Exchange Rate Fluctuations

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Assignment No.1 March 16, 2011

Objective

Objective of this paper is to understandthe reasons underlying the exchange ratemovement of Indian Rupee in context toUS dollar for the period Feb 23, 2011 toMar 10, 2011.

Comments

Feb 24 v/s Feb 23: Rs. depreciated by

25 paisa/ USD

The rupee fell the most on concern a surge

in oil prices will boost import costs and

widen the current-account deficit from a

record. Crude on New York MercantileExchange touched USD 103.41 per barrel,

the highest level since Sept-2008; amid

concern Libyas political crisis will disrupt

supplies of the commodity from the Middle

East. India almost imports 75% of the fuel

it uses. The rupee also dropped on

speculation losses in the stock market will

prompt overseas investors to pull money

out of local assets.

Feb 25 v/s Feb 24: Rs. Depreciated by

60 paisa/USD

Rupee fell for the second day in line with

weak Indian and world equity markets, as

the turmoil in Libya led to higher oil prices,

triggering fresh concerns over inflation.

Banks led the decline on worries

increasing inflationary pressures made a

case for a tighter monetary policy stanceby the central bank. FIIs were mostly

perturbed by corruption scandals and high

inflation. Brent crude futures rose as

Libyas ongoing turmoil fuelled fears the

unrest could spread to other oil producing

nations and choke supplies.

Feb 28 v/s Feb 25: Rs. appreciated by

10 paisa/USD

Rupee appreciated as the dollar traded

under heavy selling pressures against

major currencies with dollar index sliding

almost 2.40% from 78.87 to 76.94. The

Swiss franc touched a fresh all-time high

of 0.9234 and the euro rallied more than

300bps. In line, the Indian rupee

strengthened above 1% to seven weekhigh at 44.98 but failed to hold on to the

gains due to rising crude oil prices.

Date INR/ US Dollar

Feb 23, 2011 44.23

Feb 24, 2011 44.48

Feb 25, 2011 45.08

Feb 26, 2011 Sat

Feb 27, 2011 Sun

Feb 28, 2011 44.98

Mar 01,2011 44.88

Mar 02,2011 44.99

Mar 03,2011 45.05

Mar 04,2011 44.68

Mar 05,2011 Sat

1 Global Financial Management


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Mar 06,2011 Sun

Mar 07,2011 44.84

Mar 08,2011 44.82

Mar 09,2011 44.74

Mar 10,2011 44.83

Source: The exchange rate website &The Economic

Times, Pune.

Mar 01 v/s Feb 28: Rs. appreciated

by 10 paisa/USD

Rupee appreciated as trading in most

sectors in NSE & BSE have seen an uptick

post-Budget session. Strong up moves was

seen in the banking and auto space. As

the frontline stocks in the banking space

have already seen a sharp run-up. NIFTY

has moved upwards and has gained over

290 points. Also, rupee appreciated in

anticipation of large dollar inflows in

coming days. This anticipation was fuelled

due to talk of increased dollar flow swirled

after the foreign institutional investor limit

for corporate bond investment withresidual maturity of over 5 years issued by

infrastructure firm was raised in budget

by an additional dollar 20 billion taking the

limit to dollar 25 billion.

Mar 02 v/s Mar 01: Rs. depreciated by

11 paisa/USD

Rupee depreciated primarily due toincreasing uncertainty and speculation on

oil prices which was majorly fuelled by the

news of crisis in the middle east.

Mar 03 v/s Mar 02: Rs. depreciated

by 6 paisa/USD

The rupee was weaker as the choppy

equity market dented sentiment withsome oil-related dollar demand from

refiners also adding to the downward

pressure. Oil is Indias biggest import and

the state run oil refiners are the largest

buyer of the dollars in the domestic

currency market. In the currency futures

market, the most traded near-month

dollar-rupee contract on the NSE were at

45.24 and on the United Stock Exchange

at 45.23, with the total traded volume at

a high dollar 8.51 billion, which explains

the demand of dollar. Usual volume is

around dollar 6 to dollar 7 billion.

Mar 04 v/s Mar 03: Rs. appreciated by

37 paisa/USD

The rupee has appreciated primarily

because of the good upward movement in

the stock market. The market witnessedthe prefect case of short-covering in Indian

equities. The broad based rally was seen

as FIIs poured money in sectors like auto

(as there was no reversal of excise duty in

the Budget), agri-related and infra stocks.

This led to the increase in the demand for

Indian rupee against USD.

Mar 07 v/s Mar 04: Rs. depreciated by16 paisa/USD

The rupee dropped by 16 paisa because

the market sentiment was hit by political

worries on the domestic front and surging



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crude oil prices. US crude rose to a 30-

month high above dollar 106 as civil war

brewed in Libya. Foreign funds have pulled

out around dollar 2 billion from Indian

equities from the start of the year toMarch 7 with main index declining more

than 11% in 2011. As a result the 30-

shares BSE index declined by 1.43% or

263.78 points, to 18,222.67 points, with

25 of its component declining as on March

7, 2011. This withdrawal of funds by FIIs

fueled the demand for dollar and

depreciating Indian rupees.


2 paisa/USD

The Indian rupee firmed on Mar 08 as it

took comfort from a drop in oil prices,

while Dravida Munnetra Kazhagam,

(DMK), a key ally of the Congress-led UPA

government, put off a move to quit the

cabinet, helping the market win back

some investors confidence. This improved

the demand for rupees causing it toappreciate. The 30-shares BSE index

ended up 1.19%, or 216.98 points, at

18,439.65 points.


8 paisa/USD

Demand for rupees went up primarily

because BSE Sensex crawled up 0.2%higher in choppy trade on Mar 09, helped

by small gains in world equities.

Strengthening of rupee was the after

effect of the deal struck between the

ruling Congress and DMK in a row over

seat-sharing for the Tamil Nadu elections

ending days of jitters over the stability of

the UPA government.

Mar 10 v/s Mar 09: Rs. depreciated

by 9 paisa/USD

The rupee fell on speculation that crude oil

prices near a 29-month high will increase

import costs and wide a record current-

account deficit. Increase in the speculative

oil prices causes the expected inflation to

increase which further triggers theincrease in the interest rate. High interest

rates cause stock markets to fall indicating

the possibility of fund withdrawal by FIIs

resulting in the depreciation of home

currency. Though this depreciation is a

temporary phase and is corrected in long

run.


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Exchange Rate Fluctuations