Presented By

[5] Aniket Banerjee
Mitesh Chawhan
[23] Kirankumar Jathar
[25] Sunil Kale
[29] Anuja Khandekar
Prashant Mali
[41] Harshvardhan Pandere
Umesh Rai
[53] Vijayraj Shetty

 It

is rate between two currencies
specifies how much one currency is
worth in terms of the other.
 It is the value of a foreign nation’s
currency in terms of the home
nation’s currency.
 USD $ V/s Rs.

 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 turnover
was reported to be over
US $ 3.2 trillion.

 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 turnover was
reported to be over US $ 3.2 trillion.

 Spot

exchange rate

It refers to the current exchange rate and
quoted for immediate delivery of foreign
exchange .

 Forward

exchange rate

It refers to an exchange rate that is quoted
and traded today but for delivery and
payment on a specific future date.
• Premium on currency
• Discount on currency
Buying rate
Selling rate

 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 with the goods and services
of another.
 Real exchange rate = (nominal
exchange rate X domestic price) /(foreign

 It

is the record of all transactions of
the residents with the rest of the
world and vice versa.
 Equilibrium exchange rate depends
 Demand for and supply of currency
in forex market.
 And demand and supply of foreign
exchange arise from debit and
credit item in BOP.

 Measures

the price of a basket of
goods and services available
domestically relative to the same
basket available abroad –
purchasing power parity.

 Prices

of a Big Mac burger in McDonald's
restaurants in different countries.
If a Big Mac costs US$4 in the United States and
GBP £3 in the United Kingdom, the PPP exchange
rate would be £3 for $4.

 Devaluation

– the price of foreign
currencies under a fixed exchange rate
regime is increased by official action
 Revaluation - the price of foreign
currencies under a fixed exchange rate
regime is decreased by official action
 Depreciation – under a floating rate
system, price of foreign currencies
increases because of market adjustment
 Appreciation - under a floating rate
system, price of foreign currencies
decreases because of market adjustment

 Early Stages: 1947-1977
 Formative Stage: 1978-1992
 Post-Reform Stage: 1992 onwards

Early Stages: 1947-1977
The evolution of India’s foreign exchange market may be viewed in
line with the shifts in India’s exchange rate policies over the last
few decades from a par value system to a basket-peg and
further to a managed float exchange rate system.
During the period from 1947 to 1971, India followed the par value
system of exchange rate. The Reserve Bank maintained the par
value of the rupee within the permitted margin of ±1 per cent using
pound sterling as the intervention currency. Since the sterlingdollar exchange rate was kept stable by the US monetary authority,
the exchange rates of rupee in terms of gold as well as the dollar
and other currencies were indirectly kept stable.

The devaluation of rupee in September 1949 and
June 1966


Early Stages: 1947-1977
Given the fixed exchange regime during this period, the foreign exchange market for
all practical purposes was defunct.
The objective of exchange controls was primarily to regulate the demand for
foreign exchange for various purposes, within the limit set by the available supply.
The Foreign Exchange Regulation Act initially enacted in 1947 was placed on a
permanent basis in 1957.
In terms of the provisions of the Act, the Reserve Bank, and in certain cases, the
Central Government controlled and regulated the dealings in foreign exchange
payments outside India, export and import of currency notes and bullion, transfers of
securities between residents and non-residents, acquisition of foreign securities.
With the breakdown of the Bretton Woods System in 1971 and the floatation of
major currencies, the conduct of exchange rate policy posed a serious challenge to all
central banks world wide as currency fluctuations opened up tremendous opportunities
for market players to trade in currencies in a borderless market.
In December 1971, It was around this time that banks in India became interested in
trading in foreign exchange.


Formative Stage: 1978-1992
The impetus to trading in the foreign exchange market in India came in 1978 when
banks in India were allowed by the Reserve Bank to undertake intra-day trading in
foreign exchange and were required to comply with the stipulation of maintaining
‘square’ or ‘near square’ position only at the close of business hours each day.
The extent of position which could be left uncovered overnight (the open position) as
well as the limits up to which dealers could trade during the day were to be decided by
the management of banks.
The exchange rate of the rupee during this period was officially determined by the
Reserve Bank in terms of a weighted basket of currencies of India’s major trading
partners and the exchange rate regime was characterized by daily announcement by
the Reserve Bank of its buying and selling rates to the Authorized Dealers (Ads) for
undertaking merchant transactions. Authorized Dealers were also permitted to trade in
cross currencies (one convertible foreign currency versus another).

Formative Stage:PERSPECTIVE
The foreign exchange market in India till the early 1990s, however,
remained highly regulated with restrictions on external transactions,
barriers to entry, low liquidity and high transaction costs. The exchange
rate during this period was managed mainly for facilitating India’s
imports. The strict control on foreign exchange transactions through
the Foreign Exchange Regulations Act (FERA) had resulted in one of the
largest and most efficient parallel markets for foreign exchange in the
world, i.e., the hawala (unofficial) market.
By the late 1980s and the early 1990s, it was recognised that both
macroeconomic policy and structural factors
had contributed to
balance of payments difficulties. Devaluations by India’s competitors
had aggravated the situation. Although exports had recorded a higher
growth during the second half of the 1980s ( 4.3 per cent of GDP in
1987-88 to about 5.8 per cent of GDP in 1990-91), trade imbalances
persisted at around 3 per cent of GDP. This combined with a
precipitous fall in invisible receipts in the form of private remittances,
travel and tourism earnings in the year 1990-91 led to further widening
of current account deficit.


Post-Reform Period: 1992 onwards
In July 1991 the massive drawdown in the foreign exchange reserves
Stopped the pegged exchange rate system & stared two-step adjustment of
exchange rate in July 1991 done to instill confidence among investors and to
improve domestic competitiveness.
The Report of the High Level Committee on Balance of Payments (Chairman: Dr. C.
Rangarajan). Following the recommendations of the Committee to move towards the
market-determined exchange rate, the Liberalized Exchange Rate Management System
(LERMS) was put in place in March 1992 initially involving a dual exchange rate
system. Under the LERMS, all foreign exchange receipts on current account
transactions (exports, remittances, etc.) were required to be surrendered to the
Authorized Dealers (ADs) in full. The rate of exchange for conversion of 60 per cent of
the proceeds of these transactions was the market rate quoted by the ADs, while the
remaining 40 per cent of the proceeds were converted at the Reserve Bank’s official
rate. The ADs, in turn, were required to surrender these 40 per cent of their
purchase of foreign currencies to the Reserve Bank. They were free to retain the
balance 60 per cent of foreign exchange for selling in the free market for permissible
transactions. The LERMS was essentially a transitional mechanism and a downward
adjustment in the official exchange rate took place in early December 1992 and ultimate
convergence of the dual rates was made effective from March 1, 1993, leading to the
introduction of a market-determined exchange rate regime.

Post-Reform Period: 1992 onwards
The dual exchange rate system was replaced by a unified exchange
rate system in March 1993, whereby all foreign exchange receipts could
be converted at market determined exchange rates. The
restrictions on a number of other current account transactions were
relaxed. With the rupee becoming fully convertible on all current
account transactions, the risk-bearing capacity of banks increased and
foreign exchange trading volumes started rising.


This was supplemented by wide-ranging reforms undertaken by the
Reserve Bank in conjunction with the Government to remove market
distortions and deepen the foreign exchange market.
The reform phase began with the Sodhani Committee (1994) made
several recommendations to relax the regulations with a view to
vitalizing the foreign exchange market

 Currency's value is matched to the value of another single currency or to

a basket of other currencies, or to another measure of value, such as gold

 It is a rate that the central bank sets and maintains as the official

exchange rate.

 To maintain exchange

rate, the central bank
buys and sells its own
currency on the foreign
exchange market in
return for the currency

If, for example, it is determined that the value

of a single unit of local currency is equal to
US$3, the central bank will have to ensure that
it can supply the market with those dollars. In
order to maintain the rate, the central bank
must keep a high level of foreign reserves.

However, if the country persistently runs

deficits in the BOP, the central bank eventually
runs out of foreign currencies, and will not be
able to carry out the interventions

To maintain exchange rate, the

central bank buys and sells its own
currency on the foreign exchange
market in return for the currency to
which it is pegged.
However, if the country

persistently runs deficits in the BOP,
the central bank eventually runs out
of foreign currencies, and will not be
able to carry out the interventions

 Stabilizes the value of a currency
 Makes trade and investments between the

two countries easier and predictable

 Means to control inflation
 Helps keep businesses competitive in

foreign markets

 Heavy burden on exchange reserve
 Country must have sufficient reserve
 Fails to solve the balance of payment

 It is not a long term solution if the
underlying economy is weak.
 International disagreement might be
created when a country sets its exchange
rate on a too low level
 Fixing the exchange rate is not easy

The rate is determined by the private market
through supply and demand.
It is in effect since 1973
Clean floating– the central bank stands aside
completely and allows the exchange rate to be
freely determined in the forex market – official
reserve transactions are zero
Managed floating-the central bank intervenes
to buy or sell foreign currencies periodically in an
attempt to influence the exchange rates

 Simple operation, smoother, more

fluid adjustment
 Brings realism in forex transactions
 Disequilibrium in balance of payment
is auto stabilized
 No need to maintain large forex

 Tends to create uncertainty on the

international markets.
 Encourages inflation
 Floating exchange rates are affected
by more factors than only demand
and supply, such as government
 Adverse effect of speculation

Demand and supply for foreign



Balance of trade and investment
Other Countries
Economic Theory
Interest Rate
Industrial and Economic Indicator
Capital Market

 More import and less export
 Less Import and more export
 Balance of investment

 Budget deficit and national
 President’s popularity
 Terrorist attacks and war


Balance of trade and investment
Other Countries
Economic Theory
Interest Rate
Industrial and Economic Indicator
Capital Market

More import and less export
Less Import and more export


Balance of investment
Budget deficit and national
President’s popularity
Terrorist attacks and war

Turmoil in other countries
A change in foreign reserves
Acceptance of commodities in

Strong foreign
Demand for currency
Increase in money supply


Slow housing market
Overinflated housing market


Growth in Mfg/ Employment

Bear markets
Bull markets
Accounting scandals


Economic growth and stability

Economic recession

Outperforming other economies

Current Account Convertibility: Convertibility required in the
case of transactions relating to exchange of goods and services,
money transfers, income and current transfers and all those
transactions are classified as Current Account Convertibility
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 obtain the same from a bank or a money-changer. This is
a ‘current account transaction’
Capital Account convertibility: A capital account refers to
capital transfers and acquisition or disposal of non-produced, nonfinancial assets
E.g.: Suppose, one wants to import plant and machinery or invest
abroad, and needs a large amount of foreign exchange, say $2
million, the importer will have to first obtain the permission of the
Reserve Bank of India (RBI). If approved, this becomes a ‘capital
account transaction’

Capital Account Convertibility
(CAC) was first coined as a theory
by the Reserve Bank of India in 1997
by the Tarapore Committee.
Objective: to find a fiscal and
economic policy that would enable
developing Third World countries
transition to globalized market

Capital Account Convertibility (CAC) means the
freedom to convert local financial assets into foreign
financial assets and vice versa at market determined
rates of exchange.

Capital Account Convertibility allows anyone to freely
move from local currency into foreign currency and

It refers to the removal of restraints on international
flows on a country's capital account, enabling full
currency convertibility and opening of the financial

Ensure total financial mobility in the country
Efficient appropriation or distribution of international capital
in India and also helps in attracting foreign investment
Enables foreign investors to re-convert local currency into
foreign currency anytime they want to and take their money
Helps domestic companies to tap foreign markets.
Greater access for resident companies to foreign capital and
debt markets – reduce cost of capital

 One

has to operate within the limits specified
by the reserve bank of India and obtain
permission from RBI for anything concerning
foreign currency

 With

the advent of capital account
convertibility, one would be able to look
forward to more and better goods and

 Help

NRI’s remove all shackles on movement
of their funds

CAC has 5 basic statements designed as points of

All types of liquid capital assets must be able to be
exchanged freely, between any two nations, with
standardized exchange rates.
2. The amounts must be a significant amount (in excess
of $500,000).
3. Capital inflows should be invested in semi-liquid
assets, to prevent churning and excessive outflow.
4. Institutional investors should not use CAC to
manipulate fiscal policy or exchange rates.
5. Excessive inflows and outflows should be buffered by
national banks to provide collateral.

It allows domestic residents to invest abroad and
have a globally diversified investment portfolio,
this reduces risk and stabilizes the economy..

Our NRI Diaspora will benefit tremendously if and
when CAC becomes a reality. The reason is on
account of current restrictions imposed on
movement of their funds. As the remittances
made by NRI’s are subject to numerous
restrictions which will be eased considerably
once CAC is incorporated.

It also opens the gate for international savings to
be invested in India. It is good for India if
foreigners invest in Indian assets — this makes
more capital available for India’s development.

Huge amounts of capital are moving across the border anyway. It
is better for India if these transactions happen in white money.
Convertibility would reduce the size of the black economy, and
improve law and order, tax compliance and corporate governance.

Most importantly convertibility induces competition against Indian
finance. Currently, finance is a monopoly in mobilizing the savings
of Indian households for the investment plans of Indian firms. No
matter how inefficient Indian finance is, households and firms do
not have an alternative, thanks to capital controls.

As trade liberalization has consequently led to lower prices and
superior quality of goods produced in India, capital account
liberalization will improve the quality and drop the price of
financial intermediation in India.

Good economy leads to huge inflows of foreign capital, but bad
economy will lead to an enormous outflow of capital under “herd
behavior” . For example, the South East Asian crisis.
Possibility of misallocation of capital inflows. E.g. capital inflows may
fund low-quality domestic investments, like investments in the stock
markets or real estates, and desist from investing in building up
industries and factories, which leads to more capacity creation and
utilization, and increased level of employment.
An open capital account can lead to “the export of domestic savings”
(the rich can convert their savings into dollars or pounds in foreign
banks or even assets in foreign countries), which for capital scarce
developing countries would curb domestic investment. Moreover,
under the threat of a crisis, the domestic savings too might leave the
country along with the foreign ‘investments’, thereby rendering the
government helpless to counter the threat.

 International

finance capital today is
“highly volatile”, i.e. it shifts from country
to country in search of higher speculative
returns. In this process, it has led to
economic crisis in numerous developing
countries. Such finance capital is referred
to as “hot money” in today’s context. Full
capital account convertibility exposes an
economy to extreme volatility on account
of “hot money” flows.

• The Indian economy has the competence of bearing the
strains of free capital 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 the macroeconomic variables of the economy
alongside the confidence that international investors have
leveraged on India.

• However it must not be forgotten that CAC is a big step
and integrates the economy with the global economy
completely thereby subjecting it to international
fluctuations and business cycles.

 There

are restrictions on either residents or
foreigners converting currency for
transactions but 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
residents or firms registered in the country
for acquisition of assets abroad.
 Rupee is not convertible for all transactions
on capital account or inflows and outflows of
 Also known as external convertibility.

In March 1992, under dual exchange rate
system, 60% of all the receipts foreign
exchange were exchanged at the market
rate, remaining 40% of the receipts were
converted at the official rate of exchange.

It is available for some transactions like
for goods, services, capital movements,
some selected items of goods, services
and capital.

Restrictions on the amounts of the
currencies that can be exchanged.

It is applicable for the transactions on


on capital movements
include prohibitions


the uncertainty of
outflow of foreign funds with
short –term maturity .

 It

is extent to which a country's
regulations allow free flow of money
into and outside the country
 After liberalization in 1991, the
government eased the movement of
foreign currency on trade account.
I.e. exporters and importers were
allowed to buy and sell foreign

Ability to exchange money for other currencies or for
gold without government restriction.
• There is no ban either on residents converting rupees
into foreign exchange or on foreigners converting
foreign exchange into rupees for investment purpose.
•Under FEMA Regulations, resident corporates have
been allowed to invest overseas up to 100 % of their
net worth or $100 million in an overseas joint venture
or wholly owned subsidiary
•In 2000, the forex policy allowed Indians to open
accounts abroad and transfer into them up to $
25,000 a year.

Allows the wealthy in India to widen
their portfolio of assets
 Acts as hedge against the risk
associated with investing in assets in
a single country

May not lead to a new "equilibrium"
in terms of the distribution of
domestic wealth-holding between
domestic and foreign assets

 There

are restrictions on either residents or
foreigners converting currency for
transactions but 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 residents
or firms registered in the country for
acquisition of assets abroad.

The Bretton Woods Agreement of 1944 fixed
the conversion rate for one troy ounce of gold
at $35.
August 1971 - United States President Richard
Nixon takes the dollar off the 'gold standard‘
March 1973 - Most major countries adopt
floating exchange rate system. US devalues
dollar to $42.2 per ounce.
January 1980 - Gold hits record high at $850
per ounce. High inflation because of strong oil
prices, Soviet intervention in Afghanistan and
the impact of the Iranian revolution, prompts
investors to move into the metal.
August 1999 - Gold falls to a low at $251.70
on worries about central banks reducing
reserves of gold bullion and mining
companies selling gold in forward markets to
protect against falling prices.

•Feb 20, 2009 - US gold futures
rise back above $1,000 an ounce
to a peak of $1,005.40 as
investors turn to gold as major
economies face recession and
Oct 6markets
- Gold hits
a record high of $1,035.95 an ounce
in Europe, with buying fuelled by dollar weakness.
• Oct 8 - Spot gold tops $1,050 per ounce, as the
dollar's continued struggle makes the precious metal
more attractive to investors.
• Nov 4 - Gold surges to 1,097.25 an ounce, a record
for a second straight day, as the dollar drops broadly
after the Federal Reserve says it intends to keep
interest rates low for some time.


In 1991, India pawned 67 tons of gold to tide
over a balance of payments crisis.
18 years later, the Reserve Bank of India has
bought thrice that amount of gold from the
IMF to diversify its assets.

•In other words, it is a
hedge against a falling
•The exchange rate of
the dollar against the
rupee will decline as

• Dubai world a holding firm had taken loans
to build real estate tourism ventures etc.
• They are not able to repay the interest.
• For the first time in almost 10 years is a
country defaulting.
• Since Dirham is pegged to the dollar
foreign investments are affected.
• This will result in the dollar becoming
weaker, gold rising further and the Rupee
becoming stronger.

• SDRs (Special Drawing Rights) are
defined in terms of a basket of major
currencies used in international trade and
• SDRs were originally created to replace
Gold and Silver in large international
• So called “Paper Gold”, eliminates the
security problems
• The Dollar, Euro andlogistical
Pound are
in the SDR—these
and forth reserve
currencies have been
losing gold
to secondary
borders to settle national accounts.
• The SDR does not contain the Yuan, Rupee, Australian Dollar
and Canadian Dollar which are important secondary reserve

Dec 02

Dec 01

Nov 30

Nov 29


0.9360090 0.9356070 0.9330000 0.9302830


1.0347600 1.0280900 1.0230500 1.0210800


0.6202840 0.6202840 0.6210480 0.6235980

0.0909149 0.0909667 0.0913442 0.0908998
•The International Monetary Fund allocated about $4.78 billion as its
share from Special Drawing Rights (SDR) fund to India for providing
to the recession
hit global
system. 0.0134116
0 and
•Out of IMF’s 186 member
developing countries would get over $18 billion out of the $100 billion

The recent G20 summit in London raised a few
questions about the SDR.
Russia and China suggested that the Dollar be
replaced with SDR as the new reserve currency.
The countries under this proposal could convert
their reserves from dollars to SDR’s without any
erosion in their value.

The dollar continues to dominate global
currency reserves — nearly 64 per cent,
against 27 per cent held in Euros.
OPEC countries prefer to price all
petroleum products only in the US dollar.
Many of the world’s currencies are pegged
against the dollar.
Some countries have dispensed with their
own currencies 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 not disposed of even a fraction of them. This
shows their confidence in the US dollar.”


Physical stock has
remained unchanged at
approximately 357 tonnes.
 Forex Reserves
981 251,985


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