Monday, March 5, 2012

Factors Influence Currency(Rupee) Value


Hello friends!! How are you all? Hope you are doing fine. I am here back with another enlightening concept about RUPEE. Most of us are unaware about why rupee value changes every second.

        In our language “what the hell is the reason for the change of value man? Why the hell is that stuff difficult to understand?” so clear all these I am back with a good article. Sit back of our seats and have some snacks and keep on reading this.

Method followed:

The Floating Exchange Rate:
The market determines a floating exchange rate. In other words, a currency is worth whatever buyers are willing to pay for it. This is determined by supply and demand, which is in turn driven by foreign investment, import/export ratios, inflation, and a host of other economic factors.

Generally, countries with mature, stable economic markets will use a floating system. Virtually every major nation uses this system, including the U.S., Canada and Great Britain. Floating exchange rates are considered more efficient, because the market will automatically correct the rate to reflect inflation and other economic forces.

The floating system isn't perfect, though. If a country's economy suffers from instability, a floating system will discourage investment. Investors could fall victim to wild swings in the exchange rates, as well as disastrous inflation.

Factors which affect the rupee value against dollar:

1.        Market Situations.
2.       Economic Factors.
3.       Political Factors.
4.      Special Factors.



1.Market Situations:

India follows the “floating rate system” for determining exchange rate. In this system “market situation” also is pivot for determining exchange rate. As we know that 90% of the Forex market is between the inter-bank transactions. So how the banks are taking the decision for settling out their different exposure in the domestic or foreign currency that is impacting to the exchange rate. Apart from the banks, transactions of exporters and importers are having impact on this market. So in the day-to-day Forex market, on the basis of the bank and trader’s transactions the demand and supply of the currencies increase or decrease and that is deciding the exchange rate. On the basis of this study we found out the different types of the decisions, which is affecting to market. These are as follows:

·         In India, there are big Public Sectors Units (PSUs) like ONGC, GAIL, IOC etc. all the foreign related transactions of these PSUs are settled through the State Bank of India. E.g. India is importing Petroleum from the other countries so payment is made through State Bank of India in the foreign currency. When State Bank of India (SBI) sells and buys the foreign currency then there will be noticeable movement in the rupee. If the SBI is going for purchasing the Dollar then Rupee will be depreciated against Dollar and vice versa.

·         Foreign Institutional Investor’s (FIIs) inflow and outflow of the currency is having the major impact on the currency. E.g. U.S. based company is investing their money through the Stock markets BSE or NSE so her inflows of the Dollars is increasing and when it is selling out their investments through these Stock markets then outflows of the Dollars are increasing. However if the FIIs inflowing the capital in the country then there will be the supply of the foreign currency increases and Demand for the Rupee will increases and that will resulted appreciation in the rupee and vice versa.

·         Importer and Exporter’s trading is also affecting to the rupee. Like if an Indian exported material to U.S. so he will get his payments in Dollars and that will increase the supply of Dollars and increase of demand of rupee and that will appreciate the rupee and vice versa.

·         Banks can be confronted different positions like oversold or over bought position in the foreign currency. So bank will try to eradicate these positions by selling or purchasing the foreign currency. So this will be increased or decreased demand and supply of the currency. And that will cause to appreciation or depreciation in the currency.

·         As we know that in India there is a floating rate system. In India Central Bank (RBI) is always intervene in the trade for smoothen the market. And this RBI can achieve by selling foreign exchange and buying domestic currency. Thus, demand for domestic currency which, coupled with supply of foreign exchange, will maintain the price foreign currency at the desired level. Interventions can be defined as buying or selling of foreign currency by the central bank of a country with a view to maintaining the price of a given currency against another currency. US Dollar is the currency of intervention in India.

2. Economic Factors:

In the Forex Market Economic factors of the country is playing the pivot role. Every country is depending on its prospect economy. If there will be change in any economy factors, which will directly or indirectly affected to Forex market. Here there are two types of economic factors. These are as follows:
1.        Internal Factors.
2.       External Factors.

Internal Factors includes:
·         Industrial Deficit of the country.
·         Fiscal Deficit of the country.
·         GDP and GNP of the country.
·         Foreign Exchange Reserves.
·         Inflation Rate of the Country.
·         Agricultural growth and production.
·         Different types of policies like EXIM Policy, Credit Policy of the country as well reforms undertaken in the yearly Budget.
·         Infrastructure of the Country

External Factors includes:
·         Export trade and Import trade with the foreign country.
·         Loan sanction by World Bank and IMF
·         Relationship with the foreign country.
·         Internationally OIL Price and Gold Price.
·         Foreign Direct Investment, Portfolio Investment by the country.

3. Political Factors:

In India election held every five years mean thereby one party has rule for the five years. But from the 1996 India was facing political instability and this type of political instability has created hefty problem in the different market especially in Forex market, which is highly volatile. In fact in the year 1999 due to political uncertainty in the BJP Government the rupee has depreciated by 30 paise in the month of April. So we can say that political can become important factor to determine foreign exchange in India.
Due to political instability there can be possibility of de possibility delaying implementation of all policies and sanction of budget. So that will create also major impact on trade.

4. Special Factors:

          Till now we have seen the general factors, which will affect the Forex market in daily business. And on that factors the different players in the market have taken the decision. But some times some event happened in such a way that it will really change the whole scenario of the market so we can called that event special factors. However traders have to really consider those things and take the decisions. We will see these types of factors in detailed:

·   In the year 1998, when Government of India has done “Pokhran Nuclear Test” at that time rupee has been depreciated around 85 paise in day and 125 paise in seven days. Her main fear was that U.S., Australia and other countries have stop to sanctions the loans So this type of event will have major impact on the market. And due to this the decision procedure of the trader also varies.

·   In the year 2000, India has faced Kargil war, which is also affected to the market. By this war the defence expenditures are raised and due to that there will be increase in the fiscal deficit. And become obstacle in the growth of the economy. So this type of event has impact on the Forex market.

          I hope that you all are clear with what the hell influence the value of currency. Now to know about Indian currency value and its fall & recovery read my earlier article Indian Rupee Fall & Recovery.

          Hope you all loved my article. Thanks for visiting my blog and keep visiting. Comment and share this if you like and thank you. Have a nice day friends :)



                                                                                     -- Koundinya

Thursday, February 9, 2012

Indian Rupee Fall and Recovery

Hello everybody!!

After long time i am here with a topic which makes you to know the reality and enlighten you with some information. Hope you will feel better about our country's Indian Economy. Don't think its not for the one who have idea only about economics. Its for everyone who wants to know what's happening exactly.

"I saw lot of people who doesn't know how everything works but still started explaining the things in such a way that they get hatred towards India as they point out economy system of India in a bad way. So for them i want make one thing clear that maybe Indian economy looks like obsolete maruti 800 but its engine is like 1200 horsepower powerful and standard engine. So please stop propagating negative about Indian economic system comparing with other countries. No two countries situations will be similar to compare. Maybe some countries stood up quick from the disaster but the situations they have are completely differ from situations in India. Eg: Some people started speaking that Japan stood up quick even after a disastrous tsunami attack but they must consider the area they have, the population they have and the economic system they posses. Same country in 2008 suffered like anything when recession was ruling the world but in the same conditions India tried to with stand because of its standard pillars of economic system. So many people don't have an idea that the Economy of India is the ninth largest in the world by nominal GDP and the third largest by purchasing power parity (PPP)."

Now, if it comes to the post title Indian Rupee Fall and recovery; we saw disastrous time for Indian currency in 2nd half of 2011. Even though it’s recovering slowly, we must think of the reasons once to enlighten ourselves with the concepts of countries' economy.
To understand the concept of fall and its reasons, firstly we must know how the currency exchange works. There are few methods as follows to show how the exchange works.

Methods of Exchange:
There are two main systems used to determine a currency's exchange rate: floating currency and pegged currency.

The Floating Exchange Rate:
The market determines a floating exchange rate. In other words, a currency is worth whatever buyers are willing to pay for it. This is determined by supply and demand, which is in turn driven by foreign investment, import/export ratios, inflation, and a host of other economic factors.

Generally, countries with mature, stable economic markets will use a floating system. Virtually every major nation uses this system, including the U.S., Canada and Great Britain. Floating exchange rates are considered more efficient, because the market will automatically correct the rate to reflect inflation and other economic forces.
The floating system isn't perfect, though. If a country's economy suffers from instability, a floating system will discourage investment. Investors could fall victim to wild swings in the exchange rates, as well as disastrous inflation.

Pegged Currency:
A pegged, or fixed system, is one in which the exchange rate is set and artificially maintained by the government. The rate will be pegged to some other country's dollar, usually the U.S. dollar. The rate will not fluctuate from day to day.

A government has to work to keep their pegged rate stable. Their national bank must hold large reserves of foreign currency to mitigate changes in supply and demand. If a sudden demand for a currency were to drive up the exchange rate, the national bank would have to release enough of that currency into the market to meet the demand. They can also buy up currency if low demand is lowering exchange rates.

Countries that have immature, potentially unstable economies usually use a pegged system. Developing nations can use this system to prevent out-of control-inflation. The system can backfire, however, if the real world market value of the currency is not reflected by the pegged rate. In that case, a black market may spring up, where the currency will be traded at its market value, disregarding the government's peg.

When people realize that their currency isn't worth as much as the pegged rate indicates, they may rush to exchange their money for other, more stable currencies. This can lead to economic disaster, since the sudden flood of currency in world markets drives the exchange rate very low. So if a country doesn't take good care of their pegged rate, they may find themselves with worthless currency.

The above explanations of two types of currency will easily make us to understand which type of exchange method is India following (Floating System). Hope you understand how the exchange works. 

Now we will discuss about fall of Indian rupee. In 3rd quarter of 2011 Indian currency met its disastrous ever position which was at ever low INR54 almost(Dec 14) against American dollar. This fall pulled out $500 million from the stock market in just the last five trading sessions.

Reasons for the steep fall:
 First of all, it is a casualty of the general exodus from emerging markets. As a deficit economy, India is bound to suffer more than say Brazil, Korea or Malaysia.  And 18 months of interest rate rises have taken a toll on growth.

UBS analysts  proffer another explanation. They point out a steady deterioration in India’s net reserve coverage since the 2008 crisis. The reserve buffer — foreign-exchange reserves plus the annual current account balance, minus short-term external debt — stands at 9 percent of GDP, down from 14 percent in 2008.  Within emerging markets, only Egypt, Venezuela and Belarus saw bigger declines in net reserve coverage than India.

“What it really means for the present, in our view, is that the rupee is now joining the ranks of higher beta “risk” currencies,” UBS said.

Some have given reasons such as broad gains in dollar overseas due to the decay of euro, huge demand from domestic oil refiners with growing consumer demand for oil (though many argue that falling oil price could be advantageous to rupee). I also have heard of other factors such as disinvestment ( foreign investment has gone done almost by 50% today compared to 2007-2008 period - perhaps due to the corrupt image of Indian economy), slowing down of export, growing current trade account deficit (it has grown almost 3 times since 2007-2008). All these could also be valid reasons. 

After the disastrous period, Indian currency experiencing good time from past 1 month. This quick recovery was not expected as many analysts said that it may continue till May'12. As Indian currency proved itself as a volatile in decline, it is again proving its volatile nature in recovering as well. This is a bit happy news for the investors and importers but mayn't a good news for IT companies.



Currency Recovery:
The Indian rupee rose on strong inflows of the US dollar and recovery in India’s capital market that was once plagued by outflows.

Statistics from the Securities and Exchange Board of India show that overseas investors have bought Indian stocks worth US$ 2.1 billion so far this year and invested US$ 3.2 billion in debt instruments, according to Indian media.

Earlier, foreign investors had lost confidence in the Indian market as the projected annual growth rate of the Indian economy at 8 percent was revised to 7.5 percent. 

Various Indian media quoting different players from the private sector had also reported chances of the rate going below 7 percent.

This led foreign investors to pull back their investments from the Indian market, and the market saw high demand for the greenback raising its value sharply. 

The Reserve Bank of India (RBI) also played a crucial role in bringing down the exchange rate. The RBI imposed a limit on buying and selling of the US dollar and even injected dollars indirectly into the market.  

It closed at 49.15/16 on Thursday(Feb 8) which is 3 months high against american dollar.
This will say that India is almost on its way back but we all have to work to make India full fill all her dreams of reaching 3rd highest GDP by 2025 but please not making it No.1 in population by 2025 with 168mill as researches says. Hope you are leaving not with the negative impression on our own country. Never praise other countries and foreign aspects rather find out the greatness of our own selves which we are ignoring. Stay with the country rather than becoming one of those who points out on India's bad time, rather support it and HOPE FOR THE BEST. Nothing is stable.  Thanks for visiting my Blog and keep on visiting friends. 

(Reference: reuters.com, wikipedia.org, economictimes.com last but not least thanks to GOOGLE.COM)

Keep visiting friends. :)

                                                                                            --- Koundinya.K

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Thursday, January 19, 2012

Aviation Industry India '11

Hi everybody....!!
There are very important issues which are running at the same time. Of them, i would like to post an important topic is the Aviation crisis 2011.

Aviation Industry in India is a significant one among those industry segments that have experienced a phenomenal growth across the globe over the past years. The open sky policy of the Indian government is one of the key factors that have allured international players into the aviation industry in India. Since long, the aviation industry in India has been growing in terms of number of air travel firms and number of aircrafts. Rapid economic growth in India, especially in last 7-8 years has made air travel affordable to more and more Indians. Owing to the increasing number of low-cost carriers like SpiceJet, Paramount Airways, GoAir, IndiGo Airlines, there has been a spurt in the number of domestic air-travelers in last few years. The growth has been so much so that Delhi-Mumbai route is now among world's busiest routes. To meet India’s increasingly growing air traffic the airlines players are also looking for expansion of their operation. Today, Indian aviation industry is passing through a bad phase. Though, Indian carriers flew over 55 millions domestic passengers between January and November against 47 million in the like period of last year, they found it extremely difficult to continue with their expansion plans and existing operations, amid rising fuel prices and other policy constraints.

Except the low-cost airline IndiGo, which continued to earn profit, all the other airline players faced tough times and many of them had to cut employee’s salary owing to their bad financial conditions.

The crisis became more evident recently when major private player Kingfisher Airlines cancelled its operation on a number of routes owing to the losses it was incurring on it.  The government is also under pressure as the state-run Air India itself is reeling under a huge debt, estimated at over Rs 40,000 crore. A 50 to 60 per cent hike in the jet fuel prices, which account for 40-50 per cent of an airline’s operating cost, has made it difficult for airline players to make their operation profitable. The airline players are blaming central government for imposing unreasonable and unbearable duties on jet fuel prices, and demanding a cut in the taxes levied on the same.

Despite a 17 per cent growth in passenger traffic, India's civil aviation industry was hit by rising jet fuel prices and interest costs, which ate into the margins of carriers. High taxes on jet fuel and equally high airport charges were the major heads of cost for the Indian carriers, with the global airlines' body International Air Transport Association (IATA) estimating that fuel costs accounted for 45 per cent of the total costs, compared with 30 per cent for global carriers.

A midst the growing concern over an emerging crisis in aviation sector, industry honchos are mounting pressure on government to either relax taxes on ATF fuel or announce a bailout package for the ailing airlines.

In November 2011, carriers facing financial trouble approached Prime Minister Manmohan Singh seeking his intervention to at least get aviation fuel and loans at cheaper rates. The industry has accumulated losses of nearly Rs 15,000 crore in 2010-11, up from Rs 7,038 crore in 2009-10. Leading the pack is national carrier Air India followed by private sector carrier Kingfisher Airlines. The losses notched up these two giants played spoilsport for the Indian aviation sector in 2011.

                                                                                                                       
Yet, the share of air-travelers in India is less than 2 per cent and the mode of transportation for rest of the people remains mass transit systems like Indian Railways, and road transport.

Given the primary objective of a democratic government to focus on inclusive growth, the government needs to invest more on the mass transit systems. While government should positively respond to the demands of airlines players by rationalizing its policies, it should not consider any bail-out package to the ailing players. Instead the money it might consider for a bailout should be spent on building and upgrading the rural and urban mass transit systems. The airlines players should also think of increasing their efficiency and by that mean they should find ways to minimize their cost.

While government should keep focused on the mass transit systems in the country, it is also obliged to back the growth of the aviation sector that is a major indicator of country’s growing economic status. The government should definitely look into problems of the industry and consider measures like rationalizing taxes and lowering duties on jet fuel prices to help the ailing industry.
                                                                                      
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                                                                                                 --- Koundinya.K