india forex reserve movement

8/8/2019 India Forex Reserve Movement

1/16

INDIAN FOREX RESERVE MOVEMENT

SUBMITTED BY DEBAPRATIM DUTTA

REGD. NO.-09KB042


2/16

KRUPAJAL BUSINESS SCHOOL(

CERTIFICATECERTIFICATECERTIFICATECERTIFICATEThis is to certify that the project report entitled INDIAN

FOREX RSERVE MOVEMENT. In partial fulfillment for the awardof the INTERNATIONAL FINANCE of Post Graduate Diploma inManagement, an excellent work done by Debapratim Dutta bearingRegd. No. 09KB042 under my guidance and supervision, and no part of the report has been submitted for the award of any other degree orpublished in any other form to the best of my knowledge and belief.

I wish her all success in future.

Under The Guidance Of CA. Prithvi Ranjan Parhi (M.Com, FCA,

DISA (ICAI) International FinanceKrupajal Business School

Bhubaneswar.


3/16

Executive Summary

General View

The respective project is based on Forexs Reservemovement

The project is based upon certain Assumption . This project is done through the Guidance of Prithvi

Ranjan Parhi The respective project work is done by using the help of

Internet and Human Intelligence of the Assignee.

The objective of the project is to find the Indian Forexreserve movement and analysis.


4/16

INTRODUCTION

Foreign exchange MarketIn a typical foreign exchange transaction a party purchases a quantity of onecurrency by paying a quantity of another currency. The modern foreign exchangemarket started forming during the 1970swhen countries gradually switchedto floating exchange rate from the previous exchange rate regime, which remained fixed as per the Bretton Woods System.

SOURCES AND USES FOREX

The main sources of foreign exchange are- Export earnings from goods and services Remittances from overseas Direct investment flows Private and official loan inflows

A forex market is a market that facilitates exchange of currencies. The world is emerging as a globaleconomy because of flow of goods, services and capital. For each transaction of goods and servicesthere is a corresponding currency transaction, which forms a part of an international network of payments. The increase in world trade and the lowering of capital controls have led to tremendousgrowth in the foreign exchange market over the years. It offers unparalleled personaland financial freedom to make money as well as lose it in no time. It is described as the fairestmarket on earth for it is so large that no one player, not even large government can completely control its directions.

The Indian forex market is in its evolving stage, the market is described as thin with few players and

low volumes unlike the global scenario. The main reason for low volumes is the no convertibility of rupee on capital account. This research report will give insight about the evolution of the Indianforex market and the importance of forex market in a developing economy like India.

The foreign exchange market has gained a lot of importance in recent years and has become anessential part of every economy.


5/16

India being one of the fastest growing economies of the world and its ambition to become adeveloped economy by 2020, it needs a developed forex market to back its economy. This researchreport will help us understand the existing scenario of the Indian forex market and what changes will help it to become a developed forex market.

We cannot designate any physical location where forex traders get together to exchange currencies.Rather, traders are located in offices of major commercial banks around the world andcommunicate using computer terminals, telephones and other information channels. Theinternational scope of the forex market implies the absence of any central regulatory authority.Instead the forex market provides an example of private regulation, where market participantsagree on a common set of rules governing transactions and their settlement. Hence, the forexmarket is certainly not a chaotic realm of lawlessness. In fact ethical and professional standards are

essential in an economic environment in which a single verbal agreement on a telephone cancommit millions of dollars or euros.

The forex market differs from other financial markets in a number of respects. First, it is by farthe world s largest financial market in terms of transaction volume. The daily transaction volumein all currencies is estimated to amount to $3.98 trillion a day. This is gigantic even in comparisonto a very active equity market like the New York Stock Exchange, which reaches an average daily volume of approximately US$ 296 billion a day.

Secondly, the forex market is also a market with extraordinarily low transaction costs. A commonmeasure to express transaction costs is to calculate quoted spreads as the price difference between a buy (ask) and a sell ( bid) order for a currency rate relative to the mid-price. Such quoted spreads inthe forex inter-bank market can become as low as 0.5 to 1.5 basis points(a basis point is 1% of 1%,i.e. 0.0001) for the most liquid currency pairs. Quoted spreads inequity markets tend to be 50 timeslarger even for the most liquid stocks. These are some of the reasons why the forex market is knownas the fairest market of the world.

As per the BIS Triennial Survey on the global foreign exchange and derivatives market activity (2007), the foreign exchange market in India has grown into the 16th largest market in the world interms of total daily turnover which was US$34 billion in 2007. The OTC derivatives segment to f the foreign exchange market has also increased significantly to register a daily average turnover of


6/16

USD 24 billion, which is 17th largest among all countries. The daily turn over has increased toUS$48 billion in 2007-08.

There is no ready template available internationally that India could draw upon since most of the

countries that have active currency futures markets are those which are relatively moreconvertible on the capital.

The introduction of currency futures last year has provided further depth and breadth to themarket and fulfill the intended objective as an effective risk-management instrument. This isleading to an urge in all the market participants to leverage this significant milestone for skilldevelopment within as well as at a broader industry level.

FOREX DERIVATIVES IN INDIA In respect of forex derivatives involving rupee, residents have access to foreign exchange forwardcontracts, foreign currency-rupee swap instruments and currency options - both cross currency as well as foreign currency-rupee. In the case of derivatives involving only foreign currency, a range of products such as IRS, FRAs, option are allowed. While these products can be used for a variety of purposes, the fundamental requirement is the existence of an underlying exposure to foreignexchange risk whether on current or capital account.

During the first year of the launch of exchange traded currency futures reveals growing interest inthe market. However, these markets have not been able to evince the kind of activity that OTCmarkets are witnessing. Many corporate using currency derivatives for hedging their foreigncurrency exposure find requirement of margin and settlement of daily mark - to marketdifferences cumbersome especially since there is no such requirement for OTC trades. It wouldperhaps take some time for them to realize the concomitant benefits of these risk containmentmeasures. There is a perceive resistance to change or switch over from OTC to Exchange tradedframework with the grip and comfort ability level in the OTC markets.In conclusion, considering the nascent stage of development of these markets in the country, the

cautious approach of the regulators is understandable. One hopes to see further developments inexchange traded currency markets over time. There is no doubting that this is a market which willeventually establish its niche and would be an area of activity to watch and gain from for all marketparticipants in the near future.


7/16

With the passage of time, India s exchange rate policies will continue to evolve. The policy of managing the Rupee-US Dollar exchange rate is likely to continue for some time to come.However, over time as the Euro gains in importance, it will probably be become a key ingredientin setting the target value of the currency. Trading in currency and its derivatives is likely to

increase and the involvement of foreign banks is expected to go up. The introduction andpopular trading of currency futures on the rupee may bring about greater informationalefficiency in currency trading markets at the risk, however, of making the markets morespeculative.

The philosophy of cautious liberalization is likely to continue among Indian policy makers.Financial stability and avoidance of Asian Crisis-type catastrophes are likely to remain paramountin the exchange rate management system. However, if the accumulation of US dollar reserves

continues to progress uninhibited or if the economy experiences external shocks like anoil shock, itmay trigger some rethink of the exchange rate policy. Of course a lot depends on the nature bothsize and composition of cross-border investment flows. The UPA government decision to taxinterest on the nonresidentIndians deposit shows the country s heavy dependence of such flows isa thing of the past. If China is any indication, India should be able to attract several times the globalinvestment it presently does.

In barely a decade and a half since the beginning of liberalization, India s external financeshaveundergone a complete transformation. From a foreign exchange-starved, control-riddeneconomy, India has moved on to a position of $250 billion plus in international reserves with a firmrupee and with far less forex control. In 1999 the notorious FERA (Foreign Exchange Regulation Act) gave way to the much milder FEMA (Foreign Exchange Management Act). The role of policy makers, however, is no less important today than before. With the added freedom and ease of transaction comes the risk of exposure to the vagaries of world financial markets. Prudent policy and careful monitoring are necessary to reap the benefits of external sector liberalization withouttaking inordinate amount of risks.


8/16

MOVEMENT OF RESERVES

1. INTRODUCTION The level of foreign exchange reserves has steadily increased from US$5.8 billion as at end-March 1991 to US$ 113.0 billion by end-March 2004and further to US$ 141.5 billion by end-March 2005 (Table 1). Althoughboth US dollar and Euro are intervention currencies, the foreign exchangereserves are denominated and expressed in US dollar only.

Note:

1. FCA (Foreign Currency Assets): FCA is maintained as a multicurrencyportfolio, comprising major currencies, such as, US dollar, Euro, Poundsterling, Japanese yen, etc. and is valued in US dollars.

2. SDR: Values in SDR have been indicated in parentheses.3. GOLD: Physical stock has remained unchanged at approximately 357

tones.4. RTP refers to Reserve Tranche Position in IMF

2. REVIEW OF GROWTH OF RESERVES SINCE 1991 Indias foreign exchange reserves have grown significantly since 1991.The reserves, which stood at US$ 5.8 billion at end-March 1991 increasedgradually to US$ 25.2 billion by end-March 1995. The growth continued inthe second half of the 1990s, with the reserves touching the level of US$38.0 billion by end-March 2000. Subsequently, the reserves rose to US$54.1 billion by end-March 2002, US$ 76.1 billion by end-March 2003, US$113.0 billion by end-March 2004 and further to US$ 141.5 billion by end-March 2005 (Chart 1). It may be mentioned that forex reserves data priorto 2002-03 do not include Reserve Tranche Position (RTP) in IMF, as RTP

has been included as part of the forex reserves only recently. Table 2details the major sources of accretion to foreign exchange reserves duringthe period from March 1991 to March 2005.

(US $ million) Date FCA SDR GOLD RTP Forex Reserves 30-Jun-03 78,546 1 (0.9) 3,698 976 83,221 30-Sep-03 87,213 4 (2.5) 3,919 1,203 92,339 31-Mar-04 107,448 2 (1.6) 4,198 1,311 112,959 30-Sep-04 114,083 1 (1.0) 4,192 1,303 119,579 31-Mar-05 135,571 5 (3.0) 4,500 1,438 141,514


9/16

ACCRETION TO FOREIGN EXCHANGE RESERVES SINCE 1991

3. SOURCES OF ACCRETION TO RESERVES IN THE RECENTPERIOD

The increase in foreign exchange reserves in the recent period has beenon account of capital and other inflows. Major sources of increase in

Items 1991-92 to 2004-05 (up toend-September) A Reserve Outstanding as on end-March 1991 5.8 B.I. Current Account Balance -22.8

B.II. Capital Account (net) (a to e) 149.2

a. Foreign Investment 77.3 b. NRI Deposit 22.4 c. External Assistance 10.5 d. External Commercial Borrowings 21.0 e. Other items in capital account 18.0

B.III Valuation change 9.3 Total (A+BI+BII+BIII) 141.5


10/16

foreign exchange reserves have been: (a) Foreign investment (b) Externalcommercial borrowings (c) Banking capital (d) Short-term credit, and (e)Other items under capital account. Table 3 presents sources of accretionto reserves during April-March, 2004-05.

Sources of Accretion to Foreign Exchange Reserves (US $billion)

An analysis of the sources of reserves accretion during the entire reformperiod from 1991 onwards reveals that the increase in forex reserves hasbeen facilitated by an increase in the annual quantum of foreign directinvestment (FDI) from US $ 129 million in 1991-92 to US$ 4.7 billion in2003-04. During the financial year 2004-05, the quantum of FDI inflowsinto India was of the order of US$ 4.7 billion. Outstanding NRI depositsincreased from US$ 13.7 billion at end-March 1991 to US$ 33.3 billion atend-March 2004 but declined to US$ 32.9 billion as at end-March 2005.FII investments into the Indian capital market, which commenced inJanuary 1993, have shown significant increase over the subsequent years.Cumulative net FII investments, increased from US$ 827 million at end-December 1993 to US$ 25.8 billion at end-March 2004 and further to US$35.9 billion as at end-March 2005. Turning to the current account, Indiasexports which were US$ 17.9 billion during 1991-92 increased to US$ 63.8billion in 2003-04 and further to US$ 79.2 billion in 2004-05. Invisibles,such as, private remittances have also contributed significantly to thecurrent account. Net invisibles inflows increased from US$ 1.6 billion in1991-92 to US$ 26.0 billion in 2003-04 and further to US$ 31.7 billion in2004-05. Indias current account balance which was in deficit of 3.1 percent of GDP in 1990-91 turned into a surplus of 0.7 per cent in 2002-03. Asurplus of US $ 10.6 billion was posted in the current account during thefinancial year 2003-04, driven mainly by the surplus in the invisiblesaccount. However, this could not be sustained during 2004-05, with the

Items April-

September2004-05

April-September

2003-04I. Current Account Balance -6.4 10.6

II. Capital Account (net)(a to f) 32.6 20.9

a. Foreign Investment 11.9 14.8 b. Banking Capital 4.0 6.2

Of which: NRI Deposits

-1.1 3.6 c. Short-term Credit 3.8 1.4 d. External Assistance 1.9 -2.7 e. External Commercial Borrowings 5.9 -1.5 f. Other items in Capital Account 5.1 2.7

III. Valuation Change 2.4 5.4 Total (I+II+III) 28.6 36.9


11/16

current account posting a deficit of US$ 6.4 billion, driven mainly by thesurge in oil prices in the international market

4. EXTERNAL LIABILITIES VIS- -VIS FOREIGN EXCHANGERESERVES

The accretion of foreign exchange reserves needs to be seen in the light of total external liabilities of the country.

Indias International Investment Position (IIP), which is a summary recordof the stock of countrys external financial assets and liabilities, isavailable as of March 2004.

INTERNATIONAL INVESTMENT POSITION OF INDIA(US $million)

Items March 2004 P A. Assets1. Direct investment abroad 6,592 2. Portfolio investment 732 3. Other investments 15,697 4. Foreign Exchange Reserves 112,959

Total Foreign Assets 135,980 B. Liabilities1. Direct investment in India 38,676 2. Portfolio investment 43,856 3. Other investments 102,043

Total Foreign Liabilities 184,575 Net Foreign Liabilities (B-A) 48,595

P: Provisional

Source: Official website of Reserve Bank of India (http://www.rbi.org.in)

5. PREPAYMENT/REPAYMENT OF EXTERNAL DEBT

The significant increase in forex reserves enabled prepayment of certainhigh-cost foreign currency loans of the Government of India from theAsian Development Bank (ADB) and the World Bank (IBRD) amounting toUS$ 3.03 billion during February 2003. During 2003-04, prepayment of certain high cost loans to IBRD and ADB amounting to US$ 2.6 billion was
http://www.rbi.org.in/http://www.rbi.org.in/


12/16

carried out by the Government. Additionally, prepayment of bilateral loansamounting to US$ 1.1 million was also made. Thus, the total quantum of prepayments was of the order of US$ 3.7 billion during 2003-04. During2004-05, prepayment of bilateral loan to the tune of US$ 30.3 million wasmade.

6. FINANCIAL TRANSACTION PLAN (FTP) OF IMF

International Monetary Fund (IMF) designated India as a creditor under itsFinancial Transaction Plan (FTP) in February 2003, in terms of which Indiaparticipated in the IMFs financial support to Burundi in March-May 2003,with a contribution of SDR 5 million and to Brazil in June-September 2003with SDR 350 million. In December 2003, SDR 43 million was madeavailable to Indonesia under FTP. During 2004-05, SDR 61 million wasmade available under FTP to countries like Uruguay, Haiti, DominicanRepublic and Sri Lanka. Thus, the total quantum of Indias contributionunder FTP was SDR 459 million at end-March 2005.

7. ADEQUACY OF RESERVES

Adequacy of reserves has emerged as an important parameter in gaugingits ability to absorb external shocks. With the changing profile of capitalflows, the traditional approach of assessing reserve adequacy in terms of import cover has been broadened to include a number of parameterswhich take into account the size, composition and risk profiles of varioustypes of capital flows as well as the types of external shocks to which theeconomy is vulnerable. The High Level Committee on Balance of

Payments, which was chaired by Dr. C. Rangarajan, erstwhile Governor of Reserve Bank of India, had suggested that, while determining theadequacy of reserves, due attention should be paid to paymentobligations, in addition to the traditional measure of import cover of 3 to 4months. In 1997, the Report of Committee on Capital AccountConvertibility under the chairmanship of Mr.S.S.Tarapore suggested fouralternative measures of adequacy of reserves which, in addition to trade-based indicators, also included money-based and debt-based indicators.

In the more recent period, assessment of reserve adequacy has beeninfluenced by the introduction of new measures that are particularlyrelevant for emerging market countries like India. One such measure

requires that the usable foreign exchange reserves should exceedscheduled amortisation of foreign currency debts (assuming no rollovers)during the following year. The other one is based on a 'Liquidity at Risk'rule that takes into account the foreseeable risks that a country couldface. This approach requires that a country's foreign exchange liquidityposition could be calculated under a range of possible outcomes forrelevant financial variables, such as, exchange rates, commodity prices,credit spreads etc.. Reserve Bank of India has done exercises based on


13/16

intuition and risk models in order to estimate 'Liquidity at Risk (LAR)' of the reserves.

The traditional trade-based indicator of reserve adequacy, viz, importcover of reserves, which fell to a low of 3 weeks of imports at end-December 1990, rose to 11.3 months of imports at end-March 2002 andincreased further to around 14 months of imports or about five years of debt servicing at end-march 2003. At end-March 2004, the import coverof reserves was 17.0 months, which came down to 14.3 months as atend-March 2005. The ratio of short-term debt to foreign exchangereserves declined from 146.5 per cent at end-March 1991 to 4.2 per centat end-March 2004 but increased slightly to 5.3 per cent as at end-March2005. Similarly, the ratio of volatile capital flows (defined to includecumulative portfolio inflows and short-term debt) to reserves declinedfrom 146.6 per cent as at end-March 1991 to 36.0 per cent as at end-March 2004 but increased marginally to 36.8 per cent as at end-March2005.

8. INVESTMENT PATTERN AND EARNINGS FROM FOREIGNEXCHANGE RESERVES

The foreign exchange reserves are invested in multi-currency, multi-market portfolios as per the existing norms, which are similar tointernational practices in this regard. As at end-March 2005, out of thetotal foreign currency assets of US$ 135.6 billion, US$ 36.8 billion wasinvested in securities, US $ 65.1 billion was deposited with other centralbanks & BIS and US$ 33.6 billion was in the form of deposits with foreigncommercial banks.

DEPLOYMENT PATTERN OF FOREIGN EXCHANGE RESERVES (US$ Million)

As on March31, 2004

As on September30, 2004

(1) Foreign Currency Assets 107,448 135,571 (a)Securities 35,024 36,819 (b) Deposits with other central banks & BIS 45,877 65,127 (c) Deposits with foreign commercial banks 26,547 33,625 (2) Special Drawing Rights 2 5 (3) Gold (including gold deposits) 4,198 4,500 (4) Reserve Tranche Position 1,311 1,438 (5) Total Foreign Exchange Reserves 112,959 141,514

During the year 2003-04 (July-June), the return on foreign currencyassets and gold, after accounting for depreciation, decreased to 2.1 percent from 3.1 per cent during 2002-03, mainly because of lower moneymarket interest rates in major countries and a fall in prices of securitiesdue to rise in longer term yields.


14/16

Indian Forex reserve for 5years

As on Sep. 18, 2009 As on Rs. Crore US$ Mn. Rs. Crore US$ Mn.

2 3 Rs. Crore US$ Mn. ` Crore1 2 3 2 3 2 3

Total Reserves 7,63,924 1,65,5429,41,247 235,891 13,50,213 291,97213,53,607 280,770 13,24,93(a) Foreign Currency Assets +7,29,958 1,58,239 9,11,315 228,572 13,09,979 282,81112,73,653 264,353 11,98,65(b) Gold $ 30,436 6,538 28,186 6,881 38,064 8,69248,041 9,828 94,19(c) SDRs @ 6 1 8 2 17 425,336 5,224 23,10(d) Reserve Position in the IMF**3,524 764 1,738 436 2,153 4656,577 1,365 8,976

Item As on Sep. 15, 2006As on Sep. 21, 2007Rs. Crore US$ Mn.

As on Sep. 19, 2008

Item

VARIATION OF FOREX RESERVE IN 5 YEARS

Year 2006 year 2007 Year2008 Year2009 Year 2010

1Rs.Crore

US$Mn.

rscrores

US$Mn

Rs.Crore

US$Mn.

Rs.Crore

US$ Mn.

` Crore US$Mn.

Total Reserves1,31,14 21,320 1,76,02 69,40 4,08,96 56,08

13,394 -11,202

28,670 6,96(a) Foreign CurrencyAssets +

1,23,48 19,996 1,80,06 69,39 3,98,66 54,23 -36,32 -18,458 74,996 3,605

(b) Gold $ 10,465 2,003 2,250 343 9,878 1,811 9,977 1,136 46,158 10,180

(c) SDRs @ 13 3 2 1 9 2 25,31 5,220

2,231 1(d) Reserve Positionin the IMF**

2,792 676 1,790 332 415 29 4,424 9002,399 587


15/16

CONCLUSIO

)RUHLJQ H[FKDQJH IORZ QRW RQO\ KHOSHG LQ DFFXPXODWLQJ D FRPIRUWDE

H[FKDQJH UHVHUYHV LQ ,QGLD LW KDV DOVR IDFLOLWDWHG LQ EORFNLQJ W

UHPLWWDQFHV JROG HWF WKURXJK LOOHJDO FKDQQHOV 9DULRXV SROLFLHV

DQG OLEHUDOL]DWLRQ LQ JROG LPSRUWV DUH KDYLQJ EHHQ YHU\ KHOSIXO

2WKHU PDMRU FKDQJHV ZKLFK KDYH EHHQ TXLWH KHOSIXO LQ UHGXFLQJ Y

SRVW HFRQRPLF UHIRUPV SKDVH DUH OHVV GHSHQGHQFH RQ VKRUW WHUP G

PHDVXUHV UHJDUGLQJ 15, GHSRVLWV )RU H[DPSOH LQ 5%, UHGXF

LQFHQWLYH IRU 15,V WR EHQHILW IURP LQWHUHVW DUELWUDJH E\ UHPRYLQJ W

HQMR\HG RYHU /,%25 $FFRUGLQJ WR WKH EXGJHW DWWUDFWLYHQHVV

WR 15,V KDV EHHQ IXUWKHU UHGXFHG E\ WKH LQWURGXFWLRQ RI D S

LQWHUHVW RQ 15 H[WHUQDO GHSRVLWV %DQN IORZV DOVR KDYH EHHQ SUR

DSSURSULDWH PHDVXUHV IRU WKH EXVLQHVV RI IRUHLJQ EDQNV LQ ,QGLD 7

HDV\ WR VWDWH WKDW WKH IRUHLJQ H[FKDQJH UHVHUYHV RI ,QGLD LV EH\R

DGHTXDF\ QRUPV EXW WKH QRQ LQVXODWLRQ RI ,QGLDQ HFRQRP\ IURP

LQWHUQDWLRQDO ILQDQFLDO FULVLV DJDLQ KDV OHG WR IRU IXUWKHU H

H[FKDQJH UHVHUYH DYDLODELOLW\ DQG UHDGLQHVV IRU H[WHUQDO

GLYHUVLILFDWLRQ RI FRPSRVLWLRQ RI IRUHLJQ H[FKDQJH UHVHUYHV PD\ JHW,QGLD DGRSWV FDSLWDO DFFRXQW FRQYHUWLELOLW\ 7KH LQWHUHVW UDW

GHILQLWHO\ ZRUN LQ IDYRXU RI DUELWUDJH DQG (&% IORZV WR ,QGLD


16/16

BIBLIOGRAPHY

Forex News ( www.forexnews.com/ )

Real Time Forex News ( www.realtimeforex.com/index.php?page=51 )

Bloomberg- Business & Financial news

Forex News & Insight ( www.forexLive.com )

ForexFocusDaily.com ( www.forexfocusdaily.com/ )
http://www.forexnews.com/http://www.realtimeforex.com/index.php?page=51http://www.realtimeforex.com/index.php?page=51http://www.forexlive.com/http://www.forexfocusdaily.com/http://www.forexfocusdaily.com/http://www.forexfocusdaily.com/http://www.forexlive.com/http://www.realtimeforex.com/index.php?page=51http://www.forexnews.com/

india forex reserve movement

Documents