Foreign Exchange

Foreign trade and foreign exchange:

Foreign trade refers to trade between the residents of two different
countries. Each country functions as a sovereign state with its own set of
regulations and currency. The difference in the nationality of the exporter
and the importer presents certain peculiar problems conducting the trade
and settling the transactions arising therefrom.
The difficulties:
(i) Different countries have different monetary units
(ii) Restrictions imposed by countries in import and export of goods.
(iii) Restrictions imposed by nations on payments from and into the
countries; and
(iv) Differences in legal practices in different countries.
In an export transaction, the exporter wants his remittance in his currency in
order to settle his dues to the supplier and labor while the importers have
their savings and borrowings in their currencies. The importer will have to
convert his currency to that of the exporter in order to pay his remittance.
This conversion is done by banks who deal with foreign exchange. These
banks maintain stocks of foreign currencies in the form of balances with the
bank abroad. Eg: Indian banks may maintain an account with Bank of
America, Mew York where foreign exchange reserves are held. If an Indian
has to pay a remittance to an exporter in the US, the Indian bank will have to
convert INR in to US dollars as per the exchange rate.
Exchange Rate:
The rate at which one currency is converted into another currency is called
the exchange rate for the concerned currencies.
Eg: If an Indian bank pays Rs. 45 per dollar then the exchange rate of dollar
on that transaction is Rs. 45.
Numerically, 1USD = Rs. 45
The rate of exchange for a currency is known from the quotation in the
foreign exchange market.

The national currency of any country is of 3 types

1. Fixed
2. Floating
2. Hybrid
Fixed currency: Fixed currency is on the basis of either gold or any other fixed
currency. It does not change relatively with change in the economy of the
nation.
Fixed currency features:
International Trade
International Investments.
Long range planning
Speculation prevention
Small opening economies
Inflation
Terms of Trade
Complementing exchange depreciation
Floating: Floating currency is determined through demand and supply. If the
demand of the currency is low, its value will decrease, thus making imported
goods more expensive and stimulating demand for local goods and services.
Floating rate features:
Adjust BoP
Better confidence
Better liquidity
Gains from free trade
Independence of policy
Cost price relationship.

Managed rate system: No economy can trade foreign exchange in only one
type of currency rates. It is either floating or fixed. It is a hybrid of fixed and
floating.
Major factors affecting the foreign exchange in an economy
1. Differentials in Inflation
As a general rule, a country with a consistently lower inflation rate exhibits a
rising currency value, as its purchasing power increases relative to other
currencies. During the last half of the twentieth century, the countries with
low inflation included Japan, Germany and Switzerland, while the U.S. and
Canada achieved low inflation only later. Those countries with higher inflation
typically see depreciation in their currency in relation to the currencies of
their trading partners. This is also usually accompanied by higher interest
rates.
2. Differentials in Interest Rates
Interest rates, inflation and exchange rates are all highly correlated. By
manipulating interest rates, central banks exert influence over both inflation
and exchange rates, and changing interest rates impact inflation and
currency values. Higher interest rates offer lenders in an economy a higher
return relative to other countries. Therefore, higher interest rates attract
foreign capital and cause the exchange rate to rise. The impact of higher
interest rates is mitigated, however, if inflation in the country is much higher
than in others, or if additional factors serve to drive the currency down. The
opposite relationship exists for decreasing interest rates - that is, lower
interest rates tend to decrease exchange rates.
3. Current-Account Deficits
The current account is the balance of trade between a country and its
trading partners, reflecting all payments between countries for goods,
services, interest and dividends. A deficit in the current account shows the
country is spending more on foreign trade than it is earning, and that it is
borrowing capital from foreign sources to make up the deficit. In other words,
the country requires more foreign currency than it receives through sales of
exports, and it supplies more of its own currency than foreigners demand for
its products. The excess demand for foreign currency lowers the country's
exchange rate until domestic goods and services are cheap enough for
foreigners, and foreign assets are too expensive to generate sales for

domestic interests.
4. Public Debt
Countries will engage in large-scale deficit financing to pay for public sector
projects and governmental funding. While such activity stimulates the
domestic economy, nations with large public deficits and debts are less
attractive to foreign investors. The reason? A large debt encourages inflation,
and if inflation is high, the debt will be serviced and ultimately paid off with
cheaper real dollars in the future.
Factors affecting dollar fluctuations
1. Balance of Payment
a. balance of trade
b. Fall in the prices of foreign goods
c. Balance of investment
2. Politics
a. Budget deficit and national debt
b. Little or no default on debt
c. President Policy
d. Terrorist attack and war
e. Geopolitical events
d. Consistent policies
e. Government expansion
f. Elections
g. Tax cut for consumers

3. Other countries

a. Turmoil in other countries.

b. Stability in other countries
c. Change in foreign reserves
d. Strengthening euro
e. Acceptance of oil in dollars
f. Strong foreign economies
4. Entitlements
a. Social security
b. Medicare
5. Economic theory
a. Demand for dollar
b. Demand for physical currencies outside the US
c. increase in money supply
6. Interest Rates
a. Rise in interest rates
b. Attractive interest rates in other countries
c. News about interest rates.
7. American consumers
a. Consumer savings
b. Gas prices
c. The Wal-Mart Honda factor
d. Slow spending

8. Housing
a. Slow housing market

b. Strong housing markets

c. Over inflated house market
9. Industry and economic indicators
a. Low growth in manufacturing
b. Strong manufacturing growth
c. Outsourcing
d. Entrepreneurship
e. Employment growth
f. Wage rate
10. US Capital market
a. Bear market
b. Bull market
c. Accounting scandals
11. Economy
a. Economy growth and stability
b. Economic recession
c. Outperforming other economies
12. Weather
a. Unfavorable farming conditions
b. Unusually hot summer
c. Natural disaster

13. Inflation
a. Slow inflation of foreign goods
b. News about inflation

Types of foreign contracts

Spot Contract
Forward Contract
Market Order
a. Stop Loss
b. Limit Order
Spot Contract: Buying or selling of foreign currencies for immediate delivery
is called Spot Contract. In this contract the buyer or the seller want to
receive the currency quickly and efficiently while achieving the best rate
possible. The seller gets lesser margin on conversion as the amount received
is in real time avoiding the otherwise 3 day ling process. Similarly, the buyer
has to pay more to pay the amount as the amount paid will be in real time
bypassing the 3 day cycle.
Forward Contract: In forward contracts, the parties can enter into a contract
for a future date fixing the exchange rate today. Such contract is valid 2
years. Forward Contract protects against adverse currency movements and
can be used in to lock into favorable exchange rates. It is essential to study
the market carefully in order to enter into a forward contract.
Stop Loss: Stop loss sets a minimum level at which you can sell or buy your
currency. The order will be fulfilled automatically once this rate is reached,
effectively guaranteeing the minimum rate at which your currency will be
exchanged.
Limit Order: Set a higher target exchange rate at which, if this rate is
achieved, you buy or sell your currency. If you run a limit order in parallel
with a stop-loss order, the exchange rate at which you trade is guaranteed
within a given range, giving you the advantage of predictability.
As currency markets are always on the move, we monitor your orders
constantly. With your approval, we will keep you informed and make sure
that levels are amended in response to current market conditions. The
flexible nature of market orders, coupled with the expertise, market
knowledge and dedication of our Dealers, will ensure that your foreign
exchange needs are managed proactively.

Case studies
If you are an Importer in Canada, you may import goods from overseas to
Canada. To settle your international orders, you need convert Canadian
dollars to foreign currency and pay your overseas suppliers.
a. In this case you may experience some problems, such as: bad exchange
rates or high commission fees if you go through the bank; or some currencies
are not able to pay via Canadian bank networks, for example: Chinese
Yuan(RMB), New Taiwan dollar(TWD), Indonesian Rupiah(IDR), Malaysian
Dollar(MYR), etc.
b. If you are doing the export business in Canada, you may also come across
some international payment issues. A good example is when you receive the
settled currency payment from your overseas purchaser, usually USD or
HKD, or other major tradable currencies, you need convert the amount to
CAD as soon as possible at a good exchange rate.

Indian Foreign Trade 2013

Indian External debt, 2013
India's external debt was US $ 390 bn (21.2% of GDP)
Increased by US$ 44.6 bn (12.6% of GDP)
Significant rise in short term trade credit, External commercial borrowings
NRI deposits in INR
ECB contribution was highest with 31% of total external debt followed by
short term 24.8% and NRI deposits 18.2%
Short term debt increased by US $ 18.5bn or 23.7%
FII investments reduced from12% to 5.6%
Short term in total debt 24.8%.
Residual maturity 44.2%
NRI deposits 28.4%

Indian foreign exchange reserve covered approximately 75% of the debt in

2013 as compared to approximately 85% in 2012.
Foreign exchange reserves dropped from 59% in 2012 to 50.1% in 2013
Share of US $ was the highest at 57.2% in 2013
Valuation changes:
US $ 11.3 billion,appreciation in INR

Components of External Debt

1. Bilateral Loans
2. ECBs
3. Trade Credit
4. NRI deposits
5. Short term debt
ECBs rose marginally lower than preceding year. ECBs were US $ 16.3bn
from US $ 16.1 bn.
Trade credit rose from US $ 20.3 bn to US $ 27.4 bn.
NRI deposits raised from US $ 12.2 bn to US $ 70.8 bn dueto deregulation of
interest rates on NRE and NRO in December, 2011.
Short term debt increased from 78.2 bn to 96.7bn
Currency components: 57.2%
Classification of external debt:
Share of loan reduced from 49% to 45.2%
Total increase from US$ 345 bn to US $ 390 bn
Bond and NOCs rose marginally.
Short term bills amounted to US $ 39 bn.

Commercial papers share reduced from 4.4 bn to 4.3 bn.

T Bills declined from 12% to 5.6%
Share of trade credit increased from 83.3% to 89.8%
Government and Non Government Debt:
Government and non government debt decreased from 23.7% 2012 to 20.9%
in 2013
Trend in interest payment increased from 27.1 % in 2012 to 34.9% in 2013

Devaluation during 2013

The Indian rupee touched a lifetime low of 68.85 against the US dollar on
August 28, 2013. The rupee plunged by 3.7 percent on the day in its biggest
single-day percentage fall in more than two decades. Since January 2013, the
rupee has lost more than 20 percent of its value, the biggest loser among
the Asian currencies.
Major Affairs that led to change in foreign trade and economy in the last
quarter of 2013:
Cash reserve Ratio (CRR) reduces to 4%
IMF projects growth of 5.9%
India pledges US $ 100mn for reconstruction of Mali
India and Britain discusses issues of nuclear energy and cooperation,security
and terrorism & trade.
UAE to make initial investment of US $ 12 bn in infrastructure projects in
India.
Economic growth prediction falls to 5%
Economic survey for 2012 13 pegs the country's growth at 6.1% to 6.7%
and inflation at 6.2% from 6.6%
L&T merges with Future Generalli India Insurace.

Indian Foreign Trade:

Global Exports decline by 1.8% in 2012 2013 due to a) weak demand b)
Global uncertainties.
Second half of 2012 13 however turned positive with an overall decline of
1.8%
Exports which were US $ 306 bn initially fell to US $ 300.6 bn
Merchandise exports amounted to US$ 72.4 bn due to engineering
products,gems & jewelry and primary products like iron ore and minerals.
Exports increased in countries like UK & Japan but fell in major countries like
US, China, UAE
Imports in gold increased by 80.5%
Imports in oil increased by 6.5%
Imports in Non oil products decreased by 5.5%
Service Exports 2012 2013
Service exports survey was conducted by RBI. It was initiated since 2002
03.
Survey conducted to study various aspects of Computer Software (CS)
Information Technology Enabled Services (ITES)
Business Processing unit (BPO)
Computer software increased by 20% from the preceding year
Computer software amounted to 2447.8 bn INR (US $45 bn)
ITES amounted to 957.4 bn INR (US $ 17.4)
BPO increased by 72%
Computer Services constituted 71.9% of total exports.
Comprised IT services at 66.3% and 5.6% of software production
developments

ITES shared 28.1% comprised of 23.2% from BPO and 4.9% from engineering
services.
Organisation wise distribution:
Public sector continued to have the highest share with 58.7% which
increased from 64.6% in the previous year.
Private sector companies share reduced from 41.2%in the preceding year to
35.3% in the current year.
Country wise Distribution:
US & Canada: >60%
Europe: 20%
Other countries: 77.4%
Exports reduced in the areas of East and west Asia.

Currency wise distribution:

US$: 73.6%
GBP 8.5%
Euro: 7.1%
AUD: 4.2%
INR: 1.8%
Others: 4.8%
Software business Foreign Affiliates of Indian Companies (INR Billion)

IT Seervices

Locally

To India

Other Countries

23.9

1.8

0.4

Software
Production
Development

2.3

11.2

BPO

15.9

0.4

3.6

Engineering
Services

1.6

0.5

Other services

307.4

184.6

28.9

Country wise (%)

Country

Share

US

71.3

UK

6.6

Canada

4.1

Germany

Singapore

2.7

Netherlands

2.1

Other Countries

10.2

Conclusion:

CONCLUSION

Depreciation and appreciation in rupee is not a permanent phenomenon but

it is due to various reasons. An attempt has been made in this study to list
out those factors which influence the fluctuation in Indian rupee against
dollar. Here six factors have been identified to be specific to rupee
fluctuation and are modeled with multivariate regression analysis. The result
of analysis shows that these variables can explain the exchange rate
dynamics to the extent of 94.8%. Since there are various internal as well as
external reasons behind rupee appreciation and depreciation to a large
extent, It takes time to bring back the situation to the normal state. The RBI
and other Government agencies have to play their role to tackle this
situation. However, the exchange rate fluctuations modeling through various

other econometric techniques based on the different aspects of currency

rates remain the area for further research.

2013 2014
Indias merchandise exports reached a level of US $ 312.61 billion during
2013-14 registering a growth of 4.06 percent as compared to a negative
growth of 1.82 percent during the previous year. Despite the recent setback
faced by Indias export sector due to global slowdown, merchandise exports
still recorded a Compound Annual Growth Rate (CAGR) of 15.79 per cent
from 2004-05 to 2013-14.
World Trade Scenario
As per IMF,World Economic Report, 2014, world trade recorded its biggest
ever annual increase in 2010 as merchandise trading surged to 14% but
decreased to 2.6% in 2012 and slight increase to 2.7% in 2013. It however
projects acceleration of world trade in goods in 2014 2015 with forecast
growth of 4.3% & 5.3 % respectively. Volume of world trade increased

marginally to 3% in 2013 over 2.8% in 2012 and is projected to accelerate

further growth to 4.3% and 5.3% in 2014 in 2015 respectively.
Exports:
Exports saw a growth of 4.06% in 2013 14. Government set export target
was US $ 325 bn. The merchandise export here reached US $ 312.61 bn in
2013 2014.
Imports:
Cumulative imports reduced to US $ 450 bn against US $ 490.74 bn in the
previous years. Sector recorded negative growth of 8.29%. oil imports
increased to US $ 167.62 bn against 164.04bn in the previous year. Oil
imports increased from 164.04 bn to 167.62 bn in the previous year. Non oil
prdoucts imports reduced from US$ 326.7 bn to US$ 283.32 bn.

Trade Data for period 2004-05 to 2013-14

Sr.No.

Year

1
2

Exports

% Growth Imports

% Growth Trade
Balance

2004 05 375340

27.94

501065

39.53

-125725

2005 06 456418

21.6

660409

31.8

-203991

2006 07 571779

25.28

840506

27.27

-268727

2007 08 655864

14.71

1012312

20.44

-356448

2008 09 840755

28.19

1374436

35.77

-533680

2009 10 844534

0.57

1363736

-0.78

-518202

2010 11 1142922

35.7

1683467

23.45

-540545

2011 12 1465959

28.26

2345463

39.32

-879504

2012 13 1634319

11.48

2669162

13.8

-1034843

10

2013
14(P)

15.9

2714182

1.69

-820000

1894189

Month wise growth in 2013 14 with respect to 2012

2013

Month (2013 14)

% Growth

April

2.36

May

0.17

June

-3.82

July

11.8

August

13.93

September

12.94

October

14.26

November

3.56

December

3.7

January

4.03

February

-5.19

March

-4.8

20
15
10
5

Growth (%)

0
-5
-10

Exports of Principle commodities

Exports of 5 commodties during the period 2013 14 registered a share of
50.05% mainly due to significant contrbution of Petroleum (Crude &

Products) Gems & Jewelery,Transport & equipment, Machinery & Drugs,

Pharmaceutical & fine chemicals.

Principle Commodities

Share

Petrloeum

20.05

Gems & Jewelery

13.15

Trasnport

6.85

Machinery

5.19

Drugs & Pharma

4.81

Others

50

Petroleum
Gems & Jewelery
Transport
Machinery
Drugs and Pharma
Others

Y-o-Y comparison of growth

Commodities

2012 13

2013 14

Petroleum

8.6

Gems & Jewelery

-3.44

-5.18

Transport & Equipment

-14.12

-16.47

Machinery & Instruments

7.13

5.93

Drugs & Pharma

11.13

2.58

Others

5.32

5.63

15
10
5
0
-5

2012 13
2013 14

-10
-15
-20

Plantation Crops:
Exportsof plantation crops decreased by 8.17% in US. Coffee registered a
negative growth of7.81%. The value from US $ 866.13 mn to US $ 798.49
mn. Tea also reduced by 8.54%
Agriculture & allied products:
Agriculture and allied products include cereals, Pulses, Tobacco, spices,nuts
& seeds, oil meals, Guargum meals, castrol oil,shellac, sugar & molasses,
Processed Food, Meat & meat Products etc.
Export commodities registered a growth of.81% in the year 2013 2014.
Exports increased from US $ 32017.27 mn to US $ 32277.59 mn.
Ores & Minerals:
Exports of ore and minerals were estimated at US $ 5604.22 bn during 201314 registering a negative growth of .48%. Iron ore and mica recorded a
negative growth of 5.45% & 0.57% respectively.
Processed minerals,other iron ore and minerals & coal registered a growth of
1.76%, 1.59% and 0.4% respectively.

Leather & Leather manufacturers:

Exports increased from US $ 4882.35mn to US $ 5687.63 mn and recorded a
growth of 16.49%
Manufacturers have registered a growth of 13.71% and leather footwear
registered growth of 20.35%.
Gems & Jewelery:
Exports of gems and Jewelery reduced from US $ 43344.85 mn to US $
41100.13 mn registering a negavtie growth of 5.18%
Chemical & Chemical related products:
Exports of chemical related products increased from US $ 41504.68 mn to US
$ 43755.48 mn with a growth of 5.42%
Rubber, Glass & Other Products, Basic Chemicals, Pharmaceuticals &
Cosmetics, Plastic and linoleum and residual chemicals & allied products
have registered a positive growth. Rubber, Glass & Other Products, Basic
Chemicals, Pharmaceuticals & Cosmetics, Plastic and linoleum and residual
chemicals & allied products have registered a positive growth.
Energy Goods:
Energy goods consist machinery, Iron & Steel and other engineeering items.
Exports from this sector increased by 8.5% from US $ 56796.94 mn to US $
61623.50 mn
Export of residual energy items stood at 22.79%
Aluminium other than products sttod at 28.6%
primary & semi primary equipment stood at 16.47% and machinery &
instruments at 5.93%
Electrical Goods:
Exportsod electrical goods increased from US $ 8442.77 mn to US $ 7690.68
mn showing a growth of 8.91%
Textiles:

Exports of textiles was estimated at US $ 30374.65 mn and recorded a

growth of 15.24%
The export of natural silk , textiles, wool and woolen manufacturing recorded
a negative growth of 8.95%, 7.15% and 3 % respectively.
However, Readymade Garments, Cotton yarn/Fabrics/Made-ups etc.,
Manmade Textiles & Made Ups etc, Coir and coir manufactures registered a
positive growth of 15.53%, 18.11%, 12.85% and 16.89% respectively.
Handicrafts & Carpets:
Exports of handicarafts and carpets increased from US $ 203.76 mn to US $
277.13 mn with a growth of 36.01%
Exports of carpets registered a growth of 4.96% with an increase from US $
988.14 mn to US $ 1037.11 mn
Project Goods:
Export of Project goods from US $ 39.65 mn to US $ 145.97mn with a growth
of 72.84%
Petroleum Products:
Exports of petroleum products showed a growth of 3% from US $ 60859.81
mn to US $ 62685.29 mn.
Cotton Raw Materials:
Exports ofcotton raw materials increased from US $ 3622.89 mn to US $
3747.73 mn with a growth of 3.33%

Pricipal Commodties:
Commodities

Share (%)

Petroleum

36.7

Electronic Goods

6.9

Goods

6.4

Pearls, Precious and Semi Precious

Stones

5.3

Machinery except Machinery

5.3

Others

39.4

Petroleum
Electronic goods
Goods
Pearls, precious and semi
precious stones
Machinery except
elecronics
Others

Commodities

2012 - 13

2013 - 14

Petroleum

5.9

0.7

Electronic Goods

-4

-1.4

Goods

-4.8

-46.3

Pearls, Precious and

Semi Precious Stones

-19.6

-5.9

Machinery except
Machinery

-8.2

-14.3

Others

2.3

-7.2

10

-10

-20

-30

-40

-50

2012 13
2013 14