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BUS 550 -_finance_final_project_group_1_rev_5
 

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California University of Management and Technology (CALMAT) MBA

California University of Management and Technology (CALMAT) MBA
BUS550 Finance
Final Project - Analyze the exchange rate risk of India Rupee and the risk vis-à-vis the U.S.

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    BUS 550 -_finance_final_project_group_1_rev_5 BUS 550 -_finance_final_project_group_1_rev_5 Presentation Transcript

    • CALMAT MBA BUS 550 - Finance
      • Final Project
        • Analyze the exchange rate risk of India Rupee and the risk vis-à-vis the U.S.
      • Daywen Li
      • Stephanie Yuan
      • Edmond Low
    • Overview
      • Introduction of INR
      • Exchange rate analysis
        • Currency exploitation and Impact
        • Economy outlook and Forecast
      • Country risk overview
        • Security, Infrastructure and Bureaucracy
      • Conclusion
      Page 
    • Introduction of Indian Rupee
      • The Indian rupee is the official currency of India.
      • The issuance of the currency is controlled by the Reserve Bank of India (RBI).
      • The currency code for Rupees is INR.
      • The currency symbol is (since 15 July 2010)
      Page 
    • Currency Popularity Ranking Table
      • One of the most popular Indian Rupee exchange rate trade is USD to INR currency market.
      • It is a de facto controlled exchange rate.
      • Below is the currency popularity chart by XE.com
      Page 
    • Currency Rate - INR vs USD
      • As of 2010.08.26 06:52:00
      • 1.00 USD = 46.7962 INR
      • 1 INR = 0.0213693 USD
      Page 
    • Interesting INR & USD fact
      • Very few only knows the fact that INR value was equal to $US by 1947.
      • Govt. of India has depreciated the value under US pressure, later on.
      • No other country has done this till now.
      • And India is paying the price.
      Page 
    • INR vs. USD Exchange Rate Analysis
      • The India government’s strategy & policy have long-lasting impact on country’s economy.
        • Strong Government & Rupee currency  Country & Economy Stronger
      • Recently, India become strong on foreign exchange reserve.
      • This phenomena is actually causing damage to the economy, affecting everyone and benefiting the very few “selected one”.
      • This unusual phenomena of INR vs. USD impacted the growth.
      Page 
      • Weak INR benefits exporters vice versa Strong INR helps importers.
      • India imports > exports, so a strong INR would help the India’s major import bill which is oil.
      • Major importer is the Government.
      • As the weak INR increases import prices, the people pay for it.
      • Oil prices have come down from $147 to $ 99
      • Under these conditions, the INR could have become stronger – Rs.35 to 37 vs. Dollar, but it has depreciated steeply in the last couple of months from Rs.39 to Rs.45.
      • Weak INR causes higher oil prices. Either the people pay for it directly through higher petrol and diesel prices, or indirectly through oil subsidies.
      • The only beneficiaries are few major exporters & corporate.
      • The major losers are the people. Govt. of India
      INR vs. USD Exchange Rate Analysis Page 
    • Currency Exploitation Page 
      • From Jun 07 – Jun 08, RBI bought USD 107 billion.
      • RBI sold MSS Bonds to that causes INR Liquidity totaling USD 42 billion
      • Total MSS bonds outstanding = Rs. 1,71,000 crore
      • Total Cost of MSS borrowing @ 9% = 15,390 crore
      • Extra Liquidity injected after all this Rs. 2,50,000 crore. ~6.5% of GDP
      • Causes Inflation.
    • Impact on people of India
      • The soar rise of crude oil price from USD100 per barrel to USD127 per barrel causes big hard time to Indian industry.
      • The worst part is India Government never take any measure to ease the situation.
      • If this continue, it would result into deficit financing & horrible inflation.
      • To absorb such increase in prices and volatility, Government is forced to compromise with the production and social welfare expenses on infrastructure projects.
      Page 
    • Impact of Currency Instability
      • INR appreciation against USD impacted heavily to the following:
        • Exporters
        • Importers
        • Foreign investors
      • India’s exports are of handicrafts, gems, jewels, textiles, industrial machinery, leather products, chemicals & etc.
      • India is the world’s largest processor of diamonds.
      • In 1990s, the USD was moving high against the INR, exporters stood to gain, when USD1 = Rs. 48, they get Rs. 4800 for every $100.
      • But in 2007, rupee appreciated ~10%. With its value of rupee Rs. 39 = $1 as on 2007, for every $100, exporters would get only Rs. 3900.
      • This difference is drawing away the profit margins of exporters.
      Page 
      • Imports to India are petroleum products, chemicals, dyes, plastics, pharmaceuticals, iron, steel, uncut precious stones, agriculture products, paper & etc.
      • With the same scenario as given for export, if we analyze - an importer is paying Rs. 3900 now instead of Rs. 4800 paid during yester years for every $100.
      • This gain create savings in cost to consumers, thereby inflation can be controlled, but too bad this did not happen.
      • Therefore, appreciation & depreciation of INR cannot certainly be taken as beneficial to the Indian economy in general.
      Page  Impact of Currency Instability
      • The past one year, software industry in India have been a bad experience for INR earners.
      • Beginning this year, on the back of huge foreign-exchange inflows thanks to a burgeoning economy, the INR has appreciated by an unprecedented 9% against USD, making it worth 13% more than what it was a year ago.
      • All this means that the USD Indian companies are earning are fetching fewer INR back to India.
      • The Indian software sector average earnings’ - > 60% of its revenues in USD and every 1% appreciation in INR against USD can impact earnings before interest & tax margins between 3% to 5%.
      Page  Impact of Currency Instability
    • Economic Outlook of India.
      • India outlook:
        • India had the potential to influence South Asia economically in the way that China has influenced East Asia.
        • Today, with one-fifth of the world's population, but one-fiftieth of the world's gross domestic product and one-hundredth of the world's trade, India has tremendous opportunity to become a political and economic leader in the region
        • The anchor currency of the world, the dollar, is swooning due to mismanagement of the US economy.
      Page 
    • USD-INR: FORECAST FOR YEAR 2010-2011
      • The Dollar Index (systematic analysis) is most important global lead indicators for a lot of financial instruments including the Indian Rupee.
      • Chart shown the progress of the US Dollar Index from March, 2008 till Apr 2010.
      • Conclude that the US Dollar Index is on a powerful long term uptrend since March, 2008 which has the potential to retest or even breach the highs that it made in March, 2009 at 89.62 levels.
      Page 
    • Dollar Index Correlation Analysis
      • For predicting the movement of USD-INR, we have evaluated the movement of the US Dollar Index against three other financial instruments
        • Currency : A basket of Currency Pairs
        • Equity : MSCI World Index
        • Commodity : CRB Index
      • The comparison of US Dollar Index against these three financial instruments has been split into four different time frames as below.
        • Phase 1: March, 2008 - March, 2009: Uptrend which started since March, 2008 and remained in force till beginning March, 2009.
        • Phase 2: March, 2009 - November, 2009: Correction to the uptrend from March, 2009 till November, 2009 where Dollar Index went down, but created a higher bottom and hence confirmed our premise of a long term uptrend in Dollar index.
        • Phase 3: November, 2009 - April, 2010 (Possibly): Rise in US Dollar Index accompanied by divergences with Emerging Market Currencies, Global Equities & Commodities.
        • Phase 4: April, 2010 – March, 2011 (forecasted)
      Page 
    • Phase 4: PROJECTION OF USD-INR (April, 2010 – March, 2011)
      • Conclusion from the Dollar Index Correlation Analysis vis a vis Emerging Market Currencies,
      • Global Equities & Commodities.
        • It’s quite evident that there is a deviation in the movement between Dollar Index & Emerging Market currencies in Phase 3. If US Dollar has resumed its upward journey then it’s probably only a matter of time before the Emerging Market currencies would restart their downward journey.
        • Secondly, correlation between Dollar Index & MSCI world in Phase 3 indicates that divergences in this case too are prominent. This may as well indicate a reversal in the Global Equities anytime. Further, the emerging market equities have been underperforming the US equities for the last six months. Any weakness in US equity can lead to a crack in emerging market equities in the near future. This undoubtedly will impact the emerging market currencies adversely.
        • And last but not the least, the correlation between Dollar Index & CRB Index indicates that a reversal may have already happened in commodities. It is quite likely that CRB index may have peaked out on 6th January, 2010 at 293.75 and has already begun its downward journey.
      Page 
    • Technical Summary of USD INR
      • By the time Phase 1 ended, Rupee had depreciated to 52.13 on 3rd March, 2009 which proved to be the pivotal point for a steady appreciation till date.
      • As we have highlighted above, during current phase (Phase 3) clear divergences in the historical correlation are appearing in the charts, as the Dollar Index is appreciating and USD/INR instead of going up is actually going down. This means that INR along with other emerging market currencies is appreciating against USD inspite of USD appreciating against the other developed market currencies mainly Euro, GBP and Japanese Yen.
      • Our study indicates that rupee’s appreciation may halt any moment. In longer term trends, it’s difficult to predict exact tops and bottoms however a long position in US Dollar against INR at the current level of 44.45 offers extremely favorable risk reward trade.
      • Our research model signals that we may be in the vicinity of a significant charticle bottom for USD-INR. Higher targets will open up for the USD-INR above 47 and it may not surprise us if it tests or even breaks 52 level by the end of March, 2011.
      • Sources: http://www.pacefin.com/Admin/Research/USD%20INR%20FORECAST-%20FY%2011.pdf
      Page 
    • Country Risk Overview
      • India got the worst grade in PERC’s ranking. Due to the following reasons.
        • External security risk
        • Internal terrorist threats
        • Poor physical infrastructure
        • Bureaucracy
      Page 
    • External Security Risk & Internal Terrorist Threats
      • Unsettled boundary dispute with China
        • Sino-China War at 1962
      • Nuclear thread from Pakistan
      Page 
      • Jihadi Terrorism
        • HUJBI, JMB, JIB are actively engaged in terrorist activities
        • Pakistan-based organization
          • Lashkar-e-Taiba, Jaish-e-Mohammad
    • Poor Physical Infrastructure
      • Weak infrastructure remains a significant cost factor for manufacturing company
        • Significant power cuts – average 17 cut/month
      • Various studies show that dozens of billions of dollars needed to upgrade
      Page 
    • Bureaucracy
      • BBC report “India's bureaucracy is the most stifling in the world”
        • India got 9.41 out of 10 scores [10 is the worst possible scores]
      • Bureaucracy links to Corruption
        • Transparency International (TI) found more than 50% Indians experience of paying bribe to get job done in public office
      Page 
    • Conclusion
      • India and the U.S. share an extensive cultural, strategic, military and economic relationship
      • When India expects to keep growing, the bad inflation and currency may decrease the economic growing
      • External security risk, internal terrorist threats, poor physical infrastructure, bureaucracy also are big challengers to investors
      Page 
    • The End…..
      • Special Thanks to
        • Professor Dr. Tony Lima
      • Stephanie Yuan Daywen Li Edmond Low
      Page 