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FACTORS AFFECTING THE

VOLATILITY OF FOREIGN
EXCHANGE RATE
•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
Rs In Crore

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.
• 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
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
US Million
dollar
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
-2900 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 $
Trade Deficit on tips and toes of Crude prices
US Million
dollar 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
Index of Industrial
Production
Index of Industrial
production
Industrial growth showing signs
of recovery
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-

Source:
http://www.mospi.gov.in
Use based Classification
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
Source:
http://www.mospi.gov.in
Use based Classification
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
Source: improved output maybe the
http://www.mospi.gov.in de-stocking of inventories
Market Movement
EQUITY MOVEMENT DIRECT RUPEE’S

51.7
Indian stock
market posted its
biggest historical
downfall during
the year 2008-09.
While Indian rupee
depreciated nearly
4 19 percent during
2.3
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
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
Foreign Capital Inflows- Foremost Step to
US Million
Study
Dollar
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
Price Movement
Crude Oil Prices and Inflation moves hand
in hand
The increase in
de inflation during
ruC Corr = March-August 2008
in e
e e d ris gh 0.74 was mainly on account
i k s n to hi
Sp rice ate n ar of some pass-through
p re tio ye
th fla 6 of high international
in 1
to 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
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
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
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/hom
e.aspx
Liquidity Indicators
Liquidity Indicators
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
Source:http://www.ccilcertification.co.i
n/ocm/
Arbitrage Process
Borrow at 4.47% in call money
market
Spread of 28 basis point RBI
Banks
Park their funds in reverse repo
at 4.75%

Lend at Park at
CCIL 0.38% Banks 3.5% RBI

Banks make profit by this arbitrage


around 3.12%
Government Financing through
T Bills
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
If market condition is bad,
Risk appetite would be low.
Corporat Governme
e Buy ntSell
-4
at 5 at 1

Sell
Buy
at 10
at 5
15

Net gain of
6
6 Currency REER And Nominal
Exchange Rate
The 6-currency trade-
based REER which stood at
112.1 112.16 in April 2008,
6 indicating an overvaluation
of 12.2 per cent, gradually
declined to 100.07 in
February 2009 mainly on
account of significant
100.0 depreciation of the rupee
7
against the US dollar and
against other major
currencies like the euro,
the Japanese yen and the
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
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.