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When an exchange rate

is quoted for a currency pair, the currencies are usually quoted in order of their importance,
which is as follows:

r? ±uro (±


r? rreat Britain pound (rBP

r? ‰ustralian dollar (‰ 
r? nited States dollar ( S 
r? ther currencies

In case the conversion is from a rreat Britain pound to an ‰ustralian dollar, the rreat Britain
pound would be placed on the left. It will be the base currency.

In certain markets in the nited Kingdom and ±urope, the order is determined differently.
The position of the rreat Britain pound and ±uro is switched. The pound is treated as the
base currency and the ±uro is considered as the term currency.

If the currency pair does not comprise any of the currencies listed above, the Forex market

considers that currency as the base, whose exchange rate is more than 1.000.

In other countries like Japan, they use the home currency as the base. This method of quoting
exchange rates is called direct quotation or price quotation.


 


 : This is the exchange rate that is currently applicable.

: This is an exchange rate that is currently quoted and used for trading.
  

 

 

This currency exchange rate is determined by a government agency or the central bank. This
official exchange rate is regularly monitored by the bank and maintained by using the
country¶s own foreign exchange
reserves.

  

In this flexible exchange rate regime, the private market determines a currency¶s value.
However, the value fluctuates according to the demand/supply trends in the foreign exchange
rate market.


 !
The exchange rate history of the nineteenth century highlights the importance of the gold
standard in that era. From 1876 to 1913, the exchange rate system was dependent on the
respective currency¶s comparative convertibility to an ounce of gold. However, this method
of determination of the exchange rate had to be reassessed when the gold standard was
suspended during World War I.


 !"#"$%"#$$
The suspension of the gold standard in 1914 was followed by a collapse of the exchange rate
market. In the early 1920s, some countries tried to revive the gold standard to get the old
exchange system back into practice. However, the rreat Depression hit the nited States in
1929. The devastating effects of this were felt by most of the developed world. ‰s a result, all
plans on the revision of the gold standard were abandoned.

Close to the end of World War II, the Bretton Woods ‰greement was signed. Since the
impact of the rreat Depression was still fresh in the minds of the policymakers, they wanted
to shun all possibilities of a similar fiasco. The Bretton Woods ‰greement founded a system
of fixed exchange rates in which the currencies of all countries were pegged to the S dollar,
which in turn was based on the gold standard.


 !"#$$%"#&"

The Bretton Woods ‰greement was in effect till 1971. By 1970, the existing exchange rate
system was already under threat. The Nixon-led S government suspended the convertibility
of the national currency into gold. The supply of the S dollar had exceeded its demand. In
1971, the Smithsonian ‰greement was signed. For the first time in exchange rate history, the
market forces of supply and demand began to determine the exchange rate.


 !
  

The Smithsonian ‰greement did not last very long. By 1973, the extensively traded
currencies were permitted to fluctuate. In a floating currency system, a currency¶s value is
allowed to vary in keeping with the conditions of the foreign exchange market.

The advantage of a floating exchange rate system is that it is self attuned. ‰ floating currency
system allows greater liquidity and central bank control, but can be subject to attacks by
speculators, or sudden panic-driven moves by investors that lead to currency crises and
recessions.



 


±CH‰Nr± rate forecasts are drawn up through the computation of a currency¶s value vis-
à-vis other currencies over a period of time. While there are various theories that can be used
to predict exchange rates, all of them have limitations. No model has been able to establish a
monopoly in the forecasting process.


 
'
 

The two most commonly used methods for forecasting exchange rates are:

r? Fundamental ‰pproach: It forecasts exchange rates after considering the factors that
give rise to long term cycles. ±lementary data related to a country, such as rDP,
inflation rates

, productivity indices, balance of trade and unemployment rate, are taken into account.
This approach is based on the premise that the µtrue worth¶ of a currency will
eventually be realized. Hence, this approach is suitable for long term investments.

r? Technical ‰pproach: This approach is based on the premise that it is investor

sentiment that determines changes in the exchange rate and makes predictions by
charting out patterns. ther tools used in this approach are positioning surveys,
moving-average trend-following trading rules and F dealer customer-flow data.
Fund managers use these patterns to take informed decisions for short term
investments.


 
( 
Some important exchange rate forecast models are:

Purchasing Power Parity (PPP Model: This method involves studying exchange rate
movements

based on the price level changes in each country.

ncovered Interest
ate Parity ( IP Model: This model forecasts exchange rate movements
in accordance with returns from investment in the two curencies. The IP creates an
arbitrage mechanism that sets an exchange rate which equalizes returns from domestic and
foreign assets.

andom Walk Model: This approach assumes that all available information on exchange rate
movements in the future is reflected in the current exchange rate. ‰lso, any future event
leading to a change in exchange rates is purely random from today¶s perspective. Thus, the
best possible forecast of a currency¶s value is its value today. This is the simplest approach
for exchange rate forecasting.
‰ 1983 study by Meese and
ogoff depicted the superiority of the
andom-Walk Model.
However, exchange rate forecast models such as the PPP and IP have also given successful
predictions over longer timeframes. ±xchange rate forecasts works best if there is a combined
effort using these models.

 
 
The fixed exchange rate is also known as the pegged exchange rate

. This usage is not that common though. This may be described as a kind of exchange rate
regime. In this exchange rate regime the value of a particular currency is attached to the value
of another currency or a group of currencies. In certain cases the value may also be pegged to
gold. The value of the particular currency that has been pegged to another one depends on the
performance of the same, which is also known as the reference value.

ne of the major implications of the fixed exchange rate is that it does not let a government
create and adhere to a particular financial policy that is free from external influences and is
necessary for achieving domestic economic stability. There are certain conditions whereby
the fixed exchange rates are preferred for the fact that they are highly stable.

±xamples of this were seen during the financial crisis in ‰sia during the year 1997, when the
Chinese renminbi and the Malaysian
inggit were able to come out of critical financial
crises. The Chinese renminbi fixed its rate and the Malaysian
inggit pegged itself to the S
dollar, which helped revive its economic fortunes. There is a further evidence of the stability
offered by the Bretton Woods System that allowed the Western ±uropean economies to retain
a certain degree of economic stability by pegging themselves to the nited States dollar

. Countries, which adopt the fixed exchange rate regime, need to be careful with the entire
exercise. They have to make sure that they adhere to the various imperatives of such policies.
They also need to have a fair degree of confidence on the capital markets. therwise there are
chances that the entire exercise may be a complete failure. Very common examples are
‰rgentina and China.

When a government tries to institute a fixed exchange rate regime there are certain steps it
has to take. Most of the times, the governments either sell or purchase their currencies in the
open financial markets. ne of the main reasons behind a government maintaining foreign
currency reserves is to facilitate the entire process. In case the exchange rate goes down well
below the expected rate, the government purchases the domestic currency using its reserves.
This leads to an increase in the price of the currency as there is an increase in the demand for
the currency in the financial markets

. In case the rate of exchange exceeds the expected level then the government sells its foreign
reserves ‰t times the governments also make it unlawful to sell the domestic currency in
another rate, because this has had several disastrous consequences like black marketing for
example. However, some countries have been able to pull these measures off with certain
degrees of success by way of retaining complete control over the currency conversions. ‰
classic example of this is China in 1990s when they were able to able to hold their own
against the S dollar by retaining governmental control over the currency conversion rates of
the Yuan
enminbi..
  
 %  ) 
 
‰ floating exchange rate is a type of an exchange rate regime
. It is also called the flexible exchange rate. In case of a floating exchange rate, the value of a
currency keeps on fluctuating in accordance with the movements of the foreign exchange
market.

The floating exchange rate is the opposite of the fixed exchange rate. Certain economic
experts are of the opinion that a floating exchange rate is more preferable than a fixed
exchange rate. This is because they are adept at absorbing the aftereffects of critical financial
crises.

Canada is perhaps the one country, where the value of the national currency is determined by
the movements of the foreign exchange market. If there is a situation where the economic
balance is found to be disturbed, the central bank of the particular country comes in to
salvage the situation and the floating rate is somehow kept operational. Such cases are also
called managed floats.

In such cases the bank fixes a ³floor´ and a ³ceiling´, i.e., a lower and an upper limit between
which the exchange rate keeps on moving. They either buy or sell significant amounts of
foreign exchange reserves in order to provide a certain amount of support to the domestic
currencies. However, the chances of such occurrences are very low.
Floating exchange rate is also known to be self correcting. This is because it has been seen
that if there is any imbalance between the demand and supply, the floating exchange rate will
adjust itself with the market conditions. There are certain negative aspects of the floating
exchange rates. It has been observed that the floating exchange rates increase the levels of
volatility in the foreign exchange scenario. Such issues have an adverse impact on the
economic state of countries and this is especially applicable for those countries that have
emerging economies.

Most often it has been observed that these emerging countries have certain typical conditions
± they have substantial amounts of debt dollarization, the impact of the balance sheet is pretty
strong and the state of the economy is pretty unstable, to say the least. It has been observed
that if the liabilities of a country are denominated in a foreign currency and the properties are
in domestic currency, any unaccounted degradation in the value of the domestic currency is
expected to result in severe financial crisis that is enough to destabilize the economy.

This is precisely the reason as to why a big number of the emerging economies find it very
difficult to exercise floating rates. They also have shorter basic exchange rates and still
experience more problems with the rates of interest and the movements of the financial
reserves. ‰ll this compounds the problem for these smaller countries with emerging
economies.

 %    
 


The concept of exchange rate regime may be explained as the method that is employed by the
governments in order to administer their respective currencies in the context of the other
major currencies of the world. The foreign exchange market is pretty important in this case as
well.

±xchange rate regime has often been likened to monetary policies and it may be concluded
that both the processes are actually dependent on a lot of similar factors.

There are some basic exchange rate regimes that are used nowadays ± the floating exchange
rate, the pegged float exchange rate and the fixed or pegged exchange rate. In case of the
floating exchange rate regime, the values of the currencies are influenced by the movements
in the financial market.

The floating rates are extensively used in most countries of the world. Some common
examples of the floating exchange rates would be the British pound, nited States dollar,
Japanese Yen and ±uro.

The floating exchange rate regime is also known as a dirty float or a managed float. This is
because the governments always step in to address any excesses in the changes of value.

There are three types of pegged floats ± the crawling bands, pegging with horizontal bands
and crawling bands. In case of the crawling bands the rate is permitted to fluctuate within a
particular band or limit and the movements are based on a particular central value. This
central value is adjusted at definite periods. The entire exercise is performed in a controlled
manner. In case of the crawling pegs the rates of exchange stay fixed. In case the rates are
pegged with horizontal bands the rate would be allowed to move within a specified limit or
band, which is 1% more than the band.

In case of the fixed exchange rate regimes or the pegged exchange rate, as it is also known,
the rates are meant to be converting directly to some other currency. ‰t times, in case of the
pegged exchange rate, the currency may be attached to a group of currencies or even precious
metals like gold.




   
This paper focuses on the different theories used in the determination of exchange rates.

*
 **+***,'


The PPP ‰pproach is based on the law of one price. ‰ccording to this law, goods that are
identical in nature should be sold at the same price. The implication of this law is that the
exchange rates should change in response to the price differentials that exist between
countries.


 -
Pt = Pt*/et
Where Pt is the domestic price for time period t
Pt* is the foreign price for time period t
et is the exchange rate for time period t

The main problem with the Purchasing Parity ‰pproach in the determination of ±xchange
rates s that it does not hold true in the short or the medium term. But this is very much
applicable in the long run.

 
* '


This approach determines the exchange rate at which both the internal and the external
economy are in equilibrium. Internal equilibrium in the economy reflects a state of full
employment whereas external equilibrium implies equilibrium in the balance of payment.

The lacuna of this theory is that it is difficult to determine an exchange rate in the short run
that is consistent with the natural rate of unemployment or equilibrium in the balance of
payments. The magnitude o this problem gets reduced in the long run.

Monetary and Portfolio

'
   
 

This approach is based on the assumption that economic agents can chose from a portfolio of
domestic and foreign assets. The assets that can be in the form of money or bonds have an
expected return. The arbitrage opportunity that is attached with this return determines the
exchange rate.

The monetary or the portfolio approach also faces problem in its applicability in the short run.

  .
‰n exchange rate converter is a great tool to acquire the most recent value of various
currencies in the most convenient way. ‰ forex converter is a calculator that converts the
value of a currency in terms of another currency. It stores the latest data of the world¶s
currencies, which helps in making the exchange rate conversion according to the most recent
exchange rate. There are a number of ways to determine the exchange rate.

!/ 
  .

The most convenient ways of getting an exchange rate converter are:

nline ±xchange
ate Converter: There are several investment and finance related
websites offering free foreign exchange converters to convert between more than 200
currencies. These are easy to understand, fast and simple to use.

Widgets: You can embed a currency converter widget in your blog or download it to your
computer. You could also download a currency converter widget to your cell phone.


  .0() .


There are a number of features offered by exchange rate converter widgets for your cell
phone. These include:
r? Widgets may support conversions between more than 200 world currencies, legacy
±uropean currencies, unrecognized currencies and even virtual currencies.
r? ±xchange rates
are updated automatically.
r? Widgets may allow inverse conversion, simple math conversions and desired decimal
precision.
r? Some widgets support several languages, including ±nglish, rerman, French,
Spanish, Chinese, Japanese and
ussian.
While most exchange rate converter widgets are free, there are some widget applications that
are sold by forex professionals.The price may vary depending upon the functionality of the
application.
! 
 
  .

Here are some features that one can look out for in order to select an appropriate exchange
rate converter:

1. Should support the ÷

÷ that you expect to trade in.

2. Should continuously update exchange rate data to reflect the latest currency values.
3. Should be simple to use.
4. Should display the result in four decimal places for more accuracy.
Ë
  
 





The monetary approach happens to be one of the oldest approaches to determine the
exchange rate. It is also use as a yardstick to compare the other approaches to determine
exchange rate. The monetary model assumes a simple demand for money curve. The
p
÷?pow
parity or the law of one price holds true. The monetary model also
assumes a vertical aggregate supply curve. ‰ vertical aggregate supply curve does not imply
constancy in the output but a flexible price.

 )  1

‰ccording to the absolute purchasing power parity the exchange rate is obtained by dividing
the price level of the home country with that of the foreign country.i.e. *2*3- P stands for
the domestic price level and P* the foreign price level. e is the exchange rate.

  
4 . )

(25*Where k is constant and y is the real income level

In equilibrium,

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‰t this point external equilibrium is obtained in the economy. It is also clear fro the above
equation that an increase in the money supply within an economy would lead to appreciation
of the domestic ÷

÷ . Conversely, international price level a well as the output level
related inversely with the exchange rate.

Let us consider a situation where keeping all parameters fixed money supply rises in the
domestic ÷oom . Since prices are kept constant, excess money supply injects higher
demand for goods and services within the economy. In the face of a fixed output, prices are
pushed up. This will be accompanied by depreciation in the nominal exchange rate.

In the above discussion we have explained the determination of 

÷?
 under a
flexible regime. In a fixed regime the economy takes a somewhat different course.

Let us say that the foreign price level has increased, ceteres paribus. There is also excess
demand for goods that are produced in the home market. This in turn causes a balance of
payment surplus. !o
?
÷ reserves will rise along with an increase in the money
supply. The rise in the supply of money would lead to a rise in the domestic price level and
competitiveness in the economy will be as before.


 
 

The forex market (or „o
?

÷?m
??

is the world¶s largest market. Here, currencies worth almost S 3 trillion arebought and sold
on a daily basis. Moreover, the market is characterized by high liquidity, with traders being
able to open and close positions within seconds. These factors cause regular fluctuations in
currency prices, making it difficult for an individual to keep track of exchange rates. Hence,
the need for an 

 


 . ‰ forex calculator is a type of financial calculator that offers a quick and easy
way to convert any currency to another.

 
 
 

There are various types of foreign exchange calculators that help businesses, travelers and
traders get current information in a convenient way. These include:

Shortlist p

÷ ?p÷ o
: While there are close to 200 currencies being traded in the
forex market, most traders deal in only a handful of them. ver 85% of all daily transactions
in the forex market involve trading in the major currencies - S Dollar, British Pound, ±uro,
Swiss Franc, p?, Canadian Dollar and ‰ustralian Dollar. ‰ large number of
currencies are not commonly used in international trade. ‰ shortlist currency calculator is a
forex calculator that supports only the most common ÷

÷. These calculators are
updated frequently and provide fairly accurate conversions.

Longform Currency Calculators: These calculators support a variety of currencies, including

the lesser known currencies. Longformcurrency calculators typically provide conversions
between 50 currencies. These calculators are more cumbersome to use and are costlier than
the shortlist currency calculators.

p

÷ ?po

 with History: These calculators not only provide numeric conversions
between currencies, but also historical data on various currencies. ‰ currency converter with
history allows you to access the exchange rate between ÷

÷ on a particular date in the
past. While some currency converters with history are updated on a daily basis, others
areupdated automatically several times a day.

Cross
ate Calculators: Such calculators enable users to view a large variety of exchange
rates at once. ‰ cross ratecalculator lets you set a base amount for comparisons and displays a
matrix of exchange rates and conversions. Such calculatorsprovide a more comprehensive
picture of the „o

?m


-
 

The )

 for trading in the „o

?m
 is determined by technical analysis.
Technical analysis is the process of measuring the value of a currency by monitoring
historical price and volume trends. It also helps to establish the future price movements of
various ÷

÷ and financial instruments.

!)

 6

The best currency can be identified by determining the best entry and exit points, for which
the following charting methods may be considered:

r Pivot Point: This is a technical indicator to predict a fluctuation in the resistance or support
levels of a currency. It is calculated by taking the average of a currency¶s daily high, low and
÷o?p
÷.

r Candlesticks: This is a tool of technical analysis, which combines a bar-chart and a line-
chart. The bars represent the price movement range over a particular time interval.

r? r Parabolic Stop and
eversal (S‰
: It consists of bars of different lengths that have
an upward trend. The bars represent ÷oom÷?÷o
, whereas the dots guide
investors to decide the right course of action such as whether to buy or sell. Dots
above the bar indicates price rise. It also offers the best 
÷?
 to sell the
currency and vice versa.
Bollinger Bands: Presented with a line graph, the chart shows
three lines, where the line in the middle represents µmoving averages.¶ The Bollinger
bands indicate the best exchange rates to buy.

!/
 

‰n o

finds the best exchange rates as follows:

r? Plan with care before investing in forex and by setting up potential entry and exit
points.

r? Base the entry and exits strategies on support and resistance levels of the currency in
„o

.

r? Penetrate the market when minor corrections occur in a currency¶s trend. These
corrections or µretracements¶ may be in the form of a pullback in an uptrend or vice
versa.
 r? Set a µstop-loss¶ on the m to help conservative investors set tighter stops to
shield against losses.

r? Determine all possible investment outcomes and formulate counter plans to tackle
them.
By identifying patterns in currency fluctuations, it is possible to determine the best exchange
rates, plan the m?
 systematically and yield maximum profit.

c  
 

 are used in a number of countries including India and Pakistan. The Indian currency
is issued by the
eserve Bank of India (
BI. The Indian rupee exchange rate is measured
against six currency trade weighted ÷. These currencies belong to countries that have a
strong trade relationship with India.

The exchange rate of the Indian rupee (or IN
 is determined by market conditions.
However, in order to maintain effectiveexchange rates, the
BI actively trades in the
SD/IN
currency market. The rupee currency is not pegged to any particular „o
?
÷

÷

at a specific exchange rate. The
BI intervenes in the currency markets to maintain low
volatility in exchange rates and remove excess liquidity from the economy.

!

Historically, the Indian
p

was a silver-based currency, while the major economies of the world were following the gold
standard. The value of the rupee was severely impacted when large quantities of silver was
discovered in the S and ±urope. ‰fter independence, India started following a pegged

÷?
 system. The country was forced to go through several rounds of devaluation
from the 1960s to the early 1990s due to war and balance of payments problems. The rupee
was made convertible on the current ÷÷o  in 1993. The Indian currency is set to be made
fully convertible in phases over the five years ending 2010 -2011.

In June 2008, the rupee appreciated to a ten-year high of S 39.29. The stability of the
Indian economy attracted substantial foreign direct investment, while high interest rates in the
country led to companies borrowing funds from abroad.

The global financial crisis exerted pressure on ÷
?o?p
÷, which gradually plummeted
to below 50 a barrel. Due to this, dollar inflow declined, with oil companies and investors
purchasing more and more dollars. Persistent outflow of foreign funds increased the pressure
on the rupee, causing it to decline. n March 5, 2009, the Indian ÷

÷ depreciated to a
record low of S 52.06. The S dollar's gains against other major currencies also weighed
on the rupee.

‰t March end, the rupee stood at:

I SD = 50.6402 IN

1 ±uro = 67.392 IN

1 Pound Sterling = 72.4022 IN

100 p? = 51.3776 IN

Ë

 
 

The value of the rupee depends on PPP (or purchasing power parity, which reflects the
quality of life that can be maintained at a particular standard level of income. ‰nother major
factor influencing the value of the rupee is the o÷?m
. ‰n overvalued index results in
the overvaluation of the rupee.
 




 

The exchange rate trend between the rupee and the S dollar over the five years to 2009 (as
on January 1:
1 S =
2005: 43.27 IN

2006: 44.95 IN

2007: 44.11 IN

2008: 39.41 IN

2009: 48.58 IN

2010: 45.34IN




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PINTS-

1
 (exports/imports

2 c  - increasing the interest rate causes 'hot' money to flow into the economy,
therefore the demand the domestic currency increases, therefore the currency appreciates.

3 c   - relative inflation rates affects the economy's international competitiveness , so

if the economy is experiencing higher inflation rate than its trading partners to such a
situation that it is less competitive than they are, than there shall be less demand for the
domestic currency as foreign markets will demand less goods and services from you, hence
the demand for the domestic currency shall drop.

4 
  - simply a believe in the path the currency, shall cause speculators to adjust
their trades in light of this believe. e.g. if currency speculators believe that an economy is
overheating and soon there shall be a devaluation, then they will get out of the currency
causing there to be bre more supply than demand on the forex for that currency, hence it
depreciates.


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‰s we know that Forex market for Indian currency is highly volatile where one cannot
forecast exchange rate easily, there is a mechanism which works behind the determination of
exchange rate. ne of the most important factors, which affect exchange rate, is demand and
supply of domestic and foreign currency. There are some other factors also, which are having
major impact on the exchange rate determination. ‰fter studying research reports on
relationship between
upee and Dollar of last four years we identified some factors, which
have been segregated under four heads. These are:

1.? Market Situations.

2.? ±conomic Factors.
3.? Political Factors.
4.? Special Factors.

"1(5 

India follows the ³floating rate system´ for determining exchange rate. In this system ³market
situation´ also is pivot for determining exchange rate. ‰s we know that 90% of the Forex
market is between the inter-bank transactions. So how the banks are taking the decision for
settling out their different exposure in the domestic or foreign currency that is impacting to
the exchange rate. ‰part from the banks, transactions of exporters and importers are having
impact on this market. So in the day-to-day Forex market, on the basis of the bank and
trader¶s transactions the demand and supply of the currencies increase or decrease and that is
deciding the exchange rate. n the basis of this study we found out the different types of the
decisions, which is affecting to market. These are as follows:

r? In India, there are big Public Sectors nits (PS s like NrC, r‰IL, IC etc. all the
foreign related transactions of these PS s are settled through the State Bank of India.
±.g. India is importing Petroleum from the other countries so payment is made
through State Bank of India in the foreign currency. When State Bank of India (SBI
sells and buys the foreign currency then there will be noticeable movement in the
rupee. If the SBI is going for purchasing the Dollar then
upee will be depreciated
against Dollar and vice versa.
r? Foreign Institutional Investor¶s (FIIs inflow and outflow of the currency is having the
major impact on the currency. ±.g. .S. based company is investing their money
through the Stock markets BS± or NS± so her inflows of the Dollars is increasing and
when it is selling out their investments through these Stock markets then outflows of
the Dollars are increasing. However if the FIIs inflowing the capital in the country
then there will be the supply of the foreign currency increases and Demand for the

upee will increases and that will resulted appreciation in the rupee and vice versa.
r? Importer and ±xporter¶s trading is also affecting to the rupee. Like if an Indian
exported material to .S. so he will get his payments in Dollars and that will increase
the supply of Dollars and increase of demand of rupee and that will appreciate the
rupee and vice versa.
r? Banks can be confronted different positions like oversold or over bought position in
the foreign currency. So bank will try to eradicate these positions by selling or
purchasing the foreign currency. So this will be increased or decreased demand and
 supply of the currency. ‰nd that will cause to appreciation or depreciation in the
currency.
r? ‰s we know that in India there is a floating rate system. In India Central Bank (
BI
is always intervene in the trade for smoothen the market. ‰nd this
BI can achieve by
selling foreign exchange and buying domestic currency. Thus, demand for domestic
currency which, coupled with supply of foreign exchange, will maintain the price
foreign currency at the desired level. Interventions can be defined as buying or selling
of foreign currency by the central bank of a country with a view to maintaining the
price of a given currency against another currency. S Dollar is the currency of
intervention in India.

1
 



In the Forex Market ±conomic factors of the country is playing the pivot role. ±very country
is depending on its prospect economy. If there will be change in any economy factors, which
will directly or indirectly affected to Forex market. Here there are two types of economic
factors. These are as follows:

1.? Internal Factors.

2.? ±xternal Factors.

Internal Factors includes:

r? Industrial Deficit of the country.

r? Fiscal Deficit of the country.
r? rDP and rNP of the country.
r? Foreign ±xchange
eserves.
r? Inflation
ate of the Country.
r? ‰gricultural growth and production.
r? Different types of policies like ±IM Policy, Credit Policy of the country as well
reforms undertaken in the yearly Budget.
r? Infrastructure of the Country

±xternal Factors includes:

r? ±xport trade and Import trade with the foreign country.

r? Loan sanction by World Bank and IMF
r?
elationship with the foreign country.
r? Internationally IL Price and rold Price.
r? Foreign Direct Investment, Portfolio Investment by the country.

V1* 
 


In India election held every five years mean thereby one party has rule for the five years. But
from the 1996 India was facing political instability and this type of political instability has
created hefty problem in the different market especially in Forex market, which is highly
volatile. In fact in the year 1999 due to political uncertainty in the BJP rovernment the rupee
has depreciated by 30 paise in the month of ‰pril. So we can say that political can become
important factor to determine foreign exchange in India.
Due to political instability there can be possibility of de possibility delaying implementation
of all policies and sanction of budget. So that will create also major impact on trade.

$1
 


r? Till now we have seen the general factors, which will affect the Forex market in daily
business. ‰nd on that factors the different players in the market have taken the
decision. But some times some event happened in such a way that it will really change
the whole scenario of the market so we can called that event special factors. However
traders have to really consider those things and take the decisions. We will see these
types of factors in detailed:
r? In the year 1998, when rovernment of India has done ³Pokhran Nuclear Test´ at that
time rupee has been depreciated around 85 paise in day and 125 paise in seven days.
Her main fear was that .S., ‰ustralia and other countries have stop to sanctions the
loans So this type of event will have major impact on the market. ‰nd due to this the
decision procedure of the trader also varies.
r? In the year 2000,India has faced Kargil war, which is also affected to the market. By
this war the defense expenditures are raised and due to that there will be increase in
the fiscal deficit. ‰nd become obstacle in the growth of the economy. So this type of
event has impact on the Forex market.


('8!c 9!' /'
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‰side from factors such as interest rates and inflation, the exchange rate is one of the most
important determinants of a country's relative level of economic health. ±xchange rates play a
vital role in a country's level of trade, which is critical to most every free market economy in
the world. For this reason, exchange rates are among the most watched, analyzed and
governmentally manipulated economic measures. But exchange rates matter on a smaller
scale as well: they impact the real return of an investor's portfolio. Here we look at some of
the major forces behind exchange rate movements.

..
Before we look at these forces, we should sketch out how exchange rate movements affect a
nation's trading relationships with other nations. ‰ higher currency makes a country's exports
more expensive and imports cheaper in foreign markets; a lower currency makes a country's
exports cheaper and its imports more expensive in foreign markets. ‰ higher exchange rate
can be expected to lower the country's balance of trade, while a lower exchange rate would
increase it.


  
 
Numerous factors determine exchange rates, and all are related to the trading relationship
between two countries.
emember, exchange rates are relative, and are expressed as a
comparison of the currencies of two countries. The following are some of the principal
determinants of the exchange rate between two countries. Note that these factors are in no
particular order; like many aspects of economics, the relative importance of these factors is
subject to much debate.

"1   c   

‰s a general rule, a country with a consistently lower inflation rate exhibits a rising currency
value, as its purchasing power increases relative to other currencies. During the last half of
the twentieth century, the countries with low inflation included Japan, rermany and
Switzerland, while the .S. and Canada achieved low inflation only later. Those countries
with higher inflation typically see depreciation in their currency in relation to the currencies
of their trading partners. This is also usually accompanied by higher interest rates. (To learn
more, see p


 

 
 .

1   c 

Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest
rates, central banks exert influence over both inflation and exchange rates, and changing
interest rates impact inflation and currency values. Higher interest rates offer lenders in an
economy a higher return relative to other countries. Therefore, higher interest rates attract
foreign capital and cause the exchange rate to rise. The impact of higher interest rates is
mitigated, however, if inflation in the country is much higher than in others, or if additional
factors serve to drive the currency down. The opposite relationship exists for decreasing
interest rates - that is, lower interest rates tend to decrease exchange rates. (For further
reading, see -

  

V1 %'

 

The current account is the balance of trade between a country and its trading
partners, reflecting all payments between countries for goods, services, interest and
dividends. ‰ deficit in the current account shows the country is spending more on foreign
trade than it is earning, and that it is borrowing capital from foreign sources to make up the
deficit. In other words, the country requires more foreign currency than it receives through
sales of exports, and it supplies more of its own currency than foreigners demand for its
products. The excess demand for foreign currency lowers the country's exchange rate until
domestic goods and services are cheap enough for foreigners, and foreign assets are too
expensive to generate sales for domestic interests. (For more, see Y 
  p 
    
 
.

$1*) 
)
Countries will engage in large-scale deficit financing to pay for public sector projects and
governmental funding. While such activity stimulates the domestic economy, nations with
large public deficits and debts are less attractive to foreign investors. The reason? ‰ large
debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately
paid off with cheaper real dollars in the future.

In the worst case scenario, a government may print money to pay part of a large debt, but
increasing the money supply inevitably causes inflation. Moreover, if a government is not
able to service its deficit through domestic means (selling domestic bonds, increasing the
money supply, then it must increase the supply of securities for sale to foreigners, thereby
lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe
the country risks defaulting on its obligations. Foreigners will be less willing to own
securities denominated in that currency if the risk of default is great. For this reason, the
country's debt rating (as determined by Moody's or Standard & Poor's, for example is a
crucial determinant of its exchange rate.

:1


‰ ratio comparing export prices to import prices, the terms of trade is related to current
accounts and the balance of payments. If the price of a country's exports rises by a greater
rate than that of its imports, its terms of trade have favorably improved. Increasing terms of
trade shows greater demand for the country's exports. This, in turn, results in rising revenues
from exports, which provides increased demand for the country's currency (and an increase in
the currency's value. If the price of exports rises by a smaller rate than that of its imports, the
currency's value will decrease in relation to its trading partners.

;1* 
 )  
 
*

Foreign investors inevitably seek out stable countries with strong economic performance in
which to invest their capital. ‰ country with such positive attributes will draw investment
funds away from other countries perceived to have more political and economic risk. Political
turmoil, for example, can cause a loss of confidence in a currency and a movement of capital
to the currencies of more stable countries.



 

The exchange rate of the currency in which a portfolio holds the bulk of its investments
determines that portfolio's real return. ‰ declining exchange rate obviously decreases the
purchasing power of income and capital gains derived from any returns. Moreover, the
exchange rate influences other income factors such as interest rates, inflation and even capital
gains from domestic securities. While exchange rates are determined by numerous complex
factors that often leave even the most experienced economists flummoxed, investors should
still have some understanding of how currency values and exchange rates play an important
role in the rate of return on their investments.


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