Professional Documents
Culture Documents
Tybcom - A - Group No. - 5
Tybcom - A - Group No. - 5
Group no. - 5
Semester: 6
Roll No.: 42
Roll No: 43
Introduction:
In 1993, India officially moved towards a ‘market-determined exchange rate’ from a fixed peg to
the US dollar (USD). This was part of the liberalization and deregulation reforms of the early
1990s. Since then, there has been a currency market, and according to the Reserve Bank of India
(RBI) the Indian rupee (INR) has been following a market-determined exchange rate, implying
that the price of the INR is determined by the demand for and supply of foreign exchange
(forex).
Exchange Rate Regimes:
To estimate the various regimes that the INR might have experienced in the period from 2000 to
2020, we use a structural change methodology described in Zeileis et al. (2010). The essence of
this methodology is that we estimate a ‘linear regression model’ using the returns on cross-
currency exchange rates expressed in terms of a suitable ‘numeraire’ currency. We use the New
Zealand dollar (NZD) as the numeraire currency, given its stability over a long period of time.
The regression, therefore, picks up the extent to which the INR/NZD rate fluctuates in response
to fluctuations in any of the currencies.
Roll No : 045
Sap id : 40311190138
Participants in Foreign exchange market can be categorized into five major groups, viz.;
commercial banks, Foreign exchange brokers, Central bank, MNCs and Individuals and Small
businesses.
1.Central banks: Important player in the foreign market is Central bank of the various countries.
Central banks frequently intervene in the market to maintain the exchange rates of their
currencies within a desired range and to smooth fluctuations within that range.
2.Foreign Exchange Broker: Foreign exchange brokers also operate in the international
currency market. They act as agents who facilitate trading between dealers. They actively and
constantly monitor exchange rates offered by the major international banks through
computerized systems such as Reuters.
3. MNCs: MNCs they exchange cash flows associated with their multinational operations.
4.Individuals and Small Businesses: Individuals and small businesses also use foreign
exchange market to facilitate execution of commercial or investment transactions. The foreign
needs of these players are usually small and account for only a fraction of all foreign exchange
transactions.
5.Commercial Banks: These banks serve their retail clients, the bank customers, in conducting
foreign commerce or making international investment in financial assets that require foreign
exchange
Introduction:
The earliest exchange rate system was popularly known as Gold Standard which existed during
1879-1934. In this exchange rate system, the value of currencies of different countries were fixed
in terms of gold. Hence under the Gold Standard exchange rate system there could be only fixed
exchange rates. After the end of World War II to 1971, another fixed exchange rate system
known as Bretton Woods System prevailed. After 1971, the exchange rate system was not purely
flexible; hence it was called Managed Float System.
A central bank, reserve bank, or monetary authority is an institution that manages the currency
and monetary policy of a state or formal monetary union, and oversees their commercial banking
system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the
monetary base. Most central banks also have supervisory and regulatory powers to ensure the
stability of member institutions, to prevent bank runs, and to discourage reckless or fraudulent
behavior by member banks. Central banks in most developed nations are institutionally
independent from political interference. Still, limited control by the executive and legislative
bodies exists.
Name : Rushang Piyush Desai
Roll No : 047
Sap id : 40311190140
"The rate at which one country's currency may be translated into another" is how the exchange
rate is defined.
1. Inflation Rates
Changes in market inflation have an impact on currency exchange rates. If a country's
inflation rate is lower than that of another, its currency will increase in value.
2. Interest Rates
Changes in interest rates affect the value of a currency and the value of the dollar.
Interest rates, currency exchange rates, and inflation rates are all interconnected.
Increased interest rates attract more foreign capital and cause exchange rates to rise,
causing a country's currency to gain.
3. Current Account Balance
It is thought to be the most comprehensive indicator of a country's cross-border trade.
A positive current account balance means a country lends more to its trading
partners than it borrows, whereas a negative current account balance means
the country borrows more from its trade partners.
4. Monetary policy and economic performance
Investors are more likely to seek out countries with a history of excellent economic
success and sound monetary policy. The demand for and value of the country's
currency will surely rise as a result of this.
Conclusion :- The real return on a portfolio is determined by the exchange rate of the
currency in which the majority of its investments are held. The buying power of income and
capital gains received from any returns is obviously reduced while the exchange rate is falling.
Roll No.: 48
Fixed exchange rate system refers to a system in which exchange rate for a currency is fixed by
the government.
The basic purpose of adopting this system is to ensure stability in foreign trade and capital
movements. To achieve stability, government undertakes to buy foreign currency when the
exchange rate becomes weaker and sell foreign currency when the rate of exchange gets
stronger. For this, government has to maintain large reserves of foreign currencies to maintain
the exchange rate at the level fixed by it.
Flexible exchange rate system refers to a system in which exchange rate is determined by forces
of demand and supply of different currencies in the foreign exchange market.
The value of currency is allowed to fluctuate freely according to changes in demand and supply
of foreign exchange. There is no official (Government) intervention in the foreign exchange
market. Flexible exchange rate is also known as ‘Floating Exchange Rate’.
Roll No.: 49
CONCLUSION
The Indian foreign exchange market has operated in a liberalised environment for more than a
decade. A cautious and well-calibrated approach was followed while liberalising the foreign
exchange market with an emphasis on the need to safeguard against potential financial instability
that could arise due to excessive speculation. The focus was on gradually dismantling controls
and providing an enabling environment to all entities engaged in external transactions. The
approach to liberalisation adopted by the Reserve Bank has been characterised by greater
transparency, data monitoring and information dissemination and to move away from micro
management of foreign exchange transactions to macro management of foreign exchange flows.
The emphasis has been to ensure that procedural formalities are minimised so that individuals are
able to conduct hassle free current account transactions and exporters and other users of the
market are able to concentrate on their core activities rather than engage in avoidable paper
work. With a view to maintaining the integrity of the market, strong know- your-customer
(KYC)/anti-money laundering (AML) guidelines have also been put in place.
Banks have been given significant autonomy to undertake foreign exchange operations. In order
to deepen the foreign exchange market, several products have been introduced and new players
have been allowed to enter the market. Full convertibility on the current account and extensive
liberalisation of the capital account have resulted in large increase in transactions in foreign
currency. These have also enabled the corporates to hedge various types of risks associated with
foreign currency transactions. The impact of these reform initiatives is clearly discernible in
terms of depth and efficiency of the market.
Exchange rate regimes do influence the regulatory framework when it comes to the issue of
providing operational freedom to market participants in respect of their foreign exchange market
operations. Notwithstanding a move towards greater exchange rate flexibility by most EMEs,
almost all central banks in EMEs actively participate in their foreign exchange markets to
maintain orderly conditions. While the use of risk management instruments is encouraged by
many emerging markets for hedging genuine exposures linked to real and financial flows, their
overall approach towards risk management has remained cautious with an emphasis on the need
to safeguard against potential financial instability arising due to excessive speculation in the
foreign exchange market.
In the coming years, the challenge for the Reserve Bank would be to further build up on the
strength of the foreign exchange market and carry forward the reform initiatives, while
simultaneously