2. This is to certify that Ansh Bansal of class XII-E has
successfully completed this Business Studies project on
topic “Exchange Rate”. As prescribed by Mrs Ashisha
Wason during Academic year 2021-2022 as per the
guideline issued by Central Board Of Secondary
Education-CBSE.
Teacher’s Sign
Certificate
3. Acknowledgment
I would like to extend my special thank of gratitude to my
teacher Mrs Ashisha Wason ,who gave me the golden
opportunity to do this wonderful project on Business Studies
on “Exchange Rate Determination”,who also helped me in
completing my project. I came to know about so many new
things I am really thankful to them.Secondly I would also
thank my parents and friend who helped me a lot in finalising
this project within the limited time frame.
Ansh Bansal
XII-E
4. SYNOPSIS
NAME : Ansh Bansal
Class/Sec/admn.no : XXI-E/11571
PROJECT : Exchange Rate Determination
Project Sub-Topic : Method and Techniques
Objective Of Project :
Reduce volatility in exchange rates, ensuring that the market correction of
exchange rates is effected in an orderly and calibrated manner;
Help maintain an adequate level of foreign exchange reserves;
Prevent the emergence of destabilisation by speculative activities; and
Help eliminate market constraints so as to assist the development of a
healthy foreign exchange market.
Research Tool Used : Google , Wikipedia , graphs ,etc.
Mod Of Presentation : PPT
5. Summary
What is Exchange Rate Determination?
Current Depreciation
Current Appreciation
Foreign Exchange Rate Method
Fixed Exchange Rate
Floating Exchange Rate
Manage Floating Rate
Demand for Foreign Exchange
Supply of Foreign Exchange
Determination of exchange Rate
Change in Exchange Rate
Case Study
Bibliography
6.
7. List Of Content
SR.NO
SR.NO TOPIC
TOPIC PAGE .NO
PAGE .NO T.SIGN
T.SIGN
1
Certificate 2
2
Acknowledgement 3
3
Synopsis 4-6
4
Research Work 8-14
5
Introduction 15
6
Currency Appreciation and Depreciation 16-19
7
Types of exchange Rate 19-26
8
Demand for Foreign Exchange 27-28
9
Supply for Foreign Exchange 29-30
10
Equilibrium Exchange Rate 31-32
11
Change In Exchange Rate 33-34
12
Case Study 35-38
13
Bibliography 39
9. CASE STUDY - Market Determined Exchange Rate -
India’s journey through a difficult period
The introduction of LERMS introduced a new system by which the exporters
realised 60 % of their proceeds /earnings at market exchange rate, while
surrendering the rest at official exchange rate.
In other words India moved from fixed to a “dual” exchange rate for the first time
in its history.
The foreign exchange rate surrendered at official rate was made available foe
importing essential items or product including petroleum, fertilisers and life
saving drugs.
The high powered committee on BoP had thought LERMS as a transitory step
towards a more market determined exchange rate, with the expectation that both
rate would converge- to pave the way for change in exch. rate policy.Rupee
remained stable from 1992 and 1995. In 1992, Mr,Rangarajan become RBI
governor.
10. By then the exports and inward flow picked up along with some major
liberalisation measures including trade reforms. Forex reserves over the five
years beginning of 1992 to cover imports for seven months.
Rengarajan Committee recommended for targeting reserves to care of account
liabilities for servicing debts, besides cushioning imports for three months.
Budget of 1993-94 was in that line, a move towards a unified exchange rate or
a market-determined mgmt system, marking a transition to convertibility on
current account.
Proved was a point that it is important to have leadership & political backing,
along with convergence of views of all major stakeholders and institutions.
11. CASE STUDY - Market Determined Exchange Rate -
India’s journey through a difficult period
In June 1991, PV Narasimha Rao (PVNR) Govt took over and Dr.Manmohan Singh (MMS)
was named the Finance Minister. RBI Governor was Mr. S.Venkitaramanan. (SVR).
Forex reserves of the Govt has fallen to the rock bottom (Rs 2500 Cr) enough to meet imports
for just a fortnight.
The issue facing the Govt, then due to:
Iraq's invasion of Kuwait, the oil shock
Flight of NRI deposits
Restricted access to foreign borrowing caused a major
liquidity crisis.
India had to approach IMF and World Bank for assistance. Domestic opposition had been
criticising on these Intl institutions imposing their edicts for structural adjustment programs,
which among other conditions
prescribed-
reduction current & fiscal deficit
Monetary tightening &
Devaluation of currency
12. In a steep devaluation shock, On 1 July, 1991 the Govt announced 10% devaluation of
rupee, followed by a further devaluation of 20% in couple of days. A trade policy
reform followed this, announced by Commerce ministry headed by Mr.P
Chidambaram (PC).
There was a steep political resistance for this move. By July 12th Forex reserves
plummeted to $975 mill and more needed to be done, to salvage situation.
Hence a high power committee headed by Mr.Rangarajan with Mr.YV Reddy was
constituted & they recommended (interim):
Moving towards market determined Exchange rate with dual exchange rate
mechanism (interim)
Strict regulation of foreign borrowing & short term debt
Based on this in Mar 1992, Govt announced Liberalised Exch. Rate Mgmt System
(LERMS).
The new system was announced by MMS in Union Budget of 1992 and in end march
by RBI.
13. The Foreign Exchange Market Analysis
Swot Framework:
Strengths:
The business has a big geographical reach, customer base and keeps a strong brand name identity.
Business's emphasis on continuousproduct development, allowing the business to maintaininga strong market position and to enhance its client
complete satisfaction.
Weaknesses:
Business has experienced lack of technical and monetary resources, which has actually limited its ability to grow its company domestically and
worldwide.
The Foreign Exchange Market case analysis is facing increasing decline of Mexican Peso, which has led to declining of the monetary performance.
Threats:
The Foreign Exchange Market deals with serious competition from domestic and worldwide rivals along with quickly altering patterns of show
business and client choices. This might result in organisation losing its identity as a strong brand and key player
The business suffers from an increased threat of replication of its business model by different rivals. Business design is the core strength of the
business and the main factor of business's success.
Opportunities:
The business can get the opportunity of increasing demand of amusement park in U.S. by entering the U.S. show business.
Thinking about the high internet penetration in Mexico, business can make the most of this chance by establishing an interactive digital platform for
marketing its company and bring in maximum customers.
14. Pestle Analysis
The Foreign Exchange Marketis an extremely diversified service operating in the UAE, Portugal, South Korea, Turkey, Saudi Arabia, the UK, India,
Brazil and more. In order to analyze the external environment of The Foreign Exchange Market case analysis, Pestle structure has actually been used:
Political:
The business's operations and tactical decisions are affected by various political aspects, such as: undesirable laws and policies in relation to merchandise
trade, security or acquisition of intellectual property and high tax rates in certain cities. In addition, the foreign government may refuse to allow the
business to set up a park in the nation affecting its tactical decisions. In addition, political instability in the nations where The Foreign Exchange Market
runs will impact its company and growth substantially.
Economical:
This suggest that the business's choice to broaden its operations to Doha will be helpful. On the other hand, the Currency of Mexico, which suggests that
the currency of The Foreign Exchange Market case help is depreciating against the U.S dollars, affecting the organisation's success and financial stability.
Social:
The social factors such as high web penetration, usage of social networks, Mobile Apps and games have actually moved the kids's focus from checking
out local parks to hanging around on their gadgets. This has impacted the company's company locally and worldwide. In addition to which, the children's
preferences and needs have actually altered from going to regional parks to visiting theme and theme park, such as: Disney.
Technological:
Promoting and incorporation development in its business design have actually been the essential success elements for the company. The business
extremely believes in bringing new services and introducing new activities in order to engage and bring in the kids. Similarly, business is thinking about
to present an online platform to market its services to the consumer at lower expense.
Legal:
The Foreign Exchange Market case help is a highly varied organisation, for that reason, it is highly subjected to discrimination laws pertaining to
worker's recruitment, respecting the cultural distinctions and offering cultural related activities. The organisation is exposed to high compliance with
15. Introduction
An exchange rate between two
currencies is the rate at which one
currency can be exchanged for
another. For example, how many
U.S. dollars does it take to buy one
euro? As of September 24, 2021, the
exchange rate is 1.1720, meaning it
takes $1.1720 to buy €1.
16. Currency Depreciation
Currency Depreciation refer to decrease in the value of domestic currency in teams of foreign
currency. It makes the domestic currency less valuable and more of it is required to buy the
foreign currency.
For example:
(i) Rupee is said to be depreciating if price of $1 rises from Rs 45 to Rs 50.
(ii) A change from $3 = £1 to $2= £1 represents that UK pound is appreciating.
Effect of Depreciation of Domestic Currency on Exports:
Depreciation of domestic currency means a fall in the price of domestic currency (say, rupee)
in terms of a foreign currency (say, $). It means, with same amount of dollars, more goods
can be purchased from India, i.e. exports to USA will increase as they will become relatively
cheaper.
17. Currency Appreciation
Currency Appreciation refers to increase in the value of domestic currency in terms of
foreign currency. The domestic currency becomes more valuable and less of it is required
to buy the foreign currency.
For example:
(i) Indian rupee appreciates when price of $1 falls from Rs. 50 to Rs 45.
(ii) A change from $3 = £1 to $5 = £1 represents that the UK pound is appreciating.
Effect of Appreciation of Domestic Currency on Imports:
Appreciation of domestic currency means a rise in the price of domestic currency (say,
rupee) in terms of a foreign currency (say, $). Now, one rupee can be exchanged for more
$, i.e. with same amount of money, more goods can be purchased from USA. It leads to
increase in imports from USA as American goods will become relatively cheaper.
18. Currency Depreciation Vs Currency Appreciation
Basis
Basis Currency Depreciation
Currency Depreciation Currency Appreciation
Currency Appreciation
Meaning
Meaning It refers to decrease in the value of domestic currency in
terms of foreign currency.
It refers to increase in the value of
domestic currency in terms of foreign
currency.
Effect on
Effect on
Imports/Ex
Imports/Ex
ports
ports
It makes domestic goods cheaper in foreign country as
more of such goods can now be purchased with same
amount of foreign currency. So, it leads to increase in
exports.
It makes foreign goods cheaper in domestic country
as more of such goods can now be purchased with
same amount of domestic currency. So, it leads to
increase in imports.
Example
Example A change from $1 = Rs 40 to $1 = Rs 45 represents that
Indian Rupees is depreciating.
A change from $1 = Rs 42 to $1 = Rs 38 represents
that Indian Rupees is appreciating.
19. Types of Exchange Rate
There are three types of exchange rate
systems that are in effect in the foreign
exchange market and these are as
follows :
1. Fixed exchange rate System
2. Flexible Exchange Rate System
3. Managed floating exchange rate
system
20. Fixed Exchange Rate
Fixed exchange rate system refers to a system in which exchange rate for a currency
is fixed by a government.
The basis purpose of adopting this system is to ensure stability in foreign trade and
capital movements.
For this, government has to maintain large reserve of foreign currencies to
maintain the exchange rate at the level fixed by it.
When value of domestic currency is tied to the value of another currency, it is
know as ‘pegging’.
When value of currency is fixed in terms of some other currency or in term of gold,
it is know as ‘parity value’ of currency.
21. Advantages of Fixed Exchange Rate System
1. It ensures stability in foreign exchange that encourages foreign trade.
2. It helps in maintaining stable inflation rates in an economy.
Disadvantages of Fixed Exchange Rate System
3. There is a constant need for maintaining foreign reserves in order to stabilise the
economy.
4. The government may lack the flexibility that is required to bounce back in case an
economic shock engulfs the economy.
5.
22. Devaluation and Revaluation
Devaluation refers to reduction in the value of domestic currency in by the government.
Devaluation is said to be a occur when exchange rate is increased by the government
under fixed exchange rate system. On the other hand, Revaluation refers to increase in
value of domestic currency by the government.
Devaluation Vs Depreciation
Basis Devalution Depreciation
Meaning Devaluation refers to detection in the price of
domestic currency in term of or foreign currency
under fixed exchange rate regime
Depreciation rate refers to fall in market price
of domestic currency in terms of of foreign
currency under flexible exchange rate regime.
Occurrence It take place due to government It take place due to market force of demand
and supply
Exchange Rate System It take place under fixed exchange rate system It take place under flexible exchange rate
system
23. Flexible Exchange Rate
Flexible exchange rate system is also known as the floating exchange rate
system as it is dependent on the market forces of supply and demand of
different currencies in foreign exchange market.
The value of currency is allowed to fluctuate freely according to the
change in demand and supply of the foreign exchange.
There is no official(government) intervention of the foreign exchange
market.
Flexible exchange rate is also known as ‘floating exchange rate’.
The exchange rate is determined by the market, i.e through the
interaction of thousands of banks, firms and other institutions seeking to
buy and sell currency for purpose of the making transaction in foreign
exchange.
24. Advantages of Floating Exchange Rate System
1. There is no need to maintain foreign reserves in this exchange system.
2. Any deficiencies or surplus in Balance of Payment is automatically corrected
in this system.
Disadvantages of Floating Exchange Rate System
1. It encourages speculation that may lead to fluctuations in the exchange rate of
currencies in the market.
2. If the fluctuations in exchange rates are too much it can cause issues with
movement of capital between countries and also impact foreign trade.
25. Managed Floating Exchange Rate
A managed floating exchange rate is a system in which foreign exchange
rate is determined by market forces and central banh influences the
exchange rate through intervention in the foreign exchange market .
It can be safely said that a managed float is a hybrid control system. It
is neither a free-float nor a flexible float exchange rate.
In this system, central bank intervenes in the foreign exchange market
to restrict the fluctuation in the exchange rate within the central limit.
The aim to keep exchange rate close to desired target value.
For this, central bank maintain reserve of foreign exchange to ensure
that the exchange rate stay within the target value.
It is also know as ‘Dirty Floating’.
26. Advantages of a Managed Floating Regime:
1. A much stronger and resilient monetary policy.
2. The domestic economy is hardly impacted by the actions taken under a managed
floating regime.
Disadvantages of a Managed Floating Regime:
3. Competitive devaluations of currencies are the fallout of a managed regime.
4. Countries with a managed floating exchange often tend to have weaker financial
systems.
27. Demand for Foreign Exchange
The demand (or outflow) of foreign exchange comes from those people who need
it to make payment in foreign currency. It is demanded by the domestic residents
for the following reasons:
1. Imports of Goods and Services: Foreign Exchange is demanded to make the
payment for imports of goods and services.
2. Tourism: Foreign exchange is needed to meet expenditure incurred in foreign
tours.
3. Unilateral Transfers sent abroad: Foreign exchange is required for making
unilateral transfers like sending gifts to other countries.
4. Purchase of Assets in Foreign Countries: It is demanded to make payment for
purchase of assets, like land, shares, bonds, etc. in the foreign countries.
5. Speculation: Demand for foreign exchange arises when people want to make
gains -from appreciation of currency.
28. Demand curve of Foreign Exchange
Demand curve of foreign exchange slope
downwards due to inverse relationship
between demand for foreign exchange
and foreign exchange rate.
In demand for foreign exchange (US
dollar) and rate of foreign exchange are
shown on the X- axis and Y-axis
respectively. The negatively sloped
demand curve (DD) shows that more
foreign exchange (OQ1) is demanded at
a low rate of exchange (OR1), whereas,
demand for US dollars falls to OQ2 when
the exchange rate rises to OR2.
29. Supply of Foreign Exchange
The supply (inflow) of foreign exchange comes from those people who
receive it due to following reasons.
1. Exports of Goods and Services: Supply of foreign exchange comes
through exports of goods and services.
2. Foreign Investment: The amount, which foreigners invest in the home
country, increases the supply of foreign exchange.
3. Remittances (Unilateral transfers) from abroad: Supply of foreign
exchange increases in the form of gifts and other remittances from abroad.
4. Speculation: Supply of foreign exchange comes from those who want
to speculate on the value of foreign exchange.
30. Supply Curve of Foreign Exchange
Supply curve of foreign exchange
slope upwards due to positive
relationship between supply for foreign
exchange and foreign exchange rate. In
Fig. 11.2, supply of foreign exchange
(US Dollar) and rate of foreign
exchange have been shown on the X-
axis and Y-axis respectively. The
positively sloped supply curve (SS)
shows that supply of foreign exchange
rises from OQ1 to OQ2 when the
exchange rate rises from OR, to OR2.
31. Equilibrium Exchange Rate
In the foreign exchange market, the
equilibrium exchange rate is
determined by the intersection of the
demand curve for foreign currency
and the supply curve of the foreign
currency.
In the Diagram,DD is demand curve
for foreign currency and SS is the
supply curve of foreign currency. The
point E is the point of intersection,
where the demand curve and supply
curve intersects.
32. Thus, the point E represents the equilibrium exchange rate. OR is the equilibrium
exchange rate and QR is the quantity demanded and supplied of the foreign
currencies.
If exchange rate rises to OR1, then the supply of foreign currency exceeds the
demand for foreign. This will then force the exchange rate to fall back to OR due
to the excess supply. On the contrary, if the exchange rate fall to OR2, then there
exists excess demand. Consequently, the rate of exchange rises from OR2 to OR.
33. Change in Exchange Rate
The equilibrium exchange rate will be disturbed if some changes occur in the
demand or supply of foreign exchange.
Change in Demand
1. Increase in Demand:An increase in demand for foreign exchange will shift
the demand curve towards right It shows that per unit price of US Dollar (in
terms of rupees) has increased, i.e. domestic currency has depreciated.
2. Decrease in Demand:A decrease in demand will shift the demand curve
towards left Now, per unit price of US Dollar (in terms of rupees) has
decreased, i.e. domestic currency has appreciated.
34. Change in Supply:
(i) Increase in Supply: If supply of foreign exchange increases, it will lead to a
rightward shift in supply curve .A decrease in the price of foreign currency, in terms
of domestic currency, means that the domestic currency has appreciated.
(ii) Decrease in Supply: A decrease in supply will shift the supply curve towards
left .So, per unit price of US Dollar (in terms of rupees) has increased and, thus, the
domestic currency has depreciated.
35. CASE STUDY- Market Determined Exchange Rate -
India’s journey through a difficult period
The introduction of LERMS introduced a new system by which the exporters
realised 60 % of their proceeds /earnings at market exchange rate, while
surrendering the rest at official exchange rate.
In other words India moved from fixed to a “dual” exchange rate for the first
time in its history.
The foreign exchange rate surrendered at official rate was made available foe
importing essential items or product including petroleum, fertilisers and life
saving drugs.
The high powered committee on BoP had thought LERMS as a transitory step
towards a more market determined exchange rate, with the expectation that both
rate would converge- to pave the way for change in exch. rate policy.Rupee
remained stable from 1992 and 1995. In 1992, Mr,Rangarajan become RBI
governor.
36. By then the exports and inward flow picked up along with some major
liberalisation measures including trade reforms. Forex reserves over the five
years beginning of 1992 to cover imports for seven months.
Rengarajan Committee recommended for targeting reserves to care of
account liabilities for servicing debts, besides cushioning imports for three
months.
Budget of 1993-94 was in that line, a move towards a unified exchange rate
or a market-determined mgmt system, marking a transition to convertibility
on current account.
Proved was a point that it is important to have leadership & political backing,
along with convergence of views of all major stakeholders and institutions.
37. CASE STUDY - Market Determined Exchange Rate -
India’s journey through a difficult period
In June 1991, PV Narasimha Rao (PVNR) Govt took over and Dr.Manmohan Singh (MMS)
was named the Finance Minister. RBI Governor was Mr. S.Venkitaramanan. (SVR).
Forex reserves of the Govt has fallen to the rock bottom (Rs 2500 Cr) enough to meet imports
for just a fortnight.
The issue facing the Govt, then due to:
Iraq's invasion of Kuwait, the oil shock
Flight of NRI deposits
Restricted access to foreign borrowing caused a major
liquidity crisis.
India had to approach IMF and World Bank for assistance. Domestic opposition had been
criticising on these Intl institutions imposing their edicts for structural adjustment programs,
which among other conditions
prescribed-
reduction current & fiscal deficit
Monetary tightening &
Devaluation of currency
38. In a steep devaluation shock, On 1 July, 1991 the Govt announced 10% devaluation of
rupee, followed by a further devaluation of 20% in couple of days. A trade policy
reform followed this, announced by Commerce ministry headed by Mr.P
Chidambaram (PC).
There was a steep political resistance for this move. By July 12th Forex reserves
plummeted to $975 mill and more needed to be done, to salvage situation.
Hence a high power committee headed by Mr.Rangarajan with Mr.YV Reddy was
constituted & they recommended (interim):
Moving towards market determined Exchange rate with dual exchange rate
mechanism (interim)
Strict regulation of foreign borrowing & short term debt
Based on this in Mar 1992, Govt announced Liberalised Exch. Rate Mgmt System
(LERMS).
The new system was announced by MMS in Union Budget of 1992 and in end march
by RBI.
