The document discusses the growth of foreign exchange markets in India since liberalization in the early 1990s. It notes that monthly trading volumes have grown over ten times from 2003-2004 to over $359 billion in 2005-2006, making it one of the largest financial markets in India. The market is dominated by inter-bank trading among over 90 authorized dealers, mostly banks. Foreign exchange regulation has been replaced with more flexible rules, and India has moved to a managed floating exchange rate system while accumulating large foreign reserves.
Unit 2.1 Foreign Currency, Foreign Transactions- trade and non trade, and Rol...Charu Rastogi
In this presentation we discuss Definition of foreign currency and foreign transactions- trade and non trade, and Role of participants in Forex markets.
A Study on Impact in Exchange Rate of Indian Rupee versus US Dollar with Spec...IJAEMSJORNAL
Foreign Exchange Rate is the largest financial market function is converting any foreign currency into another currency. A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. Increased demand for a currency is due to either an increased transaction demand for money, or increased speculative demand for money. The transaction demand for money is highly correlated to the countries level of business activity, Gross Domestic Product (GDP), and employment levels. Most of the peoples are unemployed, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty in adjusting the available money supply to accommodate changes in the demand for money due to business transactions. Such fluctuations in exchange rate have its impact on the economic growth of the economy. Hence the present study aims at finding out the Impact in the exchange rate and stock market.
This presentation is a comprehensive presentation of Forex Market. It starts with the history of this market from Pre Gold period, Bretton wood till current floating exchange mechanism and in Indian perspective FERA and FEMA. It then gives you an idea on size, width and extent of this market and post that it covers forex exchange, quotes, and numerical. Finally, it covers few topics like Trade Finance, LIBOR, Balance of Payment & Currency Swaps
Unit 2.1 Foreign Currency, Foreign Transactions- trade and non trade, and Rol...Charu Rastogi
In this presentation we discuss Definition of foreign currency and foreign transactions- trade and non trade, and Role of participants in Forex markets.
A Study on Impact in Exchange Rate of Indian Rupee versus US Dollar with Spec...IJAEMSJORNAL
Foreign Exchange Rate is the largest financial market function is converting any foreign currency into another currency. A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. Increased demand for a currency is due to either an increased transaction demand for money, or increased speculative demand for money. The transaction demand for money is highly correlated to the countries level of business activity, Gross Domestic Product (GDP), and employment levels. Most of the peoples are unemployed, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty in adjusting the available money supply to accommodate changes in the demand for money due to business transactions. Such fluctuations in exchange rate have its impact on the economic growth of the economy. Hence the present study aims at finding out the Impact in the exchange rate and stock market.
This presentation is a comprehensive presentation of Forex Market. It starts with the history of this market from Pre Gold period, Bretton wood till current floating exchange mechanism and in Indian perspective FERA and FEMA. It then gives you an idea on size, width and extent of this market and post that it covers forex exchange, quotes, and numerical. Finally, it covers few topics like Trade Finance, LIBOR, Balance of Payment & Currency Swaps
What Is an Exchange Rate Mechanism (ERM)?
An exchange rate mechanism (ERM) is a set of procedures used to manage a country's currency exchange rate relative to other currencies. It is part of an economy's monetary policy and is put to use by central banks.
Such a mechanism can be employed if a country utilizes either a fixed exchange rate or one with a constrained floating exchange rate that is bounded around its peg (known as an adjustable peg or crawling peg).
A study on the impact of global currency fluctuations with a special focus to...Aman Vij
The paper discusses about the factors influencing and impact of currency fluctuations on global economy. Then we shift our focus to Indian rupees factors which causes the Rupee fluctuations has been discussed. In the end we discuss about the steps taken by the RBI and the government and what else can be done by investors to lessen the impact of Global currency fluctuations and what can be done to prevent Indian Rupee fluctuation.
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
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@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
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1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
what is the best method to sell pi coins in 2024DOT TECH
The best way to sell your pi coins safely is trading with an exchange..but since pi is not launched in any exchange, and second option is through a VERIFIED pi merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and pioneers and resell them to Investors looking forward to hold massive amounts before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade pi coins with.
@Pi_vendor_247
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
1. Foreign Exchange Markets
Rajesh Chakrabarti*
Introduction
During 2003-04 the average monthly turnover in the Indian foreign exchange
market touched about 175 billion US dollars. Compare this with the monthly trading
volume of about 120 billion US dollars for all cash, derivatives and debt instruments put
together in the country, and the sheer size of the foreign exchange market becomes
evident. Since then, the foreign exchange market activity has more than doubled with the
average monthly turnover reaching 359 billion USD in 2005-2006, over ten times the
daily turnover of the Bombay Stock Exchange. As in the rest of the world, in India too,
foreign exchange constitutes the largest financial market by far.
Liberalization has radically changed India’s foreign exchange sector. Indeed the
liberalization process itself was sparked by a severe Balance of Payments and foreign
exchange crisis. Since 1991, the rigid, four-decade old, fixed exchange rate system
replete with severe import and foreign exchange controls and a thriving black market is
being replaced with a less regulated, “market driven” arrangement. While the rupee is
still far from being “fully floating” (many studies indicate that the effective pegging is no
less marked after the reforms than before), the nature of intervention and range of
independence tolerated have both undergone significant changes. With an over-
abundance of foreign exchange reserves, imports are no longer viewed with fear and
skepticism. The Reserve Bank of India and its allies now intervene occasionally in the
foreign exchange markets not always to support the rupee but often to avoid an
*
College of Management, Georgia Tech, 800 West Peachtree Street, Atlanta, GA 30332, USA. Email:
rajesh.chakrabarti@mgt.gatech.edu .
1
2. appreciation in its value. Full convertibility of the rupee is clearly visible in the horizon.
The effects of these development s are palpable in the explosive growth in the foreign
exchange market in India.
Foreign Exchange Markets in India – a brief background
The foreign exchange market in India started in earnest less than three decades
ago when in 1978 the government allowed banks to trade foreign exchange with one
another. Today over 70% of the trading in foreign exchange continues to take place in the
inter-bank market. The market consists of over 90 Authorized Dealers (mostly banks)
who transact currency among themselves and come out “square” or without exposure at
the end of the trading day. Trading is regulated by the Foreign Exchange Dealers
Association of India (FEDAI), a self regulatory association of dealers. Since 2001,
clearing and settlement functions in the foreign exchange market are largely carried out
by the Clearing Corporation of India Limited (CCIL) that handles transactions of
approximately 3.5 billion US dollars a day, about 80% of the total transactions.
The liberalization process has significantly boosted the foreign exchange market
in the country by allowing both banks and corporations greater flexibility in holding and
trading foreign currencies. The Sodhani Committee set up in 1994 recommended greater
freedom to participating banks, allowing them to fix their own trading limits, interest
rates on FCNR deposits and the use of derivative products.
The growth of the foreign exchange market in the last few years has been nothing
less than momentous. In the last 5 years, from 2000-01 to 2005-06, trading volume in the
foreign exchange market (including swaps, forwards and forward cancellations) has more
2
3. than tripled, growing at a compounded annual rate exceeding 25%. Figure 1 shows the
growth of foreign exchange trading in India between 1999 and 2006. The inter-bank
forex trading volume has continued to account for the dominant share (over 77%) of total
trading over this period, though there is an unmistakable downward trend in that
proportion. (Part of this dominance, though, result s from double-counting since purchase
and sales are added separately, and a single inter-bank transaction leads to a purchase as
well as a sales entry.) This is in keeping with global patterns.
[Figure 1 about here]
In March 2006, about half (48%) of the transactions were spot trades, while swap
transactions (essentially repurchase agreements with a one-way transaction – spot or
forward – combined with a longer- horizon forward transaction in the reverse direction)
accounted for 34% and forwards and forward cancellations made up 11% and 7%
respectively. About two-thirds of all transactions had the rupee on one side. In 2004,
according to the triennial central bank survey of foreign exchange and derivative markets
conducted by the Bank for International Settlements (BIS (2005a)) the Indian Rupee
featured in the 20th position among all currencies in terms of being on one side of all
foreign transactions around the globe and its share had tripled since 1998. As a host of
foreign exchange trading activity, India ranked 23rd among all countries covered by the
BIS survey in 2004 accounting for 0.3% of the world turnover. Trading is relatively
moderately concentrated in India with 11 banks accounting for over 75% of the trades
covered by the BIS 2004 survey.
Features of the Forward premium on the Indian rupee
3
4. The Indian rupee has had an active forward market for some time now. The
forward premium or discount on the rupee (vis-à-vis the US dollar, for instance) reflects
the market’s beliefs about future changes in its value. The strength of the relationship of
this forward premium with the interest rate differential between India and the US – the
Covered Interest Parity (CIP) condition – gives us a measure of India’s integration with
global markets. The CIP is a no-arbitrage relationship that ensures that one cannot borrow
in a country, convert to and lend in another currency, insure the returns in the original
currency by selling his anticipated proceeds in the forward market and make profits
without risk through this process.
Chakrabarti (2006) reports tha t between late 1997 and mid-2004 the average
discount on the rupee was about 4% per annum. During the period the average difference
between 90-180 day bank deposit rates in India and the inter-bank USD offer rate was
about 4.5% for 3-months and 3.5% for the 6- months period. With these two figures in the
same ballpark (particularly given that bank deposit rates and inter-bank rates are not
strictly comparable), annual averages of interest rate differences and the forward
exchange premium also indicate a moderate degree of co- movement between the two
variables. The interest rate differential explains about 20% of the total variation in the
forward discount. The deviation of the Indian rupee-US dollar from the covered interest
parity, however, exhibits long-lived swings on both sides of the zero line. This would
indicate arbitrage opportunities and market imperfections provided we could be sure of
the comparability of the interest rates considered. Therefore, while the behavior of the
forward premium on the Indian rupee is broadly in lines with the CIP, more careful
empirical analysis involving directly comparable interest rates is necessary to measure
4
5. the strength of the covered interest parity condition and the efficiency of the foreign
exchange market.
Under market efficiency, the forward exchange rate is considered to be an
unbiased predictor of the future spot rate, with random prediction errors. While the
prediction errors of forward rates on the rupee appear to show some degree of
persistence, any conclusion in this matter too must await more rigorous analysis.
Intervention in Foreign Exchange Markets
The two main functions of the foreign exchange market are to determine the price
of the different currencies in terms of one another and to transfer currency risk from more
risk-averse participants to those more willing to bear it. As in any market essentially the
demand and supply for a particular currency at any specific point in time determines its
price (exchange rate) at that point. However, since the value of a country’s currency has
significant bearing on its economy, foreign exchange markets frequently witness
government intervention in one form or another, to maintain the value of a currency at or
near its “desired” level. Interventions can range from quantitative restrictions on trade
and cross-border transfer of capital to periodic trades by the central bank of the country
or its allies and agents so as to move the exchange rate in the desired direction. In recent
years India has witnessed both kinds of intervention though liberalization has implied a
long-term policy push to reduce and ultimately remove the former kind. It is safe to say
that over the years since liberalization, India has allowed restricted capital mobility and
followed a “managed float” type exchange rate policy.
5
6. During the early years of liberalization, the Rangarajan committee recommended
that India’s exchange rate be flexible. Officially speaking, India moved from a fixed
exchange rate regime to “market determined” exchange rate system in 1993. The overt
objective of India’s exchange rate policy, according to various policy pronouncements,
has been to manage “volatility” in exchange rates without targeting any specific levels.
This has been hard to do in practice.
The Indian rupee has had a remarkably stable relationship with the US dollar.
Meanwhile the dollar appreciated against major currencies in the late 90’s and then went
into an extended decline particularly during 2003 and 2004. The lock-step pattern of the
US dollar and the Rupee is best reflected in the movements in the two currencies against
a third currency like the Euro. The correlation of the exchange rates of the two currencies
against the Euro during 1999-2004 was 0.94. Several studies have established the pegged
nature of the rupee in recent years (see Chakrabarti (2006) for a more detailed
discussion). Based on volatility, India had a de facto crawling peg to the US dollar
between 1979 and 1991 which changed to a de facto peg from mid-1991 to mid-1995,
with a major devaluation in March 1993. From mid-1995 to end-2001, the rupee reverted
to a crawling peg arrangement in practice. An analysis of the ratio of the variance of the
exchange rate to the sum of the variances of the interest rate and the foreign exchange
reserves reveals a move even closer to the fixed exchange rate system. A comparison of
the sensitivity (beta) of the Dollar-rupee rate with the Euro-rupee rate for a three year
period (1999 through 2001), indicates that India had a dollar beta of 1.01 – tenth highest
among the 53 countries considered. More importantly, the US dollar-Euro exchange rate
explained about 97% of all movements in the Indian rupee-Euro exchange rate – highest
6
7. among all the 53 countries considered. Clearly the Indian rupee has been an excellent
“tracker” of the US dollar.
It is instructive to consider the Rupee-Dollar exchange rate in the light of the
purchasing power parity (PPP) holding that the exchange rate between two currencies
should equal the ratio of price levels in two countries. In its dynamic form PPP holds that
that the rate of depreciation of a currency should equal the excess of its inflation rate to
that in the other country. Over a reasonably long period of time, the devaluation in the
Indian Rupee, vis-à-vis the US dollar does seem to have an association with the
difference in the inflation rates in the two countries. Between 1991 and 2003, the two
variables have had visible co- movements with a correlation of about 0.57 (Chakabarti
(2006)). This may be a result of Indo-US trade flows dominating the exchange rate
markets but it is perhaps more likely that it reflects the exchange rate management
principles of the monetary authorities
The Reserve Bank of India has used a varied mix of techniques in intervening in
the foreign exchange market – indirect measures such as press statements (sometimes
called “open mouth operations” in central bank speak) and, in more extreme situations,
monetary measures to affect the value of the rupee as well as direct purchase and sale in
the foreign exchange market using spot, forward and swap transactions (see Ghosh
(2002)). Till around 2002, the measures were mostly in the nature of crisis management
of saving-the-rupee kind and sometimes the direct deals would be repeated over several
days till the desired outcome was accomplished. Other public sector banks, particularly
the SBI often aided or veiled the intervention process.
7
8. The exact details of the interventions are shrouded in mystery, not unusual for
central banks ever wary of disclosing too much of their hand to the currency speculators.
The Tarapore Committee report had urged more transparency in the intervention process
and recommended, in 1997, that a ‘Monitoring Exchange Rate Band’ of ± 5% be used
around an announced neutral real effective exchange rate (REER), with weekly
publication of relevant figures, something yet to be implemented. In a recent survey on
foreign exchange market intervention in emerging markets, the Bank for International
Settlements (BIS (2005b)) found that out of 11 emerging market countries considered,
India gave out most complete information on intervention strategy (along with three
others); no information on actual interventions (five others did the same) and did not
cover foreign exchange intervention in annual reports (like two other countries). On the
whole it ranked fourth most opaque in matters of foreign exchange intervention among
the eleven countries compared.
Regulation of cross-border currency flows
A feature of the economy that is intricately related with the exchange rate regime
followed is the freedom of cross-border capital flows. This relationship comes from the
so-called “impossible trinity” or “trilemma” of international finance, which essentially
states that a country may have any two but not all of the following three things – a fixed
exchange rate, free flow of capital across its borders and autonomy in its monetary
policy. Since liberalization, India has been having close to a de facto peg to the dollar and
simultaneously has been liberalizing its foreign currency flow regime.
8
9. Close on the heels of the adoption of market determined exchange rate (within
limits) in 1993 came current account convertibility in 1994. In 1997, the Tarapore
committee, on Capital Account Convertibility, defined the concept as “the freedom to
convert local financial assets into foreign financial assets and vice versa at market
determined rates of exchange ” and laid down fiscal consolidation, a mandated inflation
target and strengthening of the financial system as its three main preconditions.
Meanwhile capital flows have been gradually liberalized, allowing, on the inflow side,
foreign direct and portfolio investments, and tapping foreign capital markets by Indian
companies as well as considerably better remittance privileges for individuals; and on the
outflow side, international expansion of domestic companies. In 2000, the infamous
Foreign Exchange Regulation Act (FERA) was replaced with the much milder Foreign
Exchange Management Act (FEMA) that gave participants in the foreign exchange
market a much greater leeway.
The ultimate goal of capital account convertibility now seems to be within the
government’s sights and efforts are on to chalk out the roadmap for the last leg, though it
is not expected to be accomplished before 2009. Expectedly, the wisdom of the move has
been hotly debated . Advocates of convertibility cite the “consumption smoothing”
benefits of global funds flow and point out that it actually improves macroeconomic
discipline because of external monitoring by the global financial markets. Convertibility
can spur domestic investment and growth because of easier and cheaper financing. It can
also contribute to greater efficiency in the banking and financial systems. On the other
hand, skeptics like Williamson (2006), for instance, points out that India is yet to fulfill at
least one of the three major preconditions to Capital Account Convertibility set out by the
9
10. Tarapore committee, viz. fiscal discipline, with a public sector deficit of 7.6% of the GDP
and the ratio of public debt to GDP of over 83% in 2005-06. In any case, the argument
goes, the benefits of convertibility do not necessarily outweigh the risks and cross-border
short-term bank loans – usually the last item to be liberalized – are the most volatile. It is
generally held that it was, in fact, the lack of convertibility that protected India from
contamination during the Asian contagion in 1997-98.
The Dynamics of Swelling Reserves
An important corollary of India’s foreign exchange policy has been the quick and
significant accumulation of foreign currency reserves in the past few years. Starting from
a situation in 1990-91 with foreign exchange reserves level barely enough to cover two
weeks of imports, and about $32 billion at the beginning of 2000, India’s foreign
exchange position rocketed to one of the largest in the world with over $155 billion in
mid-2006. Since 2000, this implies a compounded annual growth rate of about 28% with
the years 2003 and 2004 having the most stunning rises at 48% and 45% respectively.
During these two years the US dollar fell against the Euro by 19% and against the rupee
by 9%. Without RBI intervention, the latter figure is likely to have been larger and the
reserves accumulation less spectacular.
A sizable foreign exchange reserve acts as liquidity cover and protects against a
run on the country’s currency, and reduces the rate of interest on Indian debt in the world
market by lowering the country risk perception by international rating agencies.
However, beyond a point, it begins to affect the money supply in the country, and interest
rates. There are significant “sterilization costs” to avoid this and the RBI loses money by
10
11. earning low returns on the safe assets used to park the reserves. Given this low rate of
return, there has been discussion about the unique proposal to use part of the reserves to
fund infrastructure projects.
Outlook
Liberalization has transformed India’s external sector and a direct beneficiary of
this has been the foreign exchange market in India. From a foreign exchange-starved,
control-ridden economy, India has moved on to a position of $150 billion plus in
international reserves with a confident rupee and drastically reduced foreign exchange
control. As foreign trade and cross-border capital flows continue to grow, and the country
moves towards capital account convertibility, the foreign exchange market is poised to
play an even greater role in the economy, but is unlikely to be completely free of RBI
interventions any time soon.
11
12. References
Bank for International Settlements, 2005a. Triennial Central Bank Survey: Foreign
exchange and derivatives market activity in 2004, Basel, Switzerland.
Bank for International Settlements, 2005b. Foreign exchange market intervention in
emerging markets: motives, techniques and implications, BIS Paper No.24, Basel,
Switzerland.
Chakrabarti, Rajesh, 2006. The Financial Sector In India: Emerging Issues, Oxford
University Press, New Delhi, 2006.
Ghosh, Soumya Kanti, 2002. RBI Intervention in the Forex Market: Results from a Tobit
and Logit Model Using Daily Data, Economic and Political Weekly, June 15,
pp.2333-2348.
Williamson, John, 2006, Why Capital account Convertibility in India is Premature,
Economic and Political Weekly, May 13, pp.1848-1850.
12