RTMU N DELHI EXCHANGE RATE MECHANISM TREASURY MARKETING UNIT NEW DELHI

RTMU N DELHIRTMU N DELHI

EXCHANGE RATE MECHANISM

TREASURY MARKETING UNITNEW DELHI



EXCHANGE RATE MECHANISMEXCHANGE RATE MECHANISM

EXCHANGE RATE IS THE CONVERSION RATE OF ONE CURRENCY IN TERMS OF OTHER CURRENCY


WHY DO WE NEED EXCHANGE RATESWHY 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.


DEMAND OF FOREXDEMAND OF FOREX

•IMPORTS•INVISIBLES•CAPITAL OUTFLOWS•FIIs•LOAN REPAYMENTS•SPECULATORS (FUNDAMENTAL/TECHNICALS)•RBI


SUPPLY OF FOREXSUPPLY OF FOREX

•EXPORTS•INVISIBLES•CAPITAL INFLOWS•FIIs•ECB DRAWDOWN•SPECULATORS•RBI


DEALING ROOMDEALING 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)


INTER BANK MARKETINTER 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


INTER BANK MARKETINTER 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


TYPE OF TRANSACTIONSTYPE OF TRANSACTIONS

•SPOT TRANSACTIONS

•TOM TRANSACTIONS

•CASH TRANSACTIONS

•FORWARD TRANSACTIONS


WHAT FACTORS AFFECT WHAT FACTORS AFFECT

EXCHANGE RATE MOVEMENTSEXCHANGE RATE MOVEMENTS

POLITCAL

ECONOMIC

SPECULATIVE


POLITICAL FACTORSPOLITICAL FACTORS

•TYPE OF GOVERNMENT•STABILITY•TRACK RECORD OF THE COUNTRY•CURRENT POLITICAL DEVELOPMENTS•VISION OF POLITICAL LEADERSHIP


ECONOMIC FACTORSECONOMIC FACTORS

•GROWTH RATE OF ECONOMY•INTEREST RATES•BOP POSITION•MOVEMENT OF CAPITAL•PURCHASING POWER PARITY•CENTRAL BANK INTERVENTION


SPECULATIVE FACTORSSPECULATIVE FACTORS

•BUYING/SELLING BY BANKS IN ORDER TO MAKE MONEY

•SPECULATIVE ACTIVITES BY CORPORATES/ INVESTEMT HOUSES MAILY IN INTERNATIONAL MARKETS


OTHER FACTORS AFFECTING EXCHANGE RATEOTHER FACTORS AFFECTING EXCHANGE RATE

Exchange Rate

Terrorism

Oil Prices Capital FlowsInflation

Interest Rates


ROLE OF CENTRAL BANKROLE OF CENTRAL BANK

•AVOIDING EXCESS VOLATILITY

•VERBAL INTERVENTION

•ACTUAL SALE/PURCHASE


CURRENCY QUOTESCURRENCY QUOTES

RIC BID ASK NAME TIME HIGH LOWINR=45.75 45.80 SBTM 12.20 45.87 45.72JPY=118.75 118.78 BOTQ 12.21 118.90 118.50GBP=1.7215 1.7220 NWBL 12.20 1.7250 1.7200EUR=1.1770 1.1775 BNPP 12.22 1.1778 1.1740AUD=.7580 .7585 CBAS 12.21 .7590 .7545XAU=480.00 480.50 ABCL 12.18 482.00 479.00

BUY LOW SELL HIGH


Inter Bank DealInter Bank Deal

SBTM: USD/INR 2CIBY: 80/83SBTM: MINECIBY: OK DONESBTM: To reconfirm at 46.83 I buy USD 2 mio

My USD to SBI N York chipsuid 230542value 09/08/10

CIBY: All agreed. My INR to my MumbaiTx deal n bifn.


Exchange Rate ArithmeticExchange Rate Arithmetic

USD/INR 44.80/85, USD/SGD 1.4010/15What rate exporter in SGD can sell proceeds to get INR?44.80/ 1.4015 = 31.9650.

USD/INR 44.80/85, GBP/USD 1.5210/15What rate importer in GBP buy GBP against INR?44.85x 1.5215= 68.2400.



Fx Reserves ($ Bio in Sep 09)Fx Reserves ($ Bio in Sep 09)

CHINA 2273JAPAN 1052RUSSIA 441S ARABIA 395TAIWAN 341INDIA 285S KOREA 264HONG KONG 240BRAZIL 235GERMANY 184

Source: Reuters


External Debt March ’09 (USD Mio)External Debt March ’09 (USD Mio)

Multilateral 39,566Bilateral 20,587Trade Credits 14,604Commercial Borrowings (ECB) 62,676NRI & FC Deposits 41,554Rupee debt 1,527Short term debt 49,373Total 229,887

Amounts 20% of GDP


World GDP (Trillion USD)World GDP (Trillion USD)

USA 14.002 14,002,000,000,000Japan 4.992China 4.832Germany 3.060France 2.499UK 2.007Italy 1.987Spain 1.397Brazil 1.268Canada 1.229India 1.185

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RTMU N DELHI EXCHANGE RATE MECHANISM TREASURY MARKETING UNIT NEW DELHI