The document discusses factors that influence exchange rates in the short, medium, and long term such as sentiment, fundamentals, technical analysis, purchasing power parity, interest rate parity, and balance of payments. It analyzes the Indian rupee's movement against the US dollar based on global economic conditions, domestic inflation and interest rates, and capital flows. While the rupee has depreciated sharply, the present band is expected to be between 49-50 rupees to the dollar due to RBI intervention and India remaining an attractive FII destination.

1. PRESENTED BY
YUVRAJ DHAGE
PRAHALAD PURANIK
KUNDAN LAL

2. Basis for calculation
Short Term Medium Long Term
Term
Sentimental Fundamental Fundamental
Technical Technical Purchasing Power
Parity
Interest Rate Parity
BOP Parity

3. Purchasing Power Parity
Based on rate of Basket of commodities in each
country. Mc-burger theory
Present Exchange rate 49, means one $ can buy
goods worth Rs.49/-. If Exchange rate appreciate by
10%, to Rs.44/-, then it will be costly to US. But
inflation in US increased by 5%, then it equilibrium.

4. Interest Rate Parity
 Components of interest
(Incentive + Risk premium + inflation)
 Exchange rate movement = Real interest rate
differentials
 Interest rate shows increasing trend.
 RBI revised Inflation projection 6.00% to 7.00%.
 Real Interest rate : India (1.19) and US (3.55)

5. Interest Rate Parity
continues….
 Present Inflation in India is 9.44%.
 US present inflation is 3.80%.
 Despite Governments assurance for
reduction in inflation in both the
countries no concrete steps has been
taken so far.

6. BOP
 GDP growth forecast for 2011-12 is between
7.5% to 8.0% (FICCI).
 India’s CAD is widening.
 The incremental credit deposit ratio was 47%
(last year-83%) during Apr-Sep (RBI data).
 Government has given export incentives.
 FC debt for USD137b(43.3% of forex reserve) is
to be paid back over the next 12 months.

7. Basis for forecast
Logical Global Movements :
RBI says that the fall in currency is due to global
change and nothing specific in the country is driving
the fall.
 Europe’s debt crisis would dampen demand for
exports (18% of our total exports)
 Spain’s credit rating cut by Fitch from AA+ to AA-
 Downgrade of various European and UK banks
continuing

8. Logical Global Movements
 Greek Economic stuck in recession. GDP is seen
contracting by 2.5% next year from 5.5% slump in 2011
according to the country’s 2012 budget draft which was
submitted to parliament after agreement with
international inspector.
 European Central Bank president Jean Claude Trichet
said the reasons debt crisis now threatens the financial
systems

9. Logical Global Movements
Continue…
 Global turmoil does not seem to come to any
halt in near future. Any small announcement
brings volatility in the market and add fuel to
the sentiment of FIIs.
 Even
the US is struggling to manage its debt and
unemployment.

10. Some Domestic facts
 Unlike 2008, this time fall in INR has been much
sharper than the rise in USD index.While rupee
has lost 11.5% in two month, the USD index has
risen by 6% (2008- 18.02/17.73)
 Macroeconomic condition is also not as strong as
it was in 2008.

11. Calculation on the basis of
Interest Rate
(1 + (rd x t)
Forward rate = S ( /(1+ rf x t )) + C
S = Spot rate
rd = Domestic interest rate
rf = Foreign currency interest rate
t - the life of the forward contract
C = transaction cost of bid-ask spread in FX markets and bid ask
spread in Money markets
 Since Indian Rupee is not fully convertible, the forward rate is determined
not only by interest rate differential but also expectation of spot movement

12. Calculation on the basis of
Interest Rate
(1 + (rd x t)
Forward rate = S ( /(1+ rf x t ))
49.18(1+.08 x 5/12)
------------------------
1+.0002 x 5/12
= 50.76

13. Technical Analysis
25/04/2011 to 07/10/2011
EXCHANGE RATE
50
49
48
47
46
Rate
45
44
43
42
41
4/25/2011 5/25/2011 6/25/2011 7/25/2011 8/25/2011 9/25/2011
Date

14. Basis for forming an opinion
 Short term movement in exchange rate
depend largely on oil prices and inflow &
outflow of FII.
 There is no indication of major variation in
oil prices.
 Sentimental movement of FII is beyond
control because of global uncertainty.

15. Contd..
 No indication of major change in Inflation and
Interest rates of both countries.
 Effect of global factors has not fully percolated to INR.
 Euro zone is yet to come out of the crisis.
 US is struggling to manage its debt and domestic affair.
 In Sept 2011 S & P raised the probability of US double
dip recession to 40%.
 News of any sudden international economic imbroglio
cannot be avoided.
 We are having managed floating rate, RBI is supporting
at Rs.50/-.

16. Contd..
 At the same time, we have seen in past
that when rupee depreciated beyond
10%, it never reversed to its previous
position.
 Despite all odds India remains a favorable
destination for FII and there is a
possibility of revisiting of FII for the same
reason that rupee has crashed against
dollar.

17. Conclusion
Considering the above, we are of the
opinion that exchange rate will be within
the band of 49.00 to 50.00

18. Bibliography
 www.rbi.org.in
 www.ficci.com
 www.tmb.in
 www. crisil.com
 Business Line
 Business Standard
 The Economic Times