currency rate 31 march 2012

PRESENTED BY

YUVRAJ DHAGE

PRAHALAD PURANIK

KUNDAN LAL

Basis for calculation

Short Term Medium Term

Long Term

Sentimental Fundamental

Fundamental

Technical

Technical

Purchasing Power

Parity

Interest Rate Parity

BOP Parity

Purchasing Power Parity

Based on rate of Basket of commodities in each

country. Mc-burger theory

Present Exchange rate 49, means one $ can buy

goods worth Rs.49/-. If Exchange rate appreciate by

10%, to Rs.44/-, then it will be costly to US. But

inflation in US increased by 5%, then it equilibrium.

Interest Rate Parity

Components of interest

(Incentive + Risk premium + inflation)

Exchange rate movement = Real interest rate

differentials

Interest rate shows increasing trend.

RBI revised Inflation projection 6.00% to 7.00%.

Real Interest rate : India (1.19) and US (3.55)

Interest Rate Parity

continues….

Present Inflation in India is 9.44%.

US present inflation is 3.80%.

Despite Governments assurance for

reduction in inflation in both the

countries no concrete steps has been

taken so far.

BOP

GDP growth forecast for 2011-12 is between

7.5% to 8.0% (FICCI).

India’s CAD is widening.

The incremental credit deposit ratio was 47%

(last year-83%) during Apr-Sep (RBI data).

Government has given export incentives.

FC debt for USD137b(43.3% of forex reserve) is

to be paid back over the next 12 months.

Basis for forecast

Logical Global Movements :

RBI says that the fall in currency is due to global

change and nothing specific in the country is driving

the fall.

Europe’s debt crisis would dampen demand for

exports (18% of our total exports)

Spain’s credit rating cut by Fitch from AA+ to AA-

Downgrade of various European and UK banks

continuing

Logical Global Movements

Greek Economic stuck in recession. GDP is seen

contracting by 2.5% next year from 5.5% slump in 2011

according to the country’s 2012 budget draft which was

submitted to parliament after agreement with

international inspector.

European Central Bank president Jean Claude Trichet

said the reasons debt crisis now threatens the financial

systems

Logical Global Movements

Continue…

Global turmoil does not seem to come to any

halt in near future. Any small announcement

brings volatility in the market and add fuel to

the sentiment of FIIs.

Even the US is struggling to manage its debt and

unemployment.

Some Domestic facts

Unlike 2008, this time fall in INR has been much

sharper than the rise in USD index. While rupee

has lost 11.5% in two month, the USD index has

risen by 6% (2008- 18.02/17.73)

Macroeconomic condition is also not as strong as

it was in 2008.

Calculation on the basis of

Interest Rate

Forward rate = S ((1 + (rd x t)

/(1+ rf x t )

) + C

S = Spot rate

rd = Domestic interest rate

rf = Foreign currency interest rate

t - the life of the forward contract

C = transaction cost of bid-ask spread in FX markets and bid ask

spread in Money markets

Since Indian Rupee is not fully convertible, the forward rate is determined

not only by interest rate differential but also expectation of spot movement

Calculation on the basis of

Interest Rate

Forward rate = S ((1 + (rd x t)

/(1+ rf x t )

)

49.18(1+.08 x 5/12)

------------------------

1+.0002 x 5/12

= 50.76

Technical Analysis

25/04/2011 to 07/10/2011

41

42

43

44

45

46

47

48

49

50

4/25/2011 5/25/2011 6/25/2011 7/25/2011 8/25/2011 9/25/2011

Rate

Date

EXCHANGE RATE

Basis for forming an opinion

Short term movement in exchange rate

depend largely on oil prices and inflow &

outflow of FII.

There is no indication of major variation in

oil prices.

Sentimental movement of FII is beyond

control because of global uncertainty.

Contd..

No indication of major change in Inflation and Interest rates of both countries.

Effect of global factors has not fully percolated to INR.

Euro zone is yet to come out of the crisis.

US is struggling to manage its debt and domestic affair.

In Sept 2011 S & P raised the probability of US double dip recession to 40%.

News of any sudden international economic imbroglio cannot be avoided.

We are having managed floating rate, RBI is supporting at Rs.50/-.

Contd..

At the same time, we have seen in past

that when rupee depreciated beyond

10%, it never reversed to its previous

position.

Despite all odds India remains a favorable

destination for FII and there is a

possibility of revisiting of FII for the same

reason that rupee has crashed against

dollar.

Conclusion

Considering the above, we are of the

opinion that exchange rate will be within

the band of 49.00 to 50.00

Bibliography

www.rbi.org.in

www.ficci.com

www.tmb.in

www. crisil.com

Business Line

Business Standard

The Economic Times