Forex and Foreign Trade

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FOREX AND FOREIGN

TRADE

Nitin Singh 06

Bhushan Narsinghani -11


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AgendaWhy Foreign Trade?

Role of Institutions

The journey so farThe Road Ahead

Impact of Global Slowdown on Exports

Principle Commodities

Direction of Trade

Forex Reserves What, Why & How Much?

FEMACAC


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Role of InstitutionsInstitutions dedicated for promoting foreign trade have

played an important role towards enhancing the process of

internationalization of Indian companiesExport-Import Bank of India a.k.a Exim bank

Export Credit Guarantee Corporation a.k.a ECGC

Indian Institute of Foreign Trade a.k.a IIFT


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The journey so far2003 2008-09

Exports US $ 63 billion US $ 168 billion

Global Merchandise

Trade

0.83% 1.45%

Global CommercialServices Export

1.4% 2.8%

Total Share in Goods andServices Trade

0.92% 1.64%

14 million jobs created as a result of augmented exports


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The Road AheadTarget annual export growth rate of 15% with annual target of

US$ 200 billion by March 2011

Export growth path of 25% per annum by 2014.Double export of goods and services by 2014

Market Diversification

26 new countries included under MFS

Africa, Latin America, Oceania, CIS countries

Incentives under MFS increased from 2.5% to 3%Market Linked Focus Product Scheme (MLFPS) expanded by inclusion of

products like pharmaceuticals, textile fabrics, rubber products, glass , etc.


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Trade Balance

Year Exports Growth

Rate (%)

Imports Growth

Rate (%)

Balance of

Trade

2003-2004 293367 15.0 359108 20.8 -65741

2004-2005 375340 27.9 501065 39.5 -125725

2005-2006 456418 21.6 660409 31.8 -203991

2006-2007 571779 25.3 840506 27.3 -268727

2007-2008 655864 14.7 1012312 20.4 -3564482008-2009(P) 766935 16.9 1305503 29.0 -538568

(Values in Rs.Crore)

Exports, Imports and Balance ofTrade


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Impact of Global Slow-down on Exports

Default in payment or delayed realization for exports

Difficulty in executing orders in hand

Difficulty in providing covers for high risk countries/ buyers byExport Credit Guarantee Corporation (ECGC)

Reluctance of exporters to execute orders for fear of defaults

Tougher due diligence by Banks in extending Pre and Post-

shipment credit and insurance cover by ECGC


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24%

16%

14%

11%

11%

24%

Share of Top Five Commodity Groups inIndia's Exports : 2008-09

ENGINEERING GOODS

PETROLEUM PRODUCTS

CHEMICALS & RELATED

PRODUCTSGEMS & JEWELLERY

TEXTILES

OTHER COMMODITIES

Principle Commodities - Exports


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Principle Commodities - Imports


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Direction of Trade - Exports


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Direction of Trade - Imports

11%

7%

7%

6%

4%65%

Major Source of India's Imports : 2008 -09

CHINA

SAUDI ARABIA

UAE

USA

IRAN

REST OF THE WORLD


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What are Forex Reserves?IMF Definition

External assets that are readily available for :

Direct financing of external payments imbalances

Indirectly regulating imbalances through intervention in exchange rates

Forex Reserves refer to :

Foreign reserves in the form of gold assets

Foreign securities held by the issue department

Domestic reserves in the form of bank reserves


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Forex HistoryStandard trading unit - Gold standard

123.27 grains of gold = British pound ( )

1879 US replaced with Gold Standard

1944 $ , new exchange unit (Bretton Woods Aggrement)

Bretton Woods Accord established World Bank & IMF

The Smithsonian agreement (1971) Floating ex rate

1994 - Online Forex Trading was introduced

2002 introduction of Euro
http://en.wikipedia.org/wiki/Pound_signhttp://en.wikipedia.org/wiki/Pound_signhttp://en.wikipedia.org/wiki/Pound_signhttp://en.wikipedia.org/wiki/Pound_sign


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Why hold Forex Reserves?Technically we can consider 3 motives :-

Transaction

Speculation

Precautionary

Forex reserves are instruments to maintain or manage the

exchange rate

Formal Objective from RBI Act :-

to use the currency system to the countrys advantage and with a view tosecuring monetary stability


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How Much Forex Reserve to Hold?Suggested rules for the adequacy of the reserves :-

The level of reserve :12 months import equivalents

The External Debt : At least equal to external debtLiquidity at Risk : Calculate financial variables like

exchange rate, credit etc.

The Guidotti rule : Reserves > amortization amount.


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Factors Affecting Forex RatesFundamental Factors

Ex: balance of payment surplus favorable exchange rate

Political and Psychological factors

Ex: US Dollar is considered to be a safer haven currency

Technical Factors

Capital Movement

Exchange rate policy and intervention

Others


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Foreign Exchange Management ActEnforced on 1st of June, 2000

FEMA replaced FERA(1973)

ObjectivesPenalties


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Capital Account ConvertibilityIn India, Foreign exchange transactions in foreign currencies are

broadly classified into two accounts :-

Current Account Transactions Capital Account Transactions

Components Transactions which gives rise or spendsnational income.Merchandise /Invisible export & Imports .

Short Term Capital transactionsLong Term Capital transactions

ExamplesImport of refrigerator

Export Of SoftwareExport of steel

Sending money to a child studying in UnitedStates .

Capital Inflows :Indian company taking loan from USbank .Foreign investment in India (FDI)Capital Outflows:Indian Companies buying assets abroad.Ex- Tata for Corus Steel


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ConvertibilityConvertibility Aspect ofCurrent Account

India has Current Account convertibility which means that we are free tobuy foreign exchange for importing goods, in other words rupee is fullyconvertible on current account .

Convertibility Aspect of

Capital Account

Today the rupee is not fully convertible on capital account as there exists

restriction on the money that comes in India or that goes out to buy assetsabroad .

CAC is desirable due to following reasons :-Reduction in Cost of Capital.

Diversify Portfolios Internationally.

Induces Competition against Indian Finance

Reduce size of black economy


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Forex and Foreign Trade

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