Exchange rates and Economic Exchange rates and Economic InfrastructureInfrastructure

By,By, Archana.C.K Archana.C.K

Athishay.N Athishay.N Swetha SuvarnaSwetha Suvarna

Sandeep.P.MSandeep.P.MSuhas.RSuhas.R

EXCHANGE RATEEXCHANGE RATE

The The exchange ratesexchange rates between between two two currencies specifies how much specifies how much one currency is worth in terms of the one currency is worth in terms of the other. other.

For example an exchange rate of For example an exchange rate of 48 INR (i.e. Rs.49.16 ) to the 48 INR (i.e. Rs.49.16 ) to the United States dollar (i.e.,$1) means (i.e.,$1) means that Rs.49.16 is worth the same as $ that Rs.49.16 is worth the same as $ 1. 1.

1 INR in INRAmerican Dollar 0.0203400 49.16Australian Dollar 0.0312977 31.9513Brazilian Real 0.0458774 21.7972British Pound 0.0135185 73.9725Canadian Dollar 0.02526 39.5882Chinese Yuan 0.144328 6.92868Euro 0.0165687 60.3548Hong Kong Dollar 0.163844 6.10338Japanese Yen 2.07104 0.48285Malaysian Ringgit 0.0749683 13.339Mexican Peso 0.27093 3.69099New Zealand Dollar 0.0360104 27.7698Singapore Dollar 0.0315328 31.713Sri Lanka Rupee 2.32558 0.43Swedish Krona 0.165292 6.04991Taiwan Dollar 0.692812 1.44339

FOREX RESERVESFOREX RESERVES

Deposits of foreign currency held by Deposits of foreign currency held by a central bank. It includes currencies, a central bank. It includes currencies, gold holdings, special drawing rates, gold holdings, special drawing rates, exchange reserve balances with IMF.exchange reserve balances with IMF.

Holding the currencies of other Holding the currencies of other countries as assets allow govts to countries as assets allow govts to keep their currencies stable and keep their currencies stable and reduce the effect of economic reduce the effect of economic shocks.shocks.

TYPES OF TYPES OF EXCHANGE RATESEXCHANGE RATES

1. Fixed Exchange Rate2. Floating Exchange R

ate3. Cross Exchange Rate

1.Fixed Exchange Rates1.Fixed Exchange Rates:

The value of a currency fixed in relation to an another currency. Fixed, and not vulnerable to any changes or a particular period of time.

2.Floating Exchange Rates:2.Floating Exchange Rates:

Price is determined by demand Price is determined by demand and supply of the currency.and supply of the currency.

No interference by the No interference by the regulatory bodies unless there regulatory bodies unless there is a extremity in appreciation is a extremity in appreciation or depreciation.or depreciation.

3.cross exchange rate3.cross exchange rate::

A cross exchange rate is the value of A cross exchange rate is the value of one foreign currency expressed in one foreign currency expressed in another. For example, we can another. For example, we can deduce from the above figures that deduce from the above figures that

1 INR= 0.021141 USD1 INR= 0.021141 USD

1 USD=1.56 AUD1 USD=1.56 AUD

EXCHANGE RATE EXCHANGE RATE DETERMINATIONDETERMINATION

1.1. SPOT EXCHANGE RATESPOT EXCHANGE RATE

2.2. FORWARD EXCHANGE RATEFORWARD EXCHANGE RATE

EXCHANGE RATE EXCHANGE RATE DETERMINATIONDETERMINATION

1.1. SPOT EXCHANGE RATESPOT EXCHANGE RATE

2.2. FORWARD EXCHANGE RATEFORWARD EXCHANGE RATE

SPOT EXCHANGE RATESPOT EXCHANGE RATE

The The spot pricespot price or or spot ratespot rate of a of a currency is the is the price that is quoted that is quoted for immediate (spot) for immediate (spot) settlement (payment and delivery).(payment and delivery).

Spot settlement is normally one or Spot settlement is normally one or

two business days from trade date. two business days from trade date.

FORWARD EXCHANGE RATEFORWARD EXCHANGE RATE

THE EXCHANGE RATE QUOTED IN THE EXCHANGE RATE QUOTED IN TRANSACTION, WHERE A FUTURE TRANSACTION, WHERE A FUTURE VALUE DATE IS SPECIFIED, IS CALLED VALUE DATE IS SPECIFIED, IS CALLED AS FORWAED EXCHANGE RATE.AS FORWAED EXCHANGE RATE.

INSTRUMENTS IN FOREX INSTRUMENTS IN FOREX MARKETMARKET

FOREIGN EXCHANGE SWAPFOREIGN EXCHANGE SWAP

FUTURESFUTURES

OPTIONSOPTIONS

FOREIGN EXCHANGE SWAPFOREIGN EXCHANGE SWAP

The most common type of forward The most common type of forward transaction is the transaction is the currency swap. .

In a swap, two parties exchange In a swap, two parties exchange currencies for a certain length of currencies for a certain length of time and agree to reverse the time and agree to reverse the transaction at a later date. transaction at a later date.

These are not standardized contracts These are not standardized contracts and are not traded through an and are not traded through an exchange. exchange.

FUTURESFUTURES

Foreign currency futures are forward Foreign currency futures are forward transactions with standard contract sizes and transactions with standard contract sizes and maturity dates. For example, 500,000 British maturity dates. For example, 500,000 British pounds for next November at an agreed rate. pounds for next November at an agreed rate.

Futures are standardized and are usually Futures are standardized and are usually traded on an exchange created for this traded on an exchange created for this purpose. The average contract length is purpose. The average contract length is roughly 3 months. roughly 3 months.

Futures contracts are usually inclusive of any Futures contracts are usually inclusive of any interest amounts interest amounts

OPTIONSOPTIONS

A A foreign exchange option (commonly (commonly shortened to just FX option) is a derivative shortened to just FX option) is a derivative where the owner has the right but not the where the owner has the right but not the obligation to exchange money obligation to exchange money denominated in one currency into another denominated in one currency into another currency at a pre-agreed exchange rate on currency at a pre-agreed exchange rate on a specified date. a specified date.

The FX options market is the deepest, The FX options market is the deepest, largest and most liquid market for options largest and most liquid market for options of any kind in the world. of any kind in the world.

EXCHANGE RATEEXCHANGE RATE Appreciation of the Exchange RateAppreciation of the Exchange Rate

A rise in the value of the Rs in relation to A rise in the value of the Rs in relation to other currencies - each Rs buys more of other currencies - each Rs buys more of the foreign currency e.g. the foreign currency e.g.

$1 = Rs.43 to $1 = Rs.38$1 = Rs.43 to $1 = Rs.38 India’s exports appear to be expensiveIndia’s exports appear to be expensive

( ↓ Xp)( ↓ Xp) Imports to the India appear more Imports to the India appear more

cheaper ( ↑ Mp)cheaper ( ↑ Mp)

EXCHANGE RATEEXCHANGE RATE Depreciation of the Exchange Depreciation of the Exchange

RateRate A fall in the value of the Rs in relation A fall in the value of the Rs in relation

to other currencies - each Rs buys to other currencies - each Rs buys less of the foreign currency e.g. less of the foreign currency e.g.

$1 = Rs.43 $1 = Rs.49$1 = Rs.43 $1 = Rs.49 India’s exports appear to be cheaper India’s exports appear to be cheaper

( ↑ Xp)( ↑ Xp) Imports to the India’s appear more Imports to the India’s appear more

expensive ( ↓ Mp)expensive ( ↓ Mp)

DETERMINANTS OF EXCHANGE DETERMINANTS OF EXCHANGE RATERATE

Purchasing power parityPurchasing power parity Relative interest ratesRelative interest rates The demand for imports (D£)The demand for imports (D£) The demand for exports (S£)The demand for exports (S£) Investment opportunitiesInvestment opportunities Speculative sentimentsSpeculative sentiments Changes in relative inflation ratesChanges in relative inflation rates

Inflation ratesInflation rates AS THE COUNTRY’S INFLATION RATE AS THE COUNTRY’S INFLATION RATE

INCREASES CURRECY OF THAT INCREASES CURRECY OF THAT COUNTRY DEPRECIATES COUNTRY DEPRECIATES

10%10% INFLATION RATE 3%INFLATION RATE 3%

CURRENCY (PER USD) Rs.38 CURRENCY (PER USD) Rs.38

Rs.48 Rs.48

Purchasing power parityPurchasing power parity

It is a theory which compares the It is a theory which compares the purchasing capacity of purchasing capacity of currency with currency with the otherthe other

Economic Economic InfrastructureInfrastructure

Definition :Definition :

Internal facilities of a country thatInternal facilities of a country that

make business activity possible,make business activity possible,

such as:such as:

Communication,Communication,

Transportation,Transportation,

Distribution Networks,Distribution Networks,

Financial institutions and MarketsFinancial institutions and Markets

and Energy Supply Systems.and Energy Supply Systems.

What does Infrastructure include:What does Infrastructure include:

Communication: Internet, Mass media, Mobile.Communication: Internet, Mass media, Mobile.

Transportation: Shipping, Railway, AirportsTransportation: Shipping, Railway, Airports andand RoadsRoads..

Distribution Networks.Distribution Networks.

Financial institutions and Markets: FDI, FII and BankingFinancial institutions and Markets: FDI, FII and Banking

andand

Energy Supply Systems:Energy Supply Systems:

Petrolieum, Biogas, Water gas, Thermal, Hydro, Nuclear,Petrolieum, Biogas, Water gas, Thermal, Hydro, Nuclear,

Solar, Tidal, Wind.Solar, Tidal, Wind.

Factors for better Infrastructure :Factors for better Infrastructure :

1) General Education (including1) General Education (including

Related forms of classical culture).Related forms of classical culture).

2) Science and Technology2) Science and Technology

(Households, Agriculture, and(Households, Agriculture, and

Industry) and Industry) and

3) Health-Care delivery systems.3) Health-Care delivery systems.

Measuring Infrastructure : Measuring Infrastructure :

Per capitaPer capita (of the labor force) (of the labor force)

Per householdPer household

Per sq.kilometer of land-area.Per sq.kilometer of land-area.

Economy of IndiaEconomy of India

Diversified Economy.Diversified Economy.Agriculture, Handicrafts, Textiles, Agriculture, Handicrafts, Textiles,

Manufacturing and Services.Manufacturing and Services.GDP of 2007-08 = US $2.965 trillion.GDP of 2007-08 = US $2.965 trillion.22NDND fastest growing economy with an fastest growing economy with an

estimated GDP growth rate 8.5%estimated GDP growth rate 8.5%..77thth largest and the 2 largest and the 2ndnd most populous most populous

country.country.

Area:Area:  3.3 Million sq km.3.3 Million sq km.

India’s Private sector contributes for India’s Private sector contributes for more than 75% of its GDP.more than 75% of its GDP.

Mixed Economy : Capitalist Market Mixed Economy : Capitalist Market and Socialist Command Economy.and Socialist Command Economy.

Bold Judiciary.Bold Judiciary.Advanced Legal & Accounting Advanced Legal & Accounting

System andSystem andUser-friendly Infrastructure, facilities User-friendly Infrastructure, facilities

of Foreign Investments and Warrants of Foreign Investments and Warrants Long-term Investors in securities.Long-term Investors in securities.

Economic Infrastructure of IndiaEconomic Infrastructure of India

Transportation :Transportation :

AIR:AIR:Aircraft departures > 214,300 [19th of 155] > 214,300 [19th of 155]Airports w/paved runways > 914 to 1523 m 74 74

[7th of 117][7th of 117]Airports w/unpaved runways > 914 to 2437 m

[27rd of 121][27rd of 121]

LAND/ROAD:LAND/ROAD:Highways > Paved 1,517,080 km[1st of 171] 1,517,080 km[1st of 171]Highways > Total 3,319,640 km[1st of 181] 3,319,640 km[1st of 181]Motor vehicles : 12 motor vehicles /100persons : 12 motor vehicles /100persons [104th of 134][104th of 134]

Roads, total network > km 3,383,344 km 3,383,344 km ... [1st of 172][1st of 172]

Roadways > Paved 1,603,705 km [2nd of 205]Roadways > Paved 1,603,705 km [2nd of 205]Roadways > Total 3,383,344 km [2nd of 222]Roadways > Total 3,383,344 km [2nd of 222]Roadways > Unpaved 1,779,639 km [2nd of 175]Roadways > Unpaved 1,779,639 km [2nd of 175]Speed limit > Speed limits in specific countries > Speed limit > Speed limits in specific countries >

Within Towns 50-60KmphWithin Towns 50-60Kmph

WATER: WATER: Coastline length 7,600 km Coastline length 7,600 km Waterways 14,500 km [9th of 106]Waterways 14,500 km [9th of 106]Waterways 3,631 km navigable by large vesselsWaterways 3,631 km navigable by large vesselsWaterways 5,200 km on major rivers and 485kmWaterways 5,200 km on major rivers and 485kmon canals suitable for mechanized vessels.on canals suitable for mechanized vessels.

Ports and harbors:Ports and harbors:Chennai (Madras), Cochin, Jawaharal Nehru,Chennai (Madras), Cochin, Jawaharal Nehru,

Kandla, Kolkata(Calcutta), Mumbai (Bombay),Kandla, Kolkata(Calcutta), Mumbai (Bombay),

Vishakhapatnam.Vishakhapatnam.

RAILWAYS :RAILWAYS :7500 Stations.7500 Stations.

A Fleet of 7800 Locomotives.A Fleet of 7800 Locomotives.

About 14K Trains run on a daily basis.About 14K Trains run on a daily basis.

Carries 13 Million People.Carries 13 Million People.

EI of KarnatakaEI of Karnataka ::

Economic Activity:Economic Activity:Manufacturing- 22%;Manufacturing- 22%;Services- 39%;Services- 39%;Agriculture - 39%Agriculture - 39%

Investor Profile: Investor Profile: Govt. 30.3%Govt. 30.3%Foreign 27%Foreign 27%Indian 42.7% Indian 42.7%

MAJOR INDUSTRIES IN MAJOR INDUSTRIES IN KARNATAKA :KARNATAKA :

AUTOMOBILE INDUSTRY.AUTOMOBILE INDUSTRY. ELECTRONIC AND ELECTRONIC AND

TELECOMMUNICATIONS.TELECOMMUNICATIONS. AGRO FOOD PROCESSING. AGRO FOOD PROCESSING. APPAREL.APPAREL. INFORMATION TECHNOLOGY. INFORMATION TECHNOLOGY. BIO TECHNOLOGY. BIO TECHNOLOGY. HANDICRAFT. HANDICRAFT. TOURISM.TOURISM.

Reason..Reason..

India's low spending on India's low spending on power, power, construction, transportation, construction, transportation, telecommunications and real estate,telecommunications and real estate, at at $31 billion or 6% of GDP in 2002 had $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher prevented India from sustaining higher growth rates.growth rates.

It is estimated that inadequate infrastructure is It is estimated that inadequate infrastructure is responsible for holding back GDP growth by roughly 2% responsible for holding back GDP growth by roughly 2% points, or an annual hit of approximately $20 billion to points, or an annual hit of approximately $20 billion to economic progress. economic progress.

In contrast, infrastructure is one of the reasons why In contrast, infrastructure is one of the reasons why China enjoys 10+% GDP growth. China spends five China enjoys 10+% GDP growth. China spends five times as much on infrastructure compared to India. Ports times as much on infrastructure compared to India. Ports in China handle 5.6 billion tons of cargo compared to in China handle 5.6 billion tons of cargo compared to India’s 650 million tons. India’s 650 million tons.

This had prompted the government to This had prompted the government to partially open up infrastructure to the partially open up infrastructure to the private sector allowing foreign investment private sector allowing foreign investment which has helped in a sustained growth which has helped in a sustained growth rate of close to 9% for the past six rate of close to 9% for the past six quartersquarters

Benefits of infrastructureBenefits of infrastructure

The benefits of infrastructure need no The benefits of infrastructure need no elaboration. Put simply, infrastructure reduces elaboration. Put simply, infrastructure reduces the cost of doing business, thereby expanding the cost of doing business, thereby expanding trade. The impact can be felt even at the trade. The impact can be felt even at the grassroots level. grassroots level.

For example, a farmer who used to be For example, a farmer who used to be dependent on the nearest market to sell his dependent on the nearest market to sell his produce (for lack of information and produce (for lack of information and transportation), can now ascertain the prevailing transportation), can now ascertain the prevailing prices in multiple markets and access the one prices in multiple markets and access the one that offers the best price. that offers the best price.

Bringing in the Money Bringing in the Money

The importance of infrastructure sector also The importance of infrastructure sector also follows from the fact that foreign investors are follows from the fact that foreign investors are now looking at infrastructural development as a now looking at infrastructural development as a yardstick for directing their investments. yardstick for directing their investments.

In fact infrastructural development had taken In fact infrastructural development had taken precedence over wage levels in assessing the precedence over wage levels in assessing the investment potential in developing countries.investment potential in developing countries.

In India infrastructure sector itself is becoming In India infrastructure sector itself is becoming an attractive investment area for FDIs.an attractive investment area for FDIs.

In contrast with ChinaIn contrast with China Chinese industries pay less than half of what their Indian Chinese industries pay less than half of what their Indian

counterparts pay for counterparts pay for powerpower. . LogisticsLogistics costs in India are among the highest in the costs in India are among the highest in the

world at 13% of GDP. world at 13% of GDP. Internet Internet users in India: More than 16 millionusers in India: More than 16 million Internet users in China: 78million.Internet users in China: 78million. Broadband Broadband users in China:17.4 million. users in China:17.4 million. Broadband users in India: Quiet LowBroadband users in India: Quiet Low It is no surprise then that Indian companies find it hard to It is no surprise then that Indian companies find it hard to

compete with China in compete with China in large-scale manufacturinglarge-scale manufacturing. .

Present situationPresent situation India holds second position in the world in roadways' India holds second position in the world in roadways'

construction, more than twice that of China.construction, more than twice that of China.

As of 2005 the electricity production was at 661.6 billion As of 2005 the electricity production was at 661.6 billion kWh with oil production standing at 785,000 bbl/day.kWh with oil production standing at 785,000 bbl/day.

As of January 15, 2007, there were 2.10 million As of January 15, 2007, there were 2.10 million broadband lines in India.broadband lines in India.

Over 76% of the broadband lines were via DSL and the Over 76% of the broadband lines were via DSL and the rest via cable modems.rest via cable modems.

In an ideal scenario……In an ideal scenario……

Better infrastructure would lead to stronger Better infrastructure would lead to stronger economic growth, which in turn, would be economic growth, which in turn, would be able to fund and support additional able to fund and support additional investments in infrastructure, creating a investments in infrastructure, creating a virtuous cycle. virtuous cycle.

Future plans :Future plans :

The Indian government regards infrastructure as The Indian government regards infrastructure as a critical constraint to its target of achieving 9% a critical constraint to its target of achieving 9% growth over the next five years growth over the next five years

The current expenditure on infrastructure is 5% The current expenditure on infrastructure is 5% of GDP annually, which must be taken to 9% by of GDP annually, which must be taken to 9% by 2011-2012 2011-2012

In monetary terms, he said India is looking to In monetary terms, he said India is looking to spend US$ 500 billion over five years, of which spend US$ 500 billion over five years, of which the private sector must contribute US$ 150 the private sector must contribute US$ 150 billion.billion.

Always there is a hope……….!Always there is a hope……….!

Hope for the best………!Hope for the best………!

Thank youThank you