Overpricing of IPOS in Bangladesh: Book building method
WP FINAL
1. WINTER PROJECT
On
A STUDY OF RELATIONSHIP BETWEEN CURRENCY,
EQUITY, COMMODITY AND THEIR MOVEMENTS IN THE
MARKET
IPER PGDM-TRIM 2
BATCH: 2014-2016
Projectguide:
Prof. Dr. A.S Khalsa
Submitted by:
SwatiMotwani
2. 2
ACKNOWLEDGEMENT
I wish to express my gratitude to those who helped me in accomplishing this challenging
project on “A study of the relationship between CURRENCY, EQUITY, COMMODITY,
and their movements in the market”
No amount of written expression can show my deepest sense of gratitude to my guide
PROF. (DR.) AMARJEET SINGH KHALSA, who motivated me to receive enormous
amount of input and inspiration at the various stages during my project preparation and
assisted me in bringing out my project in the present form.
I thankfully acknowledge an active support by my Project Guide who overwhelmingly
shared his knowledge with me and strengthened my conceptual framework.
I express my deep gratitude for PROF. (DR.) VAIBHAV LAWLEKAR for providing me a
constant support for data analysis and interpretation & findings.
I am also thankful to all the Finance Faculties of Institute of Institute of Professional
Education And Research, Bhopal who supported me in various ways and enlightened me
about the valuable information pertaining to my research work.
3. 3
DECLARATION
I, SWATI MOTWANI, student of IPER PGDM – TRIMESESTER 2, INSTITUTE OF
PROFESSIONAL EDUCATION AND RESEARCH, hereby declare that this project work
titled “A study of the relationship between CURRENCY, EQUITY, COMMODITY, and
their movements in the market” is based on the research work conducted by me and to the
best of my knowledge I have undergone through each and every process required to
accomplish the project work in the most effective manner.
Bhopal SWATI MOTWANI
Date: IPER PGDM
TRIM 2
4. 4
Contents
CHAPTER 1....................................................................................................................................................5
CONCEPTUAL OVERVIEW ..............................................................................................................................5
1.1RELATIONSHIPAND MOVEMENTS IN THE MARKET..................................................................................... 6
CHAPTER 2....................................................................................................................................................7
RESEARCH METHODOLOGY..........................................................................................................................7
2.1 Title ........................................................................................................................................................ 8
2.2. OBJECTIVE.............................................................................................................................................. 8
2.3METHODOLOGY........................................................................................................................................ 8
2.4SIGNIFICANCE........................................................................................................................................... 8
2.5 LIMITATIONS ........................................................................................................................................... 8
CHAPTER 3....................................................................................................................................................9
THEORITICAL BACKGROUND .........................................................................................................................9
3.1. CAPITAL MARKET-CONCEPTS................................................................................................................. 10
3.2 Equity share .......................................................................................................................................... 12
3.3. INTRODUCTION TO COMMODITY MARKET............................................................................................. 13
3.3.1TYPES OF COMMODITY TRADED ........................................................................................................... 13
3.4 Introduction to FOREX market .............................................................................................................. 17
3.4.1Forex Market Participants .................................................................................................................... 18
3.5.2 Functions of FOREX market.................................................................................................................. 19
3.5.3 Determinants of exchange rate............................................................................................................ 20
3.5.4 Rupee appreciation............................................................................................................................. 21
CHAPTER 4.................................................................................................................................................. 25
DATA ANALYSIS.......................................................................................................................................... 25
4.1 COEFFICIENT OF CORELATION ................................................................................................................ 26
4.2 REGRESSION MODAL.............................................................................................................................. 27
4.3 CLOSING PRICES..................................................................................................................................... 28
4.4 RETURNS............................................................................................................................................... 78
CHAPTER 5.................................................................................................................................................111
INTERPRETATION AND FINDINGS ...............................................................................................................111
5.1.1 Interpretation of coefficient of correlation. .........................................................................................112
5.2 Findings................................................................................................................................................114
BIBLIOGRAPHY...........................................................................................................................................116
6. 6
1. CONCEPTUAL OVERVIEW
1.1RELATIONSHIP AND MOVEMENTS IN THE MARKET
This study basically focuses on the relation between currency, equity, debt instruments and commodity
market by comparing and analyzing the present investment climate with respect to the Indian market. It also
demonstrates and explains as to how the other components of capital market get affected by the changes in
one component and movements in the capital market.
This report laid emphasis on the financial markets. The term "financial markets" is often used to refer just to
the markets that are used to raise finance: for long term finance.
This study focuses on the following financial markets:
1. Stock markets, which provide financing through the issuance of shares or common stock, and enable
the subsequent trading thereof.
2. Commodity markets, which facilitate the trading of commodities.
3. Money markets, which provide short term debt financing and investment.
4. Futures markets, which provide standardized forward contracts for trading products at some future
date; see also forward market.
5. Foreign exchange markets, which facilitate the trading of foreign exchange.
The economic development of a country also depends upon the size and extent of the economic activity in
the country, which need capital to carry out the activities.
8. 8
2.1 Title
A study of relationship between currency, equity, commodity and their movements in the market.
2.2. OBJECTIVE
The objective of the study is as follows:
1. Relation between currency, equity, commodity.
2. Impact of the changes in exchange rate on equity, commodity.
2.3METHODOLOGY
Research Design: Descriptive research
Data Source: Secondary data
Sample Period: Jan. 2009 – Dec. 2014
Research Tool: Correlation and Multiple Regressions.
2.4 SIGNIFICANCE
This study is quite significant as per the market context because with the help of this research analysis of
EQUITY and COMMODITY market is been done which depends on the CURRENCY. The Indian Market
is very volatile and has been seeing various bottlenecks since 2008-09’recession however after new
government being into force from 2014, sensex and commodity market are expected be plunged highest. As
well FII are pouring money with a belief to get better returns.
2.5 LIMITATIONS
This study is basically done for a period ranging to six years, so it is somewhat difficult to analyze the
situation of the market as a whole on such basis.
It could happen that during this time period of research, the market conditions would be good which can be a
great reason to alter the investor’s returns as compared to competitive market conditions.
10. 10
INTRODUCTION
3.1. CAPITAL MARKET-CONCEPTS
A capital market is simply any market where a government or a company can raise money (capital) to fund
their operations and long term investment. Selling bonds and selling stock are two ways to generate capital,
thus bond markets and stock markets (such as the Dow Jones) are considered capital markets.
The Indian capital market witnessed radical changes as a result of liberalization initiative, characterized by
institutional build up, technological advancements, modernization and transparent trading practices. The
change in the capital market is also reflected in the number of shareholders which has exploded everywhere
for the whole country to 125 lakhs with an increase of 3-4 times between 1983 and 1992. After that it rose to
20 million shareholders.
This is too small when compared to the population of India. In advanced countries, a sizable percentage of
the population invests in capital market and mutual funds. Such investments culture is to be developed in
India also. In spite of the developments in the capital market, many investors continue to keep away from
the market due the prevalence of unethical acts of promoters, shares brokers, high volatility in the market,
poor investment knowledge of the ordinary investors and high element of uncertainty and risk added to these
problems. This calls for the attention of the government and policy makers to understand the factors
influencing the capital market operations which enable them to take initiatives to decide the measures to pull
them into the ambit of investors in corporate securities. This ensures individual development as well as all-
round development of the country's economy.
During end of the year 2008 and beginning of the year 2009 when market suffered a huge losses because of
European debt crisis where Lehman brothers, Merrill lynch, some of the major giants got insolvent and
market (sensex) came to around 8000 points and nifty was running around 2500 points, some investors
changed their mind and got out of the market.
Gradually when market recovered and came to an old high of 21000 points, still people feared and didn’t
entered into the market. Eventually in June 2011, news related to Greece debt crisis hit the market; Indian
market became bullish and people thought that even if market is recovering, it may go down as of happened
in 2008-09.
So it shows the fear of globalization into individual’s mind wherein people think that if foreign markets gets
down it will directly affect the Indian market because Indian market is predominantly in consensus with
foreign markets.
But as talking about the other side of the coin, there were still people who invested into the market as were
familiar of the great potential of the market and were hoping for it to recover soon and as a result of which
Sensex reached level of 19000 points and nifty crossed 5700 points eventually, and investors who already
invested near about 8000 level of nifty were in huge profits and still are hopeful towards the market and
expected Sensex to cross 25000 points by the end of 2012. In 2014, markets gained and sensex crossed
25,000 points after winning of BJP Government. In 2015, BSE Sensex was recorded high; it crossed 29000
marks, led by blue-chip stocks. The benchmark BSE Sensex gained 0.41 percent at 29,006.02 points.
11. 11
SITUATION INDEX
SENSEX CREATING MOST WEALTH
Source: Edel invest Research
0
50
100
150
200
250
300
350
1-Jan-00
1-Jan-01
1-Jan-02
1-Jan-03
1-Jan-04
1-Jan-05
1-Jan-06
1-Jan-07
1-Jan-08
1-Jan-09
1-Jan-10
1-Jan-11
1-Jan-12
1-Jan-13
1-Jan-14
INR000's
Cumulative Investment Value if invested in equity Value if invested in FD
12. 12
3.2 Equity share
A Joint ownership of a property by one or more owner-investors and one or more owner-occupants. The
owner-investors get the benefit of depreciation, and the owner-occupants can treat a part of their monthly
mortgage payments as rent, and benefit from tax write-offs for interest and property taxes. When the
property is sold, both types of owners share in the profit or loss realized from the sale.
Equity is the stockholders' proportionate share (ownership interest) in the corporation's capital stock and
surplus. An owner's equity in business is equal to the business's assets minus its liabilities.
Equity share also called as stock market can be defined as a medium for trading of company stocks apart
from securities. The range of participants in the stock market varies from small individual stock investors to
large hedge fund to traders. This is to facilitate the exchange on a predetermined price. The purpose of a
stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a market
place.
FII’s are most bullish on India
Source:Edel invest research
18.6
-5
0
5
10
15
20
India
Indonesia
Japan
Philippines
S.Korea
Taiwan
Thailand
Vietnam
Pakistan
USDBn
Net Equity FII flows - Since Jan 2014
13. 13
3.3. INTRODUCTIONTO COMMODITYMARKET
Instability of commodity prices have always been a major concern of the producers as well as the
consumer’s in an agriculture based country like India. Farmer’s direct exposure to price fluctuations, for
instance, makes it too risky for many farmers to invest in other profitable ventures.
Apart from increasing the stability of the market, various sectors in the farm sector can better manage their
activities in an environment of unstable prices through derivative markets. These markets serve a risk
shifting function, and can be used as to lock in prices instead of relying on uncertain price developments.
There are a number of commodity linked financial risk management instruments which are used to hedge
prices though formal commodity exchanges over the counter(OTC) market and through intermediation by
financial and specialized institutions who extend risk management services.
In general these instruments are classified based on the purpose for which they are primarily used for
hedging as part of a wider marketing strategy or for price hedging in combination with other financial deals.
While forward contracts and OTC options are trade related instruments, futures, exchange traded options are
swaps between banks and customers are primarily price hedging instruments.
Forward contracts are mostly OTC agreements to purchase or sell a specific amount of a commodity on a
predetermined future date at a predetermined price. The terms and conditions of a forward contract are rigid
and both the parties are obligated to give and take physical delivery of the commodity on the expiry of
contract. The holders of forward contracts face spot price risk. The future contracts are refined version of
forwards contracts by which the parties are insulated from bearing spot risk and are traded in organize
exchanges.
3.3.1TYPES OF COMMODITYTRADED
Four types of commodities are there:-
1. Bullions
2. Agriculture
3. Base metals
4. Energy
14. 14
1. BULLIONS
Bullions consists gold and silver; gold mini, gold regular, gold gini, gold petal, silver regular and silver mini,
daily volume of commodity is around 1,00,000 crore and bullions contains 85% (Silver consists 70% and
gold consists 15%)
The bullion offers investment opportunity in the form of gold, silver, and other metals; specific categories of
metals are traded in the metal exchange. The bullion market presents an opportunity for an investor by
offering returns and the end value of future. It has been absurd that on several occasions, when stock market
failed, the gold market provided a return on investments.
Many of the respondents trade in commodities as well and bullion is the major part of commodities they
invest in; margin requirement of commodities in only 5% of contract value and there is chance of loss and
profit both are high if someone is earning profit it will be very high and if it is loss it will also be very high
so according to this case study people enter into commodities only when they have sufficient additional
money.
Bullion is the most traded commodities in india people invest in gold for hedging the risk one side they
invests in equities other side they invest in gold to reduce the risk because if market goes down or condition
of market gets worst so value of equities gets down but gold will not depreciate that much even in a bad
condition and if it is; it will recover very fast; see in the year 2008 when market got down gold was not
traded at a low value; infact it was increasing.
Gold is also a currency similar to dollar accepted by world that’s why gold does not depreciate much.
Limit to buy in one contract:
600 kg for silver
300 kg for gold
ADVANTAGES OF BULLIONS
Gold and silver brings liquidity to the market
Safe commodity
Gold is an International currency
Portfolio diversification
Gold and silver are always in demand.
INDIAN SCENARIO FOR GOLD
India, world’s largest market for gold jewellery and a key driver of the global gold demand.
The domestic drivers of gold demand are largely independent of outside forces. Indian households hold
the largest stock of gold in the world.
Two thirds of the Indian demand for gold comes from the rural parts of the country.
In 2012, gold's role as an inflation hedge bolstered its appeal in India. India imported around 850 metric
tonne (MT) of gold in 2012.
15. 15
INDIAN SCENARIO FOR SILVER
The average annual demand for silver in India is about 2500 Metric tonnes (MT) per year. In 2011, the
country’s production was around 342.13 MT.
Nearly 60% of India's silver demand comes from farmers and rural India, who store their savings in the
form of silver bangles and coins.
2. AGRICULTURE
Agriculture consists wheat, rice, pulses, seeds, maize, potato, rubber, sugar, soya bean, almond etc, Many
farmers involved in trading of agricultural commodities they have good knowledge about it. Agricultural
commodities mostly depended on monsoon, bad monsoon can damage the returns and good monsoon can
generate good returns and it affects accordingly in other commodities.
Instability of commodity prices has always been a major concern of the producers, processors, traders as
well as the consumers in agriculture -dominated country like India. Farmers’ direct exposure to price
fluctuations, for instance, makes it too risky for many farmers to invest in otherwise profitable activities.
Agricultural products, unlike others, have an added risk. Many of them being typically seasonal would
attract only lower price during the harvest season. The forward and futures contracts are efficient risk
management tools which insulate buyers and sellers from unexpected changes in future price movements.
These contracts enable them to lock in the prices of the products well in advance. Moreover, futures prices
give necessary indications to producers and consumers about the likely future ready price and demand and
supply conditions of the commodity traded. The cash market or ready delivery market on the other hand is a
time-tested market system which is used in all forms of business to transfer title of goods.
3. BASE METALS
Base metal includes copper, lead, aluminum, zinc etc and lot size of metals mostly in thousands of
kilograms.
INDIAN SCENARIO FOR COPPER
In 2012, India's production of refined copper is 689,312 MT, which is around 4% of the total world
production.
Sterlite Industries, Hindalco, and Hindustan Copper are three major producers of copper in India. From
the status of a net importer, India is emerging as a net exporter of copper on account of a rise in the
production of copper.
Electric and electronic products industry has become India's largest copper consuming sector, accounting
for 36% of the total Indian copper consumption. Telecom is still India's second largest copper consuming
sector, accounting for 20% of the total Indian copper consumption.
4. ENERGY
Energy includes crude oil and gas which is very different sector than other but very important today gas is
the basic needs of consumers and volume of crude oil and natural gas is also very high, and most investor
does trading in crude oil and natural gas after 5 pm you will see most fluctuation in these two commodities
16. 16
between 5 pm – 11 pm, and these two commodities works on the basis of foreign market mostly crude oil
because it has been imported by foreign countries and natural gas affected because it is in the same sector.
BENEFITS
Since commodity “futures” trading was permitted in 2003, the commodity derivative market in India has
witnessed phenomenal growth. Though the volume of commodity futures trade increased exponentially
since its launch in 2003, the functioning of the futures market came under scrutiny during 2008-2009 due to
price rise and the role of futures market in stabilizing spot prices was widely discussed.
Commodities, whether they are related to food, energy or metals, are an important part of everyday life.
Similarly, commodities can be an important way for investors to diversify beyond traditional stocks and
bonds, or to profit from a conviction about price movements.
Years ago, most people did not invest in commodities, because doing so required significant amounts of
time, money and expertise. Today there are a number of different routes to the commodity markets, and
some make it fairly easy for even the average investor to participate. People enters into commodities to
hedge the portfolio or to reduce the risk and commodity requires only some margin to invest which is 5% of
the contract value and every commodity has its own lot size and people have to buy at least one lot to invest
in commodities by giving 5% margin.
INDIAN SCENARIO FOR BRENT CRUDE
Oil accounts for 29% of India's total energy consumption and there seems to be no possibility of scaling
down the dependence on these fuels.
Crude oil production during the period April-March 2012 (provisional) was 38.19 million metric tonne
(MMT), as compared with 37.71 MMT during the corresponding period last year.
The total oil consumption in 2010 was around 3.34 mmb/d. India is the fourth largest consumer of oil and
imports more than 70% of its crude oil requirement.
India's refining capacity stood at 193.39 MMTPA on January 1, 2012 of which 116.89 MMT is in the
public sector, 6.00 MMT in joint ventures, and the balance 70.50 MMTPA in the private sector.
The Government of India realised the need to explore more areas and has implemented New Exploration
Licensing Policy (NELP), according to which 100% FDI is permitted for small and medium sized oil
fields through competitive bidding.
17. 17
3.4 Introduction to FOREXmarket
The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the
trading of currencies. The main participants in this market are the larger international banks. Financial
centres around the world function as anchors of trading between a wide range of multiple types of buyers
and sellers around the clock, with the exception of weekends. The foreign exchange market determines the
relative values of different currencies.
The foreign exchange market works through financial institutions, and it operates on several levels. Behind
the scenes banks turn to a smaller number of financial firms known as “dealers,” who are actively involved
in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-
scenes market is sometimes called the “interbank market”, although a few insurance companies and other
kinds of financial firms are involved. Trades between foreign exchange dealers can be very large, involving
hundreds of millions of dollars. Because of the sovereignty issue when involving two currencies, Forex has
little (if any) supervisory entity regulating its actions.
The foreign exchange market assists international trade and investments by enabling currency conversion.
For example, it permits a business in the United States to import goods from the European Union member
states, especially Euro zone members, and pay Euros, even though its income is in United States dollars. It
also supports direct speculation and evaluation relative to the value of currencies, and the carry trade,
speculation based on the interest rate differential between two currencies.
In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying for
some quantity of another currency. The modern foreign exchange market began forming during the 1970s
after three decades of government restrictions on foreign exchange transactions (the Bretton Woods
system of monetary management established the rules for commercial and financial relations among the
world's major industrial states after World War II), when countries gradually switched to floating exchange
rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of the following characteristics:
its huge trading volume representing the largest asset class in the world leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on Sunday
(Sydney) until 22:00 GMT Friday (New York);
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit and loss margins and with respect to account size.
18. 18
3.4.1ForexMarketParticipants
The main participants on the Forex market are national banks, commercial banks, financial institutions,
insurance funds, companies and individual investors.
The main reasons for their participation in the Forex market are:
– Profit from speculation on fluctuations in currency pairs
– Protection against fluctuations in currency pairs affecting trade in goods and services
As a result of the rapid development of technology the World Wide Web proved to be a major engine for
marketing, as it provides individual investors and traders access to the most current news about the Forex
market, technology and instruments.
Forex is an international Over-The-Counter market (OTC). This means that it is decentralized and is
governed by its own rules. Unlike joint stock and futures markets, there is no central exchange or clearing
organization. Thanks to this, exchange fees and clearing fees are eliminated, which reduces the cost of
transactions.
OTC foreign exchange market is formed by a number of participants with different interests and needs. They
deal directly with one another. These participants can be divided into two groups: the interbank market and
the retail market.
Interbank market:
Interbank market refers to currency transactions occurring between central banks, commercial banks and
financial institutions.
– Central Banks
– Commercial Banks
– Non-Banking Corporations
Central Banks
Central banks in the foreign exchange market are the European Central Bank, Federal Reserve Bank of the
United States, the Bank of England, Swiss National Bank and the Bank of Japan. Central banks intervene in
the foreign exchange market for several reasons:
– To increase or reduce the value of their own currency or to help another central bank to do the same.
– To restructure their reserves from one currency to another.
– To reduce undesirable fluctuations in exchange rates.
Commercial banks
Commercial banks (such as Deutsche Bank, Barclays and other) provide, thanks to daily float, liquidity in
the currency market Forex. Some transactions are transfers of foreign currency based on customer needs;
others are equity transactions of the banks for the purpose of speculation.
Non-Banking Corporations
Non-Banking corporations are financial institutions, such as administrators of property, investment funds,
pension funds and brokerages. The companies involved in foreign trade activities trade on the Forex market
to regulate cash flows as they are exposed to currency risk. Therefore they need to protect themselves from
unwanted movements in the foreign exchange market by hedging their positions. For example, Japanese
firms are major exporters to the U.S. and paid in U.S. dollars. Naturally, they have to sell dollars against yen
and are therefore exposed to any adverse impact associated with the decline in the dollar against the yen. In
addition, international companies need to repatriate profits from other currencies in their main currency. For
example, a company whose head office is in London and has offices in Europe and America could reverse
its profit from EUR and USD to its main currency, namely the British pound when creating their balance
19. 19
sheet. Thus, they will have to buy GBP and sell EUR and USD. Some companies have their own internal
dealer offices and therefore operate as quasi-banks in the market and take the currency risk involved in
trading and speculation.
Retail market:
Retail markets are referred to as transactions of small speculators and investors. These transactions are
carried out through Forex brokers who act as intermediaries between the retail market and the interbank
market. Participants in the retail market are insurance (hedge) funds, brokers, and investors.
Hedge funds
Hedging funds are private investment funds that speculate on the different classes of assets using leverage
(leverage). Global hedge funds use commercial opportunities in the Forex market. They plan and implement
transactions based on thorough macroeconomic analysis that reveals challenges to be addressed by a country
and its currency. Due to the high trading volumes and aggressive strategies, these funds are the main culprits
for the dynamics of the currency market.
Brokers
Brokers do not set their own exchange rates; they are not market makers but intermediaries between market
makers offering the most favorable price and are trying to even orders for buying with these for sale. The
broker does not disclose the name of the party making the quotation, until the other side makes an
appropriate proposal. The broker receives a commission from the transaction. In the past, brokers have been
very useful for smaller market makers, which are otherwise troubled to obtain competitive market rates.
However, the introduction of electronic brokering in recent years and the introduction of the single European
currency /euro/ greatly reduced the role of the ordinary broker.
Investors
Independent traders and investors who trade on the Forex market with their own resources in order to profit
from speculation on the development of future exchange rates. They trade mainly through platforms offering
tight spreads, immediate realization and margin trading by high leverage.
3.5.2 Functions of FOREXmarket
Foreign exchange market is a market in which foreign exchange transactions take place. In other words, it is
a market in which national currencies are bought and sold again one another.
A foreign exchange market performs three important functions:
Transfer of Purchasing Power: The primary function of a foreign exchange market is the transfer of
purchasing power from one country to another and from one currency to another. The international clearing
function performed by foreign exchange markets plays a very important role in facilitating international
trade and capital movements.
Provision of Credit: The credit function performed by foreign exchange markets also plays a very
important role in the growth of foreign trade, for international trade depends to a great extend on credit
facilities. Exporters may get pre-shipment and post shipment credits. Credit facilities are available also for
importers.
20. 20
Provision of Hedging Facilities: The other important function of the foreign exchange market is to provide
hedging facilities. Hedging refers to covering of export risk, and it provides a mechanism to exporters and
importers to guard themselves against losses from fluctuations in exchange rate.
3.5.3 Determinants of exchange rate
The following theories explain the fluctuations in exchange rates in a floating exchange rate regime (In
a fixed exchange rate regime, rates are decided by its government):
1. International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic
Fisher effect, International Fisher effect. Though to some extent the above theories provide logical
explanation for the fluctuations in exchange rates, yet these theories falter as they are based on
challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in
the real world.
2. Balance of payments model: This model, however, focuses largely on tradable goods and services,
ignoring the increasing role of global capital flows. It failed to provide any explanation for
continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current
account deficit.
3. Asset market model: views currencies as an important asset class for constructing investment
portfolios. Assets prices are influenced mostly by people's willingness to hold the existing quantities
of assets, which in turn depends on their expectations on the future worth of these assets. The asset
market model of exchange rate determination states that “the exchange rate between two currencies
represents the price that just balances the relative supplies of, and demand for, assets denominated in
those currencies.”
None of the models developed so far succeed to explain exchange rates and volatility in the longer time
frames. For shorter time frames (less than a few days) algorithms can be devised to predict prices. It is
understood from the above models that many macroeconomic factors affect the exchange rates and in the
end currency prices are a result of dual forces of demand and supply. The world's currency markets can be
viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and
demand factors are constantly shifting, and the price of one currency in relation to another shifts
accordingly. No other market encompasses (and distills) as much of what is going on in the world at any
given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but
rather by several. These elements generally fall into three categories: economic factors, political conditions
and market psychology
Economic factors
These include: (a) economic policy, disseminated by government agencies and central banks, (b) economic
conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary
policy (the means by which a government's central bank influences the supply and "cost" of money,
which is reflected by the level of interest rates).
21. 21
Government budget deficits or surpluses: The market usually reacts negatively to widening
government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the
value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods
and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and
deficits in trade of goods and services reflect the competitiveness of a nation's economy. For
example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the
country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing
power, thus demand, for that particular currency. However, a currency may sometimes strengthen when
inflation rises because of expectations that the central bank will raise short-term interest rates to combat
rising inflation.
Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity
utilization and others, detail the levels of a country's economic growth and health. Generally, the more
healthy and robust a country's economy, the better its currency will perform, and the more demand for it
there will be.
Productivity of an economy: Increasing productivity in an economy should positively influence the
value of its currency. Its effects are more prominent if the increase is in the traded sector.
3.5.4 Rupee appreciation
Whenever currency of a country moves up, it’s usually implicit that the Economy of country is doing well.
The rupee against dollar has appreciated from Rs 46 in July 06 levels to 40.50 levels in May 07, an increase
of more than 10 % (In 2014).
Source: RBI
The huge FII’s inflows in the country because of booming financial market, RBI allowing ECB borrowings
till 2.0 $billion and FDI increase in various sectors led to oversupply in Indian forex market .Also the crisis
in US mortgage sector has raised concern over working of US economy, Mr. Ben Bernanke has raised
22. 22
concern of a slowdown the US which led to depreciating US dollar. On the contrary Rupee has depreciated
against Euro and GBP, so it won’t be prudent to say that the rise in rupee is purely based on growth in
economy; it is also because of short term recession in US.
Now we are a “Trillion dollar economy” surpassing Russia; we are world’s 12th largest economy. The Forex
reserves of country are around $ 200 billion (as on March 30th 2014).
Advantages for importers
“Rupee at nine year high” is a sigh of relief for importers in the country. The oil marketing companies are
already facing the volatility in crude prices resulting in under recoveries and so the appreciating rupee here
comes to their rescue.
According to an IOC official -
“For every 1 Re appreciation the input cost of crude dips by 2%”
The rising rupee will help the government to curb inflation, as the input cost of Crude and electronic items
will be lowered which will help in fighting the ongoing Inflation and hence the interest rates.
One of the biggest beneficiaries of rising rupee stands out the borrowers who have borrowed from
international banks. The companies like Tata steel, McDowell to Name a few for their take-over plans of
Corus and Whyte & Mackay .As on Dec.2006 the country has an external debt of $142.65 billion dollar so a
7% Appreciation in dollar means the external debt is reduced to $132.66 billion(Assuming no more
borrowings are taken and no repayments made). This is again positive for increasing Gross Deficit of the
country.
Disadvantages for exporters
Given the fact that 76 % of Indian exports market is to the US .The exporters are already feeling the pinch of
rising rupee .The IT companies have more than 60% of their revenues from US. It will affect the revenue
realization of the IT companies.
According to a Satyam official -
“One percent change in rupee will hit the operating margins of IT companies for
FY 08 to 30-50 basis points “Apart from IT companies our textile sector is also loosing apart .In 2014 it
clocked a minor 5% growth in our exports to US; whereas China showed a substantial growth of 27% in
exports to US .It was on the strength of appreciating rupee that already ailing textile companies were wary
of exporting, moreover high production cost due to high interest rate scenario the textile companies stand to
lose.
Even the gold prices in country are at lower levels compared to world market which makes traders in gold
feel the heat? According to an industry analyst -“Every 10 paisa appreciation in rupee negates one dollar
upward movement in international prices “As a result gold slips in future market between Feb-Apr. 07
.Besides the above Hotel companies (Taj Gvk, ITC hotels etc) are set to lose as their 50% of revenues are in
dollar terms. Having said this:-Now the question arises, Can Government help Ailing exporters? The answer
is “YES” For that some steps (tentative) are to be taken:-1. The government can reduce export duty for
exporters.2. The government can waive off the custom duty. By doing this government can reduce the
burden on exporters and also not getting Affected by low excise duty as the importers who will get more
profits will help the government with more taxes.
Exporters help themselves -
23. 23
The exporters should reduce their over-dependence on Dollar In our country 76% of invoicing is done in
dollars, the exporters can diversify it by changing their invoicing to more stable and balanced currencies like
GBP.
Source: RBI
FII’s
FII’s the big guys who are pouring money into Indian financial markets are also loosing. With reference to
those investors who entered the Indian financial markets at a dollar rate of 44 are feeling the brunt of
depreciating dollar. For instance – take a case of FII who had invested in Indian assets. Assuming that he
invested around $1000US at a rate of Rs 43.50, now after a year his assets have appreciated by 10% to
47850 Rs, but at the same time the dollar has depreciated to Rs 40.50; now the value of his assets would be
44850 instead of47850; so the net gain to the investor is a humble 3.10 % over a year.
One can be very optimistic regarding the flows from foreign land to India because India is still an untapped
market for many of the big investors and we account for only 1% of worlds inflow so keeping this fact in
mind and also seeing the growth potential of the Indian economy, Experts think that foreign flows will keep
coming to India despite the depreciation in rupee.
We have thus seen that appreciation of currency is good for the economic health of our state, though it
carries with it certain demerits but these demerits can be worked upon and transformed into a blessing for
the economy.
24. 24
Indian Financial markets have a long way to go
Source: Edel Invest Research.
0
50
100
150
200
250
300
350
US
UK
Japan
Singapore
Malaysia
Australia
India
China
Indonesia
116 116
62
145 156
90 82
55 48
102 92
228
106
55
29
68
25 27
99 113
18
38
48
44
12
19
5
%ofGDP
Equity Government Bonds Corporate Bonds
26. 26
4. Data Analysis
4.1 COEFFICIENT OF CORELATION
Correlation statistical tool has been used to analyze the data. The values between 0-0.25
show a weak relationship among the variables. Values between 0.25-0.75 show a moderate
relationship and 0.75 and above shows a strong relationship among the variables. Below is
the table given showing correlation among the variables-NSE: CNX NIFTY, CURRENCY:
RUPEES AGAINST DOLLAR, COMMODITY: SECURITY GOLD, SECURITY SILVER,
BRENT CRUDE OIL, and COPPER.
NSE USD GOLD SILVER COPPER Brent
crude
NSE 1.00
USD -0.25 1.00
GOLD -0.13 0.47 1.00
SILVER -0.08 0.24 0.41 1.00
COPPER -0.05 0.31 0.12 0.04 1.00
Brent
crude
0.05 0.03 -0.01 0.03 -0.03 1.00
27. 27
4.2 REGRESSIONMODAL
In statistics, regression analysis is a statistical process for estimating the relationships among variables.
It includes many techniques for modelling and analyzing several variables, when the focus is on the
relationship between a dependent variable and one or more independent variable
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.258414656
R Square 0.066778134
Adjusted R Square 0.06341396
StandardError 1.281516586
Observations 1393
ANOVA
df SS MS F
Significance
F
Regression 5 163.00 32.60 19.85 3.7E-19
Residual 1387 2277.85 1.64
Total 1392 4392.70
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 0.09 0.03 2.49 0.01 0.02 0.15 0.02 0.15
USD -0.57 0.07 -8.28 0.00 -0.71 -0.44 -0.71 -0.44
GOLD 0.00 0.03 -0.07 0.94 -0.06 0.06 -0.06 0.06
SILVER -0.01 0.02 -0.62 0.53 -0.04 0.02 -0.04 0.02
COPPER 0.02 0.02 1.11 0.27 -0.02 0.06 -0.02 0.06
Brent crude 0.05 0.02 2.36 0.02 0.01 0.08 0.01 0.08
