Executive Summery: The Oxford College of Business Management

EXECUTIVE SUMMERY
Foreign exchange reserves are the foreign currency deposits and bonds held by central
banks and monetary authorities. These are assets of the central banks held in different reserve
currencies , mostly the US dollar, and to a lesser extent the euro, the UK pound, and the
Japanese yen, and used to back its liabilities. This study is done to know the impact of FOREX
reserve on the economic indicators like GDP, inflation, Balance Of Payment (BOP), interest
rates and the currency exchange rates.
The accumulation of FOREX reserve is comparatively high, compare to 1980’s and

before. The foreign investors started investing more after the liberalization and globalization of
the Indian economy in 1991. These policies made a significant change in economy that brought
many MNC’s, foreign investors to India. With the entry of foreign investments and MNC’s
created many jobs. More people became employed, this resulted increase in the purchasing
power. With the increase in purchasing power the demand for the goods and services increased.
With all these the growth (GDP) of the nation also increased. The increase in purchasing power
caused the imbalance in demand and supply of goods, which results in high inflation rate. RBI
plays a major role in maintaining inflation. When inflation becomes higher or lower than certain
level, to control inflation RBI changes monetary policy (i.e. when there is high inflation it
increases the interest rates, which sucks money from the market and vis-à-vis).
The inflow of foreign investments depends on the government policies and also the
economic condition of the country. When the interest rates are high with comparatively low
inflation and also the growth is good, then the inflow of foreign investment is comparatively
high. The more investments make the home currency weaker and foreign currency stronger. The
investors involved in arbitrage they make use of the conditions and they sale foreign currency
and buy home currency. This process will bring equilibrium in currency rates and helps to
maintain a comparatively stable value for home currency.
The BOP also plays a crucial role in the FOREX reserve of the country. The BOP helps
in settling the imports and exports. The BOP also includes NRI deposits, invisible receipts and
etc. The increase in any of these components adds to our FOREX reserve.Along with GDP,
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT Page 1

Inflation, BOP, the other things like Currency Exchange rate, CRR, PLR also contribute to
increase reserve of the country.
By looking into all these aspects, we can make out how the FOREX reserve of the
country indicates the health of nation. Also by looking into data of economic indicators the
effect of the reserve on the economy can be known. The small fluctuation in the indicators some
time leads to large variations.

CHAPTER – 1
EVOLUTION OF FOREX IN INDIA
The gradual liberalization of Indian economy has resulted in substantial inflow of foreign
capital into India. Simultaneously dismantling of trade barriers has also facilitated the integration
of domestic economy with world economy. With the globalization of trade and relatively free
movement of financial assets, risk management through derivatives products has become a
necessity in India also, like in other developed and developing countries. As Indian businesses
become more global in their approach, evolution of a broad based, active and liquid FOREX
markets is required to provide them with a spectrum of hedging products for effectively
managing their foreign exchange exposures.
In India, the economic liberalization in the early nineties provided the economic rationale
for the introduction of FOREX. Business houses started actively approaching foreign markets
not only with their products but also as a source of capital and direct investment opportunities.
With limited convertibility on the trade account being introduced in 1993, the environment
became even more conducive for the introduction of these hedge products. Hence, the
development in the Indian FOREX derivatives market should be seen along with the steps taken
to gradually reform the Indian financial markets. As these steps were largely instrumental in the
integration of the Indian financial markets with the global markets.
Since early nineties, we are on the path of a gradual progress towards capital account
convertibility. The emphasis has been shifting away from debt creating to non-debt creating
inflows, with focus on more stable long term inflows in the form of foreign direct investment
and portfolio investment. In 1992 foreign institutional investors were allowed to invest in Indian
equity & debt markets and the following year foreign brokerage firms were also allowed to
operate in India. Non Resident Indians (NRIs) and Over- seas Corporate Bodies (OCBs) were
allowed to hold together about 24 percent of the paid up capital of Indian companies, which
was further raised to 40 percent in 1998. In 1992, Indian companies were also encouraged to

issue ADRs/GDRs to raise foreign equity, subject to rules for repatriation and end use of funds.
These rules were further relaxed in 1996 after being tightened in 1995-
-Following a spurt in such issues. Presently, the raising of ADRs/ GDRs/ FCCBs is allowed
through the automatic route without any restrictions.
Foreign currency Assets as a % of total Reserves in the post & Pre Economic reforms phase:
FCA % of Total Forex Reserves
100
80
60
40
1980 1985 1990 1995 2000 2005

Year
FDI norms have been liberalized and more and more sectors have been opened up for
foreign investment. Initially, investments up to 51 percent were allowed through the automatic
route in 35 priority sectors. The approval criteria for FDI in other sectors was also relaxed and
broadened. In 1997, the list of sectors in which FDI could be permitted was expanded further
with foreign investments allowed up to 74 percent in nine sectors. Ever since 1991, the areas
covered under the automatic route have been expanding. This can be seen from the fact that
while till 1992 inflows through the automatic route accounted for only 7 percent of total inflows,
this pro- portion has increased steadily with investments under the automatic route accounting
for about 25 percent of total investment in India in 2001.
In 1991, there were also modifications to the limits for raising ECBs to avoid excessive
dependence on borrowings that was instrumental for 1991 BOP crises. In March 1997, the list of
sectors allowed to raise ECBs was expanded; limits for individual borrowers were raised while

interest rate limits were relaxed and restrictions on the end-use of the borrowings largely
eliminated. In 2000, the Indian Government permitted the raising of fresh ECBs for an amount
up to US$ 50 million and refinancing of all existing ECBs through the automatic route.
Corporate no longer had to seek prior approval from the Ministry of Finance for fresh ECBs of
up to US$ 50 million and for refinancing of prevailing ECBs.
While the inflows from abroad have been freed to a large extent, outflows associated
with these inflows like interest, profits, sale proceeds and dividend etc are completely free of any
restriction. All current earnings of NRIs in the form of dividends, rent etc has been made fully
repatriable. But convertibility in terms of outflows from residents, however, still remains more
restricted although these restrictions are gradually reduced. Residents are not allowed to hold
assets abroad. However, direct investment abroad is permissible through joint ventures and
wholly owned subsidiaries. An Indian entity can make investments in overseas joint ventures
and wholly owned subsidiaries to the tune of US$ 100 million during one financial year under
the automatic route. At the same time investments in Nepal and Bhutan are allowed to the tune
of INR 3.50 billion in one financial year. Units located in Special Economic zones (SEZs) can
invest out of their balances in the foreign currency account. Such investments are however
subject to an overall annual cap of US$ 500 million. Indian companies are also permitted to
make direct investments without any limit out of funds raised through ADRs/GDRs. Recently
mutual funds have been allowed to invest in rated securities of countries with convertible
currencies within existing limits.
RBI has been transparent in making available, in public domain, appropriate data relating
to FOREX market and those resulting from RBI operations in the foreign exchange market. RBI
disseminates the daily reference rate which is an indicative rate for market observers through its
website. The movements in foreign exchange reserves of the RBI are published on a weekly
basis in the Weekly Statistical Supplement (WSS). WSS also carries data on exchange rates of
rupee against some major currencies. The monthly Bulletin of RBI gives data regarding
purchases and sales of foreign currency undertaken by RBI against the rupee. The data regarding
the Balance of Payments and the External Debt profile of the country is put out on a quarterly
basis. RBI has already achieved full disclosure of information pertaining to international
reserves and foreign currency liquidity position under the Special Data Dissemination Standards

(SDDS) of IMF. With the concurrence of Government of India, RBI decided to compile and
make public half-yearly reports on management of foreign exchange reserves for bringing about
more transparency and also for enhancing the level of disclosure in this regard. The first such
report with reference to September 30, 2003 was put in public domain through websites of both
the Government of India and RBI in February 2004.
INTRODUCTION
Foreign Exchange Reserves (FER) is the surplus money or capital that a country parks
or maintains in the foreign country in form of currency, bond and other kind of
securities.Foreign exchange reserves are the foreign currency deposits held by national banks of
different nations. These are assets of Governments which are held in different hard currencies
such as Dollar, Sterling, Euro, Yen, Gold, SDRs.
The Economic Survey recently said India has the fourth largest foreign exchange
reserves, which helped the nation to tide over global financial crisis.India's foreign exchange
reserves touched $ 297.3 bn in December, 2010 from $ 279.1 bn in March. "It needs to be
acknowledged that foreign exchange reserves have helped insulate India from the worst impact
of the crisis," it said.
Unlike many Western nations, India was relatively less affected by the global financial
meltdown in 2008-09 that had pushed many advanced economies into recession. India had the
fourth largest foreign exchange reserves at $ 297.3 bn at the end of December 2010, it said.
At the same time, the foreign exchange reserves of Japan and Russia stood at $ 1.12
trillion and $ 479.4 billion, respectively. Neighbouring China's foreign exchange reserves was at
$ 2.45 trillion in June, 2010.According to the Survey, the country's reserves mainly comprise
portfolio investment (FII), "which are more vulnerable to sudden stops and reversals and
borrowings from abroad".
India's foreign exchange reserves have increased over the years from just $ 5.8 billion in
March, 1991. "The reserves reached a peak at $ 314.6 billion at May-end, 2008 before declining
to $ 252 billion at the end of March 2009."The decline in reserves in 2008-09 was inter alia a fall

out of the global crisis and strengthening of US dollar vis-a-vis other international currencies,"
the Survey said.
About the idea of having a multilateral option of a pre-arranged credit line, the Survey
noted such an option is necessary but is not sufficient. "... (This is because) foreign investors
often view the size of foreign exchange reserves as a key input in taking investment decisions."
Movement of Reserves
Review of Growth of Reserves since 1991
India’s foreign exchange reserves have grown significantly since 1991. The reserves,
which stood at US$ 5.8 billion at end-March 1991 increased gradually to US$ 54.1 billion by
end-March 2002, after which it rose steadily reaching a level of US$ 309.7 billion in March
2008. The reserves declined to US$ 252.0 billion in March 2009. The reserves stood at US$
292.9 billion as on September 30, 2010 compared to US $ 279.1billion as on March 31, 2010.
(Table 1 & Chart 1).
Although both US dollar and Euro are intervention currencies and the FCA are
maintained in major currencies like US dollar, Euro, Pound Sterling, Japanese Yen etc. the
foreign exchange reserves are denominated and expressed in US dollar only. Movements in the
FCA occur mainly on account of purchases and sales of foreign exchange by the RBI in the
foreign exchange market in India. In addition, income arising out of the deployment of the
foreign exchange reserves and the external aid receipts of the Central Government also flow into
the reserves. The movement of the US dollar against other currencies in which FCA are held
also impact the level of reserves in US dollar terms
Table 1 : Movement in Foreign Exchange Reserves

(US$ million)
Date FCA SDR Gold RTP Forex Reserves
30-Sep-
239,954 2 (1) 7,367 438 247,761
07

31-Mar-
299,230 18 (11) 10,039 436 309,723
08
30-Sep-
277,300 4 (2) 8,565 467 286,336
08
31-Mar-
241,426 1 (1) 9,577 981 251,985
09
30-Sep-
264,373 5224 (3297) 10,316 1365 281,278
09
31-Mar-
254,685 5006 (3297) 17,986 1380 279,057
10
30-Sep- 292,870
265,231 5130 (3297) 20,516 1993
10
Notes: 1. FCA (Foreign Currency Assets): FCAs are maintained as a multi-currency

portfolio comprising major currencies, such as, US dollar, Euro, Pound sterling, Japanese
yen, etc. and are valued in terms of US dollars.
2. FCA excludes US$ 250.0 million invested in foreign currency denominated bonds
issued by IIFC (UK) since March 20, 2009.
3. SDR (Special Drawing Rights): Values in SDR have been indicated in parentheses.
They include SDRs 3082.5 million (equivalent to US $ 4883 million) allocated under
general allocation and SDRs 214.6 million (equivalent to US$ 340 million) allocated under
special allocation by the IMF on August 28, 2009 and September 9, 2009, respectively.
4. Gold: Gold includes US$ 6699 million reflecting the purchase of 200 metric tonnes of
gold from IMF during October 19-30 2009. The physical stock of gold which was 357.75
tonne as at end September 2009, increased to 557.75 tonne as at end September, 2010.5.
RTP refers to the Reserve Tranche Position in the IMF.

Sources of Accretion to the Reserves
Table 2 provides details of the major sources of accretion to foreign exchange reserves during
the period from March 1991 to end-September 2010.
Table 2: Sources of Accretion to Foreign Exchange Reserves since

1991
(US$ billion)
Items 1991-92 to 2010-
11
(Upto September
2010)
A Reserves as at end-March 1991 5.8
B.I. Current Account Balance -144.7
B.II. Capital Account (net) (a to e) 415.7
a. Foreign Investment 236.2
Of which
FDI 102.7
FII 103.0

b.NRI Deposits 39.1
c. External Assistance 24.3
d.External Commercial Borrowings 76.7
e. Other items in Capital Account* 39.0
B.III. Valuation Change 16.5
Reserves as at end-September 2010292.9
(A+BI+BII+BIII)
* : Include errors and omissions.
External Liabilities vis-à-vis Foreign Exchange Reserves
The accretion of foreign exchange reserves needs to be seen in the light of total external
liabilities of the country. India’s International Investment Position (IIP), which is a summary
record of the stock of country’s external financial assets and liabilities as at end September 2010
is furnished in Table 4.The net IIP as at end September 2010 was negative at US$ 211.1 billion,
implying that our external liabilities are more than the external assets. The net IIP as at end
September 2008 and 2009 was US$ (-) 81.1 billion and US$ (-) 103.4 billion respectively.
Table 4: International Investment Position of India

(US$ billion)
Item September 2010 (P)
A Total External Assets 401.7
1. Direct Investment Abroad 89.2
2. Portfolio Investment 1.0
3. Other Investments 18.6
4. Foreign Exchange Reserves 292.9
B Total External Liabilities 612.8
1. Direct Investment in India 191.7
2. Portfolio Investment 164.3
3. Other Investments 256.8

Net IIP (A-B) (-)211.1
P: Provisional.
Legal Framework and Policies
The Reserve Bank of India Act, 1934 provides the overarching legal framework for
deployment of reserves in different foreign currency assets (FCA) and gold within the broad
parameters of currencies, instruments, issuers and counterparties, the law broadly permits the
following investment categories:
(i) deposits with other central banks and the Bank for International Settlements (BIS);
(ii) deposits with foreign commercial banks;
(iii) debt instruments representing sovereign/sovereign-guaranteed liability with residual

maturity for the debt papers not exceeding 10 years;
(iv) other instruments / institutions as approved by the Central Board of the Reserve Bank in
accordance with the provisions of the Act; and
(v) dealing in certain types of derivatives
.RBI has framed appropriate guidelines stipulating stringent criteria for issuers / counterparties /
investments with a view to enhancing the safety and liquidity aspects of the reserves.
HISTORICAL OVERVIEW OF GOLD STANDARD AND BRETTON WOODS

SYSTEM
The gold standard:
This is the oldest system which was in operation till the bigining of first world war and
few years after that. In the version called Gold Specie Standard, the currency in circulation
consists of gold coins with a fixed gold content. In a version called Gold Bullion Standard, the

basis of money remains a fixed weight of gold but the currency in circulation consists of paper
noteswith the monetory authorities i.e central bank of the country, standing ready to convert on
demand, unlimited amont of paper currency into gold and vice versa, at a fixed conversion ratio.
The exchange rate of any pair of currencies will be determined by their respective exchange rates
against gold. This is called “ mint-parity” rate of exchange. The actual exchange rate can depart
from this mint-parity by a small margin on either side.
The Bretton Woods System
Fallowing the Second world war , policy makers from the victorious allied powers,
pricipally the US and the UK, took up the task of tharoughly revamping the world monetory
system for the non-communist world. The outcome of this is “Bretton Woods System” and the
birth of two institutions, the International Monetory Fund (IMF) and the World Bank. The
exchange rate regime that was put in place can be charectarised as the Global Exchange
Standard. It had the fallowing features:
 The US government undertook to convert the US $ freely into gold at a fixed parity of
$35 per ounce.
 Other member countries of IMF agreed to fix the parities of their currencies vis-à-vis the
dollar with variation within 1% on either side of the central parity being permissible. If
the exchange rate hit either of the limits, the monetary authorities of the country were
obliged to “defend” it is by standing ready to buy or sell dollar against their domestic
currency to any extent requaired to keep the exchange rate within the limits.
In return for undertaking this obligation, the member countries were entitled to have access to
credit facilities from the IMF to carry out their intervention in the currency market.
Why do country need International trade?
There are numerous reasons that countries engage in international trade. A variety of

theories or explanations of international trade have been proposed. The most appealing
explanation contained in the doctrine of “comparative advantage” attributed to economist David
Ricardo. To understand this theory, let us consider a simple example. In a town there are two
persons Mr. X and Mr. Y. Mr. X is an excellent carpenter as well as good plumber. Where as
Mr. Y is a fairly competent plumber and also possesses some carpenter skills. Can some
exchange be mutually beneficial? It looks unlikely that Mr. X can benefit from the exchange
since he is good in both the aspects. It turns out this is not correct. Both of them will get benefit,
if Mr. X specializes in carpentry and Mr. Y in plumbing and each import the other’s output i.e.
Mr. X should import plumbing service from Mr. Y and Mr. Y should import carpentry service
from Mr. X. The key lays in the fact that Mr. X ‘s margin of superiority over Mr. Y is much
greater in the carpentry than in plumbing. Mr. X has a competitive advantage in carpentry and
Mr. Y in plumbing though Mr. X has an absolute advantage in both.
The same logic as above lays behind in the trade between two countries. Some countries
are deficient in critical raw materials, such as lumber or oil. To make up for these various
deficiencies, countries must engage in international trade to obtain the resources necessary to
produce the goods and/or services desired by their citizens.
Adequacy of Reserves
Adequacy of reserves has emerged as an important parameter in gauging the country’s

ability to absorb external shocks. With the changing profile of capital flows, the traditional
approach of assessing reserve adequacy in terms of import cover has been broadened to include
a number of parameters which take into account the size, composition and risk profiles of
various types of capital flows as well as the types of external shocks to which the economy is
vulnerable.

CHAPTER – 2
RESEARCH DESIGN
• TITLE OF THE STUDY:
“Impact of the FOREX reserve on economic indicators – GDP, Inflation and

balance of payment”.
• INTRODUCTION TO THE STUDY:
FOREX reserve are liquid holding of international assets. FOREX reserve

include overseas banknotes and risk-free government debt. FOREX reserve may be spent
to buy international technology goods and services.
Large reserve of foreign currency allows the government to manipulate

exchange rates usually to stabilize the foreign exchange rates to provide more favorable

environment. The FOREX reserve also act as a hedging tool, which helps to reduce the
shocks to the economy.
Sajikumar (2005) in his research paper on determining the optimum level of foreign
exchange reserve mentioned-- the increase in the inflows of the foreign reserves in the
country by the route of ADRs, GDRs, FDIs, ECBs, portfolio investments, non-resident
deposits and bank capital raises the question of an ‘optimum’ level of reserves. Further,
he discusses about the reserve adequacy indicators: Trade related indicators (reserves
should be equivalent to a few months of imports), Debt related indicators (reserves can
meet the external repayment obligations without additional borrowing for one year-
Guidotti rule) and money-related indicators i.e. reserves to broad money/ reserves to
reserve money.
Charan singh (September 2005) in his research paper on “Should India Use Foreign
Exchange Reserves For Financing Infrastructure?” at Stanford Center for International
Development mentioned -- the primary objectives of maintaining forex reserves is safety
and liquidity, maximizing returns is secondary. The forex reserves in India are managed
by RBI in consultation with the Government of India. The opinion of the author is that
India should not invest forex reserves in Infrastructure. Going ahead he says,
infrastructure projects in India yield low or negative returns due to difficulties: political
and economic — especially in adjusting the tariff structure, introducing labor reforms, and
upgrading technology and the use of FER to finance infrastructure may lead to more
economic difficulties, including problems in monetary management.
A review of the literature on the topic reveals the determination of optimal level of
FOREX reserve was emphasized, the FOREX reserve investment on infrastructure and F
OREX reserve management. This research project intends to fill the research gap.
• STATEMENT OF PROBLEM:
Foreign reserve is one of the most important factors influencing the growth of the
economy. It helps the country to meet the requirement of foreign receipts and payments. It
varies with the flow of FII and FDI’s to the country. It has an effective impact on
economic indicator of the economy, which act measuring tool of the economy. This study

is to determine the impact of foreign exchange reserve on economic indicators like GDP,
Inflation, balance of payment (BOP), Interest rate.
• OBJECTIVE OF THE STUDY:

➢ The main objective of the study is to know how the economy is
affected by the FOREX reserve.
➢ To know the criterions which influence the foreign investments.
➢ To know how it can help in the development of the country.
➢ Economic stability and growth with respect to FOREX reserve
• SCOPE OF THE STUDY;

The study helps to know how the FOREX reserve can helps to channelize the Balance of
Payment, how it helps to increase the GDP and also its effect on inflation.
• RESEARCH DESIGN:
The data will be used for this study is secondary data. Statistics information will be use
for interpretation and finding.
Analytical Tools such as Trend analysis and Moving average either of them will
be used.
• LIMITATION OF THE STUDY:

-The study is confined to the GDP, Inflation, and BOP connected with the Indian
economy.
-The FOREX reserve is also depend on the inflow of FII’s, FDI’s, etc.
-The value of Reserve also depends on government policies.
• CHAPTER SCHEME:
Chapter -1- Introduction to the study:
This chapter includes Concept of foreign exchange reserve and its impact on economic
indicators like GDP, Inflation, Balance of payment (BOP)

Chapter – 2- Research Design:
This chapter provide a plan of the study which includes Statement of problem, Need of the
study, Review of previous studies, Objectives of the study, Scope of the study,
Operational definition of concepts, Methodology, Limitations of the study.
Chapter – 3- Industry Profile:
FOREX reserves.
Chapter – 4- Analysis & Interpretation of Data
In this chapter the data collected from various sources has been analyzed interpreted and
tabulated. Appropriate graphs and diagrams will be used.
Chapter – 5- Summary of findings, Conclusions & Recommendations:
This chapter provides an overview of the dissertation, summaries the findings under each
objective and provides conclusions and recommendations based on the findings.
BIBLIOGRAPHY: -
-International financial Management, fourth edition, P G APTE, The McGraw-Hill
companies.
-Finance journels
-Newspaper and magazine
Website :
- http://indiabudget.nic.in
-http://www.business-standard.com

CHAPTER – 3
INDUSTRY PROFILE
BRIEF HERITAGE
The Forex, FX or currency industry could be the foreign exchange current market. The Forex in
its present form originates from 1973. On the other hand, it’s got been around, in some type or
one more, because the time from the Pharaohs. This is a sector exchange for altering dollars

from a single form or currency to a further. If you want to journey from a person nation to one
additional, you would need to exchange money, and this can be what the foreign exchange
market does, it trades currencies.
In 1973 the Forex industry was began because the Bretton Woods Accord was ended. The
Bretton Woods process was started out immediately after the second World War, it consisted of
a set of guidelines and procedures to regulate the global monetary procedure, and it tied all its
member countries’ currencies to the US currency and this previous a single to gold. In 1971 the
US ended the convertibility of your dollar to gold. As countries began to leave the Gold Normal,
their currencies would turned out to be at no cost floating and therefore the currency marketplace
was born as a result. Totally free floating currencies signifies the rate of exchange would
fluctuate, moving both up or down depending on many unique factors CURRENCIES And also
the FOREX
The Forex marketplace has evolved into a huge about $3.00 Trillion dollar a day market. The
majority of your transactions, a whopping estimated 85%, is finished in USD (Usa Dollar). After
that the currencies using the most trading are, the EUR (Euro), GBP (Terrific Britain’s Pound,
also regarded as Cable, Sterling or Pound), CHF (Swiss Franc), JPY (Japanese Yen), CAD
(Canadian Dollar), AUD (Australian Dollar) and NZD (New Zealand Dollar). These are all of
the major currencies.
The most active and rewarding pairing of currencies are EUR/USD and GBP/USD. The British
Pound would be the most active and fastest relocating currency. As a way to trade with the
Forex, you might like to get a small chunk in the marketplace, to be able to get that we have to
possess a shifting current market. This suggests the currency pair we determine to trade in has
for being a person which is active and liquid.
What’s LIQUIDITY?
Liquidity will mean offering to a captive audience for your price tag that you want. One example
is, once you were to promote ice to your Eskimos, it would not be a famous product because
they have so very much of it, so you would not get the very same selling price for it as in case
you were to sell ice towards the inhabitants of the Caribbean island, in which ice is really a
scarce commodity. From the very same way, there exists a large currency current market which
just concentrates on a few select currency pairs since they would be the most active currencies.

When you go for to trade in a very much less implemented currency, you will probably acquire
not lots of men and women are looking for a trade hence making trading much less lucrative.
Essentially the most active pairs are the GBP/USD and EUR/USD. The foreign exchange
marketplace is definitely the largest and most liquid money industry from the entire world.
HOW DO CURRENCIES MOVE?
If you happen to live while in the United states of America, and want to go on vacation to
Wonderful Britain, you are going to ought to buy pounds with your dollars. This can be referred
to as a foreign exchange trade. If you find yourself getting a currency, you can be offering one
more. Exchanges often happen in pairs, you will be frequently exchanging two currencies. If
your exchange pair is GBP/USD: Any time you decide to buy pounds, you certainly will be
marketing dollars, and if you ever are selling pounds, you might be shopping for bucks. You just
demand to choose irrespective of whether you’re promoting or acquiring, this is a function of the
free-floating currency.
Any time you want to trade inside Forex, you require only concentrate on one factor, irrespective
of whether the chart is heading up or down. If the chart, or currency, is heading up, the factor to
carry out is get. If the chart, or currency, is going down, the matter to perform is offer.
THE 24-HOUR Industry
The Forex industry is also unique in that this is a 24 hour current market. It is easy to trade the
Forex 24 hours a day if you so choose. The currency market place follows the sun throughout the
globe, the sessions flow as follows. If we take a look at all times as Eastern Normal Time, Tokyo
will open at seven pm EST and near at 4 am EST. London might be the next marketplace,
opening at 4 am EST and closing at 12 noon EST. London has the added distinction of currently
being the largest, oldest currency center inside globe. It accounts for about 36.7% of many of the
trades across the planet, which makes it one of the most imperative global center for foreign
exchange, New York could be second with around 17% and Tokyo third with about 6%. Some
other distinction in regards to the London current market is the time slot from 4 am EST till
ten:30 am EST is well-known to traders as currently being the most active time when lots of big
moves are created in the industry. Just after London, would be the time for that New York
current market to open at 8 am EST until 5 pm EST. One additional good time for buying and

selling is going to be at five pm EST till seven pm EST, considering that there will likely be
plenty of exercise within the industry at this time as well.
ROLLOVER
Rollover happens every last day at five pm EST. Brokers shut down their tradings from 4:58 pm
right up until five:05 pm. They do that so that you can rollover the open positions from a single
day towards the upcoming. From the Forex, the rates of interest are set day by day, so they
rollover will roll the curiosity from a person day and update it towards the up coming day.
FOREX INDUSTRY IN PERSPECTIVE –FEB 2011
The month of February witnessed quite a few developments in the retail forex industry with the
advent of the mainstream firms entering the fold and existing retail firms beefing up their
operations. The competition in the retail forex industry is good because apart from changing the
competitive landscape, it offers more choice and variation to the benefit of traders.
Some of the major highlights included FXIT which acquired an additional 30% interest in Forex
New York city LLC bringing it to an almost 50% stake. The Company, through ForexNYC,
provides introductory training as well as advanced training for retail traders that use the web-
based trading platform for buying and selling currencies, precious metals and commodity
futures. Then we heard the news report that Charles Schwab is in the early stages of introducing
forex to the array of financial products available to its customer base, followed by TD
Ameritrade offering a new mobile trading platform for iPad users. TD Ameritrade made a
stealthy entry into forex in 2009, though its purchase of ThinkorSwim.
What we see is a consolidation of the mainstream retail forex. It galvanized the major retail
brokers, in the form of two Initial Public Offerings (IPOs), capital infusions, and overhauling
their advertising. In 2010, the US Commodity Future Trading Commission (CFTC) moved to
bring retail forex out of the shadows and under its regulatory umbrella. New rules raised
registered capital requirements, lowered leverage ratios, and generally increased the amount of

scrutiny applied to brokers. This forced smaller players to merge, move overseas, or quit the
retail forex business.
The changes we see highly benefit the traders, as we heard that CitiFX introduced a new forex
pricing structure, major currency spreads to under 2 pips for its favored customers. TradeStation
Forex also announced plans “to launch and offer exclusively the company’s new forex brokerage
offering beginning later this quarter.” MIG Bank also unvieled a revolutionary new fully
transparent dealing model. The prices we obtain from our liquidity providers are 100%
transparent and can be disclosed to our clients at anytime. “Our advanced IT infrastructure and
price aggregator system allow us to constantly receive quotes from all of our liquidity providers,
instantaneously analyze them and identify the best price available to fill our client orders.”
quoted the spokesman for MIG Bank.
While things got quite busy on the retail forex front, the binary options industry was not to be
left behind. We learnt that SpotOptions, one of the leading binary options white label service
provider had sold off its flagship brand TraderXP at an undiscolsed amount. SpotOption’s core
business has always been the software it provides to binary options brokers. It will now focus on
the development of the B2B software. TraderXP has been in the market since 2009, so the exit is
quite quick.
No one really knows if this was a successful exit or not, but it does leave large enough room for
debate, if the growth in the online binary options is either too rapid or for the lack of innovation.
There are quite a few binary options brands available. Looking a bit deeper one cannot fail to
notice the striking similarities, even more so when the brands are white labeled by just one
company.
We see that the retail forex industry is probably at a mature stage where consolidation and
mergers are the right way to move ahead. Its little cousin, the binary options trading industry is
just starting out and perhaps it’s a bit too early to speculate. All said and done, one can only wait
and watch while we witness further consolidation. Online discount brokers may also establish
themselves as a major force, luring customers through the strength of their brands and the
accompanying guarantee of transparency, as well the ability to trade different types of securities
using a single, integrated platform. Spreads will continue to fall for the major currencies, and

even for some of the exotics. In fact, it probably won’t be long before retail forex becomes
completely commoditized, and it loses its novelty.
5 Prediction for the Forex Industry in 2010 and beyond
The forex industry evolved nicely in 2009. Looking towards 2010, and the new decade, here
are 5 predictions about the industry.
I wrote this post after reading Kathy Lien’s excellent article about the top 5 events of this
decade. I’m looking at trends that already began recently, as well as trends that I believe that
we’ll see in 2010 and in the following years.
1. Forex trading will become more mainstream: Most people think of forex only in the
context of buying hard currency when they go for a trip abroad. As the forex industry
continues to evolve, I believe that it will become more mainstream, getting more
attention in the media, and becoming an investment channel that the banks offer.
2. BRIC currencies to become more popular: The big nations of Brazil, Russia, India and
China aren’t very popular with forex traders. China’s economy is the third in the world,
and will soon become second, but the currency doesn’t float. The other countries aren’t
popular now. Not yet. I already wrote about the Brazilian Real. I believe that their
popularity will rise: more brokers will offer them, people :in forums will talk about them,
and their trade volume will rise.
3. Consolidation of forex brokers: Currently there are lots of forex brokers out there.
Some are market-makers, and others are ECN/STP. Most traders don’t know the
differences. I think that many of the smaller brokers, and especially market-makers, will
disappear or merge into bigger brokers. Consolidation happens in any maturing industry,
and it will eventually happen in forex.
4. Education will become important: Following the previous point, the level of education
is rising among traders and this will be seen not only in choice of brokers but also in
trading. Forex education will impact trading styles, profits and people who supply
resources for teaching and coaching forex. Here’s more about the growing role of
education.

5. Commodities will grow with forex: Oil and gold are already quite popular. As the
world recovers, more commodities will be in the limelight. Silver has gained traction due
its rise, and a food crisis will probably make wheat very popular. Commodities don’t
have to compete with forex: more brokers will probably offer both together. It’s
becoming more and more common.
CHAPTER - 4
ANALYSIS AND INTERPRETATION OF DATA
BALANCE OF PAYMENT
Balance of payments may be used as an indicator of economic and political stability. For
example, if a country has a consistently positive BOP, this could mean that there is significant
foreign investment within that country. It may also mean that the country does not export much
of its currency.
This is just another economic indicator of a country's relative value and, along with all other
indicators, should be used with caution. The BOP includes the trade balance, foreign investments
and investments by foreigners
Types of Accounts:
The balance of payments for any country is divided into two broad categories:
• The Current Account: It reports the various trades in import and export plus
income derivedfrom tourism, profits earned overseas, and payments of interest
• The capital account: It reports sum of bank deposits, private investments and debt
securities soldby a central bank or official government agencies.
The official reserve account
It is a subdivision of the capital account which contains foreign currency and securities
held by the government or the central bank, which is used to balance thepayments from year

to year. It is known as the balancing item and can be considered a "plugfactor" for
summing the balance of payments accounts to zero.
Overall balance of payment = Current Account Balance+ Capital account

b a l a n c e + O f f i c i a l Reserve Account
USES :
BOP data gives a comprehensive overview of the macro-economic and monetary

situation of national economy and is very vital for monetary and financial
monitoring purposes for policydeliberations in both the domestic and international contexts.
The data provides objective basisfor assessing the macro-economic and monetary situation of an
economy. BoP analysis helps inmacro-economic review on the following aspects of an economy
- Income growth
- External orientation
- Relationships between trade in goods and services and direct investment flows
- International banking transactions
- Assets securitization and financial market developments
- External debt situation

Study on prospects for direct investment. Direct investment income data which is available in
theBoP current account and the economy's stock of direct investment provides a methodology
for analyzing profitability of FDI.
Implications of BoP performance on exchange rate movements. Exchange rate movements are
of c o n c e r n f o r t r a d e r s a n d i n v e s t o r s a s t h e y r e f l e c t t h e c o m p e t i t i v e n e s s o f
the exports of aneconomy, the changing costs as well as the exchange rate
r i s k a s s o c i a t e d w i t h e x t e r n a l investment.
Causes:
A situation where sufficient financing on affordable terms cannot be obtained to meet

international p a y m e n t o b l i g a t i o n s c a u s e s p r o b l e m s w i t h B O P . I f d i f f i c u l t i e s
p e r s i s t , i t m a y l e a d t o a c r i s i s . Domestic currency depreciates rapidly, making
international goods and capital expensive and the economy may reach a situation of a
stand still. It may spread to other countries that are tightly linked with the domestic economy.
Key factors are weak domestic financial systems; large and persistent fiscal deficits; high levels
of external and/or public debt; exchange rates fixed at inappropriate levels; natural disasters; or
armed conflicts or a sudden and strong increase in the price of key commodities such as food
and fuel. Some of these factors will reduce exports or/ and increase imports. Others may reduce
the foreign financing available. Also investors may lose confidence in a country's prospects
leading to massive sales of assets, the so called "capital flight." Crises get complicated by inter-
linkages between various sectors of the economy. An imbalance in even one of the sectors will
rapidly spread to other sectors and will lead to culminating in a widespread economic disruption.
Shrinking foreign trade
INDIA’s trade deficit during the first nine months of fiscal 2009-10 on a balance of payments
(BoP) basis was lower at US$ 89.51 bn compared with US$ 98.44 bn during the same period in
fiscal 2008-09. The trade deficit on a BoP basis in Q3 (US$ 30.72 billion) was, however, less
than that in Q3 of 2008-09 (US$ 34.04 billion). This is revealed in e report (India's Balance of

Payments Developments during the first quarter (October-December) of 2009-10) of the
country’s central banking authority Reserve Bank of India (RBI).
The key features of India’s BoP that emerged in Q3 of fiscal 2009-10 were:(i) Exports recorded
a growth of 13.2 per cent during Q3 of 2009-10 over the corresponding quarter of the previous
year, after consecutive declines in the last four quarters.(ii) Imports registered a growth of 2.6
per cent in Q3 of 2009-10 after recording consecutive declines in the last three quarters.(iii)
Private transfer receipts remained robust during Q3 of 2009-10.(iv) Despite low trade deficit, the
current account deficit was higher at US$ 12.0 billion during Q3 of 2009-10 mainly due to lower
invisibles surplus.(v) The current account deficit during April-December 2009 was higher at
US$ 30.3 billion as compared to US$ 27.5 billion during April-December 2008.(vi) Surplus in
capital account increased sharply to US$ 43.2 billion during April-December 2009 (US$ 5.8
billion during April-December 2008) mainly on account of large inflows under FDI, Portfolio
investment, NRI deposits and commercial loans.(vii) As the surplus in capital account exceeded
the current account deficit, there was a net accretion to foreign exchange reserves of US$ 11.3
billion during April-December 2009 (as against a drawdown of US$ 20.4 billion during April-
December 2008).
Major Items of India's Balance of Payments

(US$ million)
April-December April-December
(2007-08) (PR) (2008-09) (P)
(2008-09) (PR) (2009-10) (P)

Exports 166163 175184 150520 124473
Imports 257789 294587 248967 213988
Trade Balance -91626 -119403 -98446 -89515
Invisibles, net 74592 89587 70931 59185

Current Account
-17034 -29817 -27516 -30330
Balance
Capital Account* 109198 9737 7136 41630
Change in
Reserves#
(+ indicates
-92164 20080 20380 -11330
increase;-
indicates
decrease)
Including errors & omissions; # On BoP basis excluding valuation; P: Preliminary, PR: Partially
revised. R: revised
SOURCE: Reserve Bank of India Report
Invisibles
The decline in invisibles receipts, which started in the Q4 of 2008-09, continued during Q3 of
2009-10. Invisibles receipts registered a decline of 3.1 per cent during the quarter (as against
an increase of 5.4 per cent in Q3 of 2008-09) mainly on account of decline in business,
communication and financial services, and investment income receipts. Although, software
exports recorded a robust growth of 15.3 per cent, services exports as a whole witnessed
decline of 12.3 per cent during the quarter as against an increase of 11.8 per cent during the
corresponding quarter of 2008-09.

Invisible receipts recorded a decline of 7.7 per cent during April-December 2009, as
compared with an increase of 22.2 per cent in the corresponding period of the previous year,
mainly due to the lower receipts under almost all components of services coupled with lower
investment income receipts.
Invisibles Payments
Invisibles payments recorded a growth of 12.9 per cent during Q3 of 2009-10, as compared
with a low growth of 2.4 per cent in Q3 of 2008-09, mainly led by increase in payments under
almost all components of services. Invisibles payments witnessed a positive growth of 3.7 per
cent in April-December 2009 (10.4 per cent in April-December 2008) mainly supported by
higher business, communication and financial services, and increase in payments under
investment income account.
Invisibles Balance
Size of invisibles surplus in Q3 of 2009-10 was, however, lower than Q3 of preceding year.
Therefore, despite low trade deficit, the current account deficit was higher at US$ 12.0 billion
in Q3 of 2009-10 (US$ 11.7 billion in Q3 of 2008-09). Net invisibles (invisibles receipts
minus invisibles payments) stood at US$ 59.2 billion during April-December 2009 as
compared with US$ 70.9 billion during April-December 2008. At this level, the invisibles
surplus financed 66.1 per cent of trade deficit during April-December 2009 as against 72.0
per cent during April-December 2008.
Current Account Deficit
Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during
April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At
this level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December
2009 as against 72.0 per cent during April-December 2008.
Net capital flows at US$ 43.2 billion in April-December 2009 was much higher as compared
with US$ 5.8 billion in April-December 2008 mainly due to larger inflows under FDI,
portfolio investments and NRI deposits Due to lower outward FDI, the net FDI (inward FDI
minus outward FDI) was higher at US$ 16.5 billion in April-December 2009 as compared
with US$ 14.3 billion in April-December 2008.

Portfolio investment witnessed large net inflows of US$ 23.6 billion during April-December
2009 as against a net outflow of US$ 11.3 billion in April-December 2008 due to large net FII
inflows of US$ 20.5 billion.
Net external commercial borrowings (ECBs) inflow slowed down to US$ 2.3 billion in April-
December 2009 (US$ 6.9 billion in April-December 2008) mainly due to increased
repayments.
The increase in foreign exchange reserves on BoP basis (i.e., excluding valuation) was US$
11.3 billion in April-December 2009 (as against a sharp decline in reserves of US$ 20.4
billion in April-December 2008). [A Press Release on the Sources of Variation in Foreign
Exchange Reserves is separately issued].
The gross disbursements of short-term trade credit was US$ 10.1 billion during Q1 of 2009-
10 almost same in Q1 of 2008-09. The repayments of short-term trade credits, however, were
very high at US$ 13.2 billion in Q1 of 2009-10 (US$ 7.8 billion in Q1 of 2008-09). As a
result, there were net outflows of US$ 3.1 billion under short-term trade credit during Q1 of
2009-10 (inflows of US$ 2.4 billion in Q1 of 2008-09)
Banking capital mainly consists of foreign assets and liabilities of commercial banks. NRI
deposits constitute major part of the foreign liabilities. Banking capital (net), including NRI
deposits, were negative at US$ 3.4 billion during Q1 of 2009-10 as against a positive net
inflow of US$ 2.7 billion during Q1 of 2008-09. Among the components of banking capital,
NRI deposits witnessed higher inflows of US$ 1.8 billion in Q1 of 2009-10 (net inflows of
US$ 0.8 billion in Q1 of 2008-09) reflecting the positive impact of the revisions in the ceiling
interest rate on NRI deposits.
Other capital includes leads and lags in exports, funds held abroad, advances received
pending for issue of shares under FDI and other capital not included elsewhere (n.i.e.). Other
capital recorded net outflows of US$ 1.6 billion in Q1 of 2009-10.
Balance of Payments (BoP)
Merchandise Trade
Exports

On a BoP basis, India’s merchandise exports posted a decline of 17.3 per cent in
April-December 2009 (as against a high growth of 27.5 per cent in the
corresponding period of the previous year).
INDIA's cumulative value of exports for the first 11 months of fiscal 2009-10 (April-2009
to February-2010) stood at US $ 152983 million (Rs 727345 crore) as against US $ 172379
million (Rs. 774585 crore) registering a negative growth of 11.3 per cent in Dollar terms
and 6.1 per cent in Rupee terms over the same period last year. Country's cumulative value
of imports for the period April, 2009- February, 2010 was US $ 248401 million (Rs.
1180124 crore) as against US $ 287099 million (Rs. 1289412 crore) registering a negative
growth of 13.5 per cent in Dollar terms and 8.5 per cent in Rupee terms over the same
period last year.
Oil imports during this 11-month period were valued at US$ 73230 million which was 18.2
per cent lower than the oil imports of US $ 89492 million in the corresponding period last
year. Non-oil imports during April, 2009- February, 2010 were valued at US$ 175171
million which was 11.4 per cent lower than the level of such imports valued at US$ 197607
million in April 2008- February, 2009.
EXPORTS & IMPORTS (April-February, FY 2009-10)
In $ Million In Rs Crore
Exports including re-exports
2008-09 172379 774585
2009-10 152983 727345
Growth 2009-10/2008-
-11.3 -6.1
2009 (percent)
Imports

2008-09 287099 1289412
2009-10 248401 1180124
Growth 2009-10/2008-
-13.5 -8.5
2009 (percent)
Trade Balance
2008-09 -114721 -514827
2009-10 -95418 -452779
Figures for 2008-09 are the latest revised whereas figures for 2009-10 are provisional
The trade deficit for April 2009- February, 2010 was estimated at US $ 95418 million
which was lower than the deficit of US $ 114721 million during April 2008 -February,
2009.
Source: Federal Ministry of Commerce, Government of India
Imports
Import payments, on a BoP basis, also remained lower recording a decline of 14.0 per cent
during April-December 2009 as compared with a high growth of 35.6 per cent in the
corresponding period of the previous year.
According to the DGCI&S data, exports declined by 17.3 per cent, and imports growth was
negative at 22.0 per cent led by the decline in both oil imports (a decline of 29.7 per cent) and
non-oil imports (a decline of 18.4 per cent) during April-December 2009.

On a BoP basis, the merchandise trade deficit decreased to US$ 89.5 billion during April-
December 2009 from US$ 98.4 billion in April-December 2008 mainly on account of both
lower oil and non-oil import payments
Inflows & Outflows from NRI Deposits and Local Withdrawal (In $ millions)
Inflows Outflows Local Withdrawals
2006-07 (R) 19914 15593 13208
2007-08 (PR) 29401 29222 18919
2008-09 (P) 37,089 32,799 20,617
2008-09 (Q1) (PR) 9063 8249 5157
2009-10 (Q1) (P) 11172 9354 5568
P: Preliminary, PR: Partially revised. R: revised
SOURCE: Reserve Bank of India report India's Balance of Payments Developments

during the First Quarter (April-June 2009) of 2009-10
Variation in Reserves
During April-December 2009, there was an accretion to foreign exchange reserves mainly on
account of valuation gains. Also, inflows under foreign investments, Non-Resident Indian
deposits and short-term trade credits have contributed significantly to the increase in foreign
exchange reserves during April-December 2009.
On balance of payments basis (i.e., excluding valuation effects), the foreign exchange
reserves increased by US$ 11,300 million during April-December 2009 as against a decline of
US$ 20,380 million during April-December 2008. The valuation gains, reflecting the
depreciation of the US dollar against the major currencies, accounted for US$ 20,185 million
during April-December 2009 as compared with a valuation loss of US$ 33,375 million during

April-December 2008. Accordingly, valuation gains during April-December 2009 accounted
for 64.1 per cent of the total increase in foreign exchange reserves.
GDP
Gross domestic product (GDP), is the measure of the value of the goods and services
produced by the U.S. economy within a given time period. GDP is one of the most
comprehensive and closely watched economic statistics. This is because several government
institutions make key decisions concerning the economy using it. Components of GDP by
expenditure GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G)
and Net Exports (X -
M).
Y = C + I + G + (X − M) Here is a description of each GDP component:

C (consumption) is normally the largest GDP component in the economy, consisting of private
(household final consumption expenditure) in the economy. These personal expenditures fall
under one of the following categories: durable goods, non-durable goods, and services.
Examples include food, rent, jewelry, gasoline, and medical expenses but do not include the
purchase of new housing.
I (investment) include business investment in equipments for example and do not include
exchanges of existing assets. Spending by households (not government) on new houses is also
included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean
purchases of financial products. Buying financial products is classed as 'saving', as opposed to
investment. This avoids double-counting: if one buys shares in a company, and the company
uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP
when the company spends the money on those things; to also count it when one gives it to the
company would be to count two times an amount that only corresponds to one group of
products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future
production, not directly an expenditure on products.
G (government spending) is the sum of government expenditures on final goods and services.
It includes salaries of public servants, purchase of weapons for the military, and any investment
expenditure by a government. It does not include any transfer payments, such as social security
or unemployment benefits.
X (exports) represents gross exports.
M (imports) represents gross imports.
The White House and Congress uses the GDP statistics to prepare the Federal budget, the
Federal Reserve formulates monetary policy basing on the same. Wall Street and the business
community also depend on the GDP to prepare forecasts of economic performance that provide
the basis for production, investment, and employment planning.
Due to the procyclic nature of the GDP as an indicator, it is the most obvious statistic
to look up to when judging the present status of an economy any where in the world. This

statistic is also used to determine the poverty index of an area and will thus influence in a
great way the government’s investment strategies towards improving the area.
How is it compiled?
The government collects all information regarding investments and incomes earned by
individuals as well as companies from the national income and product accounts (NIPAs)
produced by the Bureau of Economic Analysis (BEA). The NIPAs are a set of economic
accounts that provide information on the value and composition of output produced in the
United States during a particular period and on the distribution and uses of the income
generated by the same production.
GDP is composed of goods and services that are produced for sale in the market. It is
however worth noting that there are goods that are produced but do not really go into the
market directly. These include services such as the defense services provided by the Federal
Government. Education services provided by local governments and other emergency housing
or health care services provided by nonprofit making organizations such as the Red Cross also
fall in the group of non-market productions, Homes or business structures that are owned and
occupied by the same persons all have to be taken into consideration when computing these
statistics. However, not all productive activity is included in GDP. Some activities, such as
the care of one's own children, unpaid voluntary work and illegal or black-market deals are
not included because they are difficult to evaluate, as no real documentation is available
following such transactions.
GDP’s impact on Forex

GDP simply portrays the way money is earned and spent on a regular basis, it is therefore
has a very direct relationship to the foreign exchange rate. When the production is high and it
translates into good revenue the currency grows stronger. There are however other factors that
may lead to negative trends in the forex market. Take the situation of GDP getting high due to
some factors such as illegal dealings such as money laundering or criminal activity such as huge
ransoms in the case of piracy in the high seas. The effects would lead to inflation and the dollar

may loose its purchasing power, as there would be too much money circulating that has not
actually been earned. This would reduce the demand for the dollar and the forex rates would
have to come down. If the inflation persists, the federal bank may be compelled to adjust interest
rates in order to contain the situation. Such a move automatically affects the forex rates.
There is a likely chance that a high GDP may attract foreign products into the country
from other countries. If many countries target the U.S. as their export destination, it is likely that
the country may surfer a balance deficit due to too many imports at the expense of local exports.
The country may find itself importing more than their exports can match, a situation that may
reduce the dollar rate internationally.
The simple thing that is portrayed by GDP is the way money is earned and spent on a
regular basis, that is why it has a very direct relationship to the foreign exchange rate. The
currency grows stronger when the production is high and it translates into good revenue.
However there are other factors that may lead to negative trends in the forex market.
You may take the situation of GDP getting high. This might happen due to some factors
like illegal dealings such as money laundering or criminal activity or due to huge ransoms in the
case of piracy in the high seas. All such effects lead to inflation and the dollar's purchasing
power is decreased, as due to these illegal dealings too much money would be circulating that
has not actually been earned.
This in turn would reduce the demand for the dollar and eventually the forex
rates would come down. If the inflation persists, the federal bank might be forced to adjust
interest rates in order to regulate the situation. Automatically such a move will affect the forex
rates.
Forex ‘reserve hoarding’ costs 2% of GDP

With around $312 billion foreign exchange (forex) reserves, India’s bank balance is quite
healthy. But the country seems to be paying a heavy price while accumulating excess foreign
exchange reserves — or what’s called reserve hoarding.

A study by Abhijit Sen Gupta for economic think tank Indian Council of Research in
International Economic Relations (ICRIER) says the country is losing more than 2 per cent of its
gross domestic product (GDP) by accumulating reserves instead of employing resources to
increase the physical capital of the economy. By diverting resources from physical investment
and employing them for reserve accumulation, India lost nearly $13 billion, or 2.34 per cent, of
its GDP in 2003-04.
In the following two years the loss was slightly lower due to a higher return on foreign currency
assets. However, with a relatively low incremental capital-output ratio (ICOR) and hence a high
marginal product of capital in 2006-07, the loss rose drastically to nearly $18 billion, or 2.16per
cent, of GDP. “Thus, we find that in terms of physical investment foregone, India is paying a
substantial cost,” the study said.
The cost of excess reserves has been increasing steadily and in 2006-07 stood in excess of $2.5
billion, or 0.30 per cent, of the GDP. The study makes three interesting observations: India has
accumulated excess reserves, the cost of excess reserves and how returns can be maximised.
“By 2007 India had accumulated more than $80 billion of excess reserves,” says the study —
Cost of holding excess reserves: The Indian experience. The cost of holding reserves is
measured by the interest rate spread between the private sector’s cost of short-term borrowing
abroad and the yield that
the central bank earns on its liquid assets.
“The Reserve Bank of India (RBI) could well do to maintain an adequate level of reserves in the
form of low return but highly liquid assets for meeting its needs like current account financing,
meeting short term external debt obligations, restraining excessive volatility in the exchange rate
etc., and park the excess reserves in an account with an objective of maximising returns subject
to acceptable risks,” Sen Gupta’s study points out.
The funds in such an account could be profitably invested in non-treasury based assets like
equities, private equity company and real estate, which are associated with greater market risk
and hence correspondingly higher returns.
The bulk of India’s reserves are held in the form of securities or deposits with foreign
commercial banks and international organisations. However, the rate of earning on foreign

currency assets and gold, after accounting for depreciation was only 4.6 per cent in 2006-07 and
3.9 per cent in 2005-06. The inflation rate during these two years was around 5.43 per cent and
4.38 per cent, implying a real rate of return of -0.82 per cent in 2006-07 and -0.48 per cent in
2005-06.
The low returns are due to the RBI’s cautious policies, which are guided by principles such as
maintaining mark-to-market value and liquidity by taking minimal credit and market risk. The
RBI limits itself to investing in short dated AAA-rated government debt securities. “Such low
returns have raised several questions about the management of international reserves by the
RBI,” the report said.
BIG MONEY, LOW RETURNS
• RBI gets low returns on forex deployment in low-yielding securities abroad
• Sen Gupta says forex should be deployed in high return areas like equity, real estate and private
equity companies
• By diverting resources from physical investment and employing them for reserve
accumulation, India lost $18 bn in 2006-07
OVERVIEW
International trade uses a variety of currencies, the most important of which are held as foreign
reserves by governments and central banks. Here the percentage of global cummulative reserves

held for each currency between 1995 and 2005 are shown: the US dollar is the most sought-after
currency, with the Euro in strong demand as well.
1. The economy of India is the fourth largest in the world, with a GDP of $3.63 trillion at PPP,
and is the tenth largest in the world with a $691.9 billion at 2004 USD exchange rates and has a
real GDP growth rate of 6.2% at PPP.
2. Growth in the Indian economy has steadily increased since 1979, averaging 5.7% per year in
the 23-year growth record.
3. Indian economy has posted an excellent average GDP growth of 6.8% since 1994 India, the
fastest growing free-market democracy in the world, registered a growth rate of 8.2 percent in
FY 2004.
4. India has emerged the global leader in software and business process outsourcing services,
raking in revenues of US$12.5 billion in the year that ended March 2004.
5. Agriculture has fall to a drop because of a bad monsoon in 2005. There is a paramount need to
bring more area under irrigation.
6. Export revenues from the sector are expected to grow from $8 billion in 2003 to $46 billion in
2007.
7. India’s foreign exchange reserves are over US$ 102 billion and exceed the forex reserves of
USA, France, Russia and Germany. This has strengthened the Rupee and boosted investor
confidence greatly.
8. A strong BOP position in recent years has resulted in a steady accumulation of foreign
exchange reserves. The level of foreign exchange reserves crossed the US $100 billion mark on
Dec 19, 2003 and was $142.13 billion on March 18, 2005.
9. Reserve money growth had doubled to 18.3% in 2003-04 from 9.2 in 2002-03, driven entirely
by the increase in the net foreign exchange assets of the RBI.

10. Reserve money growth declined to 6.4% in the current year to January 28, 2005.
11. During the current financial year 2004-05, broad money stock (M3) (up to December 10,
2004) increased by 7.4 per cent (exclusive of conversion of non-banking entity into banking
entity, 7.3 per cent) .
12. Economics experts and various studies conducted across the globe envisage India and China
to rule the world in the 21st century.
Sectors of Indian Economy
There are three major sectors of Indian Economy
Agriculture
Agriculture and allied sectors like forestry, logging and fishing accounts for 25% of the GDP. It
employs almost 58% of the total work force. It is the largest economic sector and plays a
significant role in the overall socio-economic development of India. Due to steady improvement
in irrigation, technology, modern agricultural practices the yield per unit area of all crops has
increased tremendously.
Industry
Index of industrial production which measures the overall industrial growth rate was 10.1% in
October 2004 as compared to 6.2% in October 2003. The largest sector here holds the textile
industry. Automobile sector has also demonstrated the inherent strength of Indian labor and
capital. The three main sub sectors of industry viz Mining & quarrying, manufacturing, and
electricity, gas & water supply recorded growths of 5%, 8.8% and 7.1% respectively.
Services
The service sector is the fastest growing sector. It has the largest share in the GDP accounting
for about 48% in 2000. Business services, communication services, financial services,
community services,hotels and restaurants and trade services are among the fastest growing
sectors

EFFECT OF GDP ON FOREX MARKET
The simple thing that is portrayed by GDP is the way money is earned and spent on a regular
basis, that is why it has a very direct relationship to the foreign exchange rate. The currency
grows stronger when the production is high and it translates into good revenue. However there
are other factors that may lead to negative trends in the forex market.
You may take the situation of GDP getting high. This might happen due to some factors like
illegal dealings such as money laundering or criminal activity or due to huge ransoms in the case
of piracy in the high seas. All such effects lead to inflation and the dollar's purchasing power is
decreased, as due to these illegal dealings too much money would be circulating that has not
actually been earned.
This in turn would reduce the demand for the dollar and eventually the forex rates would come
down. If the inflation persists, the federal bank might be forced to adjust interest rates in order to
regulate the situation. Automatically such a move will affect the forex rates.

INFLATION
inflation can be defined as the increase in the level of price. inflation could happen because too
many people are chasing too few goods (Demand pull) or the cost of production(raw materials,
labor) went up (Cost push). When this happens, goods and services become more expensive and
not every body would be able to afford it. The govt try to reduce Price level by increasing
interest rates. An increase in interest rates would increase the value of investment for people who
have invested in the country. Potential investors would see the reward for investing in that
country thus demand more of their currency. this increases the demand and the value of the
currency.
When inflation rate is down, banks would cut down interest rates to encourage economic
activities. On the other hand, during high inflation, banks would increase the interest rates to
discourage lending and spending. Hiking up the interest rates boosts the value of the currency.
This is true in US where rising of interest rates by the Federal bank would encourage investors to
capitalize on higher returns.
Currencies also influence each other. For example the Bank of Japan has to pay close attention
to the market to make sure that their currency remains weak in order to maintain their high
export rates. This is due to China’s reluctance to revalue the Chinese Yuan thus making China’s
products more competitive. Meanwhile, the Euro is nick-named the anti-dollar, meaning that a
fall in the dollar value will boost up the Euro. This is due to the Euro becoming the up-and-
coming option for reserving currency as there is a possibility of the European economy
becoming much stronger and also the chances of the dollar depreciating are risky higher due to
long term deficits in trade balance. Plus, Japan holds a large percentage of their reserves in the
US dollar.
INFLATION is a term used to depict an increase of average prices through the economy. It
means that money is losing its power. In other words, when prices keep on rising because of
overheated economic growth or lots of wealth in the marketplace chasing very less opportunities
is known as inflation. Usually salary increases so that organizations can hold on good

employees. But unfortunately salary rises more slowly as compare to the prices of the
commodities. So at the end people life style actually decreases.
Impact of forex reserves, the silent killer
Another dimension to the entire issue is the issue of our burgeoning foreign exchange reserves.
You may recall that India faced a huge forex crisis in the early 1990s, when it fell to less than
one billion dollars. Since then, India has seen an unprecedented accumulation of foreign
exchange. Forex reserves now stand in excess of $300 billion today.
This accumulation of forex reserves has its own impact on the inflation in India. And this
requires some explanation. To understand what has been stated above, one needs to look into the
composition of these reserves and distinguish between capital and revenue flows.
Unlike China, which has largely built its forex reserves by its gargantuan exports, India has
predominantly built its forex reserves through capital flows.
The following table captures the composition of India's forex reserves since 1991, when we
virtually had zero reserves:
* Total capital flows since 1991 = $360 billion
* Total revenue flows since 1991 = $60 billion
* Net forex reserves = $300 billion
It may be noted that India's imports have exceeded its exports in the aggregate by $60 billion
during this period. Indian policy-framers have to frame appropriate policies to attract capital
flows to compensate for the current account deficit. And unlike China, which attracts FDI flows,
India attracts FII flows, i.e. huge flows into the stock markets and remittances /deposits from
Non-Resident Indians.
According to reports, India had accumulated forex reserves of about $100 billion during 2007-
08. This means a sustained inflow of approximately Rs 400,000 crore into the Indian economy
during this period. Naturally, this led to the classical case of too much money chasing too few
goods -- the classical definition of inflation.

It may be recalled that the aggregate increase in the money supply (M3) in India was a mere 12
per cent in 2003 when this government took over. Now, thanks to the incessant capital flows, the
aggregate money supply within the economy now stands at 23 per cent -- far too high for
comfort
Inflation and Loss
• Fiat currency, which identifies money that is not backed by gold, is always susceptible to
long-term devaluation, or inflation. Inflation identifies the loss of purchasing power that
occurs over time. Central banks pressure the value of domestic currency through printing
and creating money in order to buy foreign exchange.
• Nations that hold large amounts of foreign currency incur losses in purchasing power as
the exchange values of that currency decrease. Foreign exchange reserves earn little in
terms of interest. This means that interest income will not overcome the losses realized
from holding depreciating currency. Treasury officials decide whether foreign exchange
reserves would have been of better service to the home nation as domestic investments
How will an increase in foreign exchange reserves help an economy?
Also, is it possible for an increase in foreign exchange reserves elevate the inflation?
An increase in foreign exchange reserves helps an economy by increasing the "cushion" it has
against excessive variations of the exchange rate. This is particularly important for fixed
exchange regimes where it is vital for an economy to keep its exchange rate constant, so the
greater the reserves the easier it it for this given economy to defend its parity because it can
conduct market operations (selling or buying foreign exchange) to maintain their parity.
It can also be important for floating regimes when the variations in the exchange rate are so great
that they can disrupt the international trade of this economy and, obviously, destabilize the
economy. Once again, the greater the reserves, the better off the central bank is to intervene the
foreign exchange market.
How can an increase in Foreign Exchange Reserves help cushion the effect of inflation to
citizens?

We were assigned to analyze a news article and mine is about the Philippine government's
measures vs. inflation and selling its remaining Petron shares is one of their measures. It was
said that this will help increase Foreign Exchange Reserves. Now, I'm wondering how this can
help reducing the effects of inflation.
A central's bank sale of domestic currency to buy foreign assets in the foreign exchange market
results in an increase of the monetary base.
The increase in the money supply will lead to a higher real money supply in the short run which
will cause the interest rate on domestic currency assets to fall shifting the demand curve to the
left.
When the demand curve shifts to the left prices go down to reach a new lower equilibrium level.
CAUSES:
• When the government of a country print money in excess, prices increase to keep up with
the increase in currency, leading to inflation.
• Increase in production and labor costs, have a direct impact on the price of the final
product, resulting in inflation.
• When countries borrow money, they have to cope with the interest burden. This interest
burden results in inflation.
• High taxes on consumer products, can also lead to inflation.
• Demands pull inflation, wherein the economy demands more goods and services than
what is produced.
• Cost push inflation or supply shock inflation, wherein non-availability of a commodity
would lead to increase in prices.
PROBLEMS DUE TO INFLATION
• When the balance between supply and demand goes out of control, consumers could
change their buying habits, forcing manufacturers to cut down production.
• The mortgage crisis of 2007 in USA could best illustrate the ill effects of inflation.
Housing prices increases substantially from 2002 onwards, resulting in a dramatic
decrease in demand.

• Inflation can create major problems in the economy. Price increase can worsen the
poverty affecting low income household,
• Inflation creates economic uncertainty and is a dampener to the investment climate
slowing growth and finally it reduce savings and thereby consumption.
• The producers would not be able to control the cost of raw material and labor and hence
the price of the final product. This could result in less profit or in some extreme case no
profit, forcing them out of business.
• Manufacturers would not have an incentive to invest in new equipment and new
technology.
• Uncertainty would force people to withdraw money from the bank and convert it into
product with long lasting value like gold, artifacts.
How is forex reserve inflation appreciation of rupee related?
1. Imagine an X- shaped diagram in front of your eyes. Now place this within X and Y axis with
X axis being INR and Y axis being USD. Now imagine first arm of the X- diagram, the arm that
goes (\) ie topleft to bottom right: this is the Supply curve of USD vs INR. The other arm that
goes (/) ie topright to bottom left: this is the demand curve of USD vs INR. The point where both
the arms cross is the equilibrium point (E). This is the current exchange rate ie 1 USD =x INR.
2. Now, if Forex Reserve increases (inflates) the supply arm of the (X curve) shifts upward ie
more toward the Y-axis. The demand curve remains constant. Hence the point where the 2 arms
interesect, the equilibrium:E, have shifted. This new E, would mean less INR for more USD.
3. Hence the appreciation of INR
in effect, as the forex reserve increases (i), the supply of USD in the local Indian market (i),
hence there are fewer INR chasing the USD, which indicates a supply glut of USD and hence
drop in the exchange rate that USD can command , hence the rupee appreciation

Return on forex reserves skids to 2%
Mumbai, Apr 3 Even as domestic interest and inflation rates shot through the roof, the country’s
$303 billion-plus (Rs 13.63 trillion) forex reserves fetched a measly 2.09 per cent return for the
year ended June, 2010, which if adjusted against inflation at 8.31 per cent, is a negative return on
the asset.
This has happened so because the Reserve Bank has chosen to invest those monies in foreign
markets/assets and not in the domestic market/assets. However, it has to be noted that the RBI
could not have done otherwise under the prevailing rules governing foreign exchange reserves
management.
“The rate of earnings on foreign currency assets (FCAs) and gold, after accounting for
depreciation, decreased from 4.16 per cent in July, 2008, to June, 2009, to 2.09 per cent in July,
2009, to June, 2010, reflecting the generally low global interest rate environment,” the RBI’s
half-yearly report on management of forex reserves released last week said.
Accordingly, RBI could only get an interest yield of a paltry Rs 27,000 crore from this 2.09 per
cent interest rate - which is even way below the return rate on savings accounts- on this mound
of cash. However, had the central bank chosen to deploy these funds in the country, it would
have fetched as much as 4.5 times more return at a whopping Rs 1,21,900 crore at the prevailing
interest rates.
Contrast this with the current interest rate in the country, which had been spiked as many as
eight times since March, 2010, and adjust this with the current inflation of 8.31 per cent. A 390-
day term deposit gets you as much as 9 per cent or more return today and even saving bank rates
offer a higher return of a full 3.50 per cent.
Headline inflation, after hovering in high double digits, came down to 8.31 per cent in February,
while food inflation for the third week of March stood at 9.5 per cent.
But both these numbers were in high double digits for most part of the last fiscal, forcing the
RBI to raise short-term borrowing and lending rates as many as eight times since last March.
After the recent mid-quarter review, the current short-term lending repo rate is pegged at 6.75
per cent, while the short-term borrowing rate, or reverse repo, stands at 5.75 per cent. The bank
rate and cash reserve ratio are kept at 6 per cent each..

Inflation, Deflation, and the Forex Impact
Consumer Price Index (CPI) and its sister indicator, Producer Price
Index (PPI) are heavily watched data releases that indicate inflation/deflation trends. CPI does
not have a concrete release date, but it is typically midweek in the second or third week of the
month. The data is a month to month (MoM) comparison of the two previous months, and it
works much like the pH scale. Zero is inflation/deflation neutral. A CPI score above zero is
inflation positive, and a score below zero is deflation positive. The data is composed from a
survey of households, who are asked to keep a running diary of the cost of certain items. The
items surveyed include: food; housing, apparel; transportation; recreation; medical care;
education, and miscellaneous goods.
Inflation and deflation have far reaching effects on the Forex market. CPI is scrutinized by the
Federal Open Market committee (FOMC) when determining its monetary policy. The FOMC
aims to keep inflation or deflation at a target rate (present day target is 0.2). The FOMC may
raise interest rates to curb inflation, or cut rates to fight deflation. The FOMC may also alter the
money supply to achieve its goals. An inflation positive U.S. CPI reading can been seen as
bullish by the market if it creeps above the target inflation rate. The expectation is that the
FOMC will raise interest rates to combat inflation, thus increasing return on U.S. Dollar
associated securities. In healthy economic environments, inflation is a symptom of a growing
economy. Inflation in an unhealthy economy marked by high employment is undesirable.
Stagflation is the term given to this situation. Stagflation puts a tremendous amount of stress on
consumers, as prices increase, but the economy (and likely wages) do not. The role of deflation
in the economy is a hotly debated topic. Some economists maintain controlled deflation is good
for a recovery since it increases a currency's spending power. However, when a currency
becomes too strong, global demand for a country's goods wanes due to increased prices abroad.
Fewer exports hurts GDP, and compounds the effects of a recession. The Great Depression is

an example of unchecked deflation contributing to an already dire situation. CPI readings below
zero may also be interpreted as U.S. Dollar positive, as lower prices indicate a flight to safety by
lenders and investors.
The Forex market reaction to CPI data is often dynamic, and hinges greatly on the current
economic environment at the time of the news release. It is important to consider where the
current Federal Funds rate is in relation to the CPI data. Is there room for a rate cut? What is
the current interest rate compared to other nations'? When all factors are considered, CPI data
gives the individual Forex trader insight into possible future FOMC moves.
Inflation has long been a serious enemy to economic growth and the world's central banks
constantly try to keep inflation in check by adjusting monetary policy. Inflation can influence
currency exchange rates considerably, and the perception of inflationary trends makes up one of
the basic items affecting central bank monetary policy.
Inflation can perhaps be most basically described as what results when too many dollars start
chasing too few goods. This represents an oversimplification of the issue, but it does give an idea
of the nature of inflation, which generally signals not the increase in worth of goods, but the
declining value of the paper money used to buy those goods.
Because inflation affects all levels of society and the totality of consumers in an economy, it
makes up one of the most important economic indicators to central banks and forex traders alike.
In addition, many large central banks such as the U.S. Federal Reserve have an obligation to
keep inflationary forces at bay. As a result, they may raise the level of short term interest rates to
contain inflation. In addition, they might lower these same rates to counteract deflationary
tendencies and to stimulate the economy by making money easier to borrow.
The following sections describe various methods of assessing inflation levels used by
fundamental analysts with a focus on the U.S. economy, as well as the impact that inflation
controls can have on the forex market
Effects of Inflation in the Forex Market
Central banks tend to fight inflation by adjusting interest rates as a key part of their economic
control policy. In this way, central banks indirectly affect wholesale and consumer prices. These

in turn affect the value of the nation's currency, and as a result, the level of economic activity in
the country.
Because of the way that inflation affects interest rates, when an economic number indicative of
inflationary trends is released that points to an increase in inflation, this will usually be bullish
for the currency of that nation. This effect arises because interest rates would tend to be adjusted
higher to fight this inflationary tendency.
Conversely, if the number indicates a decrease in inflation, this will tend to put downward
pressure on the currency, because interest rates would be adjusted lower as a result.
THE TABLE SHOWING TOTAL FOREX RESERVE OF THE COUNTRY
Date Forex reserve (in crore) Date Forex reserve (in crore)
9-Apr-10 1,243,346 16-May-09 1,260,208
2-Apr-10 1,259,840 9-May-09 1,261,403
26-Mar-10 1,257,706 2-May-09 1,264,048
19-Mar-10 1,307,259 25-Apr-09 1,264,900
12-Mar-10 1,272,666 18-Apr-09 1,256,167
5-Mar-10 1,275,462 11-Apr-09 1,263,605
26-Feb-10 1,286,848 4-Apr-09 1,284,075
19-Feb-10 1,294,806 28-Mar-09 1,275,438
12-Feb-10 1,296,997 21-Mar-09 1,273,257
5-Feb-10 1,297,351 14-Mar-09 1,284,240
29-Jan-10 1,302,793 7-Mar-09 1,273,041
22-Jan-10 1,307,259 28-Feb-09 1,264,589
15-Jan-10 1,304,176 21-Feb-09 1,243,154
8-Jan-10 1,303,529 14-Feb-09 1,216,767
1-Jan-10 1,322,680 7-Feb-09 1,225,976
25-Dec-09 1,325,132 31-Jan-09 1,218,692
18-Dec-09 1,328,189 24-Jan-09 1,217,420

11-Dec-09 1,329,201 17-Jan-09 1,229,599
4-Dec-09 1,329,519 10-Jan-09 1,245,881
27-Nov-09 1,342,415 3-Jan-09 1,247,495
20-Nov-09 1,329,803 27-Dec-08 1,220,869
13-Nov-09 1,218,263 20-Dec-08 1,198,239
6-Nov-09 1,336,559 13-Dec-08 1,220,840
30-Oct-09 1,335,502 6-Dec-08 1,221,778
24-Oct-09 1,327,874 29-Nov-08 1,234,460
17-Oct-09 1,319,760 22-Nov-08 1,229,078
10-Oct-09 1,312,241 15-Nov-08 1,218,263
3-Oct-09 1,341,887 8-Nov-08 1,201,761
26-Sep-09 1,343,894 1-Nov-08 1,245,444
19-Sep-09 1,353,607 25-Oct-08 1,288,201
12-Sep-09 1,363,389 18-Oct-08 1,331,787
5-Sep-09 1,357,418 11-Oct-08 1,333,424
29-Aug-09 1,349,895 4-Oct-08 1,331,166
22-Aug-09 1,324,962 27-Sep-08 1,352,622
15-Aug-09 1,308,131 20-Sep-08 1,353,607
8-Aug-09 1,298,440 13-Sep-08 1,331,659
1-Aug-09 1,308,220 6-Sep-08 1,280,950
25-Jul-09 1,294,687 30-Aug-08 1,293,157
18-Jul-09 1,295,260 23-Aug-08 1,288,763
11-Jul-09 1,284,209 16-Aug-08 1,268,052
4-Jul-09 1,269,107 9-Aug-08 1,266,326
27-Jun-09 1,282,324 2-Aug-08 1,294,411
20-Jun-09 1,268,147 26-Jul-08 1,295,449
13-Jun-09 1,249,819 19-Jul-08 1,313,957
6-Jun-09 1,230,010 12-Jul-08 1,318,212
30-May-09 1,240,441 5-Jul-08 1,318,212
23-May-09 1,232,744 28-Jun-08 1,332,345
21-Jun-08 1,342,380
14-Jun-08 1,331,659
7-Jun-08 1,350,520
31-May-08 1,339,943
24-May-08 1,352,232
17-May-08 1,337,188
10-May-08 1,293,083
3-May-08 1,337,188
26-Apr-08 1,256,906
19-Apr-08 1,252,286
12-Apr-08 1,247,621
5-Apr-08 1,246,605
29-Mar-08 1,239,558
ANALYSIS
The accumulation pattern of FOREX reserves in 2008 as revealed from weekly statements of
Reserve Bank of India (RBI), showed a continuous accumulation of reserves till May 23, 2008.
After May 23, the country has been witnessing a continuous fall in its FOREX reserves. From
May 23 to July 25, 2008, the FOREX reserve has decreased. The reserve showed a slow
recovery till September 2009, but again it is constantly decreasing.

INTERPRETATION
The level of India's foreign exchange reserves, which had touched a low of US$ 5.8
billion at end-March 1991, peaked at US$ 314.6 billion at end-May 2008. The reserves declined
thereafter to US$ 247.7 billion at the end of November 2008 and were at US$ 252.0 billion at the
end of March 2009. Fallout of the global crisis and strengthening of the US dollar vis-à-vis other
international currencies has been responsible for the decline. The currency came under sharp
pressure after the collapse of the Lehman Brothers in September 2008. This is the major cause
for fall in the FOREX reserve. The RBI intervened to augment supply in the domestic foreign
exchange market aimed at reducing undue volatility.
Also political uncertainty was one of the factors, which has led FII’s to withdraw from
India’s equity market. A report on June 13 has revealed a depletion of huge $4.9 billion of
FOREX reserves. In the first week of July, Left parties finally withdrew its support and we saw
huge depletion of $3.3 billion reserves. RBI’s action to stop rupee falling further, added to that
more than eight per cent depreciation of rupee this year and RBI’s sustained action to sell the
dollar in order to maintain rupee below psychological level of 43, has also contributed to the
depletion of FOREX reserve of the country. Reserves have dropped $7.87 billion during the
week ended Oct 3, on account of market interventions by the central bank to stabilize the rupee
and heavy selling by foreign funds. The reserves, which include foreign currency assets, and
gold, stood at $283.94 billion. India’s foreign exchange reserves rose US$ 990 million to US$
248.6 billion in the week ended January 30 2010.Foreign currency reserves rose by US$ 589
million to US$238.8 billion, while the reserve position in the IMF increased US$ 2 million to
US$ 830 million. Gold reserves grew by US$ 399 million to US$ 8.8 billion. Special drawing
rights stood at US$ 3 million in the week ended January 30.
THE TABLE SHOWING THE INFLATION RATE
Date Inflation rate (in %) Date Inflation rate (in%)

24-Oct-09 1.34 28-Mar-09 0.26
17-Oct-09 1.51 21-Mar-09 0.31
10-Oct-09 1.21 14-Mar-09 0.27

3-Oct-09 0.92 7-Mar-09 0.44
26-Sep-09 0.7 28-Feb-09 2.43
19-Sep-09 0.83 21-Feb-09 3.03
12-Sep-09 0.37 14-Feb-09 3.36
5-Sep-09 0.12 7-Feb-09 3.92
29-Aug-09 -0.12 31-Jan-09 4.39
22-Aug-09 -0.21 24-Jan-09 5.07
15-Aug-09 -0.95 17-Jan-09 5.64
8-Aug-09 -1.53 10-Jan-09 5.6
1-Aug-09 -1.74 3-Jan-09 5.24
25-Jul-09 -1.58 27-Dec-08 5.91
18-Jul-09 -1.54 20-Dec-08 6.38
11-Jul-09 -1.17 13-Dec-08 6.61
4-Jul-09 -1.21 6-Dec-08 6.84
27-Jun-09 -1.55
29-Nov-08 8
20-Jun-09 -1.3
22-Nov-08 8.4
13-Jun-09 -1.14
15-Nov-08 8.56
6-Jun-09 -1.61
8-Nov-08 8.9
30-May-09 0.13
1-Nov-08 8.98
23-May-09 0.48
25-Oct-08 10.72
16-May-09 0.61
18-Oct-08 10.68
9-May-09 0.61
11-Oct-08 11.35
2-May-09 0.48
4-Oct-08 11.44
25-Apr-09 0.75
27-Sep-08 11.98
18-Apr-09 0.57
20-Sep-08 11.99
11-Apr-09 0.26
13-Sep-08 12.23

4-Apr-09 0.18
6-Sep-08 12.09
30-Aug-08 12.1 3-May-08 7.83
23-Aug-08 12.34 26-Apr-08 7.61
16-Aug-08 12.4 19-Apr-08 7.57
9-Aug-08 12.63 12-Apr-08 7.33
2-Aug-08 12.44 5-Apr-08 7.14
26-Jul-08 12.01 29-Mar-08 7.41
19-Jul-08 11.98
12-Jul-08 11.89
5-Jul-08 11.91
28-Jun-08 11.89
21-Jun-08 11.63
14-Jun-08 11.42
7-Jun-08 11.05
31-May-08 8.75
24-May-08 8.24
17-May-08 8.1
10-May-08 7.82
ANALYSIS
At the end of March 2008 the inflation was about 7.41, which gradually increased till about
12.63. The high inflation which was started around May, it continued till November. After that it
gradually started decreasing and it touched aroun Zero during May 2009. During june 2009 it
touched negetive digits. The deflation does not prevailed for a long time. At the beginning of the
September the country came out from the deflation and started to show a positive sign in the
economy.
INTERPRETATION
The main cause of the high inflation during 2008 may be because of the Global economic
crisis, which started around middle of 2007. The main cause for inflation may be the high
purchasing power of the people, which is due to the high growth of different sectors which were
providing high salary. With the fall of many giant companies which laid the building blocks of

the world economic crisis, many people lost their jobs alnog the world and India also got
effected from this. This raised the unemployment rate and also decreased the purchasing power.
After many measures taken by RBI and the government the inflation started coming down.
Foreign exchange reserves rose $2 billion during the week ended May 23 2008, though the
central bank sold dollars during the week to meet importers demand. According to the latest
figures released by the Reserve Bank of India in its weekly statistical supplement (WSS), total
foreign exchange reserves including gold and special drawing rights (SDR) rose $2,090 million
during the week ended May 23. Almost the entire growth in reserves during the week was on
account of the growth in foreign currency assets, which went up $2,085 million. Reserves with
the IMF rose $5 million, though the value of SDRs and gold in reserves remained unchanged
during the week. The central bank reportedly sold dollars during the week to meet oil importers.
The Indian economy started slowly recovering in 2009 but the inflation went below Zero.
Again the interference of RBI and the government made the economy to come out of deflation.
Currently the economy is showing revival signs. RBI is taking all measures to revival of
economy. During end of December 2009 Government has taken measures to address the price
rise in essential commodities.
The inflation as measured by year-on-year variation in Wholesale Price Index (WPI),

accelerated from 0.5% in September 2009 to 9.9% in March 2010, exceeding the Reserve
Bank's baseline projection of 8.5% for March 2010 set out in the Third Quarter Review. Year-
on-year WPI non-food manufactured products (weight: 52.2%) inflation, which was
(-) 0.4% in November 2009 turned marginally positive to 0.7% in December 2009 and rose
sharply thereafter to 3.3% in January 2010 and further to 4.7% in March 2010. Year-on-year
fuel price inflation also surged from (-) 0.7% in November 2009 to 5.9% in December 2009, to
8.1% in January 2010 and further to 12.7% in March 2010. Despite some seasonal moderation,
food price inflation remains elevated. The WPI inflation is no longer driven by supply side
factors alone. The contribution of non-food items to overall WPI inflation, which was negative
at (-) 0.4% in November 2009 rose sharply to 53.3% by March 2010. Consumer price index
(CPI) based measures of inflation were in the range of 14.9-16.9% in January/February 2010.
Thus, inflationary pressures have accentuated since the Third Quarter Review in January 2010.
The increase in foreign-exchange reserves of a country will lead to the increase in base money

running. Base money effects directly increase of the total money supply so that the total social
demands increase rapidly. Commodity market achieve a balance of supply and demand through
price increases in the circumstances of no idle resources and no a corresponding increase in
total supply.
BALANCE OF PAYMENT (BOP)
THE TABLE SHOWING MAJOR ITEMS OF INDIA’S BOP (In US$ million)

ANALYSIS
India’s merchandise exports recorded a growth of 13.2 per cent in Q3 of 2009-10 as against a
decline of 8.4 per cent in Q3 of 2008-09. Import payments while, on a BOP basis, registered a
growth of 2.6 per cent in Q3 of 2009-10 as compared with an increase of 9.2% in Q3 of 2008-09,
grew by 6.6 per cent on Directorate General of Commercial Intelligence and Statistics
(DGCI&S) basis during the quarter under review. The low growth in imports is mainly attributed
to decline in oil related import payments due to lower international crude oil prices during the
period.
INTERPRETATION
On a BOP basis, the merchandise trade deficit decreased to US$ 89.5 billion during April-

December 2009 from US$ 98.4 billion in April-December 2008 mainly on account of both lower
oil and non-oil import payments. On a BOP basis, India’s merchandise exports posted a decline
of 17.3 per cent in April-December 2009 (as against a high growth of 27.5 per cent in the
corresponding period of the previous year). Import payments, on a BOP basis, also remained
lower recording a decline of 14.0 per cent during April-December 2009 as compared with a high
growth of 35.6 per cent in the corresponding period of the previous year. According to the
DGCI&S data, exports declined by 17.3 per cent, and imports growth was negative at 22.0 per
cent led by the decline in both oil imports (a decline of 29.7 per cent) and non-oil imports (a
decline of 18.4 per cent) during April-December 2009.
The Indian economy is firmly on the recovery path. Exports have been expanding since October
2009, a trend that is expected to continue. The industrial sector recovery is increasingly
becoming broad-based and is expected to take firmer hold going forward on the back of rising
domestic and external demand.
THE TABLE SHOWING INVISIBLE GROSS RECEIPTS AND PAYMENTS (In US$
million)

THE GRAPH SHOWING KEY COMPONENTS OF INVISIBLE RECEIPTS
ANALYSIS
The merchandise trade deficit decreased to US$ 89.5 billion during April-December
2009 from US$ 98.4 billion in April-December 2008. Invisible receipts recorded a decline of 7.7
% during April-December 2009, as compared with an increase of 22.2 % in the corresponding
period of the previous year. Private transfer receipts, comprising mainly remittances from
Indians working overseas, increased to US$ 40.8 billion in April-December 2009 from US$ 37.1
billion in the corresponding period of the previous year. Private transfer receipts constituted 16.9
% of current receipts in April-December 2009. Software receipts at US$ 34.9 billion showed a
marginal decline of 1.7 % in April-December 2009.

INTERPRETATION
The decline in the invisible receipt mainly due to the lower receipts under almost all components
of services coupled with lower investment income receipts. Private transfer receipts, comprising
mainly remittances from Indians working overseas, increased. Under Private transfers, the
inward remittances for family maintenance accounted for about 52.7 per cent of the total private
transfer receipts, while local withdrawals accounted for about 43.7 per cent in April-December
2009.
THE GRAPH SHOWING MOVEMENT IN CURRENT ACCOUNT BALANCE

THE TABLE SHOWING NET CAPITAL FLOWS
ANALYSIS
Invisibles payments witnessed a positive growth of 3.7 per cent in April-December 2009. Net
invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during April-
December 2009 as compared with US$ 70.9 billion during April-December 2008. The current
account deficit at US$ 30.3 billion in April-December 2009, which was high compared to US$
27.5 billion during April-December 2008. Net capital flows at US$ 43.2 billion in April-
December 2009 were much higher as compared with US$ 5.8 billion in April-December 2008.

INTERPRETATION
Invisibles payments witnessed a positive growth mainly supported by higher business,

communication and financial services, and increase in payments under investment income
account. Decline in invisibles surplus led to higher current account deficit at US$ 30.3 billion in
April-December 2009. Net capital flows were much higher as compared to April-December
2008 mainly due to larger inflows under FDI, portfolio investments and NRI deposits.
GDP (GROSS DOMESTIC PRODUCT)
YEAR GDP (In %)

Jan 2006 9.5%
Jan 2007 9.7%
Jan 2008 9.2%
Jan 2009 6.7%
Jan 2010 7.2%
ANALYSIS
The GDP of India was 9.7% during 2007. Which declined to 9.2% during 2008. During
2009 the GDP fell down to 6.7%. The GDP at the beginning of 2010 is 7.2% which showing
sign of revival of the economy.
INTERPRETATION
The macro economic situation confirms signs of a turnaround for the economy. The first

quarter GDP released on August 31, 2009 had hinted at a recovery with growth in real GDP
being placed at 6.1 per cent (up from a level of 5.8 per cent each in Q3 and Q4 of 2008-09).
The growth in real GDP in Q2 was 7.9 per cent. GDP growth in the first half (H1) of 2009-10 is
now placed at 7.0 per cent. While there is a deceleration in the growth of agriculture and allied
activities from a level of 2.7 percent in second quarter (Q2) of 2008-09 to 0.9 per cent in of
2009-10, the levels of growth in industry at 8.3 per cent (6.1 per cent in Q2 of 2008-09) and
services at 9.3 per cent (9.8 per cent in Q2 of 2008-09) indicate the broad based nature of
recovery.
THE TABLE SHOWING THE CHANGES IN CRR
DATE CRR (in %) 6-Mar-09 5

1-Aug-08 8.75
4-Jan-08 7.5 13-Mar-09 5
8-Aug-08 8.75
11-Jan-08 7.5 20-Mar-09 5
15-Aug-08 8.75
18-Jan-08 7.5 22-Aug-08 8.75 27-Mar-09 5

25-Jan-08 7.5 3-Apr-09 5
29-Aug-08 8.75
1-Feb-08 7.5 10-Apr-09 5
5-Sep-08 9
8-Feb-08 7.5 17-Apr-09 5
12-Sep-08 9
15-Feb-08 7.5 24-Apr-09 5
19-Sep-08 9
22-Feb-08 7.5 1-May-09 5
26-Sep-08 9
29-Feb-08 7.5 8-May-09 5
3-Oct-08 9
7-Mar-08 7.5 15-May-09 5
10-Oct-08 9
14-Mar-08 7.5 22-May-09 5
17-Oct-08 6.5
21-Mar-08 7.5 29-May-09 5
24-Oct-08 6.5
28-Mar-08 7.5 5-Jun-09 5
31-Oct-08 6
4-Apr-08 7.5 12-Jun-09 5
7-Nov-08 6
11-Apr-08 7.5 19-Jun-09 5
14-Nov-08 5.5
18-Apr-08 7.5 26-Jun-09 5
21-Nov-08 5.5
25-Apr-08 7.75 3-Jul-09 5
28-Nov-08 5.5
2-May-08 7.75 10-Jul-09 5
5-Dec-08 5.5
9-May-08 7.75 17-Jul-09 5
12-Dec-08 5.5
16-May-08 8 24-Jul-09 5
19-Dec-08 5.5
23-May-08 8 31-Jul-09 5
26-Dec-08 5.5
30-May-08 8.25 7-Aug-09 5
2-Jan-09 5.5
6-Jun-08 8.25 14-Aug-09 5
9-Jan-09 5.5
13-Jun-08 8.25 21-Aug-09 5
16-Jan-09 5.5
20-Jun-08 8.25 28-Aug-09 5
23-Jan-09 5
27-Jun-08 8.25 4-Sep-09 5
30-Jan-09 5
4-Jul-08 8.25 11-Sep-09 5
6-Feb-09 5
11-Jul-08 8.5 18-Sep-09 5
13-Feb-09 5
18-Jul-08 8.5 20-Feb-09 5 25-Sep-09 5
25-Jul-08 8.75 2-Oct-09 5
27-Feb-09 5
9-Oct-09 5 22-Jan-10 5
16-Oct-09 5 29-Jan-10 5
23-Oct-09 5 5-Feb-10 5
30-Oct-09 5 12-Feb-10 5
6-Nov-09 5 19-Feb-10 5.5
13-Nov-09 5 26-Feb-10 5.5
20-Nov-09 5 5-Mar-10 5.75
27-Nov-09 5 12-Mar-10 5.75
4-Dec-09 5 19-Mar-10 5.75
11-Dec-09 5 26-Mar-10 5.75
18-Dec-09 5 2-Apr-10 5.75
25-Dec-09 5 9-Apr-10 5.75
1-Jan-10 5 16-Apr-10 5.75
8-Jan-10 5 23-Apr-10 5.75
15-Jan-10 5
ANALYSIS
At the beginning of 2008 the CRR was 7.5%, which gradually increased to 8%, 8.25%.
The CRR was made 9% during September 2008. Till second week of October 2008 it was at 9%.
After that the rate came down to 6.5% for two week, then it is further reduced to 6%, 5.5% and
made 5% after January 2009. The rate kept constant till February 2010.
In third week of February 2010 it is increased to 5.5%. It again increased to 5.75% during the
beginning of the March 2010.

INTERPRETATION
In 2008 the inflation rates was increased and it reached highest up 13%. The RBI intervened to
control the prevailing high inflation in the economy. During the middle of 2008 the inflation
rates were above 12%, at that time RBI has increased the CRR to 8-9%. The increase in CRR
will suck the money from the market and the money supply will get reduced. The increase in
CRR also reduces the purchasing power and helps to bring down the prevailing high inflation.
During 2009 the economy came out of inflation, which kept CRR rate normal at 5%. The
Reserve Bank announced a 0.75 basis points increase in the CRR in the Third Quarter Review of
January 2010. As inflation continued to increase, driven significantly by the prices of non-food
manufactured goods, and exceeded the Reserve Bank's baseline projection of 8.5 per cent for
March 2010 (made in the Third Quarter Review), the Reserve Bank responded expeditiously
with a mid-cycle increase of 25 basis points each in the policy repo rate and the reverse repo rate
under the LAF on March 19 2010. As a result of the increase in the CRR, about Rs. 12,500 crore
of excess liquidity will be absorbed from the system. It said during the year 2010 the Foreign
Currency Assets (FCAs) inched up by $13.3 billion. As a part of its foreign exchange reserve
management operations, the RBI has purchased 200 tonnes of gold from the International
Monetary Fund (IMF).

Intern
ational trade uses a variety of currencies, the most important of which are held as foreign
reserves by governments and central banks. Here the percentage of global cummulative reserves
held for each currency between 1995 and 2005 are shown: the US dollar is the most sought-after
currency, with the Euro in strong demand as well.
CHART SHOWING THE MOVEMENT OF CURRENCY EXCHANGE RATE
(Rupees v/s US $)

Showing the sign of revival of the economy.
RBI hikes policy rates by 25 bpc to fight inflation
The Reserve Bank of India, or RBI on Thursday increased its overnight lending and borrowing
rates by a quarter percentage point each to control high inflation, which has already begun
hurting the common man.
The RBI hiked its repo rate or the rate at which it infuses money into the banking system to
6.75% and reverse repo rate, at which it sucks out excess money, to 5.75%.
With the latest round of 25 basis point (bp) hike, the apex bank has hiked its short-term rates
eight times since March 2010 to battle high inflation. One bp is one hundredth of a percentage
point.
“Based on the current and evolving growth and inflation scenario, the Reserve Bank is likely to
persist with the current anti-inflationary stance,” the RBI said..
Immediately after the announcement, the benchmark sensex was trading 62.11 points down at
18,296.58 points while the yield on the most traded 8.08 % government bond maturing in 2022
remained largely unchanged at 8.07%.
The headline inflation, which is still above the central bank’s projection of 7% for the fiscal year
ending March, 2011, rose to to 8.31% in February, from 8.23% the previous month, defying
forecasts of a slowdown. RBI has raised its projection for March inflation to 8%.
In the past one year, the central bank has hiked is repo rate by 175 bps from 5% to 6.75% and
reverse repo rate by 225 bps from 3.5% to 5.75%.
RBI hikes key rates by .25% retain GDP forcast at 8.5%
With a view to rein in high inflation, the Reserve Bank of India Tuesday raised its key short-
term lending and borrowing rates by 0.25 per cent each with immediate effect.
The short-term lending (repo) rate has been hiked to 6.50 per cent and the borrowing (reverse
repo) to 5.50 per cent, a move that will make funds expensive for banks and may lead to a hike
in interest rates.

The Reserve Bank, however, projected GDP growth at 8.5 per cent with an upside bias. It also
warned that inflation is a matter of concern and revised its projection for FY’11 to 7 per cent
from 5.5 per cent earlier.
These initiatives, the RBI said will “rein in rising inflationary expectations, which may be
aggravated by the structural and transitory nature of food price increases.”
The apex bank further said its monetary action was aimed at reining in rising inflationary
expectations, while at the same time being moderate enough not to disrupt growth.
Forex Fundamental Analysis – Growth GDP – Inflation – Balance of payment
Fundamental analysis focuses on financial and economic theories as well as political

developments, to identify the forces of supply and demand of foreign exchange. Includes the
review of macro economic indicators, stock markets and political considerations (the latter
influence trust in government and the climate of the country). Among the most important
macroeconomic indicators are the growth rates, the measurements of Gross Domestic Product,
interest rates, inflation, unemployment, money supply, foreign exchange reserves and
productivity.
Sometimes, governments try to influence market forces intervened to prevent their currencies
deviate from the desired levels. Interventions in the Forex market are performed by central banks
and may have a significant impact, albeit temporary. Indeed, a central bank can enter the
currency market as most investors, buying or selling the currency against another, or engage in a
coordinated action with other central banks to produce an effect more pronounced. Alternatively,
some countries affect prices simply leaving the possibility of an intervention, or threatening one.
The Forex Market reflects the expectations that investors have on the price evolution of the
currency. Macroeconomic factors, the news about a currency, or events that occur in the country
of the currency are determinants in the evolution of its price. Investors looking for clues on the
macro-economic data to predict the behavior of the currency and anticipate the market.
However, many times, when they leave, the news is already “discounted” by the market and do
not produce the desired effect. Hence the popular advice: “Buy the rumor and sell the news”.
The governments issued a frequency evolution of its main macroeconomic variables. Investors
in the foreign exchange market anticipates these with their own estimates, and prices of the

currencies incorporate these expectations. When you publish a figure that does not match the
consensus of the market, there are sudden movements that may cause strong gains.
1. Growth
Governments tend to publish a quarterly growth figure of Gross Domestic Product

(GDP). It is a crucial variable, since it is far more of a global economy. In economic
cycles of expansive growth, greater disposable income which in turn implies a higher
consumption and savings. Moreover, companies are encouraged by the increase in
private consumption and investment. However, excessive growth could lead to
inflationary pressures and increases in interest rates. In principle, a higher GDP expected
push the price of the currency of the country upwards, while a push to lower the GDP
decline.
2. Price evolution: Inflation
The appreciation or depreciation of one currency against another is offset by a change in

the differential in interest rates. In principle, the currencies with higher interest rates can
be seen due to the containment of future inflation and higher profits offered by those
currencies. The macroeconomic variable continues every month. A push CPI higher than
expected exchange rate upward, while if it is less than expected to push it downwards.
3. Balance of Payments
Ideally, the equilibrium level of contribution is one that produces a balance of the
Current Account stable. A country with a trade deficit will experience a reduction of its
foreign exchange reserves, which ultimately lowers (depreciates) the value of the
currency. A cheaper currency makes its exports more affordable abroad, while more
expensive imports. After an intermediate period, imports are reduced, while exports are
increasing, thus stabilizing the trade balance and the currency towards equilibrium
CHAPTER - 5
FINDINGS
• The FOREX reserve helps to maintain constant growth of the economy.

• The reserves are very important to carry on the trade activities of the nation.
• There is an imbalance in the export and import of the country.
• The FOREX reserve of India increasing constantly. This shows that the investments are
increasing in the country. But compare to the beginning of 2007 the reserve has
drastically fallen.
• The policies of the government also affect the reserves. Because of right monetary
policies India was able to achieve a good growth during global meltdown.
• The reserves also play a vital role in maintaining the value of the home currency. The
values of the currency also impact the foreign investors. If rupee becomes stronger then
the investments will decrease.
• In order to deal with external shocks transmitting through various accounts of the balance
of payments, it is necessary to have sufficient foreign exchange reserves in the country.
• In spite of global financial crisis India achieved 9.2% growth in 2008. But the growth fell
down to 6.7% in 2009. The GDP is 7.2% in January 2010, which shows the revival of the
economy.
• The CRR, PLR, Bank rates, repo rate, reverse repo rate plays a vital role in controlling
liquidity in the economy and also helps to control the prevailing inflation.
• The inflation, which went negative during the end of 2009, now it showing positive sign.
This is a good sign of development.
SUGGESTIONS
• The country should be maintain adequate reserve, so that it can meet the demand and
supply.
• The government should take some actions to increase exports.

• As rural areas cover the most part of the India, the government should give emphasis to
agriculture. If the government provides adequate support and educate the farmers that
will help to increase the yield and helps to increase the exports of agricultural products.
• Recent food inflation of India is touching sky, the government should give preference to
increase agricultural product by educating farmers about proper utilization of resources
like water and other thing. By doing this the food inflation in the country can be
controlled in the future.
• Appropriate action should be taken to create balance between export and import.
• The country should allow more foreign investors in sectors like Power sectors that will
helps to meet power demand and also will bring more efficient technologies.
CONCLUSION
The movement of FOREX reserves and the economic indicators like GDP, Inflation, and BOP
are interrelated to one another. FOREX reserve supports healthy development of a nation. It also
helps the nation to overcome from unexpected shocks; it acts as a protection shield for nation.
This study shows that country should maintain adequate reserve to carry on its activities
including imports and exports. The increase in exports will bring more foreign money and also
contributes to increase the GDP of nation. The study also revealed the relation between the
interest rates and the inflation. With he rise in CRR the FOREX reserve with government
authority also rises. The accumulation of the reserve helps to decrease the risk and helps to
increase the liquidity in the market when the money supply gets low. The increase in the money
supply will lead to a higher real money supply in the short run which will cause the interest rate
on domestic currency assets to fall shifting the demand curve to the left. When the demand curve
shifts to the left prices go down to reach a new lower equilibrium level. The reserves also help in
manipulating the currency exchange rates and maintain that in favorable condition, so that the
foreign investments can increase. The study shows that the country should maintain adequate
reserve for the healthy and prosperous India.

Executive Summery: The Oxford College of Business Management

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EXECUTIVE SUMMERY

The accumulation of FOREX reserve is comparatively high, compare to 1980’s and

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EVOLUTION OF FOREX IN INDIA

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1980 1985 1990 1995 2000 2005

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Review of Growth of Reserves since 1991

Table 1 : Movement in Foreign Exchange Reserves

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Notes: 1. FCA (Foreign Currency Assets): FCAs are maintained as a multi-currency

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Table 2: Sources of Accretion to Foreign Exchange Reserves since

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Table 4: International Investment Position of India

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Legal Framework and Policies

(ii) deposits with foreign commercial banks;

(iii) debt instruments representing sovereign/sovereign-guaranteed liability with residual

(v) dealing in certain types of derivatives

HISTORICAL OVERVIEW OF GOLD STANDARD AND BRETTON WOODS

The gold standard:

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The Bretton Woods System

Why do country need International trade?

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Adequacy of reserves has emerged as an important parameter in gauging the country’s

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• TITLE OF THE STUDY:

“Impact of the FOREX reserve on economic indicators – GDP, Inflation and

• INTRODUCTION TO THE STUDY:

FOREX reserve are liquid holding of international assets. FOREX reserve

Large reserve of foreign currency allows the government to manipulate

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• OBJECTIVE OF THE STUDY:

• SCOPE OF THE STUDY;

• LIMITATION OF THE STUDY:

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Chapter – 3- Industry Profile:

Chapter – 4- Analysis & Interpretation of Data

Chapter – 5- Summary of findings, Conclusions & Recommendations:

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HOW DO CURRENCIES MOVE?

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FOREX INDUSTRY IN PERSPECTIVE –FEB 2011

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5 Prediction for the Forex Industry in 2010 and beyond

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ANALYSIS AND INTERPRETATION OF DATA

The official reserve account

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Overall balance of payment = Current Account Balance+ Capital account

BOP data gives a comprehensive overview of the macro-economic and monetary

- International banking transactions

- Assets securitization and financial market developments