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EXCHANGE RATE MECHANISM TREASURY MARKETING UNIT NEW DELHI RTMU N DELHI RTMU N DELHI EXCHANGE RATE MECHANISM EXCHANGE RATE IS THE CONVERSION RATE OF ONE CURRENCY IN TERMS OF OTHER CURRENCY RTMU N DELHI WHY DO WE NEED EXCHANGE RATES INTERNATIONAL TRADE: Economic Dependencies, Economies of scale and Cost arbitrage •INTERNATIONAL BUSINESS REQUIRES CROSS BORDER PAYMENTS. •DIFFERENT COUNTRIES HAVE DIFFERENT CURRENCIES. •IMPORTER/EXPORTER REQUIRE PAYMENT IN THEIR RESPECTIVE CURRENCIES. RTMU N DELHI DEMAND OF FOREX •IMPORTS •INVISIBLES •CAPITAL OUTFLOWS •FIIs •LOAN REPAYMENTS •SPECULATORS (FUNDAMENTAL/TECHNICALS) •RBI RTMU N DELHI SUPPLY OF FOREX •EXPORTS •INVISIBLES •CAPITAL INFLOWS •FIIs •ECB DRAWDOWN •SPECULATORS •RBI RTMU N DELHI DEALING ROOM •BANKS HAVE TO SELL CURRENCIES BOUGHT •IT ALSO HAS TO BUY BACK CURRENCIES SOLD •THIS PROCESS OF MATCHING IS CALLED COVER OPERATIONS •BANKS DEAL AMONGST THEMSELVES TO ADJUST MISMATCHES •THIS GIVES RISE TO INTER BANK MARKET •BANKS ALSO BUYS AND SELLS ON THEIR OWN ACCOUNT TRADING (CURRENCY TRADING) RTMU N DELHI INTER BANK MARKET •CONSISITS OF BANKS, CORPORATES AND BROKERS •MARKET REMAINS OPEN ROUND THE CLOCK EXCEPT ON SATURDAYS, SUNDAYS AND LOCAL HOLIDAYS •NO RATE DIFFERENCE INSPITE OF DIFFERENT GEOGRAPHICAL LOCATIONS •ALL CURRENCIES ARE QUOTED AGAINST US DOLLAR •ALL QUOTES ARE TWO-WAY (BID, ASK, SPREAD) •MOST CURRNECIES ARE IN DIRECT MODE •EXCEPT EUR,GBP,AUD AND NZD RTMU N DELHI INTER BANK MARKET •READY AND FORWARD RATES •DISCOUNT AND PREMIUM •FORWARD/SWAP POINTS •LONG/SHORT/SQUARE •DAYLIGHT/OVER NIGHT/STOP LOSS LIMIT ( FOR RISK MANAGEMENT) •TRENDING OF QUOTES RTMU N DELHI TYPE OF TRANSACTIONS •SPOT TRANSACTIONS •TOM TRANSACTIONS •CASH TRANSACTIONS •FORWARD TRANSACTIONS RTMU N DELHI WHAT FACTORS AFFECT EXCHANGE RATE MOVEMENTS POLITCAL ECONOMIC SPECULATIVE RTMU N DELHI POLITICAL FACTORS •TYPE OF GOVERNMENT •STABILITY •TRACK RECORD OF THE COUNTRY •CURRENT POLITICAL DEVELOPMENTS •VISION OF POLITICAL LEADERSHIP RTMU N DELHI ECONOMIC FACTORS •GROWTH RATE OF ECONOMY •INTEREST RATES •BOP POSITION •MOVEMENT OF CAPITAL •PURCHASING POWER PARITY •CENTRAL BANK INTERVENTION RTMU N DELHI SPECULATIVE FACTORS •BUYING/SELLING BY BANKS IN ORDER TO MAKE MONEY •SPECULATIVE ACTIVITES BY CORPORATES/ INVESTEMT HOUSES MAILY IN INTERNATIONAL MARKETS RTMU N DELHI OTHER FACTORS AFFECTING EXCHANGE RATE Interest Rates Terrorism Exchange Rate Inflation Oil Prices Capital Flows RTMU N DELHI ROLE OF CENTRAL BANK •AVOIDING EXCESS VOLATILITY •VERBAL INTERVENTION •ACTUAL SALE/PURCHASE RTMU N DELHI CURRENCY QUOTES RIC BID INR=45.75 JPY=118.75 GBP=1.7215 EUR=1.1770 AUD=.7580 XAU=480.00 ASK NAME TIME 45.80 SBTM 12.20 118.78 BOTQ 12.21 1.7220 NWBL 12.20 1.1775 BNPP 12.22 .7585 CBAS 12.21 480.50 ABCL 12.18 HIGH LOW 45.87 45.72 118.90 118.50 1.7250 1.7200 1.1778 1.1740 .7590 .7545 482.00 479.00 BUY LOW SELL HIGH RTMU N DELHI Inter Bank Deal SBTM: CIBY: SBTM: CIBY: SBTM: CIBY: USD/INR 2 80/83 MINE OK DONE To reconfirm at 46.83 I buy USD 2 mio My USD to SBI N York chipsuid 230542 value 09/08/10 All agreed. My INR to my Mumbai Tx deal n bifn. RTMU N DELHI Exchange Rate Arithmetic USD/INR 44.80/85, USD/SGD 1.4010/15 What rate exporter in SGD can sell proceeds to get INR? 44.80/ 1.4015 = 31.9650. USD/INR 44.80/85, GBP/USD 1.5210/15 What rate importer in GBP buy GBP against INR? 44.85x 1.5215= 68.2400. RTMU N DELHI RTMU N DELHI Fx Reserves ($ Bio in Sep 09) CHINA JAPAN RUSSIA S ARABIA TAIWAN INDIA S KOREA HONG KONG BRAZIL GERMANY 2273 1052 441 395 341 285 264 240 235 184 Source: Reuters RTMU N DELHI External Debt March ’09 (USD Mio) Multilateral Bilateral Trade Credits Commercial Borrowings (ECB) NRI & FC Deposits Rupee debt Short term debt Total 39,566 20,587 14,604 62,676 41,554 1,527 49,373 229,887 Amounts 20% of GDP RTMU N DELHI World GDP (Trillion USD) USA Japan China Germany France UK Italy Spain Brazil Canada India 14.002 4.992 4.832 3.060 2.499 2.007 1.987 1.397 1.268 1.229 1.185 14,002,000,000,000 RTMU N DELHI