The study explores about the causes of fluctuations in the exchange rate determination of INR vs USD. It is based on several factors such as Technical and Fundamental analysis with these tools we can know when the rupee is appreciated/depreciated w.r.t dollar, economic position of a country and also supply/demand of domestic currency.

INTRODUCTIONEXCHANGE RATE:

THE PRICE OF ONE CURRENCY IN RELATION TO ANOTHER.

TYPES OF EXCHANGE RATES :

* FIXED EXCHANGE RATE

* FLOATING EXCHANGE RATE

CURRENCY PAIRS: THE BUYING AND SELLING OF THESE CURRENCIES “ BASE CURRENCY AND COUNTER CURRENCY”.

INR/USD = 0.02 ->SELLING RUPEE S TO BUY DOLLARS. i.e. 1RS = $: 0.023256

USD/INR = 43 -> SELLING DOLLAR TO BUY RUPEES. i.e. 1$ = RS: 43/-

SELL QUOTE/BID PRICE : THE PRICE AT WHICH YOU CAN SELL THE BASE CURRENCY.BUY QUOTE/OFFER PRICE : THE PRICE AT WHICH YOU CAN BUY THE BASE CURRENCY.

INDUSTRY PROFILETYPE : GLOBAL FOREX MARKET

ESTABLISHEMENT : BRETTON WOODS AGREEMENT IN JULY,1944 BY JOHN MAYNARD KEYNES & HARRY DEXTER (IMF)

STRUCTURE : DECENTRALIZED “INTERBANK” MARKET.

PARTICIPANTS : BANKS, CORPORATIONS AND INDIVIDUALS.

TARDING HOURS : 24 HOUR MARKET

MAJOR MARKETS : LONDON, NEW YORK, TOKYO –(50% OF DAILY TURNOVER)

TURNOVER : $1.9 TRILLION IN APRIL 2011.

MAJOR CURRENCIES : USD, EUR, JPY, GBP, CAD, AUD, NZD, CHF.

HIGHLIGHTS : INTERNATIONAL RESERVE CURRENCIES : USD & GBP ONLINE TRADING BEGAN IN 1990’s. 80% OF ALL FOREIGN EXCHANGE TRANSACTIONS IS USD

COMPANY PROFILE:

TYPE : STOCK BROKING COMPANY (INDIA INFOLINE)

ESTABLISHMENT : OCTOBER 1995 REVENUE : 149.79 (USD IN MILLIONS) IN 2011.

MARKET CAP : 2218.125 ( RS. IN MILLIONS)

HEAD QUARTERS : MUMBAI (MAHARASHTRA)

KEY EXECUTIVES : NIRMAL JAIN ( CHAIRPERSON) R. VENKATRAMAN ( M.D) SUNIL LOTKE ( COMPANY SECRETARY)

SERVICES : EQUITIES BROKING, WEALTH ADVISORY SERVICES AND PORTFOLIO MANAGEMENT SERVICES.

HIGHLIGHTS : IIFL HAS BEEN AWARDED THE “ BEST BROKER IN INDIA “ BY FINANCE ASIA..

A1+ RATING FROM ICRA FOR SHORT-TERM DEBT INSTRUMENT.

NEED FOR THE STUDY

TO UNDERSTAND THE GLOBAL ECONOMIC POSITION OF A COUNTRY. TO KNOW THE MARKET MOVEMENTS, IN ORDER TO HAVE INVESTMENT DECISIONS.

SCOPE

THE STUDY IS CONFINED TO UNDERSTAND THE MACRO ECONOMIC ENVIRONMENT,FOREX RESERVES, BANK RATES AND GOVERNMENT POLICIES AND THEIR SYSTEM.

RESEARCH METHODOLOGY

TYPE OF RESEARCH : DESCRIPTIVE RESEARCH

DATA COLLECTION : THE STUDY IS CONFINED TO SECONDARY SOURCES LIKE PUBLISHED DATA , BOOKS AND WEBSITES etc.,

SAMPLE SIZE : 06 VARIABLES ( RESERVES, REAL GDP, EXPORTS, IMPORTS,INFLATION AND UN-EMPLOYMENT)

DATA ANALYSIS TOOL : CORRELATION AND REGRESSION.

To understand the macro economic determinants of exchange rates.

To study the determination of exchange rate.

To study the impact of dollar fluctuations in the Indian Economy.

To study the reasons for appreciation and depreciation of rupee.

OBJECTIVES

LIMITATIONSThe study is confined to the period of 2004 to 2010.

The sample size is limited to yearly average data of exchange rate determinants.Everything should be considered at market movements and central bank rates.

Only major macro economic factors are going to be considered.

DATA ANALYSIS & INTERPRETATION1. TO UNDERSTAND THE MACRO ECONOMIC DETERMINENTS:

INTEREST RATES TRADE ACCOUNT BALANCE

CREDIT GROSS DOMESTIC PRODUCT

COMMODITY PRICES EMPLOYMENT DATA

INDUSTRIAL PRODUCTION RETAIL SALES

INFLATION POLITICAL SITUATION

FISCAL POLICY MONETARY POLICY

FINANCIAL MARKETS GEOPOLITICAL FACTORS AND WARS

2. THE EXCHANGE RATE IS DETERMINED:

INCOME + CONSUMPTION

CONSUMPTION + INCOME

INCOME + SAVINGSINCOME + TAX REVENUE

PUBLIC EXPENDITURE + INCOMEINVESTMENT + INCOME

INCOME + REAL INTEREST RATE

INCOME + IMPORTSEXPORTS + INCOMEINCOME + EMPLOYMENT

EMPLOYMENT = UN-EMPLOYMENT

UN-EMPLOYMENT -- WAGES

WAGES + PRICE LEVEL

PRICE LEVEL + REAL EXCHANGE RATE

REAL EXCHANGE RATE + IMPORTS

NOMINAL MONEY SUPPLY + REAL MONEY SUPPLY

NOMINAL MONEY SUPPLY + NOMINAL EXCHANGE RATE

NOMINAL EXCHANGE RATE + REAL EXCHANGE RATE

IMPORTS -- INCOME

PRICE LEVEL -- REAL MONEY SUPPLY

REAL MONEY SUPPLY -- REAL INTEREST RATE

REAL INTEREST RATE -- INVESTMENT

REAL EXCHANGE RATE -- EXPORTS

TABLE: YEARLY AVERAGE EXCHANGE RATES FOR THE PERIOD OF 2004-2010.

EXCHANGE RATE

45 43 45 41 43 48 45

PERIOD 2004 2005 2006 2007 2008 2009 2010

RESERVES 126 136 165 275 256 274 284

INFLATION 4.2 4.2 5.3 6.4 8.3 10.9 11.7

REAL GDP 8.10 9.20 9.70 9.90 6.40 6.80 10.40

GDP(PPP) 3319 3660 4156 2966 3297 3680 4060

EXPORTS 5200 7400 9000 10000 14000 11500 14500

IMPORTS 8000 10000 12000 14000 20000 16000 26000

POPULATION 106 108 109 112 114 116 117

UN-EMPLOYMENT

9.57 8.93 8.24 8.32 10.57 16.28 16.78

2005 2006 2007 2008 2009 2010

YEARLY AVERAGE EXCHANGE RATE OF INR VS USD FOR THE PERIOD OF 2004-2010

YEAR RUPEE/DOLLAR STRONGEST/

WEAKEST

2007 $: 41/- STRONGEST

2008 $: 43/- WEAKEST

2009 $: 48/- ALL TIME LOWEST

SINCE2004

2010 $:45/- BUILDING STRONG

THE WEAK & STRONG MOVEMENT OF RUPEE: DURING THE PERIOD OF 2004-2010

VALUE OF DOLLAR ($)

INDIAN EXPORTS VALUE

INDIAN IMPORTS VALUE

INCREASES INCREASES DECREASES

DECREASES DECREASES INCREASES

IMPACT OF DOLLAR FLUCTUATIONS ON THE INDIAN ECONOMY

SUPPLY DEMANDVALUE OF THE

DOMESTIC

CURRENCY

HIGH LOW DEPRECIATED

LOW HIGH APPRECIATED

APPRECIATION / DEPRECIATION OF THE RUPPEE:

People are entering into market with out fundamental knowledge about currency market and macro economic determinants, it doesn’t provide good source of investment decisions. The exchange rate is determined based on the following factors they are:-central bank rates, foreign exchange reserves, GDP growth rate, release of economic data (inflation , un-employment, population etc.) , strength of economy-( FIIs , FDIs ,Trade balance, exports and imports etc.), Natural calamities, News and Innovations etc.

During the period of financial crisis (2007- 2009):It shows the less volatility in the period of 2007 to 2008. It’s to be RECESSION in 2008. Here: The INR value is strong when compared to USD.It shows the high volatility in the period of 2008 to 2009. It’s to be DEPRESSION in 2009. Here: The INR value is weak when compared to USD.

Exchange rate fluctuations has a significant impact on the overall economy of a country.If value of $ (dollar) increases: - Indian Exports value Increases and Indian Imports

value is going to be Decreases and vice-versa.

Appreciation/Depreciation of the domestic currency depends on the supply of foreign exchange reserves, liquidity conditions in the economy as determined by money supply and central bank’s policy intentions.

When base currency is appreciating/depreciating it means that our currency is strengthen/weaken and its value is increases/decreases w.r.t dollar.

FINDINGS

As an investor, one must know how exchange rate movement affects the economy.

i.e. * In short run: Technical Analysis- Current market positions (buyers and sellers proportion), and update news (downfall and innovations). * In long run: Fundamental Analysis-Here based on concepts with past and present position should be analyzed and need to forecast the future position (good/bad to invest).

Central Bank and Government plays a key role in order to determine the exchange rate, so they need to develop effective administrative system, monetary and fiscal polices.Strong Government, strong currency, strong Rupee makes economy-country stronger

Balanced exchange rate should be maintained by the government; especially in India because is developing country it has equal importance with exports and imports.

Abnormal movement in the exchange rate - Rupee vs. Dollar –disturbs growth.Weak Rupee benefits exporters, and strong Rupee helps ImportersA one per cent rise in the rupee against the dollar will have a 75-80 basis points impact on the operating margins for IT companies (India is mostly depending up on IT service)

To manage floating exchange rate system, the government should purchases the home currency/foreign currency in order to maintain the supply/demand in the economy.

Forex trading should be used to speculation for profit or to hedge against currency fluctuations and it should be protected from frauds.

SUGGESTIONS

D is for Direction(What is the market direction?)

E is for Entry(What are your entry options?)

C is for Chart(Chart the support and resistance)

I is for Investigate(Investigate the market environment. Research the hot zones, market correlations, confirmation indicators.)

D is for Deal(Deal with price action. Let price dictate your trade, in forex quotes are called “dealing rates”.)

E is for Exit(Plan your exits.)

DECIDE

From the above study we conclude that the exchange rate is determined based on the market movements, central bank rates, government regulations and supply/demand available in a country. The appreciation/depreciation of domestic currency is completely based on the strength of the economy and also various factors such as natural calamities, economic, political etc, which are un-controllable.

CONCLUSION