mkt&exchange rates
TRANSCRIPT
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Exchange rate and Stock marketsExchange rate and Stock markets
By:Sanjay Kumar
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HistoryHistory
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Early 1990s
Increase in trade deficit , led RBI to undertakedownward adjustment of Rupee in 2 stages
September 24, 1975Adjustable nominal peg to a basket of currencies of
major trading partners with a band
1950-1951 until mid-December 1973
Rupee linked to the Pound Sterling
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As of today
Exchange rate are market determined but RBIsometimes intervene to keep a check
March 1993LERMS was replaced by the unified exchange rate
system.( Market determined exchange rate)
March 1992
Introduction of dual (official as well as marketdetermined) exchange rate
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Factors
affectingExchange
rates
Differentialsin inflation
Demand &Supply
Differentialsin interest
rates
Current-accountdeficits
Public debt
Politicalstability and
economicperformance
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Capital Account ConvertibilityCapital Account Convertibility
y Freedom to convert local financial assets into foreign financialassets at market determined exchange rates
y Unrestricted mobility of capital
y India presently has current account convertibility, which meansthat foreign exchange is easily available for import and export for
goods and services.
y India also has partial capital account convertibility
y Case: South east Asian currency crisis
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To be achieved before CACTo be achieved before CAC
Fiscaldeficit
needs to bereduced to3.5% of the
GDP
Monetaryexchangerate band
of plusminus 5%should beinstituted
Forexreserves
should notbe lessthan 6
months
importcover
Inflationrates need
to becontrolled
between 3-
5%
CRR needsto be
reduced to3%
NPAs to bebrought
down to 5%
Interestrate to be
fullyderegulate
d
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RBI measures to check Exchange rateRBI measures to check Exchange rate
RBIMeasures
Interestrate
OMO
CRR
Primaryplacement
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Case to think uponCase to think upon
US Interest rate 2% 6% India Interest rate
Exchange rate 44
$ borrowed in US $1,000 Rs. 44,000 Converted to Rs and invested in India
Payback $1,020 Rs. 2,640 Earnings in Rs
Rs. 46,640 Total
Convert Rs back to dollars
Old calc (If Exchange rate remains same)
US dollar $1,060
Repay loan $1,020Net Earnings $40
Its not so easy to make money , rate will/might change
45.4 New exchange rate
New calc
US dollar $1,027
Repay loan $1,020
Net Earnings $7
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Movement of exchange rate and stockMovement of exchange rate and stockmarketmarket
y Depends on stage of the economy
y In case of India, USD/INR exchange rate and stock market mostlyhas a negative correlation but with other currencies there is nospecific relationship as such.
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ContCont
High growth MoreInvestments
Demand for
homecurrency
Home
currencyappreciates
Exportsaffected
Decrease in
Interestrates
Investment
becomeslessattractive
Home
currencysupplyincreases
Rates settledown End
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NIFTYand Exchange rate movementNIFTYand Exchange rate movementgraphsgraphs
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35
40
45
50
55
USD/INR
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60
65
70
75
80
85
90
GBP/INR
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50
55
60
65
70
75
EURO/INR
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30
35
40
45
50
55
60
YEN/INR
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