Introduction forex exchange.
Forex market in India.
Characteristics of Forex market.
Factors influencing exchange rate.
Types of exchange rate.
Government control on Forex market.
Function of forex market.
Depreciation of Indian rupee.
Reasons for depreciation.
Positive and Negative Impact of Depreciation.
Conclusion and Recommendation.
INTRODUCTION TO FOREIGN
The term Foreign exchange implies two things:
b) Exchange rate
Forex is the international market for the free trade of
currencies. Traders place orders to buy one currency with
According to Hartly Withers, “ Foreign exchange is the art
and science of international monetary exchange”
The forex market is the world’s largest financial market.
Over $4 trillion dollars worth of currency are traded each
day. The amount of money traded in a week is bigger than
the entire annual GDP of the United States!
The main currency used for forex trading is the US dollar.
FOREX MARKET IN INDIA
Largest financial market in existence.
The phenomenon that has dramatically changed India’s foreign
exchange market was liberalization of economy started during
Major participants :buyers, sellers, market mediators and the
Regulated by FERA, 1947 which is replaced by FEMA, 1999.
Introduced currency futures in 2009 for growth.
The growth rates of developed countries are much lower as
compared to India.
According to Haines, “Exchange rate is the price of the
currency of a country can be exchanged for the number of
units of currency of another country.”
Exchange rate is that rate at which one unit of currency of a
country can be exchanged for the number of units of
currency of another country.
FACTORS AFFECTING EXCHANGE
As with any market, the forex market is driven by supply and demand:
If buyers exceed sellers, prices go up
If sellers outnumber buyers, prices go down
The following factors can influence exchange rates:
National economic performance.
Central bank policy.
Trade balances – imports and exports.
Market sentiment – expectations and rumours.
Unforeseen events – terrorism and natural disasters
Despite all these factors, the global forex market is more stable than stock
markets; exchange rates change slowly and by small amounts.
TYPES OF EXCHANGE:-
Fixed and Floating exchange rate.
Buying and selling.
How does government control exchange rate ?
In fixed or hybrid exchange rate regime where
government controls exchange rate, control is
exercised by actively participating in
international currency market through its
RBI also allows market to determine the
exchange rate whenever it is necessary
Example: INR v/s USD
OPERATION OF FOREX MARKET
Spot Market: (Current Market).
Spot Market is of daily nature. It does not trade in future
Spot rate of exchange is that rate which happens to prevail at
the time when transactions are incurred.
It only caters to forward transaction.
It determines forward exchange rate at which forward
transaction are to be honoured.
FUNCTIONS OF FOREX MARKET
Two main function:
1. Determine price of currencies
2. Transfer currency risk
To maintain this function following
steps are taken:
FACTORS AFFECTING FOREX MARKET
1. Balance of payment.
2. Monetary policy &fiscal policy.
3. Domestic financial market.
4. RBI intervention in forex market.
5. Interest rate.
7. Business environment
8. GDP growth and phases of business cycle
9. Global economic situation and financial crisis
10. Political factors
FOREX MARKET RISK :-
Exposure to exchange rate movement.
Any sale or purchase of foreign currency entails foreign
Foreign exchange transaction affects the net asset or net
liability position of the buyer/seller.
Carrying net assets or net liability position in any
currency gives rise to exchange risk.
You could control your losses, by mental stop or hard stop.
Mental stop means that you already set you limit of your loss. A
hard stop is your initiative to stop when you think you must to
Using correct lot size
As a beginning just use smaller lots you could stay flexible and
logic than emotions while you trade.
Tracking overall exposure
sample: you go to short on EUR/USD and long on
USD/CHF, you exposed two times for USD in the same
direction. If USD goes down , you have a double dose of pain.
So, keep your overall exposure limited, it keeps you for the long
haul for trading
The bottom line
Trading is about opportunities, you must take action while the
Devaluation vs. Depreciation
Devaluation occurs when a country purposefully
lowers the value of its currency as it applies to its
exchange rate with currencies from other countries
around the world.
Depreciation is the decline in a value of a currency
based on market factors like supply and demand.
Huge trade deficit.
Lower capital inflows.
Huge current account deficit.
Low growth and inflation.
Withdrawal of investments.
Gold price rise.
Low forex exchange reserves.
Dependence on foreign money.
Recovery in the US.
Impact on exports
• Higher import bills
• Fiscal slippage
• Increased burden on borrowers
The value of the rupee in terms of dollars will
depend highly on the performance of Indian
economy. Further depreciation will only worsen the
situation. If taken care, there are still chances of
reviving the rupee.
•Controlling fiscal deficit.
•Controlling current account deficit.
•Adding to the reserves.
•Reviving the investment cycle.
•Capitalise the public sector banks.
•Reap the benefit of the good monsoon.