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
