ashish sumit

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    PRESENTED BY:

    91 SOBIYA KHAN

    92 DHANANJAY KHANVILKAR

    93 CLETUS LOPES94 ASHISH MATAI

    95 SUMIT MEHTA

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    I would like to express my special thanks of gratitude to

    Professor Ajgoankar who gave us golden opportunity to do

    this wonderful project on an interesting topic INDIAS

    EXCHANGE RATE POLICY, which also helped me to dolot of research and I came to know about many new things.

    I am really thankful to them.

    Secondly I would also like to thank my parents and friends

    who helped me a lot in finishing this project on time. I am

    making this project not only for marks but to also increase my

    knowledge .

    THANKS AGAIN TO ALL WHO HELPED ME.

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    It is rate between two currencies specifieshow much one currency is worth in terms of

    the other. It is the value of a foreign nations currency in

    terms of the home nations currency.

    USD $ V/s Rs.

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    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 turnoverwas reported to be over

    US $ 3.2 trillion.

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    Spot exchange rateIt refers to the current exchange rate and quoted forimmediate delivery of foreign exchange .

    Forward exchange rateIt refers to an exchange rate that is quoted and traded

    today but for delivery and payment on a specific futuredate. Premium on currency

    Discount on currency

    Buying rate Selling rate

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    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 withthe goods and services of another.

    Real exchange rate = (nominal exchange rate Xdomestic price) /(foreign price).

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    It is the record of all transactions of theresidents with the rest of the world and viceversa.

    Equilibrium exchange rate depends on

    Demand for and supply of currency in forex

    market. And demand and supply of foreign

    exchange arise from debit and credit item inBOP.

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    Measures the price of a basket of goods and

    services available domestically relative to the

    same basket available abroad

    purchasing power parity.

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    Prices of a Big Mac burger in McDonald'srestaurants in different countries.

    If a BigM

    ac costs US$4 in the United Statesand GBP 3 in the United Kingdom, the PPP

    exchange rate would be 3 for $4.

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    Devaluation the price of foreign currenciesunder a fixed exchange rate regime is increasedby official action

    Revaluation-

    the price of foreign currenciesunder a fixed exchange rate regime is decreasedby official action

    Depreciation under a floating rate system, priceof foreign currencies increases because of market

    adjustmentAppreciation - under a floating rate system, price

    of foreign currencies decreases because of marketadjustment

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    The devaluation of rupee in September 1949 and June 1966

    HISTORICAL PERSPECTIVE

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    Currency's value is matched to the value of anothersingle currency or to a basket of other currencies, orto another measure of value, such as gold

    It is a rate that the central bank sets and maintainsas the official exchange rate.

    To maintain exchange rate,the central bank buys and sellsits own currency on theforeign exchange market inreturn for the currency towhich it is pegged.

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    y If, for example, it is determined that the value of asingle unit of local currency is equal to US$3, the

    central bank will have to ensure that it can supplythe market with those dollars. In order to maintainthe rate, the central bank must keep a high level offoreign reserves.

    yHowever, if the country persistently runs deficits inthe BOP, the central bank eventually runs out offoreign currencies, and will not be able to carry out

    the interventions.

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    Stabilizes the value of a currency

    Makes trade and investments between the twocountries easier and predictable

    Means to control inflation

    Helps keep businesses competitive in foreignmarkets

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    Heavy burden on exchange reserve

    Country must have sufficient reserve

    Fails to solve the balance of payment disequilibrium It is not a long term solution if the underlying

    economy is weak.

    International disagreement might be created whena country sets its exchange rate on a too low level

    Fixing the exchange rate is not easy

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    The rate is determined by the private market through supplyand demand.

    It is in effect since 1973

    C

    lean floating

    the central bank stands aside completely andallows the exchange rate to be freely determined in the forexmarket official reserve transactions are zero

    Managed floating-the central bank intervenes to buy or sellforeign currencies periodically in an attempt to influence the

    ex

    change rates

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    Simple operation, smoother, more fluidadjustment

    Brings realism in forex transactions Disequilibrium in balance of payment is auto

    stabilized

    No need to maintain large fore

    x

    reserve

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    Tends to create uncertainty on theinternational markets.

    Encourages inflation Floating exchange rates are affected by more

    factors than only demand and supply, such asgovernment intervention

    Adverse effect of speculation

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    yBalance of trade and investmentyPoliticsyOtherCountries

    yEconomic Theoryy Interest RateyConsumersyHousing

    y Industrial and Economic IndicatoryCapital MarketyEconomyy Inflation

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    More import and less export

    Less Import and more export

    Balance of investment

    Budget deficit and national debt

    Presidents popularity

    Terrorist attacks and war

    Elections

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    OTHERCOUNTRIES

    Turmoil in other countries

    A change in foreign reserves

    Acceptance of commodities in dollars

    Strong foreign economies

    ECONOMICTHEORY

    Demand for currency

    Increase in money supply

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    INTEREST RATES

    CONSUMER BEHAVIOR

    Savings

    Spending

    HOUSING

    Slow housing market

    Overinflated housing market

    INFLATION RATE

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    INDUSTRYAND ECONOMIC

    INDICATORS

    Growth inMfg/ Employment

    Outsourcing

    Entrepreneurship

    CAPITALMARKET

    Bear marketsBull markets

    Accounting scandals

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    ECONOMY

    Economic growth and stability

    Economic recession

    Outperforming other economies

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    CurrentAccountConvertibility:Convertibility required in the case oftransactions relating to exchange of goods and services, money transfers,income and current transfers and all those transactions are classified asCurrent AccountConvertibility

    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 obtainthe same from a bank or a money-changer. This is a current accounttransaction

    CapitalAccount convertibility: A capital account refers to capitaltransfers and acquisition or disposal of non-produced, non-financialassets

    E.g.: Suppose, one wants to import plant and machinery or investabroad, and needs a large amount of foreign exchange, say $2 million, theimporter will have to first obtain the permission of the Reserve Bank of

    India (RBI). If approved, this becomes a capital account transaction

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    There are restrictions on either residents orforeigners converting currency for transactionsbut 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 residentsor firms registered in the country foracquisition of assets abroad.

    Rupee is not convertible for all transactions oncapital account or inflows and outflows ofcapital.

    Also known as external convertibility.

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

    exchange.

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

    Restrictions on the amounts of the currencies thatcan be exchanged.

    It is applicable for the transactions on capital

    account.