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Forex market and rupee depreciation


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Forex market and rupee depreciation

  2. 2. INDEX  Introduction forex exchange.  Forex market in India.  Characteristics of Forex market.  Exchange rate.  Factors influencing exchange rate.  Types of exchange rate.  Market participants.  Government control on Forex market.  Function of forex market.  Depreciation of Indian rupee.  Reasons for depreciation.  Positive and Negative Impact of Depreciation.  Conclusion and Recommendation.
  3. 3. INTRODUCTION TO FOREIGN EXCHANGE The term Foreign exchange implies two things: a)Foreign currency. b) Exchange rate
  4. 4. FOREX MARKET  Forex is the international market for the free trade of currencies. Traders place orders to buy one currency with another currency.  According to Hartly Withers, “ Foreign exchange is the art and science of international monetary exchange”  The forex market is the world’s largest financial market. Over $4 trillion dollars worth of currency are traded each day. The amount of money traded in a week is bigger than the entire annual GDP of the United States!  The main currency used for forex trading is the US dollar.
  5. 5. FOREX MARKET IN INDIA  Largest financial market in existence.  The phenomenon that has dramatically changed India’s foreign exchange market was liberalization of economy started during early 90′s.  Major participants :buyers, sellers, market mediators and the authorities.  Regulated by FERA, 1947 which is replaced by FEMA, 1999.  Introduced currency futures in 2009 for growth.  The growth rates of developed countries are much lower as compared to India.
  6. 6. CHARACTERISTICS OF FOREX MARKET  Liquidity.  Volume.  Extended hours.  Transaction cost.  Geographical Dispersion.
  7. 7. EXCHANGE RATE  According to Haines, “Exchange rate is the price of the currency of a country can be exchanged for the number of units of currency of another country.”  Exchange rate is that rate at which one unit of currency of a country can be exchanged for the number of units of currency of another country.
  8. 8. FACTORS AFFECTING EXCHANGE RATES As with any market, the forex market is driven by supply and demand:  If buyers exceed sellers, prices go up  If sellers outnumber buyers, prices go down The following factors can influence exchange rates:  National economic performance.  Central bank policy.  Interest rates.  Trade balances – imports and exports.  Political factors.  Market sentiment – expectations and rumours.  Unforeseen events – terrorism and natural disasters Despite all these factors, the global forex market is more stable than stock markets; exchange rates change slowly and by small amounts.
  9. 9. TYPES OF EXCHANGE:-  Fixed and Floating exchange rate.  Buying and selling.
  11. 11. How does government control exchange rate ?  In fixed or hybrid exchange rate regime where government controls exchange rate, control is exercised by actively participating in international currency market through its central bank  RBI also allows market to determine the exchange rate whenever it is necessary  Example: INR v/s USD
  12. 12. OPERATION OF FOREX MARKET  Spot Market: (Current Market). Principle characteristics:-  Spot Market is of daily nature. It does not trade in future deliveries.  Spot rate of exchange is that rate which happens to prevail at the time when transactions are incurred.  Forward Market: Principles Characteristics:-  It only caters to forward transaction.  It determines forward exchange rate at which forward transaction are to be honoured.
  13. 13. FUNCTIONS OF FOREX MARKET Two main function: 1. Determine price of currencies 2. Transfer currency risk To maintain this function following steps are taken:  Transfer function  Credit function  Hedging
  14. 14. FACTORS AFFECTING FOREX MARKET 1. Balance of payment. 2. Monetary policy &fiscal policy. 3. Domestic financial market. 4. RBI intervention in forex market. 5. Interest rate. 6. Inflation. 7. Business environment 8. GDP growth and phases of business cycle 9. Global economic situation and financial crisis 10. Political factors
  15. 15. FOREX MARKET RISK :-  Exposure to exchange rate movement.  Any sale or purchase of foreign currency entails foreign exchange risk.  Foreign exchange transaction affects the net asset or net liability position of the buyer/seller.  Carrying net assets or net liability position in any currency gives rise to exchange risk.
  16. 16. RISK MANAGEMENT Controlling losses  You could control your losses, by mental stop or hard stop. Mental stop means that you already set you limit of your loss. A hard stop is your initiative to stop when you think you must to stop it. Using correct lot size  As a beginning just use smaller lots you could stay flexible and logic than emotions while you trade. Tracking overall exposure  sample: you go to short on EUR/USD and long on USD/CHF, you exposed two times for USD in the same direction. If USD goes down , you have a double dose of pain. So, keep your overall exposure limited, it keeps you for the long haul for trading The bottom line  Trading is about opportunities, you must take action while the opportunities arise.
  17. 17. Devaluation vs. Depreciation  Devaluation  Devaluation occurs when a country purposefully lowers the value of its currency as it applies to its exchange rate with currencies from other countries around the world.  Depreciation  Depreciation is the decline in a value of a currency based on market factors like supply and demand.
  18. 18.  Huge trade deficit.  Lower capital inflows.  Huge current account deficit.  Devaluation pressure.  Low growth and inflation.  Rupee speculation.  Withdrawal of investments.  Gold price rise.  Policy inaction.  Low forex exchange reserves.  Dependence on foreign money.  Recovery in the US.  Capital controls.
  19. 19.  Impact on exports  Tourism sector • Higher import bills • Fiscal slippage • Increased burden on borrowers
  20. 20. CONCLUSION The value of the rupee in terms of dollars will depend highly on the performance of Indian economy. Further depreciation will only worsen the situation. If taken care, there are still chances of reviving the rupee.
  21. 21. Recommendations:- •Controlling fiscal deficit. •Controlling current account deficit. •Adding to the reserves. •Reviving the investment cycle. •Capitalise the public sector banks. •Reap the benefit of the good monsoon. •Encourage manufacturing. •Encourage exports. •Controlling Imports
  22. 22. Bibliography :-   arket  