI index
12.63
Corr = 0.74
The increase in inflation duringMarch-August 2008 was
mainly on account of some
pass-through of high
international crude oil prices
to domestic prices aswell as
elevated levels of prices of iron
and steel, basic heavyinorganic chemicals,
machinery and machine tools,
oilseeds/oil cakes, raw cotton
and textiles. Inflation
decelerated sharply as
international energy and
commodity prices declinedsubstantially and demand
pressures eased following the
impact of global financial
crisis.
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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 %.
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Second Stimulus Package
The Second Stimulus Package was announced by RBIon Friday 2nd January 2009.
RBI cut key Repo Rate further by an aggressive 100bpts 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 addsfurther liquidity to the financial markets. RBI is worriedthat due to liquidity crunch the Indian GDP growthshould not suffer in this fiscal.
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Third Stimulus Package
Govt. of India announced a surprise third Stimulus
Package on 24th February09 cutting excise duty
and service tax by 2.00 % on majority of bulk
products and select services.
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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 theeconomy 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.
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Key Policy Rates
0
1
2
3
4
5
6
7
8
9
10
Mar'04
Oct'04
Oct'05
Jun'06
Oct'06
Jan'07
Mar'07
May'07
Nov'07
Apr'08
Jun'08
Aug'08
Oct'08
Dec'08
Mar'09
Repo Rate
Reverserepo
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
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Liquidity Indicators
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Liquidity Indicators
0.00
0.501.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
0
10000
20000
30000
40000
50000
60000
6thFeb09
27thFeb09
6thMar09
27t
hMar09
3rdApr09
24thApr09
1stMay09
21stMay09
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 companyand other banks can also
participate in CBLO.
CBLO is regulated by CCIL
whereas Call market
depends upon thewillingness of borrower and
lender.
Source:http://www.ccilcertification.co.in/ocm/
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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%
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Government Financing through T Bills
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
12-Nov-08
26-Nov-08
10-Dec-08
24-Dec-08
7-Jan-09
21-Jan-09
4-Feb-09
18-Feb-09
4-Mar-09
18-Mar-09
1-Apr-09
15-Apr-09
29-Apr-09
13-May-
91-DayT-Bill
182 -DayT-Bill
364 -DayT-Bill
7.21
7.31
7.19
The Central
Government borrows
funds to finance its
'fiscal deficit'. The
market borrowing ofthe Central Government
is raised through the
issue of dated securities
and 91, 182 or 364 days
treasury bills either by
auction or by floatationof loans.
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Spread shrinks on improved risk
appetite
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
1-Jan-09 1-Feb-09 1-Mar-09 1-Apr-09 1-May-09
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
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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 ofsignificant 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
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Conclusion And Forecasting
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Pros
Foreign capital inflow from Mar to May is $5.5 billion
Indias foreign exchange reserves went up by $4.24billion to $255.94 billion during the week ended May15, 2009, mainly due to revaluation of currencies.
Foreign currency assets increased on account of theappreciation of euro, sterling and yen against the USdollar held in the reserve.
Liquidity is sufficient to pay for imports
As cement, automobiles and steel sectors haveimproved so we can say that infrastructure andmanufacturing would recover due to increase indemand
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Cons
The Indian rupee has lost close to 25 percent of its value inless than a year, yet its exports have been fallingconsistently 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, therecent fall in the rupee may not prove much lucrative.
Hence, Slowdown in Export resulting in threat to ForexReserve
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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
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Forecasting
Hence we have concluded that USD/INR
would be stable at Rs 44 for the 1st quarter for
2009-10.