Combined

Treasury Management and Foreign Exchange Markets
SAT ISH KR I S HNAN

Introduction
25 years in Financial Markets
◦ Both a Market Risk Manager and Risk Advisor
◦ Risk Manager in a Large Corporate responsible for FX/Interest Rate risk management
◦ Then, 2 decades in Financial Markets function in Standard Chartered Bank on risk advisory
◦ Managing Director, Financial Markets : Heading risk advisory function for Commercial Banking Segment,
South Asia Region
◦ Visiting Faculty & Trainer of Bank/Corporate Treasury Executives
◦ Technical Analyst and active Market Participant & Consultant, Investor & Mentor
◦ Specialised in Elliott Wave Analysis

Sessions
Session Topic Details
1 Introduction to Financial Markets and Treasury Function
2 Bank Treasury Operation
3 Corporate Treasury Management
4 -7 Foreign Exchange Management – FX market, FX rate
forecasting with fundamentals and Technical analysis
8 Banks FX Trading Desk
9 FX Advisory in Banks
10 Risk Management, Regulations and Controls
Coverage & Evaluation
Treasury Activities with focus on Foreign Exchange markets
Presumes students are well versed with
 Fixed income markets
 Banking
 Derivatives
Evaluation
 Quiz 1 (post session 4)
 Quiz 2 (post session 7)
 Group Project (sessions 6-10) – teams made, Group/Individual participation considered
 End term exam
Introduction to
Financial Markets and
Treasury Management
SESSION 1
Financial Markets
Asset Classes and Inter linkages
 Equity
 Debt
 Commodity
 Currency
Price Discovery & its impact on bilaterals

Participants and motives
Drivers and Themes
Treasury Management
Deals with Funds and Risks thereon
Compliments
 Other functions of organisation
 Other sub-functions within Finance
Financial Intermediation business vs Others

Risk Management
 Risk Management process
 Analyse and forecast market movements
 Hedging – proprietary and client requirements
Beyond Banking in Banks
Role of Full service Commercial Banks – areas beyond Financial Intermediation
As a regulated entity
◦ Benefits: Better credit standing and related business opportunities
◦ Extending credit standing to support commerce
Domestic/International Trade & capital Flow enabler

◦ Letters of credit, Guarantees, Capital flows processing, etc.,
◦ Trade finance and CASA as cross sell for trade processing
◦ Better pulse on the clients business and sharper credit decision enabler
◦ Foreign Exchange business recovers major part of the cost, overlay opportunities
◦ Comprehensive client solution on “Trade + FX” - leveraging Treasury capabilities
Objective of Treasury
Liquidity management to maximise net interest income
◦ Deploy deposit liabilities, investments maturity cashflows, etc.., for optimum return
◦ Fund balance sheet with suitable mix to optimise marginal cost of funds
◦ To ensure asset-liability mismatch is kept at manageable levels
Effectively manage Foreign Exchange assets and liabilities

Manage market risk with approved and prudential norms
Capture arbitrage opportunities
Maintain statutory reserves – CRR, SLR on current and forward planning basis
Offer comprehensive ‘value added treasury’ and related services to bank’s customers
Risks Managed in Treasury
Liquidity Risk • Funding, Market
Interest Rate Risk • Fixed Rate, Floating Rate
Foreign Exchange Rate Risk • FX price, Gap, Derivative position
Compliance Risk • Regulations on Financial Markets, Statutory obligations
Credit Risk • Counterparty, Country, Pre-settlement/Settlement
Other Risks • Operational, Legal, Compliance, Reputational

Functions of a Treasurer
Liquidity Management – domestic and foreign currency
Profitable deployment of funds
Trading and Arbitrage
Hedge and cover operations
Foreign Exchange activities– Hedging, Proprietary, Client hedging
Ensuring Strict compliance with Statutory requirements
Nature of Treasury Assets & Liabilities
Treasury vs Non-Treasury
 Marketability
 Mark Risk bearing
Domestic Assets and Liabilities

Foreign Exchange
 Inter bank – spot, forward, FC placement/borrowings
 Merchant transaction – PCFC, FC bill Purchase, FC Loans, FCNR B loans, PSFC, ECB
Derivatives
 IRS, FRA, IRF, IRO, Currency Options
Organisational Structure
• Dealing and investment – Risk Taking

Front Office • Functions as profit centre
• Risk Management
Mid Office • Policy compliances
• Management information
• Deal confirmation,
Back-Office • Settlements, Accounting and Reconciliation,
• Marking to Market and Revaluations
FRONT OFFICE –typical activities
Manage investments and market risk as per ALCO guidelines
Dealing Room – centre for risk management and client risk interactions
Policies and Delegations sacrosanct for committing the bank to market
Acts as Profit centre
High Controls and high monitoring – restricted area and high surveillance
Market Data services – Reuters, Bloomberg, etc., supports for live market info
Code of Conduct – signed up and breaches are career limiting
MIDDLE OFFICE – typical activities
3Ms : Measurement, Monitoring and Management Reporting of Risks
Limit setting and exposure monitoring
Assessing likely market movements
Position Monitoring – Net Open Positions – Overnight/Daylight
VAR – calculation and reporting
Stress testing & Back testing of investment and trading positions
Risk Return analysis
Marking open positions to market – assess unrealised P&L
BACK OFFICE – Typical activities
Deal slip verification
Generation, dispatch, record keeping of interbank confirmation
Monitoring receipts and recording keeping of counterparty deal contracts
Effecting and receiving payments – domestic/Foreign currency
Settlement and margin maintenance with CCP (central Counter Party)
Statutory Reporting to the RBI
Nostro / Vostro accounts reconciliation and maitenance
Responsibilities of a Bank Treasurer
Balance sheet Management
Transfer Pricing
Reserve & Investment Management
Trading and Distribution
Extending expertise to customers
Regulation, Supervision and Assurance
Regulations
 Basel Committee for Banking Supervision (BCBS) Guidelines
 Internal Control Guidelines
Supervision
 Regulatory supervision
 Internal Audit
 Concurrent Audit
Q&A
SAT ISH KR I S HNAN
Introduction
25 years in Financial Markets
◦ Both a Market Risk Manager and Risk Advisor
◦ Risk Manager in a Large Corporate responsible for FX/Interest Rate risk management
◦ Then, 2 decades in Financial Markets function in Standard Chartered Bank on risk advisory
◦ Managing Director, Financial Markets : Heading risk advisory function for Commercial Banking Segment,
South Asia Region
◦ Visiting Faculty & Trainer of Bank/Corporate Treasury Executives
◦ Technical Analyst and active Market Participant & Consultant, Investor & Mentor
◦ Specialised in Elliott Wave Analysis

Sessions
Coverage & Evaluation
➢Treasury Activities with focus on Foreign Exchange markets
➢Presumes students are well versed with
➢ Fixed income markets
➢ Banking
➢ Derivatives
➢Evaluation
➢ Quiz 1 (post session 4)
➢ Quiz 2 (post session 7)
➢ Group Project (sessions 6-10) – teams made, Group/Individual participation considered
➢ End term exam
Treasury Function in
Banks
SESSION 2
What is liquidity Risk?
Liquidity :
◦ Bank’s ability to fund increase in asset and meet all cash & collateral obligation, at a reasonable funding
cost
Liquidity Risk :
◦ Risk of not able to meet such obligations without affecting banks financial condition
Solvency vs Liquidity
Types
◦ Funding Liquidity : ability to obtain funding at reasonable price
◦ Market Liquidity : ability to convert asset into cash
Mismatch – Negative/positive – Benefits and risks
◦ Negative Gap : Outflows > Inflows in the time bucket
◦ Positive Gap : Inflows > Outflows in the time bucket
Northern Rock – meltdown story
1997 : British Bank, listed in London stock exchange in 1997
2007 : Among top 5 mortgage lenders in UK, grew rapidly - (always relied on negative gap in ALM)
Aug’07 : subprime crisis led nervousness made borrowing difficult
Sep’07 : FSA commented:
‘The FSA judges that it is solvent, exceeds its regulatory capital requirement, has a good quality loan
book’
12-sep : NR approached for emergency funding of £ 3b
13-sep : BBC broke news on NR seeking emergency funding
14-sep : Run on the bank started and estimated £2b was withdrawn till 17sep
17-sep : Exchequer announced full guarantee of deposits & imposed penal interest for banks with risky funding
Feb’08 : Emergency borrowings reached £25b. Bank was nationalised, split into (AMC) with bad debts & Banking
Nov’11 : Virgin group acquired Northern Rock Plc for £747 m.
A solvent, healthy bank was quickly brought down due to poorly managed Liquidity risk.
Liquidity Risk Management (LRM)
Balancing between liquidity vs profitability
◦ Excessive liquidity : Loss of profitability
◦ Inadequate liquidity: Loss of trust and risk of collapse
Sound LRM process critical

◦ Commensurate with the size and complexity of the bank
Maturity mis-matches an inherent risk in banking

◦ How well managed differentiates the good vs others
◦ Funding gap monitored on bucket-wise and on cumulative basis also A funding gap is the amount of money
needed to fund the ongoing operations or
future development of a business or project
External Shocks and unforeseen mis-matches that is not currently funded with cash,
equity, or debt.
◦ Contagion impact and systemic risk
LRM some considerations
Liquid assets proportion
Extent of volatility in deposits
Degree of reliance on volatile source of funding
Level of funding source diversification
Historical trend on stable deposit
Quality of maturing assets
Market reputation
Availability of undrawn standby
Impact of off-balance sheet exposure
Contingency plans
Liquidity: Source and Deployment
➢Cash in excess of CRR requirement
➢Investment in excess of SLR requirement - Repo
➢Prime Assets – T Bills, Top rated ST papers, Loans to top rated companies
➢Swapping Forex funds to INR
➢Undrawn lines from RBI – Marginal Standing Facility
➢Undrawn lines from FIs & other Banks
➢Deposits (public and other banks)
Sound LRM principles
Basel Committee of Banking Supervision (BCBS) published ‘Principles for Sound Liquidity Risk
Management and Supervision’ in Sep 2008. It envisages the fol:
Fundamental Principle of Management & Supervision
◦ Bank to establish robust framework, Supervisors should assess it adequacy, liquidity position and take prompt
corrective action to limit damage to financial system
Governance
◦ Articulate Risk tolerance and Strategy
◦ Senior mgmt. to develop, review and report strategies & policies and report to Board
◦ Incorporate liquidity cost in internal pricing, performance evaluation & new product approval process
Measurement and Management of Liquidity risk
◦ Sound process of identifying, measuring, monitoring and controlling liquidity risk
◦ Monitor and control across entities, business line, currencies
Measurement and Management of Liquidity risk (contd.)
◦ Establish funding strategy. Regularly gauge its funding capacity
◦ Manage intraday funding positions : stress test to ensure no damage to payment
◦ Manage collateral position and settlement systems differentiating between encumbered and
unencumbered assets
◦ Stress test – short-term and protracted, Institution-specific & market wide scenarios
◦ To have Contingency Funding Plan
◦ Maintain High Quality Liquid Assets as cushion as insurance against stress scenario
Public disclosure
◦ LRM framework soundness to be transparent to avoid surprises
Regulatory requirements
Basel Framework for Liquidity Risk Management in Banks
Regulatory reserve requirement
◦ Cash Reserve Ratio (CRR)
◦ Statutory Liquidity Ratio (SLR)
◦ Liquidity Coverage Ratio (LCR)
◦ Net Stable Funding Ratio (NSFR)
Other Risk Monitoring Tools
◦ Contractual Maturity mismatch
◦ Funding Concentration
◦ Available unencumbered assets
◦ LCR by significant currency
◦ Market-related monitoring tools
◦ Early warning indicators like equity price movement, Bond/CD rates, etc.,
Statutory Reserves
➢CRR
➢ (3%) of NDTL (Net Demand & Term Liabilities)
➢ Should maintain atleast 95% of Reserve requirement on a daily average
➢ Every Rs 100 borrowed, will allowing lending of Rs 97 only
➢SLR
➢ Specified Assets
➢ Cash, Gold, Unencumbered approved securities
➢ SLR securities include G sec., SDL, T Bills, etc.,
Stat Cost Computation
➢Assume cost of NDTL funds is 7%
➢Weighted Return on Specific securities held in SLR is 4%.
➢What is the effective cost of funds, taking CRR/SLR into account?
• {Borrowing cost – Return on Reserve) * {1/(1-Reserve %)}

• {(100 * 7%) – (3 * 0%) – (18 * 4%)} * { 1/ 0.79)
• 6.28 / 0.79
• 7.95%
➢ Thus, the stat cost is 95 bps
Liquidity Coverage Ratio (LCR)
Basel Framework post 2007 crisis
Aimed to promote short term resilience to survive acute stress over 30days
LCR = ≥ 100%
◦ [High Quality Liquid Asset] / [Total net cash outflows 30 day horizon, under stress scenario ]
HQLA - characteristics
◦ Unencumbered
◦ Low credit and market risk
◦ Ease and certainty of valuation
◦ Low correlation with risky assets
◦ Listing on recognised exchange
◦ Active and sizeable market
◦ Presence of committed market makers
◦ Low market concentration and flight to quality
HQLA assets
Categories of HQLA and Value assumed
Level 1 – full value
◦ Cash & G secs (in excess of CRR/SLR), Marketable securities of foreign sovereigns
◦ 0% haircut on the market value
Level 2 - with haircut, and cannot be more than 40% of HQLA stock
◦ Level 2-A - 15% haircut
◦ CP, Corp Bonds, etc with minimum rating of AA-, PSE marketable securities, multi development banks
with risk weight of upto 20% under Basel, etc.,
◦ Level 2-B – 50% haircut
◦ This category should not be more than 15% of total HQLA stock
◦ Equity shares of non-bank/FI/NBFC or affiliated entities and included in Sensex/nifty. marketable
securities on sovereigns with risk weights of 20-50% under basel, credit rating not below BBB-, etc.,
Total Net Cash Outflow
Total Expected cash outflow Less expected cash-inflow
For the subsequent 30 calendar days, in stressed scenario
Cash outflow
◦ Outstanding bal. of various liabilities and off balance sheet commitment
◦ Multiplied by Run off rate
Cash inflow
◦ Expected to flow
◦ Subject to cap of 75% of cash outflow
Run off rate/inflow rates prescribed
Liquidity Monitoring Tools
➢Basel framework prescribes for better monitoring of liquidity position
➢Metrics
1. Contractual Maturity Mismatch - funding needs
2. Funding Concentration
3. Available Encumbered Assets
4. LCR by Significant currency
5. Market Related Monitoring Tools - equity, bond/credit market price
discovery clues
Net Stable Funding Requirement (NSFR)
Definition:
NSFR: ‘amount of available stable funding relative to the amount of required stable
funding’
Available Stable funding (ASF) : “ a proportion of capital and liabilities expected to be
reliable over the time horizon considered by NSFR, which extends to one year’
Required Stable Funding (RSF) : ‘is a function of liquidity characteristics and residual
maturities of various assets held, as well as those of its off-balance sheet exposure’
Ensures maintenance of stable funding profile in relation to the composition of assets
and off balance sheet activities
Ensures maintenance of stable funding profile in relation to the composition of
assets and off balance sheet activities
Limits over-reliance on short term wholesale funding and promotes funding
stability
NSFR : [ ASF / RSF ] ≥ 100%
◦ ASF = Available Stable Funding = Liability category x Associated ASF factor
◦ RSF = Required Stable Funding = Asset Category, Off BS exposure x Associate RSF factor
Comparing LCR & NSFR
LCR NSFR
Risk Addressed Liquidity Liquidity
Objective Promotes ST resilience to Promotes resilience over
potential Liquidity disruption longer term by requiring
to survive an acute stress funding of activities with more
scenario for 30days stable source on ongoing basis
Time horizon in focus 30 days 1 year
Means of regulation Quality of Asset held Stable funding source
Adjustment factor Run off Factor for cashflow Associated Available Stability
Factor
Associated Required liability
Factor
Scenario presumed Stressed Normal
Bond Portfolio Management
➢Investment Policy of the bank to govern
➢Active and Passive Approach
➢Banking Book and Trading Book
➢Categorisation
➢ Held Till Maturity (HTM)
➢ Available for Sale (AFS)
➢ Held For Trading (HFT)
➢Buying corporate bonds by private placement counted as part of this

Held till Maturity
➢Intention to hold and receive interest, not capital gains
➢Not to marked to market
➢Profit/(loss) on sale of these investments to be
➢ To P&L and
➢ Gains taken to Capital Reserve Account
➢Once a year, shifting from/to HTM is permitted with Board approval, usually at the
beginning of the year
➢If shift >5% of investment book value, disclosure of market value and provision not
done
➢Exception: SLR holding reduction, direct OMO, Govt buying back securities
➢Conversion into HTM, at cost or market which ever is lower
Held for Trading/Available for Sale
➢Securities held for short term price movement is HFT
➢Securities not falling into HTM & HFT, is classified as AFS
➢Banks treasury investment/trading policy to guide on quantum, limit, exposure
type, stop loss, etc., for HFT category
➢HFT securities need to be sold within 90 days.
➢Gain/loss is taken to P&L account
➢Shift from AFS to HFT is done with approvals, as delegated in Board approved
policy
Bond Book
➢Buy and Hold strategy
➢Investment maturity strategies
➢ Varying maturities
➢ Re-investment risk
➢Ladder or spaced Maturity strategy
➢ With limited portfolio expertise
➢ Efficient way to build is to participate in auction
➢Front End loaded Maturity Strategy – emphasise on liquidity over income
➢Back End loaded Maturity Strategy – emphasise on income
➢The Barbell Strategy – combination of the above
➢Immunisation, Dedication, Riding the Yield curve, etc.,
Assessing Market conditions / views
➢Central Bank Liquidity framework
➢Policy Rates and monetary Policy transmission
➢Market pricing and Banking System Liquidity
➢Understanding Banking System Liquidity & Tools
➢Drivers
➢ Statutory Reserve requirement
➢ Govt. spending / tax remittances
➢ OMO
➢ Cash in circulation- change
➢ FX intervention / swaps
System Liquidity
➢Deficit/Surplus
➢ On a given day, banking system is net borrow under LAF deficit, surplus if lender
➢Measuring system Liquidity

➢ Net Borrowing under LAF +
➢ Excess of reserves maintained by banks
➢Transient Vs Durable deficit/surplus

➢ GoI balance contribute to transient/temporary diff
➢ Unsterlised FX, Change in Cash in Ciruclation, etc., contribute to durable
➢ Durable = Net borrowing by banking system over GOI balance
SAT ISH KR I S HNAN
Sessions
Group Project - Group 1
➢ Topic: Liquidity Coverage Ratio of Banks – An Analysis
➢ Scope:
➢ Pick any 5 banks (with a mix of private and public sector banks in India)
➢ Analyse their LCR ratio as on 30Sep21, both in terms of (i) change over 31mar21 position and (ii)
compare LCR among the group of banks chosen
➢ Expect the group to also cover the impact of the key business model differences, business strategy and
other financial parameters on the LCR
➢Date of presentation: 19 Jan 22 (Wed)
Group can choose one presenter, who will present the analysis for 7 mins and there will be
random selection of group members who will respond to the discussion points.
(question to an absentee, if any, will be considered as unanswered question)
Total duration will be 15 mins.
Group is requested to submit the PPT before the session by mail to TTA
➢Drivers
➢ OMO, Issuance of Gsecs – Operation Twist
➢ FX intervention
➢ FX swaps
Banking System Liquidity
OMO G Sec purchase
Fund transfer
FX bought by RBI
Reserve reduction
Cash in Cir. decrease
Govt. Spending
Cash in Cir. Increase

Reserve Increase
Tax pymt, Gsec issuance
OMO G Sec sale
FX sold by RBI
➢Deficit/Surplus
➢ On a given day, banking system is net borrower under LAF deficit, lender if surplus


➢ Unsterlised FX, Change in Cash in Circulation, etc., contribute to durable
➢ Durable Deficit = Net borrowing by banking system over GOI balance
Corporates
SESSION 3
Liquidity & Cash Management
CORPORATE Risk Management

TREASURY –
with Financial
Markets focus Trade Financing
Term Funding – Domestic & International

➢Liquidity Risk
➢ Operational Liquidity Risk
➢ Strategic Liquidity Risk
➢Key Tools for managing Liquidity

➢ Cash Management
➢ Working Capital Management
➢ Organising and Managing Borrowing facilities
Cash Flow Modelling
➢Practice of planning and forecasting the sources and uses of cash
➢To provide framework that enables effective, efficient and economic use
➢Maximisation of Free cashflow
➢ Cashflow generated from operations Less Capital expenditure
➢ To help investing in growth generating options
➢Optimising ‘float’ and bank charges
➢ Cash pooling – also refers to ‘cash concentration’
➢ Physical, Notional
➢ Cross border – challenges
➢ Cash netting
➢Cross border transfer efficiencies - FC Collection Accounts, etc.,
Risk Management
➢Risk Management Organisation
➢ Board Approved policy
➢ Risk Management Function
➢ Risk Monitoring and Reporting
➢ Internal Controls and Assurances
➢Market Risks and Business Integration

➢ Interest Rate Risk - Funding
➢ Foreign Exchange Risk – Cross border trade, Funding
➢ Commodity Risk – Raw material consumption, Inventory, Sales
Risk Management Framework
➢Risk Identification & Quantification
➢ Costing & Budgeting – Benchmarking
➢ Transactions, Translation & Economic exposure
➢Risk Management approach
➢ Pass through
➢ Natural Hedge – Myths & pitfalls
➢ Hedging with financial instruments -Drivers and Factors
➢ Profit centre vs Support function
➢Hedging
➢ Permissible Hedging products
➢ Time Horizon for hedging
➢Risk Reporting and Monitoring
➢ Value At Risk – risk measurement for comprehensive risk monitoring
Risk Management – drivers
➢ Arbitrage opportunities
➢ Funding arbitrage - short term/ long term
➢ Procurement/Trade arbitrage
➢ Currency of denomination
➢ Factors to consider – Tax, Source concentration, Strategic partnership
➢Factors considered in Risk Management decisions

➢ Shareholder guidance
➢ Cashflow benefit vs Accounting impact
➢ P&L account volatility
➢ Tax and Subsidy impacts
Trade Financing
➢Bank financing vs non-bank financing
➢Supply Chain Financing
➢ Fintech’s innovation and changing landscape
➢ Foreign Currency financing

➢ Buyers Credit
➢ Suppliers Credit
➢ Export Financing – Packing Credit, Post shipment Loan, Export Bill Discounting
➢Domestic Foreign Currency Financing

Term Financing
➢ Bonds vs Bilateral Loans
➢ Domestic vs Overseas Borrowings
➢ External Commercial Borrowings
➢ Regulatory Guidelines
➢ Hedging and nuances
➢ Local Currency denominated Overseas Borrowing

➢ Masala Bonds (INR), Dimsum Bonds (CNY), etc.,
➢ FX Risk to Lender’s account
➢ Benefits & Challenges
Investment Management
➢ Investment Policy – Board Approved
➢ Risk Appetite and Return expectations – consistent approach
➢ Risk Appetite
➢ Credit Risk grid
➢ Term Risk
➢ Liquidity measure
➢ Yield Curve anticipation and flexibility for Duration play
➢Risk Diversification
➢Monitoring and early exits
➢Internal Control and focus
SAT ISH KR I S HNAN
Corporates
SESSION 3

TREASURY –
with Financial

➢Liquidity Risk

➢ Cash Management
Cash Flow Modelling
➢ Cash netting
Risk Management

➢ Pass through
➢Hedging

Trade Financing

➢ Buyers Credit

Term Financing

➢ Risk Appetite
➢ Term Risk
➢ Topic: “Foreign Exchange Hedging Strategies at General Motors”
➢ Scope: Group to discuss the high level details of GM’s exposure, approach, challenges, hedging approach,
hedging tools, etc., to bring out how FX hedging program works for a corporate. Case material can be the
sole source of information/data.
➢Date of presentation: 20 Jan 22 (Thu)
Group can choose one presenter for each of the 3 sub-topics, who will present it over 7-10 mins and there
will be random selection of group members who will respond to the discussion points.
FOREIGN EXCHANGE
MARKETS
SESSIONS 4 & 5
Global Foreign Exchange Market
Currency *Vol in $ Bln % Rank
➢Exchange Rate - value of a currency by
expressed in terms of another Vol
➢Round the clock market All 6,590 100%
EUR USD 1,584 24.0% 1
➢Driven by need for cross border activities
USD JPY 871 13.2% 2
➢Highly sensitive to regulatory/policy GBP USD 630 9.6% 3
changes AUD USD 358 5.4% 4
USD CAD 287 4.4% 5
USD CNY 269 4.1% 6
USD CHF 228 3.5% 7
USD HKD 219 3.3% 8
USD KRW 125 1.9% 9
USD INR 110 1.7% 10
* Daily average data as published by Bank of International Settlement
FX Markets – Brush-up of basics
➢Value of 1 currency expressed in terms of another
➢Quoted in pairs
➢Direct vs Indirect Quote
➢Crosses
➢Construction of FX rates for illiquid pairs – no arbitrage condition
➢Settlement conventions
➢Forward premium vs discount
Nuts and bolts
➢Currency Pairs
➢ Value of one currency expressed in terms of another currency
➢Price
➢ A rate expressed in “Quote currency” for 1 unit of “Base Currency”
➢ E.g., 1 USD (base currency) = 75.00 INR (quote currency)
➢ Normally quoted with 4 decimals
➢Quotes : Bid /Offer
➢ E.g., 74.95/96 (to be read as 74.95/74.96)
➢ Bid is the rate at which the price maker is willing to buy Base Currency
➢ Ask is the rate at which the price maker is willing to sell the Base Currency
➢ What to infer from price quotes and changes?
Nuts and bolts – Quote conventions
➢Spread
➢ The difference between the BID and ASK price
➢ 1 paise spread in a price of 74.95/96
➢ Wider spread indicate illiquid market and vice versa
➢Pips
➢ Usually FX rates are quoted with 4 decimals e.g., EURUSD 1.1515. The 4th digit after the decimal is called the pip.
➢ E.g., 20 pips profit in a EURUSD position represents gain of 0.0020 USD for 1 EUR.
➢ Thus, on EUR 1mio, 20 pip gain would give $2000 (E 1,000,000 x 0.0020)
➢Direct and Indirect Quotes

➢ USD is considered as base currency in most currency pairs. Where USD is the base currency and other currency is quote
currency, it is called Direct quote (e.g., USD INR)
➢ Where USD is a quote currency, is it called Indirect quote (e.g., EURUSD, GBPUSD, AUDUSD, NZDUSD)
Nuts and bolts -Crosses
➢Where home currency is neither a base currency nor quote currency, it is called Crosse
currency quote.
➢For non-USDINR pair, Quote can be constructed through USD, thus tapping to most
liquid markets
E.g., EURINR buying is done effectively by
➢ Buying USD by paying(selling) INR &
➢ With the USD bought, Buying EUR by paying (selling) USD
➢In Crosses rate computation, direct/indirect quotes have to be carefully considered.

➢ Examples
➢ Direct Quote: CAD INR : USDINR / USD CAD = 75.00 / 1.3400 = 55.97
➢ Indirect Quote: EUR INR = EUR USD x USD INR = 1.1650 x 75.00 = 87.3750
Nuts and bolts : Transaction Types
Transaction Types
➢Spot : most traded, settled on T+2
➢Cash : dealt for the same day settlement: Spot +/- Cash-Spot
➢Tom : dealt for T+1 settlement; Spot Rate +/- Tom-Spot
➢Forward : to settle on a specific date in future as agreed; Spot Rate +/- swap points
➢Swaps : to buy (or sell) on a nearer future date and reverse the same on farther date, for a price
difference
➢ E.g., Buy/Sell USDINR Jan end over Feb end =
➢ BUY USD on jan last date @ jan outright forward and
➢ SELL USD, on feb last date @ feb outright forward rate, the difference represents swap points
Settlement & Adjustment
➢Settlement for spot on T+ 2
➢ Transaction date (T) is the date on which the buyer and sell entered into the transaction
➢ To settle on the second working date post the transaction date
➢ Working date on markets from both the currency considered
➢ E.g., for USDINR pair, both Mumbai and New York holidays considered
➢Swap Points
➢ When actual date of requirement is earlier or later than T+2
➢ Swap points are adjusted to arrive at the Rate (Cash, Tom & outright forward rate)
➢ Interest rate differential of both currency will determine the net interest adjustments,
➢ known as “swap points”
Forward Premium & Discount
➢Premium : Forward Rate > Spot Rate
➢ if base currency’s Interest rate < Interest rate of quoted currency
➢Discount : Forward Rate < Spot Rate

➢ if base currency’s Interest rate > Interest rate of quoted currency
➢Quote convention
➢ ASK > BID : Premium (e.g., 35/36)
➢ BID > ASK : Discount (e.g., 36/35)
➢ Example:
➢ Buy USDINR for value date 3 month from spot
➢ USD interest rate < INR interest rate, hence this is a premium to be added.
➢ Assuming 3m swap points is Rs 1 per USD, Outright forward rate is 76.00 (75.00 + 1.00)
Markets :Texture, Colour and dynamics…
➢Over The Counter (OTC) & Exchange Traded
➢Participants
➢Market Makers
➢Speculators
➢Risk Managers
➢Arbitrageurs
➢Transactors :Investors, Imports, Exports, Borrowers, etc.,
➢Asset Classes
➢Stocks, Bonds, Foreign Exchange, Commodities
SAT ISH KR I S HNAN
FOREIGN EXCHANGE
MARKETS
SESSIONS 4, 5 & 6
EUR USD 1,584 24.0% 1
USD JPY 871 13.2% 2
USD CAD 287 4.4% 5
USD CNY 269 4.1% 6
USD CHF 228 3.5% 7
USD HKD 219 3.3% 8
USD KRW 125 1.9% 9
USD INR 110 1.7% 10
➢Quoted in pairs
➢Crosses
Nuts and bolts
➢Currency Pairs
➢Price
➢ E.g., 74.95/96 (to be read as 74.95/74.96)
➢Spread
➢Pips

currency quote.
liquid markets

➢ Examples
Transaction Types
difference
➢Swap Points

➢Quote convention
➢ Example:
➢Participants
➢Market Makers
➢Speculators
➢Risk Managers
➢Arbitrageurs
➢Asset Classes
Asset Classes Inter-Linkages
Stocks FX Commodities
• Risk-free rate threshold • Carry Trade • Inflation expectations
• Valuation Discounting • Real return expectation • Monetary policy action
Bonds • Economic Cyclicality • Inflation expectation • Risk-free rate threshold
• Risk Appetite • Monetary policy action
• Asset allocation
• Investment Flows • Inflation expectations
• FX impact on expected • Invt. Com. valuation
FX earnings and re-ratings NA • FX impact on cost
• Valuation net of inflation exp. • Impact on FX flow
• Fuel: Inflation exp

• Indl: Input cost impact on
Stocks NA earning
• Invt.: Risk Appetite
• Proxy trades
FX Markets – Functioning & Dynamics
➢Milestones in FX History
➢ Pre-Bretton-wood
➢ Great Depression led policies
➢ Inward looking – trade barriers, competitive weakness in currencies, capital restrictions
➢ Bretton wood (1945-70)
➢ IMF Monitored
➢ USD pegged to Gold @ 35$/oz
➢ In turn, all currencies pegged to USD at “Par Rate”
➢ US committed to convert USD into GOLD, vice-versa
➢ Change in Par Rate with IMF consent
➢ Post Brettonwood (1971 onwards)
➢ Temporary suspension of USD-Gold conversion
➢ Multiple exchange mechanisms evolved – peg, floating, block/unions
➢ Oil shock led floating rate adjustment helped
➢Currency Crisis
➢ Attack to test Governments’ resolve and ability to defend Exchange policy
FX Crises - snapshot
➢1960s US BoP Crisis under Bretton-wood
➢ US gold holding was marginally increasing, while global trade grew rapidly
➢ 1950: BoP swung negative, imposed import quota on oil, etc.,
➢ Countries held USD as proxy for gold – bought at Central bank price vs Open market price
➢ 1961: “London Gold Pool” – 8 countries to intervene in gold open market to correct divergence
➢1994 Mexico Economic Crisis
➢ Excessively expansive fiscal and monetary policy
➢ Govt. guaranteed short term debt denominated in USD
➢ NAFTA led investor confidence – tempted to borrow in USD
➢ Civil issues & political instability worried foreign investors, risk premium widened
➢ Intervention to defect peg was challenged.
➢ Devalued Peso caused capital flight, Interest rate raised, growth impacted, default
➢ Switched to free float, Peso collapsed, inflation to 52%,
➢ Contagion to Other Emerging Economies
FX Crises- snapshot
➢1997 Asian Financial Crisis
➢ Started in Thailand – couldn’t defend Peg
➢ Capital flight followed, spread to other SEA countries with high debt
➢ Indonesia, South Korea, Thailand – severely affected
➢ Foreign Debt-GDP ratio rose from 100% -167% in Large ASEAN 1993-96
➢1998 Russian Financial Crisis
➢ Devaluation and Debt default
➢ Combination of factors – war, high fiscal deficit, intensified by two external shocks
➢ Asian financial crisis and lower oil demand
➢ Political crisis further impacts
➢ To address, interest rates were raised to 150%, IMF package of $22.6 bln.
➢1999-00 Argentine Economic Crisis
➢ Other Crisis triggered economic impact
➢ Defaults
➢ Moved from Fixed to floating exchange rate
FX market Dynamics
➢External
➢ A Bridge to global investors/trade partners
➢ Confidence is key
➢ Exchange Rate mechanism – defend when challenged
➢ Contagion channel
➢Internal
➢ Inflation driver
➢ Growth impacting
➢ Key for Economic stability
➢ Money supply – a tool in toolkit
Exchange Rate Regimes
➢Independently Floating
➢ No controls – both capital and trade flows, Round the clock Dealing, Self adjusting
➢Fixed or Peg
➢ Fixed conversion to another currency (UAE, OMR, QAR, HKD, SAR, etc.)
➢ Floating against other currencies
➢ Low risk mgmt. & cost, trade growth
➢ Interest rate alignment
➢Currency Union - countries with no currency of its own
➢ 19 Countries 1 Currency, No Fiscal union
➢ Sovereign risks vs FX/BOP risk, Common FX policies – wider implications
➢Dirty Peg/ Managed Peg
➢ Peg with Horizontal Band, Crawling peg/band, no predetermined path, etc.,
➢ Restricted movement, Central Bank controls
➢ Topic: “Euro – A common currency for Euro zone”
➢ Scope: Group to discuss the details of Launch history, mechanism and functioning of
Euro as a common currency for Euro zone.
➢Date of presentation: 20 Jan22 (Thu)
Group can choose one presenter for each of the 3 sub-topics, who will present it over 7-
10 mins and there will be random selection of group members who will respond to the
discussion points.
Managed peg – sample
➢China
➢ 2 Markets 1 Currency
➢ Onshore – CNY (RMB for local use)
➢ Daily range of +/- 2% from CNY Fix Rate
➢ Market forces drive prices to extremes
➢ Next day fix takes market directions
➢ Yuan in Offshore – CNH – more freely traded
➢ Swap arrangement connect offshore-onshore market
➢Singapore
➢ FX driven monetary management – “BBC- Basket, Band, Crawl” - approach
➢ Allows SGD to move in range around trade weighted value of currency basket
➢ Unstated range, MAS management – balances Growth vs Inflation
➢ Money Supply lever ceded for FX management
➢India
➢ No level targeted officially
➢ Active RBI intervention for ‘ excessive volatility’ management
➢ Asymmetric preference – observed curtailing Strenght, accepting controlled weakness
➢ Spot vs forward intervention by RBI – forward premium curve impact & carry trade
Understanding Indian FX Markets
➢Capital Accounts - restricted convertibility
➢Regulatory approach & framework
➢ RBI, FEDAI, AD banks
➢Orderly and well managed, though shallow
➢ RBI intervention and Reserve Building
➢Global integration
➢ Increased Access to non-residents
➢Capital flow characteristics – uniqueness and peculiarities
➢INR denominated flows
➢ INR invoicing, Masala Bonds, INR ECB, etc.,
USDINR VS DXY
$/Re –Bouts of Volatility & Policy Responses
Year Cause Impact & Developments
1993-95 Post Rate • Huge Capital flows with raise in imports
unification stability • Capital A/c surplus at 3.8% vs 1.6% of CAD
• RBI absorbed, Reserves raised to $20.6 bln from 6.3 bln in mar 93
• Stable exchange rate at 31.37
1995-96 Mexican Crisis • Continued stability for a while
• Contagion impact felt on flows, Rupee weakened to 33.96 & 36.48 by Jan96
• Sterilised intervention and Administrative measures were introduced
• Pressure resumed with lower capital flows
• INR over-valuation on REER (WPI at 12.7%) got corrected
1997-98 South East Asian • SE Asian crisis spread to Brazil, Russia

crisis & Sanction on • India -Sanctions, Rating Downgrade , Suspension of Intl. Bilateral lending
India for Pokran • 39.74 (apr98) – 41.50 (may98) – 42.47 (jun98) - >43 briefly RBI stepped in
Testing • Administrative measures & Resurgent India Bonds ($4.2 bln)
• ~ 42.50 from Aug98-Mar99
2000 Higher import bill • 43.40 (apr00) – 44.28 (may00)

and reduced flows • Strong Intervention and Administrative steps
• CRR & Bank Rate Raised, refinance facility cut by 50%
• India Millennium Deposit flow brought back positive sentiment
• Stabilised around 46.50
1995-96 Mexican Crisis led Volatility
➢Some of the Administrative measures imposed
➢ Imposition of Interest Surcharge on import finance (15%, then to 25%)
➢ CRR requirement reduced by 0.5% on domestic and non-resident deposits
➢ FCY denominated deposits exempt from CRR
➢ Interest on NRE Deposits were increased
➢ Discontinuation of Post Shipment Credit in Foreign Currency
2000 : Import Surge / lower flows
➢Some of the administrative measures imposed
➢ Imposition of Interest Surcharge on import finance (50%)
➢ RBI announced that it would meet partially or fully the Govt. debt service payment
directly as may be needed
➢ RBI will meet partially or fully the requirement for Oil import bill
➢ RBI will sell USD through SBI or intervene directly in order to meet the supply-demand
imbalance
➢ Overdue export bill – 25% interest charge
➢ Window for FII demand to be met directly or instructed to go to market
➢ Bank not to encourage speculative transaction
➢ Raising of CRR (0.5%), Bank Rate (1%), Reduction of 50% of refinance facility for banks
2001 9/11 Terrorist • 47.41 (11-sep) – 48.43 (17sep)
Attacks • Intervention ($894 mio) & Administrative measures
• Rupee remained stable ~48
• Current account surplus by 0.7% of GDP
2008-09 Lehman Crisis • Run up to Crisis :
• Robust flow,
• High GDP growth rate (9% in 2007-08)
• Current Account Deficit (1.3% in 2007-08)
• WPI 4.7%
• Rupee appreciated to 39.99 (mar 08) on strong flows
• Crisis triggered global deleveraging led repatriation
• Rupee breached 50 (27oct), 50.95 (mar09)
• RBI scaled up intervention with a record $ 18.7 bln
• Measures were announced by RBI to restore confidence
• Normal Liquidity in Fx market by Dec2008
• Rupee appreciated to 45.14 by mar2010
2001 : 9/11 Terrorist Attack
➢Action: Alongside intervention by selling USD, RBI announced the following measures
➢ Reiteration to keep Interest Rates stable with adequate liquidity
➢ Assurance to sell FCY to meet any demand-supply mismatch
➢ Opening window for purchase of select Government securities on auction basis
➢ Relaxation of FII limits
➢ Special financial package for large value exports of select products
➢ Reduction on export credit financing by 1%
2008 GFC
➢ Announced its intentions - selling USD to meet the demand-supply mismatch
➢ Rupee-Dollar swap facility
➢ was introduced for the Banks to meet their short term foreign funding requirements. LAF
was available for the above for the corresponding tenor. This facility was extended till Sep 2009
➢ Special Market operations
➢ meeting the forex requirement for public sector oil marketing companies continued
➢ Encourage forex inflow
➢ NR deposit interest cap hiked
➢ External Commercial Borrowings guidelines relaxation for corporates
➢ NBFC / HFC to access foreign borrowings
2011-12 European • Debt crisis deepened in Europe and US down graded
Crisis & US • Safe heaven flow into USD
Rating • INR under pressure
downgrade • Announced measures to boost capital account flows & Administrative control
• Rupee gained by 11% to 48,86 (6Feb12) from 54.24 (15dec11)
• Renewed pressure
• Widening trade deficit
• Poor Capital flow
• Further measures were Announced in May 2012
• Rupee stabilised and remained range bound
2011 : European Crisis & US Downgrade
➢Action: RBI announced measures to boost capital account flows & Administrative controls
• NRI INR Deposit Interest Rate - deregulation
• ECB interest cap relaxation
• For Average maturity of 3-5 years
• Cancellation & Rebooking facility – withdrawal
• Past Performance limit for Importers – reduced to 25%
• Mandatory delivery on hedging on Past performance basis
• No cancellation of cash/tom/spot deals
• Drastic cut in Net Overnight Open Position Limit (NOOPL)
• Day light position not to exceed NOOPL
• Banks access to Futures in exchanges curbed
2012 : Additional Measures
➢Action: RBI announced measures more to curb the excess liquidity led FX speculation
➢ Recalibration of MSF Rate to 3% over Repo rate
➢ Limiting overall funding under LAF to 1% of NDTL of the banking system reckoned at Rs. 75k crs
➢ Open Market sales of Gsecs for Rs. 12k cr
2013 Tapering • Excessive QE flows flooded EME in search of yield
Tantrum • Chairman Bernanke Testimony (22may2013)
• Sudden stop and reversal in may 2013 combined with poor fundamentals
• CAD 4.8%
• GDP growth 4.4%
• WPI 7.4%
• Fiscal Deficit 4.9%
• Rupee weakened along with other Emerging market currency
• Jul15 measures with some measures gradually
• FCNR B with concessional swap window – master stroke
• 3.5% rate for 3 year swap (raised $26bln)
2013 : Jul-15th Measures
➢Action: RBI announced additional measures on renewed pressure
➢ Increase in Interest Rate Ceiling on FCNR B deposits
➢ Export credit interest ceiling deregulated
➢ Requirement to convert 50% of EEFC balance mandatorily
➢ ECB end use expanded to include Repayment of Rupee Borrowing for Capital
Expenditure
➢ FII limit for G Secs increased to $ 20mio (from $15mio)
➢ FII investment in Infrastructure debt (with bells and whistles)
2018 Oil rally, US • Emerging markets felt the heat of feds tightening with reduced portfolio
Feds flows to emerging markets
tightening, • Oil rallied to over 80$ on supply concerns on Iran sanctions and venzuela
Trade Tariff supply impact
war • US hiked tariff on china imports and retaliation steps begin
• Rupee weakened along-with other Emerging market currency
• RBI intervention for a controlled weakness
• Brent cooled off with fear of shrinking trade, INR stability returned
Policy Focus
➢Impossible Trinity : Policy Trilemma of Balancing
1. Free Capital Mobility
2. Controlled exchange rate
3. Flexible monetary policy
➢Yield Curve Management

➢ Inflation expectations
➢ Domestic credit growth
➢Forward Curve management

➢ vs Interest Rate Differentials
➢ Carry trade
Drivers in FX Market
➢Demand/Supply driven price movement
➢Valuation
➢ Purchasing Power Parity Theory – Law of One Price
➢ Nominal Effective Exchange Rate (NEER), Real Effective Exchange Rate (REER)
➢ Role of INFLATION on Exchange Rates
➢ Uncovered Interest Rate Parity Theory (UIP) vs Covered Interest Rate Parity (CIP)
➢ Monetary Policy Action & Exchange Rates
➢ Policy Trilemma: Capital Mobility – Exchange Rate – Monetary Policy
➢Flows
➢ Trade, Arbitrage, Speculative, Capital, Remittances
➢Positioning
➢ Hedging – creates lead and lag
REER/NEER
No. 36: Indices of Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) of the Indian Rupee
2020 2021
2019-20 2020-21
Item November October November
1 2 3 4 5
40-Currency Basket (Base: 2015-16=100)
1 Trade-weighted
1.1 NEER 98.00 93.92 93.01 93.60 94.04
1.2 REER 103.20 103.46 104.84 105.27 106.24
2 Export-weighted
2.1 NEER 97.38 93.59 92.98 93.15 93.99
2.2 REER 102.88 102.96 104.63 104.37 105.74
6-Currency Basket (Trade-weighted)
1 Base: 2015-16 = 100
1.1 NEER 94.92 88.47 87.42 86.59 87.60
1.2 REER 103.62 101.88 103.35 102.79 104.61
2 Base: 2018-19 = 100
2.1 NEER 100.78 93.93 92.81 91.93 93.00
2.2 REER 103.32 101.59 103.06 102.49 104.31
Note : Increase in indices indicates appreciation of rupee and vice versa. For 6-Currency index, base year 2018-19 is a moving one, which gets updated every year.
REER figures are based on Consumer Price Index (combined). The details on methodology used for compilation of NEER/REER indices are available in December
2005, April 2014 and January 2021 issues of the RBI Bulletin.
Manual on Financial and Banking Statistics
5. EXTERNAL SECTOR STATISTICS
This chapter covers the concepts and definitions 5.1.1. Current Account
relating to India’s external sector statistics
covering balance of payments, external debt, 5.1.1.1. Merchandise Trade
foreign investment inflows, NRI deposits, Merchandise credit relates to export of goods
international investments position, foreign while merchandise debit represent import of
exchange reserves, etc. The data on each of these goods. These are mainly based on reporting from
components are compiled following the the authorized dealers (ADs) supplemented by
international best practices. The detailed aspects the information from other sources such as
of each of the components are outlined below. DGCI&S, USAID, Government of India. The item
“Non-monetary Gold Movement” has been
5.1. BALANCE OF PAYMENTS excluded from Invisibles in conformity with the
In India’s balance of payments (BoP), IMF Manual on BOP (4th edition) from May 1993
transactions are recorded in accordance with the onwards; these entries have been included under
guidelines given in the fifth edition of IMF’s merchandise. Data on gold and silver brought
Balance of Payments Manual (1993), with minor in by the Indians returning from abroad have
modifications to adapt to the specifics of the been included under imports payments with
Indian situation. The Manual defines BoP as a contra entry under Private Transfer Receipts
statistical statement that systematically since 1992-93.
summarises, for a specific time period, the
economic transactions of an economy with the 5.1.1.2. Services
rest of the world. Transactions between residents Services receipts and payments are compiled
and non-residents consist of those involving based on the information received from ADs
goods, services, and income; involving financial supplemented with other sources such as Air
claims on and liabilities to the rest of the world; India, embassies, NASSCOM, Full-fledged money
and those classified as transfers, involving changers, Government of India.
offsetting entries to balance one-sided
transactions. The data are received from the
5.1.1.2.1. Travel
banking system as part of the Foreign Exchange
Management Act (FEMA), 1999. The data are Travel’ represents all expenditure by foreign
received by the Reserve Bank of India mainly tourists in India on the receipts side and all
from the banking system (authorized dealers) as expenditure by Indian tourists abroad on
part of the Foreign Exchange Management Act payments side. Travel receipts largely depend on
(FEMA), 1999. the arrival of foreign tourists in India during a
given time period.
The basic structure of the Balance of Payments
(BOP) of India consists of: 5.1.1.2.2. Transportation
(i) Current account: exports and imports of ‘Transportation’ records receipts and payments
goods, services, income (both investment on account of the carriage of goods and natural
income and compensation of employees) and persons as well as other distributive services (like
current transfers; port charges, bunker fuel, stevedoring, cabotage,
(ii) Capital account: assets and liabilities covering warehousing, etc.) linked to merchandise trade.
direct investment, portfolio investment, loans,
5.1.1.2.3. Insurance
banking capital and other capital;
‘Insurance receipts’ consist of insurance on
(iii) Statistical discrepancy;
exports, premium on life and non-life policies
(iv) International reserves and IMF transactions. and reinsurance premium from foreign insurance
222
External Sector Statistics
companies. Insurance on exports is directly funds held abroad by ADs out of foreign currency
related to total exports from India. loans/export proceeds, payment of taxes by non-
residents/refunds of taxes by foreign
5.1.1.2.4. Government not included governments, interest/discount earnings on RBI
elsewhere (GNIE) investment etc. Investment income payments
comprise payment of interest on non-resident
‘Government not included elsewhere (GNIE)’
deposits, payment of interest on loans from non-
receipts represent inward remittances towards
residents, payment of dividend/profit to non-
maintenance of foreign embassies, diplomatic
resident share holders, reinvested earnings of the
missions and offices of international/regional
FDI companies, payment of interest on
institutions in India, while GNIE payments record
debentures, FRNs, CPs, fixed deposits,
the remittances on account of maintenance of
Government securities, charges on Special
Indian embassies and diplomatic missions
Drawing Rights (SDRs) etc.
abroad and remittances by foreign embassies on
their account. In accordance with the IMF’s Balance of
Payments Manual (5th edition), ‘compensation
5.1.1.2.5. Miscellaneous of employees’ has been shown under head,
‘Miscellaneous services’ comprise of a host of “income” with effect from 1997-98; earlier,
business services, viz., communication, ‘compensation of employees’ was recorded under
construction, financial, software and news agency the head “Services – miscellaneous”.
services, royalties, copyright and license fees,
management services and others. Of late, data 5.1.2. Capital Account
on software services – receipts and payments, The data on capital account are compiled on the
are presented separately.
basis of various returns filed by the entities
engaged in capital account transactions to the
5.1.1.3. Transfers (Official, Private) Reserve Bank of India or Government of India.
Transfers represent one-sided transactions, i.e., These include reporting on foreign direct
transactions that do not have any quid pro quo, investment, foreign institutional investment/
such as grants, gifts, and migrants’ transfers by ADR/GDR, external commercial borrowing
way of remittances for family maintenance, (ECBs)/foreign currency convertible bonds
repatriation of savings and transfer of financial (FCCBs), trade credit, NRI deposits and other
and real resources linked to change in resident banking liabilities/assets. The data on external
status of migrants. Official transfer receipts assistance are obtained from the Government of
include grants, donations and other assistance India.
received by the Government from bilateral and
multilateral institutions. Similar transfers by 5.1.2.1. Foreign Investment
Indian Government to other countries are
Foreign investment has two components, namely,
recorded under official transfer payments. foreign direct investment and portfolio
investment. Foreign direct investment (FDI) to
5.1.1.4. Income and by India up to 1999-2000 comprise mainly
Transactions are in the form of interest, dividend, equity capital. In line with international best
profit and others for servicing of capital practices, the coverage of FDI has been expanded
transactions. Investment income receipts since 2000-01 to include, besides equity capital.
comprise interest received on loans to non- reinvested earnings (retained earnings of FDI
residents, dividend/profit received by Indians on companies) and ‘other direct capital’ (inter-
foreign investment, reinvested earnings of Indian corporate debt transactions between related
FDI companies abroad, interest received on entities). Data on equity capital include equity
debentures, floating rate notes (FRNs), of unincorporated entities (mainly foreign bank
Commercial Papers (CPs), fixed deposits and branches in India and Indian bank branches
223
operating abroad) besides equity of incorporated denote loans extended by the Export Import
bodies. Data on reinvested earnings for the latest Bank of India (EXIM bank) to various countries
year (2002-03) are estimated as average of the and repayment of such loans. Commercial
previous two years as these data are available Borrowings - to India denote drawls/ repayment
with a time lag of one year. In view of the above of loans including buyers credit, suppliers credit,
revision, FDI data are not comparable with floating rate notes (FRNs), commercial paper (CP),
similar data for the previous years. In terms of bonds, foreign currency convertible bonds
standard practice of BoP compilation, the above (FCCBs) issued abroad by the Indian corporate,
revision of FDI data would not affect India’s etc. It also includes India Development Bonds
overall BoP position as the accretion to the (IDBs), Resurgent India Bonds (RIBs), India
foreign exchange reserves would not undergo any Millennium Deposits (IMDs).
change. The composition of BoP, however, would
undergo changes. These changes relate to 5.1.2.5. Short-Term Loans to India
investment income, external commercial
It is defined as the drawls in respect of loans,
borrowings and errors and omissions. In case of
utilized and repayments with a maturity of less
reinvested earnings, there would be a contra
than one year.
entry (debit) of equal magnitude under
investment income in the current account. ‘Other
Capital’ reported as part of FDI inflow has been 5.1.2.6. Banking Capital
carved out from the figure reported under It comprises three components: a) foreign assets
external commercial borrowings by the same of commercial banks (ADs), b) foreign liabilities
amount. ‘Other Capital’ by Indian companies of commercial banks (ADs), and c) others.
abroad and equity capital of unincorporated ‘Foreign assets’ of commercial banks consist of
entities have been adjusted against the errors (i) foreign currency holdings, and (ii) rupee
and omissions for 2000-01 and 2001-02. overdrafts to non-resident banks. ‘Foreign
liabilities’ of commercial banks consists of (i)
5.1.2.2. Portfolio Investment Non-resident deposits, which comprises receipt
and redemption of various non-resident deposit
Portfolio investments mainly include FIIs’
schemes, and (ii) liabilities other than non-
investment, funds raised through GDRs/ADRs
resident deposits which comprises rupee and
by Indian companies and through offshore funds.
foreign currency liabilities to non-resident banks
Data on investment abroad, hitherto reported,
and official and semi-official institutions. ‘Others’
have been split into equity capital and portfolio
under banking capital include movement in
investment since 2000-01.
balances of foreign central banks and
international institutions like IBRD, IDA, ADB,
5.1.2.3. External Assistance
IFC, IFAD, etc., maintained with RBI as well as
External assistance by India denotes aid movement in balances held abroad by the
extended by India to other foreign Governments embassies of India in London and Tokyo.
under various agreements and repayment of
such loans. External Assistance to India denotes 5.1.2.7. Rupee Debt Service
multilateral and bilateral loans received under
the agreements between Government of India and Rupee debt service includes principal repayments
other Governments/International institutions and on account of civilian and non-civilian debt in
repayments of such loans by India, except loan respect of Rupee Payment Area (RPA) and
repayment to erstwhile “Rupee area” countries interest payment thereof.
that are covered under the Rupee Debt Service.
5.1.2.8. Other Capital
5.1.2.4. Commercial Borrowings Other capital comprises mainly the leads and
Commercial borrowings cover all medium/long lags in export receipts. Besides this, other items
term loans. Commercial Borrowings by India included are funds held abroad, India’s
224
subscription to international institutions, quota through banking system and the banks that
payments to IMF, remittances towards recouping undertake foreign exchange transactions must
the losses of branches/subsidiaries and residual submit various periodical returns and supporting
item of other capital transaction not included documents prescribed under the FEMA to RBI.
elsewhere.
The above information is further supplemented
by information available from the Directorate
5.1.3. Movement in Reserves
General of Commercial Intelligence and Statistics
Movement in reserves comprises changes in the (DGCI&S), various embassies/consulates
foreign currency assets held by the RBI and SDR including Indian embassies/consulates abroad,
balances held by the Government of India. These various ministries/government agencies/
are recorded after excluding changes on account departmental undertakings, USAID, National
of valuation. Valuation changes arise because Association of Software Service Companies
foreign currency assets are expressed in US (NASSCOM), Air India, financial institutions and
dollar terms and they include the effect of commercial banks (independent of reporting
appreciation/depreciation of non-US currencies under ITRS), corporate sector and the RBI’s own
(such as Euro, Sterling, Yen) held in reserves. records.
In accordance with the provisions of IMF’s
Balance of Payments Manual (5th Edition), gold 5.1.6. Data Dissemination
purchased from the Government of India by the At present, BoP statistics are published in two
RBI has been excluded from the BOP statistics. formats, viz., standard presentation with broad
Data from the earlier years have, therefore, been heads and detailed presentation with break-up
amended by making suitable adjustments in of broad heads. The standard presentation with
“Other Capital Receipts” and “Foreign Exchange broad heads is compiled in accordance with the
Reserves”. Similarly, item “SDR Allocation” has methodology set out in the IMF Balance of
been deleted from the table. Payments Manual, 5th edition (BPM5) and is
published every quarter with a lag of three
5.1.4. Exchange Rates months as per IMF’s Special Data Dissemination
Standards (SDDS) requirements. The
Foreign currency transactions have been
converted into rupees at the par/central rates disaggregated data on invisibles are finalised and
up to June 1972 and on the basis of average of published once the firm data on components
become available. Invisibles are broadly classified
the Bank’s spot buying and selling rates for
sterling and the monthly averages of cross rates under three heads, viz., services, transfers and
income. While services, comprise travel,
of non-sterling currencies based on London
market thereafter. Effective March 1993, transportation, insurance, government not
conversion is made by crossing average spot included elsewhere (GNIE) and miscellaneous (i.e.
other services); transfers constitute private
buying and selling rate for US dollar in the
foreign exchange market and the monthly transfers and official transfers and income
includes investment income and compensation
averages of cross rates of non-dollar currencies
based on the London market. of employees.
5.1.5. Data Sources 5.1.7. Revisions Policy for India’s Balance of

Payments Data
Data on BoP are primarily compiled on the basis
of International Transaction Reporting System India’s balance of payments statistics are
(ITRS) in the form of fortnightly R-Returns filed published as ‘preliminary’, ‘partially revised’ and
by ADs/banks dealing in forex transactions. In ‘revised’ data. Preliminary data are quarterly and
accordance with the Foreign Exchange are released with a lag of three months from the
Management Act (FEMA), 1999, all foreign reference date (i.e., data for the quarter ending
exchange transactions must be channeled March 2004 are available at the end of June
225
2004). Preliminary data are subjected to some (ii) bilateral, (iii) IMF, (iv) trade credits, (v)
revisions during the year and partially revised commercial borrowings, (vi) NRI deposits, (vii)
data are released with lags of six months, nine rupee debt and (viii) short-term debt of maturity
months and twelve months from the reference up to one year. In contrast to the liabilities side
date, alongside preliminary data for the relevant of the international investment position (IIP), the
quarter(s). Partial revisions in the annual data external debt data do not include any financial
are carried out with a lag of eighteen months liabilities arising from foreign direct investment
from the reference date. Thereafter, the data are (except loans obtained by FDI enterprises in
‘frozen’ and final revisions are incorporated in India from their parent company abroad) and
the revised data, which are released within a lag equity component of foreign portfolio investment.
of twenty-four months from the reference date.
Extraordinary revisions may be undertaken within 5.2.2. Accounting Conventions
this cycle in the event of methodological changes
External debt data are compiled and
in respect of data collection and compilation
disseminated on original maturity basis. External
procedures and/or significant changes indicated
debt is compiled and presented both in terms of
by data sources that cause structural shifts in
US dollar and Indian rupees. The external debt
the data series. These extraordinary revisions are
figures are first compiled in terms of Indian
documented at the time of release. Preliminary,
rupees and then converted into US dollar at the
partially revised and revised data are clearly
spot exchange rate on the reference date.
identified in the text and tables.
5.2.3. Nature of the Basic Data Sources

5.2. EXTERNAL DEBT
At present various sources are used for obtaining
The definition of gross external debt adopted by
information on various components of the
India is based on the definition provided in 1988
external debt. The office of the Controller of Aid,
by the International Working Group on External
Accounts and Audit Division, Ministry of Finance
Debt Statistics (IWGEDS), which was set up
(MoF), Government of India (GoI) collects
jointly by the Bank for International Settlements
information on (i) multilateral and bilateral debt,
(BIS), the International Monetary Fund (IMF), the
excluding that part of multilateral/bilateral non-
Organisation for Economic Cooperation and
conessional debt to non-government entities for
Development (OECD) and the World Bank. The
which approval needs to be sought under the
core definition of external debt given by the
ECB route; (ii) bilateral component of trade
IWGEDS is “gross external debt is the amount,
credit.
at any given time, of disbursed and outstanding
contractual liabilities of residents of a country The External Debt Management Unit (EDMU) of
to non-residents to repay principal, with or the Department of Economic Affairs, MoF, GoI,
without interest, or to pay interest, with or collects data on rupee debt and export credit
without principal”. component for defence purposes. Securities and
The coverage of data is broadly consistent with Exchange Board of India (SEBI) is the source
the recommendations made in IMF’s “External for data on FII investment in debt instruments.
Debt Statistics – Guide for Compilers and Users”, Information on all other components of debt, viz.,
1993. The external debt classification commercial borrowings, NRI deposits and trade
distinguishes between type of debtor/creditor, by credits (both long and short term) is collected
maturity, i.e., long term and short term, by type by the Reserve Bank of India.
of transactions, i.e., deposit or trade related and
by element of concessionality. 5.2.4. Compilation Practices
India’s external debt data are disseminated
5.2.1. Scope of the data under two broad heads namely, long-term and
The gross external debt of the country is short-term. Long term debt is classified into
classified under eight categories: (i) multilateral, multilateral, bilateral, IMF, export credit,
226
commercial borrowings, rupee debt and NRI are those loans under ODA, which carry
deposits. Short-term debt comprises NRI grant element of more than 25 per cent.
deposits and trade related credits. The further Rest are all non-concessional.
disaggregation of long-term and short-term debt
“IMF” classification represents use of Fund
is based on creditor source and the status of
borrower. credits. “Export credits” essentially include
long-term trade credits. ”Buyers’ credits’
Loans raised by India under external are export credits raised through
assistance programme or Official commercial banks with insurance cover
Development Assistance (ODA) are covered from export credit agency of the donor
for the most part under multilateral and country. “Suppliers’ credits’ are credits
bilateral classification. Under multilateral, extended by the suppliers with or without
the following creditor sources have been insurance cover by export credit agencies.
identified: IDA, IBRD, ADB, EEC(SAC), “Export credit component of bilateral loans’
OPEC, ISO, NIB, and IFC(W). Loans raised are export credits routed through
from all the above international bodies commercial banks and are part of the
except IFC(W) are included under package of bilateral assistance.
multilateral. The latter is treated as a part
“Commercial borrowings” comprise
of commercial borrowings. Multilateral
group comprises the loans extended by the borrowings from international capital
above international institutions to the markets on commercial terms.
“Commercial banks loans’ refer to
Government under ODA as well as loans to
non-Government entities including those at borrowings by Indian entities from
international banks and other financial
market determined interest rates
(commercial borrowings). leasing and lending by overseas branches
of Indian commercial banks to Indian
Bilateral group represents loans received residents. ‘Securitised Borrowings’ include
from bilateral sources. Certain bilateral funds raised through the issue of securitised
credits to Government of India contain an instruments like bonds (including for
export credit component, for example example India Development Bonds and
French and German credits as well as Swiss Resurgent India Bonds), Floating Rate
mixed credits, which is not treated as Notes, Euro-Commercial Paper, Note
bilateral but as a part of export credit. Issuance Facility, etc., and Non-convertible/
Loans raised by non-Government entities convertible debentures. India Millennium
including those at market related interest deposits (IMDs) also figure here. FII
rates (commercial borrowings) from bilateral investment in Government securities is
sources, for example EXIM Japan, EXIM treated as part of securitised borrowings.
USA and KFW Germany, are covered under “Loans/securitised borrowings with
bilateral category. multilateral/bilateral guarantee and IFC(W)”
covers borrowings of Indian residents from
The multilateral and bilateral loans are
international capital market with a
classified into Government and Non- guarantee from multilateral/bilateral
Government borrowings. Government agencies.
borrowings are those which pass through
Central Government’s budget. Non- NRI deposits consist of deposits under
Government borrowings include all loans Foreign Currency Non-resident (Banks)
raised by the non-government bodies with (FCNR)(B) and Non-resident (External)
or without Government guarantee. Rupee Account (NR(E)RA). Back data
Government and Non-Government credits include Foreign Currency Non-resident
are further disaggregated into concessional Account (FCNRA) which was withdrawn with
and non-concessional. Concessional loans effect from August 1994.
227
Rupee debt covers civilian and non-civilian following three broad heads, viz., equity capital,
(defence) rupee debt owed to Russia which reinvested earnings and intra-company loans. FPI
are payable through exports. includes portfolio flows through issuance of
American depository receipts (ADRs)/global
Short-term debt represents all borrowings
depository receipts (GDRs) and investment by
including NRI deposits with maturity of six Foreign Institutional Investors (FIIs).
months to one-year.
5.3.2. Accounting Conventions

5.2.5. Other Aspects
Foreign Investment data is compiled and
The Reserve Bank of India compiles and
presented in terms of US dollar.
publishes quarterly data on India’s external debt
for quarters ending March and June and the
Ministry of Finance, Government of India releases 5.3.3. Nature of the Basic Data Sources
external debt data for quarters ending September The basic source for obtaining information on
and December. The data are not seasonally various components of foreign investment is the
adjusted. The data are preliminary when first Reserve Bank of India.
released and are revised in about one year, by
which time they become final. 5.3.4. Compilation Practices
In India, foreign investment data including FDI and
5.3. FOREIGN INVESTMENT INFLOWS FPI are compiled on a monthly basis by the RBI,
Foreign investment inflows can be broadly using an international transactions reporting
categorised as Foreign Direct Investment (FDI) system (ITRS) as the principal source of
and Foreign Portfolio Investment (FPI). FDI is the information. Following the methodology prescribed
process whereby residents of one country (the in BPM5, data on fresh inflows of foreign direct
home country) acquire ownership of assets for investment are being captured through reporting
the purpose of controlling the production, of these transactions by the companies who receive
distribution and other activities of a firm in these funds. The companies who receive the foreign
another country (the host country). According investment report send these receipts data with full
to International Monetary Fund (IMF) definition details to the Reserve Bank, which are then
contained in the Balance of Payments Manual, consolidated and used for compilation of direct
Fifth Edition (BPM-5), FDI has three components, investment data. Amount raised by the corporates
viz., equity capital, reinvested earnings and other through issuances of ADRs/GDRs are reported to
direct capital. India reports FDI inflows in the Reserve Bank.
accordance with the IMF definition, which
include reinvested earnings and other direct The Reserve Bank also separately obtains from
capital flows, besides equity capital. Portfolio the custodians, on a weekly basis, the details of
actual inflows/outflows into the accounts of the
Investment includes investment in equity
securities and debt securities in the form of FIIs. Data on reinvested earnings and other
capital is captured through annual surveys on
bonds and notes, money market instruments and
other instruments such as American Depository FDI companies. These different components are
Receipts (ADRs)/Global Depository receipts that then, finally compiled and consolidated to obtain
the data on aggregate foreign investment in India.
usually denotes ownership of equity.
5.3.1. Scope of the data 5.3.5. Other Aspects

Following the IMF practice and in line with other RBI publishes foreign investment data on a
country practices, foreign investment data are monthly basis in the RBI Bulletin, which
published under two broad heads: Foreign Direct provides component-wise details of direct
Investment (FDI) and Foreign Portfolio Investment investment and portfolio investment. Direct
(FPI). FDI data for India is published under the investment comprises of inflows through (i)
228
Equity via Government (SIA/FIPB) route, RBI FCNR(B) deposits are designated in foreign
automatic route, NRI, acquisition of shares and currency. The deposits can be made by NRIs.
equity capital of unincorporated bodies, (ii) They are accepted in Pound Sterling, US Dollar,
Reinvested Earnings and (iii) Other capital. EURO, Japanese yen, Australian dollar and
Portfolio investment covers: (i) GDRs / ADRs (ii) Canadian dollar. FCNR(B) deposits are accepted
FIIs, and (iii) offshore funds and others. for the tenure of one year and above but less
than two years, two years and above but less
5.4. NON RESIDENT DEPOSITS than three years and three years only.
Non resident Indians (NRIs) are allowed to open NR(E)RA and NR(NR)RD, on the other hand, are
and maintain bank account in India under a rupee denominated deposit schemes, where in
special deposit schemes – both rupee NRIs can park their funds in both term deposits
denominated and foreign currency denominated. as well savings accounts.
Such deposits are termed NRI deposits. For the
purpose of opening and maintaining NRI 5.4.2. Accounting Conventions
deposits, Non resident Indian and Overseas
corporate bodies are defined as follows: FCNR (B) deposits are compiled and disseminated
in US dollar. For FCNR (B) deposits, conversion
An Indian Citizen residing outside India and into a numeraire currency (US dollar) is done on
a Foreign Citizen of Indian origin residing the basis of average monthly exchange rate. NRE
outside India for employment/ carrying on and NRNR deposits data are first compiled in
business or vocation outside India or terms of Indian rupees and then converted into
staying abroad under circumstances US dollar. The stock data at the end of each
indicating an intention for an uncertain month is calculated on the basis of end-period
duration of stay abroad are defined as Non- exchange rate for the respective month. For
Resident Indians. Persons posted in United compilation of the monthly net flow figures, the
Nations organizations and officials deputed average rupee-US dollar exchange rate for the
abroad by Central/State Governments and month is used for conversion.
public sector undertakings on temporary
assignments are also treated as non- 5.4.3. Nature of the Basic Data Sources
residents. The basic source for obtaining information on
Foreign citizens of Indian origin are treated various components of NRI deposits is the
at par with NRIs for certain facilities under Reserve Bank of India.
bank deposits and investments in India. ‘A
person of Indian origin’ means an individual 5.4.4. Compilation Practices
(not being a citizen of Pakistan or At present, the monthly outstanding balances
Bangladesh or Sri Lanka), who at any time, under the existing Non-Resident Deposit schemes
held an Indian passport; or who or either are compiled on the basis of fortnightly statement
of whose parents or whose grandparents on external liabilities received by Reserve Bank
were citizens of India by virtue of the of India (RBI) under Section 42(2) of the RBI
Constitution of India or the Citizenship Act, Act. These data are supplemented by information
1955 (57 of 1955). received in the form of monthly statements
submitted by ADs to the Reserve Bank for
5.4.1. Scope of the data calculating the maturity structure and comparing
the balances under various deposits.
NRI deposits include deposits under Foreign
Currency Non-resident (Banks) (FCNR)(B) and
Non-resident (External) Rupee Account 5.4.5. Other Aspects
(NR(E)RA). Back data include NR(NR)RD which The figures on NRI deposits are published in
was withdrawn in 2002. the Reserve Bank of India Bulletin on a monthly
229
basis. It is also published every quarter in the whereas international investments received by a
table on Balance of Payments of the Bulletin. country from non-resident entities form its
foreign liabilities. These assets/liabilities are
5.5. INTERNATIONAL INVESTMENT primarily financial assets and financial liabilities.
POSITION OF INDIA Assets are divided into direct investment,
The International Investment Position (InIP), portfolio investment, financial derivative, other
compiled as at the end of a specific period such investment and reserve assets. Liabilities are
as quarter-end or year-end, is the balance sheet divided the same way except for reserve assets,
of the stock of external financial assets and i.e., direct investment, portfolio investment,
liabilities of a country. The net InIP (the stock of financial derivative and other investment.
external assets less the stock of external liabilities)
shows the difference between what an economy Direct Investment and Portfolio Investment
owns in relation to what it owes. Reflecting the
As per the IMF manual, international
increased world interest in levels of foreign
investment, InIP has been included under Special investments are broadly classified under five
Data Dissemination Standard (SDDS) of the IMF categories viz. direct investment, portfolio
investment, financial derivatives, other
to provide key information for assessing a
country’s economic relations with the rest of the investment and reserve assets. Direct investment
world. The conceptual framework for the InIP is the category of international investment that
reflects the objective of a resident entity in one
was introduced in the fifth edition of the
International Monetary Fund’s (IMF’s) Balance of economy obtaining a lasting interest in an
enterprise resident in another economy. Direct
Payments Manual (BPM5) in 1993. The position
at the end of a specific period reflects financial investment includes equity capital, reinvested
transactions, valuation changes, and other earnings, and other capital (inter company debt).
Claims on and liabilities to affiliated enterprises
adjustments that occurred during the period and
affected the level of assets and/or liabilities. are shown separately. The “lasting interest”
aspect is translated in terms of holding of
RBI disseminates InIP data annually as per the ordinary share or voting power, a threshold of
format prescribed under the SDDS by the ten percent is indicated by IMF. Otherwise the
International Monetary Fund (IMF). This manual investment is classified as portfolio investment
presents the detail compilation procedure in equity.
followed to compile the InIP of India.
The manual states that portfolio investment
5.5.1. Concept
includes equity securities and debt securities in
The underlying concept of Balance of Payments the form of bonds and notes, and money market
(BoP) and InIP are same [ref. BPM5 (1993), BoP instruments. Excluded are any of the
Compilation Guide (1995), BoP Text Book (1996)]. aforementioned instruments included in the
Transactions between residents and non-residents categories of direct investment and reserve
of an economy are shown in the BoP under three assets. Portfolio investment under each
accounts, viz., current account, capital account instrument then is sub-classified by institutional
and financial account. The international resident sectors viz. Monetary authorities,
investment position measures the economy’s stock General government, Banks and Other sectors.
of external financial assets and liabilities; the BOP
financial account measures transactions during
the period in these assets and liabilities. Financial Derivatives
Financial derivatives are financial instruments
5.5.2. InIP Components: Definition and
that are linked to another specific financial
Classification
instrument, indicator, or commodity and through
Foreign Assets and Foreign Liabilities which specific financial risks can be traded in
International investments made by a country in financial markets in their own right. The
non-resident entities constitute foreign assets derivatives are classified by the four institutional
230
resident sectors, viz., Monetary authorities, is presented in the Annex 5.1. At present two
General government, Banks and Other sectors. methods are followed to compile the data as
All financial derivatives are included here except stated below:
those reported under reserve assets.
In the case of direct investment (DI) data,
BoP data are added to the previous year
Other investment stock value. Necessary exchange rate
The fourth category of investments, viz., ‘Other changes are taken into account in the final
investment’ includes investments other than in compilation. In the case of DI assets, data
equities and securities such as Trade credits, are first compiled based on US Dollars
loans, currency and deposits and other assets/ (USD) values and then converted to Indian
liabilities. (such as capital subscriptions to rupee values. In the case of DI liabilities,
international, non-monetary organizations and data are first compiled in Indian rupee (INR)
miscellaneous accounts receivable and payable). and then converted to USD. Exchange rate
Other investment are also classified by sector of USD as on end-March vis-à-vis INR of
and lastly by original maturity (long term and the reference year is used for conversion.
short term). Data as on end-March 1997 that was
compiled through a census and published
A detail discussion on data sources for the above
in 2000 provide the base value [RBI(2000)].
items are available in InIP Guide (2002)
published by the IMF. Data pertaining to Banks, Government and
Monetary authority are compiled based on
Reserve Assets published sources or collected from the
Reserve assets are foreign financial assets corresponding agencies. If the published
available to, and controlled by, the monetary data of the stock values are available in
authorities or financing or regulating payments USD as well as in INR (e.g. reserves,
imbalances or for other purposes. external debt, etc.), then the published
information is used for InIP. If the data are
available in either currency only, end-March
5.5.3. Dissemination of InIP of India exchange rate of USD vis-à-vis INR of the
India has been disseminating data pertaining to reference year is used for necessary
InIP since 1951. The first study on India’s InIP conversion.
entitled “Census of India’s Foreign Liabilities and
Assets (as on June 30, 1948)” was published by Data pertaining to corporate sector (other
the RBI in 1951 [RBI(1951)]. However, with than direct investment and portfolio
India’s subscription to SDDS, India committed investment) are compiled based on survey,
to disseminate InIP as per the SDDS format viz., survey on foreign liabilities and assets
prescribed by IMF. Currently annual data as on on non-financial companies, mutual funds,
March are released by September of the same insurance companies.
calendar year through RBI website . Data are
released as per the prescribed format under 5.5.5. Limitation of the current methodology
SDDS and are available from end March 1997. Changes in InIP over a period occur due to four
reasons, viz., financial transactions, price and
5.5.4. Compilation Methodology/Procedure exchange rate changes, and other adjustments
The format of the InIP as prescribed by the IMF as shown in Table 5.1.
Table 5.1: Changes in InIP
Changes
Position at the Financial Price Exchange Other Position at
beginning of Transactions Changes Rate Adjustments the end of
the period Changes the period
231
At present a few items, viz., reserves, non- into account as information on price changes
resident deposits, are compiled incorporating all and other adjustments are not readily available.
the changes mentioned above. However, in the Following the above, the sources of data of
case of all other items, changes due to financial various components and compilation procedures
transactions and exchange rate only are taken are given in Table 5.2.
Table 5.2. Compilation of Guidelines for International Investment Position

Flow Stocks Source
A. Assets
1. Direct Investment Abroad
1.1 Equity Capital and Reinvested BoP Table: 43 Net flow is added to base data on RBI Bulletin for
Earnings (in USD) - stock, which are available in the Flow data
Latest article titled ‘Census of India’s (Statements on BoP
(as relevant) Foreign Liabilities and Assets as data)
on March 1997; RBI Bulletin
(October 2000)’.@
1.1.1 Claims on Affiliated NA
Enterprises
1.1.2 Liabilities to Affiliated NA
Enterprises (-)
1.2 Other Capital BoP Table 43 Net flow is added to base data on RBI Bulletin for
(in USD) - Stock, which are available in the Flow data
Latest (as article titled ‘Census of India’s
relevant) Foreign Liabilities and Assets as
on March 1997; RBI Bulletin
(October 2000)’. @
1.2.1 Claims on Affiliated NA
Enterprises
1.2.2 Liabilities to Affiliated NA
Enterprises (-)
2. Portfolio Investment
2.1 Equity Securities BoP Table: 43 As mentioned for items 1.1 & 1.2 RBI Bulletin for
(in USD) - Flow data
Latest (as
relevant)
2.1.1 Monetary Authorities Not Applicable
2.1.2 General Government Not Applicable
2.1.3 Banks International Banking Statement RBI Bulletin –
(IBS) (Statement-II) Item 3.1: other Articles on
Assets: Investment in Equity International
Abroad : Locational Banking Banking Statistics.
Statistics
2.1.4 Other Sectors 2.1-2.1.3
2.2 Debt Securities –
2.2.1 Bonds and Notes
2.2.1.1 Monetary Authorities Not Applicable
232
Flow Stocks Source

2.2.1.2 General Government Not Applicable
2.2.1.3 Banks – IBS (Statement-II) Item RBI Bulletin -
2.2 → Investment in Other Debt Articles on
Securities International
Banking Statistics
2.2.1.4 Other Sectors Articles on Survey data Foreign Liabilities
and Assets Survey
(FLAS) canvassed by
DESACS (BPSD)
2.2.2 Money-market Instruments
2.2.2.1 Monetary Authorities Not Applicable
2.2.2.2 General Government Not Applicable
2.2.2.3 Banks – IBS (Statement-II) Item RBI Bulletin -
2.1 → Investment in Foreign Govt. Articles on
securities International
Banking Statistics
2.2.2.4 Other Sectors – Survey data Foreign Liabilities
and Assets Survey
(FLAS) conducted by
DESACS (BPSD)
3. Financial Derivatives – NA
3.1 Monetary Authorities
3.2 General government
3.3 Banks
3.4 Other sectors
4. Other Investment – As per item 4.1.2
4.1 Trade Credit
4.1.1 General Government Not Applicable
4.1.1.1 Long-term
4.1.1.2 Short-term –
4.1.2 Other Sectors
4.1.2.1 Long-term As per the survey Foreign Liabilities
and Assets Survey
(FLAS) conducted by
DESACS (BPSD)
4.1.2.2 Short-term – Collected from
Department of
Economic Analysis
and Policy (Division
of International
finance); Data
pertain to Export
proceeds not
realised by
Corporate Sector
233
Flow Stocks Source

4.2 Loans
4.2.1 Monetary Authorities Not Applicable
4.2.1.1 Long-term
4.2.1.2 Short-term
4.2.2 General Government
4.2.2.1 Long-term (1) Advances to Foreign Govt. and Data on item (1) are
(2) Partition Debt Payable by compiled by RBI
Pakistan (Department of
Economic Analysis
and Policy)Data on
item (2) were
published by RBI
(Census of India’s
Foreign Liabilities
and Assets as on
March 1997, RBI
Bulletin, October
2000).
4.2.2.2 Short-term NA
4.2.3 Banks Banks Assets and Liabilities Compiled by RBI
(BAL) (Item-5) (DESACS)
4.2.3.1 Long-term Banks’ Assets and Liabilities (BAL) Compiled by RBI
(Item-5) (DESACS)
4.2.4 Other Sectors Survey data Foreign Liabilities
and Assets Survey
(FLAS) conducted by
RBI, (DESACS)
4.2.4.1 Long-term Not Applicable
4.2.4.2 Short-term Not Applicable
4.3 Currency and Deposits
4.3.1 Monetary Authorities Nil
4.3.2 General Government Balances Held Abroad by RBI (Department of
Embassies of India Economic Analysis
and Policy)
4.3.3 Banks BAL-Currency (Item-1)+Deposits Compiled by RBI
(Item-2) (DESACS)
4.3.4 Other Sectors Survey Foreign Liabilities
and Assets Survey
(FLAS) conducted by
RBI (DESACS)
4.4 Other Assets
4.4.1.1 Long-term
4.4.1.2 Short-term
234
Flow Stocks Source

4.4.2.1 Long-term Subscriptions to international Included are AFD,
Institutions after conversion: IFC, IDA, IBRD,
Annual Reports MIGA, ADB. Data
are collected from
respective website.
4.4.2.2 Short-term Not Applicable
4.4.3 Banks
4.4.3.1 Long-term (1)Consolidated Balance Sheet of Item (1) from RBI
Overseas Branches of Indian (Department of
Banks (Liabilities : Head Offices Banking
i.e. HO funds) and (2) BAL Supervision)Item (2)
[Vostro (Debit)] compiled by by RBI
(DESACS)
4.4.4 Other Sectors Survey: LIC, Insurance, Mutual Foreign Liabilities
Fund, Corporate and Assets Survey
(FLAS) conducted by
RBI (DESACS)
4.4.4.1 Long-term -do- -do-
4.4.4.2 Short-term -do- -do-
5. Reserve Assets
5.1 Monetary Gold Data are published by RBI RBI, RBI Bulletin
(Table 4.4)
5.2 Special Drawing Rights -do- -do-
5.3 Reserve Position in the Fund -do- -do-
5.4 Foreign Exchange -do- -do-
5.4.1 Currency and Deposits Data Template on International IMF’s SDDS site
Reserves (India page)
5.4.1.1 With Monetary Authorities -do- -do-
5.4.1.2 With Banks -do- -do-
5.4.2 Securities -do- -do-
5.4.2.1 Equities
5.4.2.2 Bonds and Notes
5.4.2.3 Money-market Instruments
5.4.3 Financial Derivatives (net)
5.5 Other Claims
B. Liabilities
1. Direct Investment in Reporting
economy
1.1 Equity Capital and Reinvested BoP Table 42 Net flow is to be added to Stock; RBI Bulletin,
Earnings (In Indian base data are available in the October 2000
235
Flow Stocks Source

Rupee)-Latest article titled ‘Census of India’s
(as relevant) Foreign Liabilities and Assets as
on March 1997.
1.1.1 Claims on Direct Investors (-) NA
1.1.2 Liabilities to Direct Investors NA
1.2 Other Capital BoP Table 42 Net flow is to be added to Stock; RBI Bulletin,
(In Indian base data are available in the October 2000
(as relevant) Foreign Liabilities and Assets as
on March 1997.
1.2.1 Claims on Direct Investors (-) NA
1.2.2 Liabilities to Direct
Investors $$$ NA
2. Portfolio Investment
2.1 Equity Securities
2.1.1 Banks @@
2.1.2 Other Sectors $$ BoP Table 42 Net flow is to be added to Stock; RBI Bulletin,
(In Indian base data are available in the October 2000
(as relevant) Foreign Liabilities and Assets
as on March 1997;
2.2 Debt securities
2.2.1 Bonds and notes
2.2.1.1 Monetary Authorities Nil
2.2.1.2 General Government Non resident Government (NRG) RBI (DESACS)
(Purpose code ‘02’)
2.2.1.3 Banks External Debt—V.b) Securitised External Debt
borrowings (excluding FCCB) Statistics
2.2.1.4 Other Sectors ## India’s External Debt - V.b) External Debt
Securitised Borrowings [Only Statistics; RBI
FCCB]
2.2.2 Money-market Instruments
2.2.2.1 Monetary Authorities Nil
2.2.2.2 General Government NRG (Treasury Bill) Compiled by RBI
(DESACS)
2.2.2.3 Banks Nil
2.2.2.4 Other Sectors Nil
3. Financial Derivatives NA
3.1 Monetary Authorities
3.2 General Government
3.3 Banks
3.4 Other Sectors
236
Flow Stocks Source

4. Other Investment
4.1 Trade Credits
4.1.1.1 Long-term Export credit component of External Debt
Bilateral credits - India’s External Statistics, MoF, GoI.
Debt
4.1.2 Other Sectors
4.1.2.1 Long-term India’s External Debt - suppliers’ External Debt
credit + Export credit for defence Statistics, MoF, GoI.
purposes
4.1.2.2 Short-term India’s External Debt: Others: External Debt
Trade related (Short term debt Statistics, MoF, GoI.
over six months)
4.2 Loans
4.2.1 Monetary Authorities
4.2.1.1 Use of Fund Credit & International Financial Statistics IMF
loans from the fund (IFS): Page 534 : India : Total fund
credit & loans outstanding
Excluding SDR
4.2.1.2 Other Long-term Nil
4.2.1.3 Short-term Nil
4.2.2.1 Long-term India’s External Debt –Multilateral External Debt
(A)+Bilateral (A)+Rupee Debt Statistics, MoF, GoI.
4.2.3 Banks Nil
4.2.3.1 Long-term India’s External Debt[Multilateral External Debt
→Non Govt-→Non concessional → Statistics. MoF, GoI
Financial Institutions + Bilateral
→ Non Govt. → (Concessional →
Financial Institutions + Non
concessional → financial
institutions)]
4.2.4 Other Sectors
4.2.4.1 Long-term** India’s external Debt-[Multilateral External Debt
→ Non Govt. → Non concessional Statistics, MoF,
→ a)Public sector + b) Private GoI.RBI (DESACS)
sector )] + [ Bilateral → Non Govt.
→ concessional → (Private +
Public sector) + Bilateral -> Non
Govt. → Non concessional →
(Private + Public sector) ] + Buyer’s
credits + Commercial Banking
237
Flow Stocks Source

loans + Loans/ securitized
borrowings etc. with multilateral/
bilateral guarantee and IFC(W)]—
ECB(FDI component collected from
ECB section
4.3 Currency and Deposits
4.3.1 Monetary Authorities NRG(Purpose’01') Compiled by RBI
(DESACS)
4.3.2 General government Nil
4.3.3 Banks @ India’s External Debt-. NRI & FC External Debt
Deposits+ NRI deposits up to Statistics
1 year
4.3.4 Other sectors Nil
4.4 Other Liabilities
4.4.1.1 Long-term
4.4.1.2 Short-term
4.4.2 General Government Nil
4.4.2.1 Long-term
4.4.2.2 Short-term
4.4.3 Banks
4.4.3.1 Long-term Nil
4.4.3.2 Short-term BAL NOSTRO (Debit: Code Compiled by RBI
(convert into Indian rupees (DESACS)
then into USD with March end
exchange rate of the reference
year)
4.4.4 Other sectors Survey Foreign Liabilities
and Assets Survey
(FLAS) conducted by
RBI (DESACS)
4.4.4.1 Long-term
4.4.4.2 Short-term
NA : Not Available
$$ : Foreign Direct Investment (FDI) & Portfolio Investment are not adjusted for price changes.
$$$ : All liabilities (other than equity) between direct investor & direct investment enterprises are treated as other capital.
@ : Include accrued interest. Do not include non-resident non-repatriable deposits from 1997-2001.
** : Includes Buyers’ Credit. Loan transactions between direct investor & direct investment enterprises are treated as other
capital.
@@ : Equity Investments in Banks by Non-residents included under FDI.
Reference:
RBI Census of India’s Foreign Liabilities and Assets as on March 1997; RBI Bulletin (October 2000). (2000)
238
5.6. STATISTICS ON FOREIGN EXCHANGE ii. Deposits with

RESERVES
a. Central Banks
Reserve Bank of India has been publishing the
data on Foreign Exchange Reserves to fulfill b. Foreign Commercial Banks
statutory and international obligations as a c. Bank for International Settlements
member of International Monetary Fund (IMF).
d. International Bank for Reconstruction
The data on Foreign Exchange Reserves are
and Development (IBRD)
published at prescribed intervals in various
publications and/or on its official website iii. Treasury Bills - Sovereign
www.rbi.org.in for use by domestic and
international entities and Research personnel. iv. Securities and bonds (Foreign Securities) –
Sovereign and supranational
5.6.1. Concepts of India’s International The Foreign Currency Assets are reflected in the
Reserves balance sheet of Reserve Bank as:
India’s concept of international reserves conforms
to IMF’s Balance of Payments Manual, fifth i. Foreign Securities (Issue Department
edition, Chapter XXI. Reserves are held for the Balance sheet )
purpose of intervention in the domestic foreign ii. Balances held abroad
exchange markets, providing foreign currency
iii. Investments
liquidity to the Government and as backing for
domestic currency. Foreign Exchange Reserves or Reserve Assets
Data are classified and presented under these are defined as consisting of those external assets
heads. that are readily available to and controlled by
monetary authorities for direct financing of
5.6.2. Concepts and Definitions of Foreign payments imbalances, for indirectly regulating
Exchange Reserves the magnitude of such imbalances through
The Foreign Exchange Reserves consist of the intervention in exchange markets to affect the
following components: currency exchange rate, and/or for other
purposes. The category of reserve assets, as
i. Foreign Currency Assets (FCA) defined in the Manual, comprises Monetary Gold,
ii. Gold Special Drawing Rights of IMF, RTP with IMF,
iii. Special Drawing Rights (SDR) Foreign Exchange Assets (consisting of currency
and deposits and securities), and other claims.
iv. Reserve Tranche Position in IMF (RTP)
Securities that do not satisfy the requirements
Reserve Bank of India has direct control over of reserve assets are included in direct investment
the Foreign Currency Assets and Gold, which and portfolio investment.
are reflected in its Balance sheet while Special
Foreign Exchange or Currency Assets includes
Drawing Rights and Reserve Tranche Position in
monetary authorities’ claims on nonresidents in
IMF are reflected in the books of Government of
the forms of ECUs, currency bank deposits,
India. SDRs and RTP, which appear in the books
government securities, other bonds and notes,
of the Government but are readily available to
money market instruments, financial derivatives,
Reserve Bank (monetary authority) for use, are
equity securities, and non-marketable claims
included in Foreign Exchange Reserves.
arising from arrangements between central banks
Foreign exchange reserves are deployed as per or governments. (Foreign exchange covers claims
the provisions of the Reserve Bank of India Act that are shown as the foreign exchange
1934. Broadly, the FCA comprises: component of the series for international liquidity
i. Cash Balance in Nostro accounts published by the Fund in International Financial
maintained with various Central Banks. Statistics.)
239
Monetary Gold is gold owned by the authorities repayable to the member. Reserve tranche
(or by others who are subject to the effective purchases are purchases from the Fund of other
control of the authorities) and held as a reserve currencies that do not cause Fund holdings of
asset. Other gold (non-monetary gold, possibly a member’s currency to exceed the member’s
including commercial stocks held for trading quota (minus holdings that reflect the member’s
purposes by authorities who also own monetary use of Fund credit). A purchase from the Fund
gold) owned by any entity is treated in this is recorded as an increase in foreign exchange
Manual as any other commodity. Transactions holdings and a decrease in the member’s reserve
in monetary gold occur only between monetary position in the Fund; a repurchase is recorded
authorities and their counterparts in other as a decrease and an increase, respectively.
economies or between monetary authorities and Purchases in the reserve tranche are not
international monetary organizations. Like SDRs, regarded as a use of Fund credit, are not subject
monetary gold is a reserve asset for which there to charges, and do not require repurchase. RTP,
is no outstanding financial liability. shown as a memo item with effect from May 23,
2003, is included in the reserves from the
Special Drawing Rights of IMF (SDRs) are weekend ended April 2, 2004.
international reserve assets created by the
International Monetary Fund to supplement other
5.6.3. Special Data Dissemination Standards
reserve assets that are periodically allocated to
IMF members in proportion to their respective (SDDS) of the International Monetary
quotas. SDRs are not considered liabilities of the Fund (IMF) - International Reserves
and Foreign Currency Liquidity Data
Fund, and IMF members to whom SDRs are
allocated do not incur actual (unconditional) Template
liabilities to repay SDR allocations. The Fund The SDDS was established in 1996 to guide
determines the value of SDRs daily by summing, countries that have, or that might seek, access
in U.S. dollars, the values—which are based on to international capital markets in the
market exchange rates—of a weighted basket of dissemination of economic and financial data to
currencies. The basket and weights are subject the public.1 This site provides information about
to revision from time to time. SDRs can be used economic and financial data disseminated by
to acquire other members’ currencies (foreign member countries that subscribe to the SDDS.
exchange), to settle financial obligations, and to
Reserve Bank subscribed to SDDS effective
extend loans. Changes in the SDR holdings of
December 27, 1996. Metadata was posted on the
monetary authorities can arise through (i)
DSBB – Dissemination Standards Bulletin Board
transactions involving SDR payments to or
on October 30, 1997. Reserve Bank completely
receipts from the Fund, other participants in the
subscribed to Metadata on December 14, 2001.
SDR Department of the Fund, or other holders
The IMF requires that data should be available
or (ii) allocation or cancellation. Transactions
at regular intervals in public domain. The
such as those enumerated under (i) are included
Reserve Bank publishes these data in its
in the balance of payments; allocations or
publications. The Reserve Bank also publishes
cancellations are not entered in the balance of
on its website, advance dissemination of release
payments but are reflected in the international
calendars for these data categories in accordance
investment position.
with SDDS requirements.
Reserve Tranche Position of IMF member is
defined as the member’s position in the IMF’s 5.6.3.1. Coverage characteristics
General Resource Account which is recorded
There are two publications relating to the reserve
under the category for reserve assets. The
assets i.e Foreign Exchange Reserves under WSS
member’s reserve position is the sum of the
and the data Template on International Reserves
reserve tranche purchases that a member may
draw upon and any indebtedness of the Fund
1.
(under a loan agreement) that is readily http://dsbb.imf.org/Applications/web/sddshome
240
and Foreign Currency Liquidity under SDDS. 5.6.5. Dissemination of Foreign Exchange
Data is disseminated in US dollars (in millions) Reserves or Assets
and Indian Rupees (in crores, where one crore = The statistics related to country’s Foreign
10 million) on the Foreign Exchange Reserves Exchange Reserves are disseminated by Reserve
(comprising Foreign Currency Assets and Gold Bank in the following publications and frequency.
held by RBI and SDRs and RTP with IMF) under
WSS and in US dollars (in millions) only under At weekly intervals (under Table 2) in the
data template on International Reserves and Weekly Statistical Supplement (WSS) with
Foreign Currency Liquidity. a lag of one week at every week-end. The
data are presented in Indian Rupees as well
5.6.3.2. Periodicity as US dollar. Data include variation in
Reserve Asset (component-wise) over
Data are released on weekly basis (on week-end) previous week, over last December and close
for the Foreign Exchange Reserves and on
of previous financial year, i.e., March 31.
monthly basis (on month-end) for the Data
Template on International Reserves and Foreign At monthly intervals (under Table No.44) in
Currency Liquidity. Reserve Bank of India Bulletin; the data
include reserve assets (component-wise) for
5.6.3.3. Timeliness month-wise position for the current and
immediately preceding two financial years.
Data are released one week after the reference
The working notes are indicated under
week-end with respect to Foreign Exchange
“Notes on Tables” of the bulletin.
Reserves and one month after the reference
month-end for the Data Template on Weekly, monthly, quarterly, and annual
International Reserves and Foreign data on Foreign Exchange Reserves are also
Currency Liquidity. published in the Handbook of Statistics on
Indian Economy (Table 154; Table 197 and
5.6.4. Integrity and Quality of Data Table 201). These data were included earlier
The terms and conditions of dissemination of in the Report on Currency and Finance,
official statistics include those relating to the Vol.II for current and previous years under
confidentiality of individually identifiable reference of the publication.
information. The data is compiled in accordance
The RBI “Annual Report” publishes quarterly
with the terms of Section 53 (1) of the Reserve
time series data for the last three years on:
Bank of India Act 1934, which requires that the
Foreign currency assets, gold, SDRs and the
RBI furnish a weekly statement of accounts of
RTP with IMF
the Issue Department and the Banking
Department to the Central Government. The RBI 5.7. THE NOMINAL EFFECTIVE EXCHANGE
Act 1934 is published in Hindi and English and RATE (NEER) AND THE REAL
is available, for a fee, from book stores selling EFFECTIVE EXCHANGE RATE (REER)
government publications, from the Controller of OF THE INDIAN RUPEE
Publications, Civil Lines, Delhi - 110006, India.
The indices of NEER and REER are often used
The data on international reserves are
disseminated by the RBI as a service to the public. as indicators of external competitiveness. These
indices are essentially drawn from the
Data are compiled according to the 5th edition purchasing power parity doctrine. NEER is a
of the IMF’s “Balance of Payments Manual”. The weighted average of bilateral nominal exchange
methodology used for compilation is indicated rates of the home currency in terms of foreign
in footnotes in the monthly “Reserve Bank of currencies. REER is a weighted average of NEER
India Bulletin” and in the Data Template on adjusted for inflation differential between India
International Reserves and Foreign Currency and the trading partner. Generally speaking, a
Liquidity. country has to adjust its exchange rate (in case
241
of fixed exchange rate) or the exchange rate of which formed part of RBI’s existing indices of
adjusts itself (in case of flexible exchange rate) NEER/REER, necessitating the exploration of
to the basic fundamentals of the domestic possibility of computing new series of NEER/
economy vis-à-vis major trading partners like REER with revised set of currencies and new
inflation differential and the movement in the weights. In December 2005, RBI replaced its
other exchange rates. existing 5-country indices with new six-currency
indices of NEER/REER. It also revised its thirty
There has been considerable discussion on
six-country indices and replaced them with a
movements in Nominal and Real Effective new 36-currency indices of NEER/REER.
Exchange Rate (NEER and REER) of the Indian
rupee. The stated stand of the RBI on this issue The new six-currency indices include U.S.A,
in the recent period has been that RBI does not Eurozone, U.K., Japan, China and Hong Kong
consider REER to be an effective tool for SAR. The new indices have two new currencies
management of short-term movements in - both Asian - the Chinese Renminbi and the
exchange rate. As there is certain arbitrariness Hong Kong Dollar. Two currencies in the existing
with respect to selection of base year, weights five-country series, viz., French franc and
and prices, the use of REER could be suited to Deutsche mark have been replaced by Euro in
track the movements of currency over of time the new indices. China and Hong Kong SAR have
rather than exchange rate levels at any particular become India’s important trading partners and
point of time. together accounted for around 9 per cent of
REER movements are subject to various India’s foreign trade in 2004-05. The six
countries/regions, represented by the six
influences, including capital flows, and the
estimation of REER raises several methodological currencies, together accounted for around 40 per
issues, e.g., the choice of a basket of currencies, cent of India’s total foreign trade in 2004-05 as
compared with a lower coverage of around 22
the choice of the base period, the choice of
weights and the choice of price index. per cent of India’s total foreign trade in the case
of the existing five-country index. China’s share
Nevertheless, in the long run, this index could
be useful to assess the movements in the in India’s foreign trade, which stood at a paltry
exchange rate of rupee vis-à-vis cross currency 0.19 per cent in 1991-92 increased to 6.1 per
cent in 2004-05. The increase has been
movements and inflation differential.
especially pronounced in the last 4 years. China
The Reserve Bank of India has been constructing is likely to emerge as a major trading partner of
five-country and thirty six-country indices of India in the years to come and a big competitor
NEER and REER as part of its communication too. Thus, including China takes account of third
policy and to aid researchers and analysts. The country competition in a limited way. The
five-country (U.S.A, Germany, France, Japan and Chinese renminbi (RMB) is likely to gain in
U.K) NEER and REER, which is a quick index, importance in future as China has already taken
was introduced by the RBI (Department of some steps on July 21, 2005 to make its
External Investments and Operations (DEIO)) in exchange rate regime more flexible. Thus, it
July 1998 and was published in the RBI Bulletin makes eminent sense to include China in the
every month. Additionally, the 5-country NEER new 6-currency indices of NEER/REER.
and REER were constructed on a daily basis for Including Hong Kong in the new indices takes
close monitoring of the nominal and real care of the trade with mainland China, which is
movement in the exchange rate of the rupee. The being routed through Hong Kong. The inclusion
changing trade pattern of India, which rendered of China and Hong Kong SAR also takes care of
the fixed trade weights in the case of 5-country the problem of falling share in India’s total
NEER/REER anachronistic and the introduction foreign trade of the countries included in existing
of single euro notes and coins for the entire 5-country indices and reflects an increasing
Eurozone with effect from January 1, 2002, recognition of the Indian economy’s rapidly
replacing the existing national currencies, some growing integration with the rest of Asia.
242
5.7.1. Note on Methodology period from 1992-93 to 1996-97. The new indices
5.7.1.1. Definition will use 3-year moving average trade weights in
place of the present fixed trade weights in order
The six-currency trade based NEER and REER to suitably reflect the changing pattern of India’s
are constructed on a daily as well as monthly foreign trade with its major trading partners.
basis. The currencies chosen are US Dollar,
Euro, Pound sterling, Japanese yen, Chinese The weights are constructed on the basis of
renminbi and Hong Kong Dollar. geometric average of India’s bilateral trade
(exports plus imports) with countries/regions
NEER: NEER is the weighted geometric average represented by the six-currencies during the
of the bilateral nominal exchange rates of the three year period, which gets updated every year.
home currency in terms of foreign currencies. Thus, unlike the earlier practice of having fixed
In terms of formula, weights, the new set of weights will be different
every year. The average share of each country
6 in the average total trade for the three years,
NEER = II (e/ei) w i e.g., 2002-03 to 2004-05, is normalised to arrive
i=1
at the requisite weights (wi). Weights used in
REER : REER is the weighted average of NEER the computation of new six-currency series are
adjusted by ratio of domestic inflation rate to as follows (Table 5.3):
foreign inflation rates. In terms of Formula,
6 Table 5.3: Weighting Pattern for Six-
REER = II [(e/ei) (P/Pi) ]w i Currency Series
i=1
(In per cent)
Where e : Exchange rate of rupee against
a numeraire (SDRs) Year Euro Japan UK USA Hong- China
kong
(i.e., SDRs per Rupee) (in index 1993-94 42.06 14.01 12.04 26.33 4.55 1.01
form)
1994-95 40.25 13.50 11.73 26.95 5.40 2.17
ei : Exchange rate of currency i 1995-96 39.22 13.44 11.33 26.95 6.07 2.98
against the numeraire (SDRs) 1996-97 38.95 12.87 11.25 27.29 6.15 3.49
(i.e., SDRs per currency i)
1997-98 39.28 11.76 11.55 27.46 6.03 4.20
(i= US Dollar, Euro, Pound 1998-99 38.71 11.03 11.82 28.21 6.03 4.20
Sterling, Japanese Yen, Chinese
1999-00 37.79 10.64 11.86 28.59 6.68 4.44
Renminbi, Hong Kong Dollar)
2000-01 36.67 9.92 12.15 29.12 7.48 4.65
wi: Weights attached to currency/
2001-02 35.88 9.30 12.06 29.08 8.02 5.67
country i in the index
2002-03 35.55 8.31 11.67 29.51 7.67 7.29
P : India’s wholesale price index (in
2003-04 35.52 7.85 10.84 28.90 7.55 9.34
Index form)
2004-05 35.12 7.15 10.13 28.19 7.45 11.96
Pi : Consumer Price Index of Country
i (in Index form) 5.7.2. Sources and Procedures
For data on exchange rate, the daily morning

5.7.1.2. Weighting Scheme eastern market exchange rates of the five
The existing five-country indices use fixed trade currencies, viz., euro, pound sterling, Japanese
weights, which are based on the average of yen, Hongkong dollar and Chinese renminbi are
India’s bilateral trade (exports plus imports) with crossed with SDR-USD rate. For US dollar, SDR-
the countries in the index during the five-year USD rate is taken into consideration. In the case
243
of the Indian rupee, RBI’s reference rate for US REER and NEER of their respective national
Dollar, announced at 12.00 noon, is crossed with currencies are being computed by most of the
SDR-USD rate to arrive at SDR-Rs. rate. The country authorities and also by many global
weekly all commodities wholesale price index financial institutions/investment banks/
(WPI) is used as an index of inflation for India in multilateral institutions like IMF to gauge the
REER. The WPI data are updated every week. competitiveness of various currencies and their
These data are available with a time lag of 2 likely future movements. Many countries are
weeks. For the 6 countries/regions represented reporting NEER and REER to the IMF. These
by the 6 currencies, monthly consumer price data are published in the International Financial
indices (CPI) are used as a measure of inflation Statistics (IFS), which is a monthly publication.
in these countries. In the case of euro, Depending on the availability of data, IMF also
Harmonised Index of Consumer Prices (HICP) has publishes REER for some advanced countries
been used. China does not provide inflation based on other cost indicators like relative unit
indices but provides year-on-year monthly growth labour cost and relative value added deflators,
rates, which have been converted into indices by relative export unit values in manufacturing and
taking 1993-94 as the base year. The CPI data of relative wholesale prices, apart from REER based
these countries/regions are taken from online on consumer prices. The methodology used by
information system like Bloomberg as soon as RBI for computing 6-currency REER and NEER
these are announced by them. Later, these CPI indices is in consonance with best international
data are substituted, wherever possible, by the practice adopted by top multilateral institution
price indices available in the International like IMF and other countries/institutions in this
Financial Statistics (IFS), International Monetary regard.
Fund, which comes with a time lag.
Indices of six-currency NEER and REER of the
The exchange rates have been defined in indirect Indian Rupee are published in the Reserve Bank
quotes so that the appreciation/depreciation of of India Bulletin under Table 51.
the rupee is directly reflected by a rise/fall in
index value. Thus, a rise in index represents an
5.8. STATISTICS ON TURNOVER IN FOREX
appreciation of rupee relative to the six
MARKET
currencies and a fall in index represents
depreciation of rupee relative to these currencies. 5.8.1. Data Source
As against the practice of having three base years
in the case of five-country indices, viz., 1991- Foreign exchange turnover data provides a
92, 1993-94 and 2003-04 (financial years based measure of market activity and can also provide
on monthly averages), the last being a moving a rough proxy for market liquidity. To gauge the
base updated every year to facilitate comparison size of the foreign exchange markets, forex
with a more recent period, the new six-currency turnover data is collected from authorized dealers
indices will have 1993-94 as fixed base and in India.
2003-04 as a moving base, which would change
The Reserve Bank of India, Forex Markets
every year as at present. In this connection, it
Division, Foreign Exchange Department, collects
may be mentioned that since the indices are
data in respect of foreign exchange transactions
geometric series, the percentage difference
on a daily basis through the FEMIS a wide area
between any two period would be same in such
network. All the authorized dealers are required
a series, whatever be the base year.
to send a file containing details of Merchant
The base year 1993-94 will remain fixed for (Spot, Forwards and Cancellation of Forwards)
several years, while the base year 2003-04 will and Interbank (Spot, Swap & Forwards)
be a moving one (i.e., from April 1, 2006 the purchases and sales data. The data so collected
base of 2003-04 would be changed to 2004-05 is then sent to Press Relations Division for
and so on). The indices are given on a financial dissemination on a weekly basis through the
year basis (average) since 1993-94. Weekly Statistical Supplement.
244
5.8.2. Definitions of terms related to forex supply and demand of foreign exchange for this
transactions duration. This also indicates “expectation on
Merchant: Where one of the parties to the interest differentials”.
contract is not a bank (AD). Forward Rate Agreement (FRA): A contract for
borrowing or lending at a stated interest rate
Interbank: Where both the parties to the contract
over a stated time period that begins at some
are banks (includes transactions with RBI)
time in the future Parties wishing to protect
Spot transaction: Single outright transaction themselves against future interest-rate
involving exchange of two currencies at a rate movements use FRAs.
agreed on the date of contract, for value or
delivery within two business days and includes 5.9. STATISTICS ON PURCHASE/SALE OF
cash (same day delivery)& tom (next day delivery) FOREX BY RBI
transactions. Over the years, the exchange rate of rupee has
evolved from one being fixed by the central bank
Outright forward: Transactions involving the
to one being determined by the market forces of
exchange of two currencies at a rate agreed on demand and supply. During the period 1975-
the date of contract for value or delivery at some 92, the exchange rate of rupee was officially
time in future (more than two business days
determined by the RBI in terms of weighted
later). basket of currencies of India’s major trading
Cancellation of forwards: On the purchase side partners and the exchange rate regime was
the forward merchant sale contracts cancelled characterized by daily announcement, by the
and on the sale side cancelled forward purchase RBI, of its buying and selling rates to Authorized
contracts are indicated. Dealers. Following the recommendations of the
Rangrajan Committee on Balance of Payments,
Swap: Transaction which involves the actual the Liberalised Exchange Rate Management
exchange of two currencies (principal amount System (LERMS) involving dual exchange rate
only) on a specific date at a rate agreed at the for the rupee was instituted in March 1992.
time of the conclusion of the contract and a Under LERMS, foreign exchange amounting to
reverse exchange of the same two currencies at 40 per cent of the receipts from current account
a date further in the future at a rate agreed to transactions was to be surrendered by the ADs
at the time of the contract. Only foreign exchange to RBI, at the official pre-announced exchange
swaps between ADs are to be reported. Double rate. The exchange rate for the sale of the
counting is not eliminated. remaining 60 per cent could be market-
The data forwarded by ADs through the dial up determined. LERMS was meant to be transitional
mode is merged in the FEMIS system and reports mechanism for enabling a movement from the
are generated on-line. managed regime to a market-determined system.
The switch to market-determined exchange rate
Spot Rate: The rate of exchange quoted for regime took place in March 1993, wherein the
transactions involving immediate settlement. It exchange rate of rupee was determined by the
usually refers to the current market rate for a market forces of demand and supply in the forex
currency. Interest is either added on (premium) market.
or subtracted from (discount) this rate to
determine pricing for non-spot trades, which are 5.9.1. Exchange rate management objectives
referred to as forwards in the FX market.
The exchange rate policy of RBI has been
Forward Premium: Forward premium is the articulated from time to time in monetary policy
difference between the respective forward rate statements, annual publications and also in
(i.e. the rate at which a foreign exchange contract various speeches on the subject by the Top
is struck today for settlement at a specified Management of the Bank. The objective has been
future date) and spot rate. This indicates the maintenance of orderly conditions in the market,
245
correcting any temporary mismatch in the on behalf of RBI in the market. Indirect
system and curbing excessive volatility or interventions became the primary mode of
speculative activity. During times of volatility, RBI intervening in the forex market by RBI since
has also been issuing press releases for 1997-98.
communicating its own assessment of the market
movements, reiterating its commitment of Interventions are ordinarily done in the spot
maintaining orderly conditions in the market and market. However, RBI also operates in the
forward and swap markets for purposes such
announcing policy measures, if any, for
stabilizing the market. The data on purchase/ as correcting distortions in the forward premia,
mitigating cash-dollar shortage in the market,
sales operations is placed in the public domain
with a one month lag. (Table No 48- RBI Bulletin). creating forward forex assets (to meet large bullet
redemption like RIB), etc.
5.9.2. Intervention operations of RBI
5.9.3. Statistics On Daily Foreign Exchange
Foreign exchange intervention can be defined as Reference Rates
a transaction by an official agent of the
government, to influence the value of the Effective from March 1, 1993, following the
unification of exchange rates, the era of free
exchange rate. Put simply, it can be defined as
the official purchase or sale of foreign assets floating market determined exchange rate regime
against domestic assets in the foreign exchange of the rupee, based on demand and supply
began. Accordingly, the Reserve Bank is
market.
announcing the rupee reference rate for the US
According to Section 40 of the RBI Act, Reserve Dollar and Euro daily at 12.00 noon. This is an
Bank can buy or sell foreign currency to any indicative rate, which is the average of the middle
authorized person. In addition to US dollar, RBI rates of the 12.00 noon quotes obtained from a
has the option to use the Euro as an intervention few select banks in Mumbai. The Reference Rate
currency. Generally, intervention is used as a is given out in a Press Release daily and is
tool for regulating the external value of rupee. placed on the RBI website, and also in the RBI
However, intervention can also be used as a tool Bulletin (Table No. 47).
of monetary policy because of its impact on
liquidity. When the central bank buys foreign References
exchange from the market, it infuses an 1. BPM5(1993): Balance of Payments Manual
equivalent amount of rupee funds into the (5-th edition), 1993, International Monetary
system (injection of liquidity); the opposite
Fund (IMF).
happens when it sells foreign exchange in the
domestic market. Over the years RBI has 2. Balance of Payments Compilation Guide,
intervened in the spot, forward and swap 1996, IMF.
markets either directly or indirectly 3. Balance of Payments Text Book, 1996, IMF.
Direct intervention - Banks are contacted 4. International Investment Position, A guide
directly and asked to quote a two way price to Data Sources, 2002.
and the RBI buys or sells at the quoted 5. RBI (1951): Report on the Census of India’s
rate. In 1995-96, most of the transactions Foreign Liabilities and Assets as on 30-th
were done directly with the authorized June, 1948; Reserve Bank of India, 1951.
dealers.
6. RBI (2000): Census of India’s Foreign
Indirect intervention - RBI intervenes Liabilities and Assets as on March 1997,
indirectly through select public sector RBI Bulletin, October.
banks. These banks, in turn, buy or sell
246
SAT ISH KR I S HNAN
Analysing and view taking…
➢Macro Data – domestic and global
➢ Employment – Non-farm Payroll, Initial Claims, Unemployment rate, Earning growth
➢ GDP
➢ CPI, PMI
➢ Interest Rate decision
➢ Central Bank MPC minutes
➢Geopolitical developments
➢ Cross border –trade/Investment flows impacting
➢Contagion impact
➢ Gold to FX, Brent to FX, Bond to FX,
➢Market Positioning
➢ Hedge ratio
➢ Speculative positioning
Arbitrage & Carry Trade
➢Arbitrage
➢ Onshore-Offshore / OTC – Exchange Traded
➢ Non- deliverable Forwards Offshore curve vs Deliverable Forwards onshore forwards curve
➢ Tax, Cashflow, Capitalisation, etc.
➢Carry Trade
➢ Borrowing on lower interest & investing in higher return yielding asset
➢ Positive Carry on higher yield currencies
➢ Driven by running gains in stable conditions
➢ Interest rate expectations play a dominant role
A virtual visit to a Bank dealing room….
Interbank desk - traders
➢ Quoting prices to Sales dealers for client transactions, ALM for BS risk management
➢ Managing positions - Aggregation, Covering, Running position
➢ Takes momentary view and quick to close/reverse positions
➢ Disciplined -Intra day limits, net option positions limits, focused on profits, stop loss limits as per policy
Sales Desk – Sales dealers

➢ Servicing clients on their FX settlement/hedging needs
➢ Back to back cover of client transactions, no FX open position
➢ Proactive dealers track clients exposure and cross border dynamics, to
➢ service them with timely market news dissemination, analysing key events, etc.,
➢ Provide regulatory changes update,
➢ Constructing and offering suitable and appropriate hedging solutions
Technical Analysis – an Intro

➢Basic Principles
1. Everything is discounted and reflected in market prices
2. Prices move in trends and trends persist
3. Market action is repetitive
➢Driven by collective reaction which follows pattern

➢Factors and drivers will vary, but reactions will have repetitive patterns
➢“Trend is a Friend”
Application and Limitations
➢Powerful tool
➢ For trend identification
➢ Reversal warnings
➢ Acceleration spotting
➢Improves success strike rate
➢ Technical don’t fail, technical analyst do!!
➢Compliments fundamental analysis, not to be used in isolation
➢One of the key modules for successful trading
➢ Temperament, Money management and Trading techniques are others
➢For long term position management with trend visibility
➢Multiple scenarios exist
➢ Recognise, identify alternatives, know point of negation and strategize accordingly
Basic Chart Construction
➢Most Common Chart types
1. Line chart
▪ Only close levels captured
2. Bar chart
▪ Captures Open, High, Low & Close In a bar
3. Japanese candlestick chart
▪ Resembles candles and wicks
▪ Open, High, Low and Close captured
➢ Open and Close forms body of the candle &
➢ Upper and lower shadows denote the high and low beyond the body resp.
➢Chart Interval (OHLC for a period)

▪ Ranging from Minute charts to yearly charts
▪Volume
▪ Help analyse change in volume relative to price changes
Different types of charts
Inference from a chart
➢Open
➢ Vs previous close
➢ Difference is referred to as Gap
➢Extent of High and low
➢ Degree indicates intensity
➢ Bull Bear dominance inferred
➢Close
➢ Sustainability clues
➢ Positioning inferred
➢Volume
➢ Wider/narrower influencers
➢Trend
➢ Reversal, Continuation (up or down), sideways
Analysis - Types
➢Observable Patterns in the Chart
➢ Reversal
➢ Continuation
➢ Gaps
➢Analytical Tools
➢ Trendline and Channels
➢ Support and Resistance
➢ Moving Averages
➢ RSI
➢ MACD
➢ Volume Analysis, Gap, Fibonacci relationships, etc.,
➢Charting Methods and Theory
➢ Japanese Candlestick Charting
➢ Elliott Wave theory – with rules and patterns
✓ Done
Trendline & Channels
Connect two points and extend the line further
➢If there are multiple points sitting on the trendline, it is a valid

trendline
➢Expect market to respect the trendline whenever the prices

come closer to that
➢Can be helpful to have stop and reverse strategies on breakout
➢Later, the trendline functions as resistance (correction on

bearish trend)
Channel
➢2 Parallel trendlines keeping the price within it
➢Otherwise similar to trendlines

Moving Averages
➢Simple, Weighted, Exponential MAs are used

➢Most common is SMA
➢Period of SMA is a choice….usually 20DMA, 50
/ 100/ 200 are used
➢MA as resistance and support
➢MA cross over confirms trend change
➢ Crossing of longer period SMA by shorter
period SMA is crossover
✓ Done
Relative Strength Index (RSI)
➢Relative Strength Index is a measure of

velocity of price movement
➢RSI = 100 - [100 /(1+RS)]
➢ RS= Ave of upward px change / Ave of
downward px change
➢Extreme RSI levels indicate likely trend
completion/reversal
➢ Normally above 70 and below 30
considered overbought or oversold
respectively
➢Price action making new high/low without
RSI making corresponding HIGH/LOWs or vice
versa indicates lack of momentum, called
“Divergence”
Fibonacci Analysis
➢Application of Fibonacci number series identified by mathematician Leonordo
Fibonacci in 13th century
➢Mathematical relationship, expressed as ratios between the numbers are
applied in technical analysis for predicting the distance of a move, support,
resistance, etc.,
➢Fibo numbers are arrived at by adding previous two numbers
➢ i.e., 0, 1, 1, 2, 3, 5, 8,13, 21, 34, 55, ……
➢The ratios are derived from the Fibonacci numbers by dividing & multiplying
the n by (n-1), (n-2), (n-3), then initial results are ignored to identify often
repeated ratios
➢ i.e., 23.6%, 38.2%, 61.8% & 161.8%, 261.8%, 423.6%
Fibonacci Relationship
Fibonacci - Projections
Candlestick Charting
➢Candle has body and shadows
➢ Open to close forms body
➢ High to body forms upper shadow and
➢ Low to body forms lower shadow
➢ While body shows higher close and dark candle for
lower close
➢Observes reversal and continuing patterns

Some Common Patterns
Elliot Wave Theory
Elliot Wave Theory
➢Conventional tools are lagging indicators (after a
formation takes place)
➢Elliot helps analyse and predict far into future
➢ Works on theory that the pattern of wave formation unfolds
itself differently at different stages of the trend
➢Price action is divided into

➢ Impulse waves : moves with the trend
➢ Corrective waves : moves opposite to the trend
➢Further each wave sub-divides into

➢ 5 in impulse waves (labelled 1-2-3-4-5)
➢ 3 in corrective waves (labelled a-b-c)
Elliot Wave – Rules
➢3 Golden Rules
1. Wave 2 should move beyond the origin of wave 1
2. Wave 3 should not be the shortest
3. Wave 4 should not enter the territory of wave 1

Fundamental Concepts
➢Major movement unfolds in 5 wave, then corrected in 3 waves in
opposite direction
➢Numbered phases are known as “impulse wave” and lettered phases are
“corrective waves”
➢Wave 2 corrects wave1, wave 4 corrects wave 5
➢Entire sequence of w-1 to w-5 is corrected by wave a-b-c
➢In macro sense, w-1 to w-5 completes a wave of higher degree.
➢Thus, w-1, w-3, w-5 completes either wave (1), (3) or (5): wave a-b-c
completes either w-2 or w-4
➢In minor degree, wave breaks into smaller waves
➢ Waves 1,3,5 – to have 5 waves
➢ Waves 2,4 – to have 3 waves
➢ Waves a,b,c – depends on the corrective pattern
➢Roman letters, brackets are used to number different degree waves e.g.,
(III), III, (3), 3, (iii), iii
Impulse waves - Variations
➢Extension :
➢ Exaggerated moves – totally out of scale
➢ Usually expect only once in a wave cycle
➢ Mostly probably in 3 wave
➢Diagonal Triangle
➢ Wedge like pattern
➢ Usually converging, rarely expanding
➢ Occurs in 5th wave (also in C wave)
➢ Usually, sub-waves in 3-3-3-3-3
➢ Overlap of 4 into 1 happens, not a rule
➢ Last leg can overshoot or undershoot
➢Failure
➢ 5th wave at times fail
➢ Appears like double top/bottom
➢ Indicates strong reversal
Correction – Basic forms
1. Zig Zag
➢ 3 waves of 5-3-5
➢ Deeper correction
2. Flat Correction
➢ 3 Internal waves of 3-3-5
➢ Waves of equal lengths
3. Irregular Correction
➢ Similar to flat correction 3-3-5
➢ B-extends beyond origin of A wave
➢ Normally C = A, but can extend aswell
4. Triangle Correction
➢ 3-3-3-3-3 wave structure
➢ Numbered as a-b-c-d-e
➢ Only in penultimate wave (w-4, w-b)
FX Trading Desk
➢Market Maker – Role and responsibilities
➢ Client requirement precede trading
➢Inviting ‘hits’ with Quotes – how done?
➢Organisation structure of Trading floor
➢ Fx Spot Trading
➢ Fx Forward Trading
➢ FX Options Trading
➢ Interest Rate Swaps Trading
➢ Bond Trading
➢Trading Book and Trader’s Position/P&L
➢ Cost of funds
➢ Transfer of Position for round the clock management
➢ Risk cover between desks and risk aggregation
FX Spot trader
➢ Provide covers to
➢ client cover, hedges – advisory support
➢ Option trader - Delta hedging
➢ ALM – Funding in foreign currencies
➢ Swap trader – spot leg of Currency swaps
➢Covers forward premium with forwards trader
➢Funding from ALM
➢NOOP : Net Overnight Open Position
➢ Currency wise position limit – Internal & Regulatory
➢Daily P&L
FX Forward Trader
➢Forward Gap - normally upto 18 months
➢ Aggregate
➢ Individual bucket
➢Provide covers to Sales for Client advisory/hedging requirements

➢Funding from ALM in respective currencies
➢Covers Spot leg with spot trader
➢Arbitrage play
Fx Option Trader
➢Trades in Option Volatility
➢ Vols are traded input into option pricing
➢ indicates the degree of swing in prices
➢ Derived from traded option prices, referred to as “Implied vols”
➢Provides cover to Clients option requirements

➢Covers spot/forward risk and runs vega risk
➢ Vega : Option Greek that denotes the change in option value with change in vols
➢Option on composite prices – correlation risk

➢ Risk in EUR-INR option ≠ Risks in (EUR-USD option + USD-INR option)
SAT ISH KR I S HNAN
Introduction to
Financial Markets and
Treasury Management
SESSION 1
Financial Markets
➢Asset Classes and Inter linkages
➢ Equity
➢ Debt
➢ Commodity
➢ Currency
➢Price Discovery & its impact on bilateral

➢Participants and motives
➢Drivers and Themes
Treasury Management
➢Deals with Funds and Risks thereon
➢Compliments
➢ Other functions of organisation
➢ Other sub-functions within Finance
➢Financial Intermediation business vs Others

➢Risk Management
➢ Risk Management process
➢ Analyse and forecast market movements
➢ Hedging – proprietary and client requirements
Beyond Banking in Banks
Role of Full service Commercial Banks – areas beyond Financial Intermediation
As a regulated entity
◦ Benefits: Better credit standing and related business opportunities
◦ Extending credit standing to support commerce
Domestic/International Trade & capital Flow enabler

◦ Letters of credit, Guarantees, Capital flows processing, etc.,
◦ Trade finance and CASA as cross sell for trade processing
◦ Better pulse on the clients business and sharper credit decision enabler
◦ Foreign Exchange business recovers major part of the cost, overlay opportunities
◦ Comprehensive client solution on “Trade + FX” - leveraging Treasury capabilities
Objective of Treasury
Liquidity management to maximise net interest income
◦ Deploy deposit liabilities, investments maturity cashflows, etc.., for optimum return
◦ Fund balance sheet with suitable mix to optimise marginal cost of funds
◦ To ensure asset-liability mismatch is kept at manageable levels
Effectively manage Foreign Exchange assets and liabilities

Manage market risk with approved and prudential norms
Capture arbitrage opportunities
Maintain statutory reserves – CRR, SLR on current and forward planning basis
Offer comprehensive ‘value added treasury’ and related services to bank’s customers
Risks Managed in Treasury
Liquidity Risk • Funding, Market
Interest Rate Risk • Fixed Rate, Floating Rate
Foreign Exchange Rate Risk • FX price, Gap, Derivative position
Compliance Risk • Regulations on Financial Markets, Statutory obligations
Credit Risk • Counterparty, Country, Pre-settlement/Settlement
Other Risks • Operational, Legal, Compliance, Reputational

Functions of a Treasurer
➢Liquidity Management – domestic and foreign currency
➢Profitable deployment of funds
➢Trading and Arbitrage
➢Hedge and cover operations
➢Foreign Exchange activities– Hedging, Proprietary, Client hedging
➢Ensuring Strict compliance with Statutory requirements
Nature of Treasury Assets & Liabilities
➢Treasury vs Non-Treasury
➢ Marketability
➢ Mark Risk bearing
➢Domestic Assets and Liabilities

➢Foreign Exchange
➢ Inter bank – spot, forward, FC placement/borrowings
➢ Merchant transaction – PCFC, FC bill Purchase, FC Loans, FCNR B loans, PSFC, ECB
➢Derivatives
➢ IRS, FRA, IRF, IRO, Currency Options
Organisational Structure
• Dealing and investment – Risk Taking

Front Office • Functions as profit centre
• Risk Management
Mid Office • Policy compliances
• Management information
• Deal confirmation,
Back-Office • Settlements, Accounting and Reconciliation,
• Marking to Market and Revaluations
FRONT OFFICE –typical activities
➢Manage investments and market risk as per ALCO guidelines
➢Dealing Room – centre for risk management and client risk interactions
➢Policies and Delegations sacrosanct for committing the bank to market
➢Acts as Profit centre
➢High Controls and high monitoring – restricted area and high surveillance
➢Market Data services – Reuters, Bloomberg, etc., supports for live market info
➢Code of Conduct – signed up and breaches are career limiting
MIDDLE OFFICE – typical activities
➢3Ms : Measurement, Monitoring and Management Reporting of Risks
➢Limit setting and exposure monitoring
➢Assessing likely market movements
➢Position Monitoring – Net Open Positions – Overnight/Daylight
➢VAR – calculation and reporting
➢Stress testing & Back testing of investment and trading positions
➢Risk Return analysis
➢Marking open positions to market – assess unrealised P&L
BACK OFFICE – Typical activities
➢Deal slip verification
➢Generation, dispatch, record keeping of interbank confirmation
➢Monitoring receipts and recording keeping of counterparty deal contracts
➢Effecting and receiving payments – domestic/Foreign currency
➢Settlement and margin maintenance with CCP (central Counter Party)
➢Statutory Reporting to the RBI
➢Nostro / Vostro accounts reconciliation and maitenance
Responsibilities of a Bank Treasurer
➢Balance sheet Management
➢Transfer Pricing
➢Reserve & Investment Management
➢Trading and Distribution
➢Extending expertise to customers
Regulation, Supervision and Assurance
➢Regulations
➢ Basel Committee for Banking Supervision (BCBS) Guidelines
➢ Internal Control Guidelines
➢Supervision
➢ Regulatory supervision
➢ Internal Audit
➢ Concurrent Audit
Banks
SESSION 2
What is liquidity Risk?
Liquidity :
◦ Bank’s ability to fund increase in asset and meet all cash & collateral obligation, at a reasonable funding
cost
Liquidity Risk :
◦ Risk of not able to meet such obligations without affecting banks financial condition
Solvency vs Liquidity
Types
◦ Funding Liquidity : ability to obtain funding at reasonable price
◦ Market Liquidity : ability to convert asset into cash
Mismatch – Negative/positive – Benefits and risks
◦ Negative Gap : Outflows > Inflows in the time bucket
◦ Positive Gap : Inflows > Outflows in the time bucket
Northern Rock – meltdown story
1997 : British Bank, listed in London stock exchange in 1997
2007 : Among top 5 mortgage lenders in UK, grew rapidly - (always relied on negative gap in ALM)
Aug’07 : subprime crisis led nervousness made borrowing difficult
Sep’07 : FSA commented:
‘The FSA judges that it is solvent, exceeds its regulatory capital requirement, has a good quality loan
book’
12-sep : NR approached for emergency funding of £ 3b
13-sep : BBC broke news on NR seeking emergency funding
14-sep : Run on the bank started and estimated £2b was withdrawn till 17sep
17-sep : Exchequer announced full guarantee of deposits & imposed penal interest for banks with risky funding
Feb’08 : Emergency borrowings reached £25b. Bank was nationalised, split into (AMC) with bad debts & Banking
Nov’11 : Virgin group acquired Northern Rock Plc for £747 m.
A solvent, healthy bank was quickly brought down due to poorly managed Liquidity risk.
Liquidity Risk Management (LRM)
Balancing between liquidity vs profitability
◦ Excessive liquidity : Loss of profitability
◦ Inadequate liquidity: Loss of trust and risk of collapse
Sound LRM process critical

◦ Commensurate with the size and complexity of the bank
Maturity mis-matches an inherent risk in banking

◦ How well managed differentiates the good vs others
◦ Funding gap monitored on bucket-wise and on cumulative basis also
External Shocks and unforeseen mis-matches

◦ Contagion impact and systemic risk
LRM some considerations
Liquid assets proportion
Extent of volatility in deposits
Degree of reliance on volatile source of funding
Level of funding source diversification
Historical trend on stable deposit
Quality of maturing assets
Market reputation
Availability of undrawn standby
Impact of off-balance sheet exposure
Contingency plans
Liquidity: Source and Deployment
➢Cash in excess of CRR requirement
➢Investment in excess of SLR requirement - Repo
➢Prime Assets – T Bills, Top rated ST papers, Loans to top rated companies
➢Swapping Forex funds to INR
➢Undrawn lines from RBI – Marginal Standing Facility
➢Undrawn lines from FIs & other Banks
➢Deposits (public and other banks)
Fundamental Principle of Management & Supervision
◦ Bank to establish robust framework, Supervisors should assess it adequacy, liquidity position and take prompt
corrective action to limit damage to financial system
Governance
◦ Articulate Risk tolerance and Strategy
◦ Senior mgmt. to develop, review and report strategies & policies and report to Board
◦ Incorporate liquidity cost in internal pricing, performance evaluation & new product approval process
Measurement and Management of Liquidity risk
◦ Sound process of identifying, measuring, monitoring and controlling liquidity risk
◦ Monitor and control across entities, business line, currencies
Measurement and Management of Liquidity risk (contd.)
◦ Establish funding strategy. Regularly gauge its funding capacity
◦ Manage intraday funding positions : stress test to ensure no damage to payment
◦ Manage collateral position and settlement systems differentiating between encumbered and
unencumbered assets
◦ Stress test – short-term and protracted, Institution-specific & market wide scenarios
◦ To have Contingency Funding Plan
◦ Maintain High Quality Liquid Assets as cushion as insurance against stress scenario
Public disclosure
◦ LRM framework soundness to be transparent to avoid surprises
Regulatory requirements
Basel Framework for Liquidity Risk Management in Banks
Regulatory reserve requirement
◦ Cash Reserve Ratio (CRR)
◦ Statutory Liquidity Ratio (SLR)
◦ Liquidity Coverage Ratio (LCR)
◦ Net Stable Funding Ratio (NSFR)
Other Risk Monitoring Tools
◦ Contractual Maturity mismatch
◦ Funding Concentration
◦ Available unencumbered assets
◦ LCR by significant currency
◦ Market-related monitoring tools
◦ Early warning indicators like equity price movement, Bond/CD rates, etc.,
Statutory Reserves
➢CRR
➢ Should maintain atleast 95% of Reserve requirement on a daily average
➢ Every Rs 100 borrowed, will allowing lending of Rs 97 only
➢SLR
➢ Specified Assets
➢ Cash, Gold, Unencumbered approved securities
➢ SLR securities include G sec., SDL, T Bills, etc.,
• {Borrowing cost – Return on Reserve) * {1/(1-Reserve %)}

• {(100 * 7%) – (3 * 0%) – (18 * 4%)} * { 1/ 0.79)
• 6.28 / 0.79
• 7.95%
➢ Thus, the stat cost is 95 bps
Liquidity Coverage Ratio (LCR)
Basel Framework post 2007 crisis
Aimed to promote short term resilience to survive acute stress over 30days
LCR = ≥ 100%
◦ [High Quality Liquid Asset] / [Total net cash outflows 30 day horizon, under stress scenario ]
HQLA - characteristics
◦ Unencumbered
◦ Low credit and market risk
◦ Ease and certainty of valuation
◦ Low correlation with risky assets
◦ Listing on recognised exchange
◦ Active and sizeable market
◦ Presence of committed market makers
◦ Low market concentration and flight to quality
HQLA assets
Categories of HQLA and Value assumed
Level 1 – full value
◦ Cash & G secs (in excess of CRR/SLR), Marketable securities of foreign sovereigns
◦ 0% haircut on the market value
Level 2 - with haircut, and cannot be more than 40% of HQLA stock
◦ Level 2-A - 15% haircut
◦ CP, Corp Bonds, etc with minimum rating of AA-, PSE marketable securities, multi development banks
with risk weight of upto 20% under Basel, etc.,
◦ Level 2-B – 50% haircut
◦ This category should not be more than 15% of total HQLA stock
◦ Equity shares of non-bank/FI/NBFC or affiliated entities and included in Sensex/nifty. marketable
securities on sovereigns with risk weights of 20-50% under basel, credit rating not below BBB-, etc.,
Total Net Cash Outflow
Total Expected cash outflow Less expected cash-inflow
For the subsequent 30 calendar days, in stressed scenario
Cash outflow
◦ Outstanding bal. of various liabilities and off balance sheet commitment
◦ Multiplied by Run off rate
Cash inflow
◦ Expected to flow
◦ Subject to cap of 75% of cash outflow
Run off rate/inflow rates prescribed
Liquidity Monitoring Tools
➢Basel framework prescribes for better monitoring of liquidity position
➢Metrics
1. Contractual Maturity Mismatch - funding needs
2. Funding Concentration
3. Available Encumbered Assets
4. LCR by Significant currency
5. Market Related Monitoring Tools - equity, bond/credit market price
discovery clues
Definition:
NSFR: ‘amount of available stable funding relative to the amount of required stable
funding’
Available Stable funding (ASF) : “ a proportion of capital and liabilities expected to be
reliable over the time horizon considered by NSFR, which extends to one year’
Required Stable Funding (RSF) : ‘is a function of liquidity characteristics and residual
maturities of various assets held, as well as those of its off-balance sheet exposure’
Ensures maintenance of stable funding profile in relation to the composition of assets
and off balance sheet activities
Ensures maintenance of stable funding profile in relation to the composition of
assets and off balance sheet activities
Limits over-reliance on short term wholesale funding and promotes funding
stability
NSFR : [ ASF / RSF ] ≥ 100%
◦ ASF = Available Stable Funding = Liability category x Associated ASF factor
◦ RSF = Required Stable Funding = Asset Category, Off BS exposure x Associate RSF factor
Comparing LCR & NSFR
LCR NSFR
Risk Addressed Liquidity Liquidity
Objective Promotes ST resilience to Promotes resilience over
potential Liquidity disruption longer term by requiring
to survive an acute stress funding of activities with more
scenario for 30days stable source on ongoing basis
Time horizon in focus 30 days 1 year
Means of regulation Quality of Asset held Stable funding source
Adjustment factor Run off Factor for cashflow Associated Available Stability
Factor
Associated Required liability
Factor
Scenario presumed Stressed Normal
Bond Portfolio Management
➢Investment Policy of the bank to govern
➢Active and Passive Approach
➢Banking Book and Trading Book
➢Categorisation
➢ Held Till Maturity (HTM)
➢ Available for Sale (AFS)
➢ Held For Trading (HFT)
➢Buying corporate bonds by private placement counted as part of this

Held till Maturity
➢Intention to hold and receive interest, not capital gains
➢Not to marked to market
➢Profit/(loss) on sale of these investments to be
➢ To P&L and
➢ Gains taken to Capital Reserve Account
➢Once a year, shifting from/to HTM is permitted with Board approval, usually at the
beginning of the year
➢If shift >5% of investment book value, disclosure of market value and provision not
done
➢Exception: SLR holding reduction, direct OMO, Govt buying back securities
➢Conversion into HTM, at cost or market which ever is lower
Held for Trading/Available for Sale
➢Securities held for short term price movement is HFT
➢Securities not falling into HTM & HFT, is classified as AFS
➢Banks treasury investment/trading policy to guide on quantum, limit, exposure
type, stop loss, etc., for HFT category
➢HFT securities need to be sold within 90 days.
➢Gain/loss is taken to P&L account
➢Shift from AFS to HFT is done with approvals, as delegated in Board approved
policy
Bond Book
➢Buy and Hold strategy
➢Investment maturity strategies
➢ Varying maturities
➢ Re-investment risk
➢Ladder or spaced Maturity strategy
➢ With limited portfolio expertise
➢ Efficient way to build is to participate in auction
➢Front End loaded Maturity Strategy – emphasise on liquidity over income
➢Back End loaded Maturity Strategy – emphasise on income
➢The Barbell Strategy – combination of the above
➢Immunisation, Dedication, Riding the Yield curve, etc.,
➢Drivers
➢ OMO, Issuance of Gsecs – Operation Twist
➢ FX intervention
➢ FX swaps
OMO G Sec purchase
Fund transfer
FX bought by RBI
Reserve reduction
Cash in Cir. decrease
Govt. Spending
Cash in Cir. Increase

Reserve Increase
Tax pymt, Gsec issuance
OMO G Sec sale
FX sold by RBI
➢Deficit/Surplus
➢ On a given day, banking system is net borrower under LAF deficit, lender if surplus


➢ Unsterlised FX, Change in Cash in Circulation, etc., contribute to durable
➢ Durable Deficit = Net borrowing by banking system over GOI balance
Corporates
SESSION 3

TREASURY –
with Financial

➢Liquidity Risk

➢ Cash Management
Cash Flow Modelling
➢ Cash netting
Risk Management

➢ Pass through
➢Hedging

Trade Financing

➢ Buyers Credit

Term Financing

➢ Risk Appetite
➢ Term Risk
FOREIGN EXCHANGE
MARKETS
SESSIONS 4 & 5
EUR USD 1,584 24.0% 1
USD JPY 871 13.2% 2
USD CAD 287 4.4% 5
USD CNY 269 4.1% 6
USD CHF 228 3.5% 7
USD HKD 219 3.3% 8
USD KRW 125 1.9% 9
USD INR 110 1.7% 10
➢Quoted in pairs
➢Crosses
Nuts and bolts
➢Currency Pairs
➢Price
➢ E.g., 74.95/96 (to be read as 74.95/74.96)
➢Spread
➢Pips

currency quote.
liquid markets

➢ Examples
Transaction Types
difference
➢Swap Points

➢Quote convention
➢ Example:
➢Participants
➢Market Makers
➢Speculators
➢Risk Managers
➢Arbitrageurs
➢Asset Classes
Asset Classes Inter-Linkages
Stocks FX Commodities
• Risk-free rate threshold • Carry Trade • Inflation expectations
• Valuation Discounting • Real return expectation • Monetary policy action
Bonds • Economic Cyclicality • Inflation expectation • Risk-free rate threshold
• Risk Appetite • Monetary policy action
• Asset allocation
• Investment Flows • Inflation expectations
• FX impact on expected • Invt. Com. valuation
FX earnings and re-ratings NA • FX impact on cost
• Valuation net of inflation exp. • Impact on FX flow
• Fuel: Inflation exp

• Indl: Input cost impact on
Stocks NA earning
• Invt.: Risk Appetite
• Proxy trades
FX Markets – Functioning & Dynamics
➢Milestones in FX History
➢ Pre-Bretton-wood
➢ Great Depression led policies
➢ Inward looking – trade barriers, competitive weakness in currencies, capital restrictions
➢ Bretton wood (1945-70)
➢ IMF Monitored
➢ USD pegged to Gold @ 35$/oz
➢ In turn, all currencies pegged to USD at “Par Rate”
➢ US committed to convert USD into GOLD, vice-versa
➢ Change in Par Rate with IMF consent
➢ Post Brettonwood (1971 onwards)
➢ Temporary suspension of USD-Gold conversion
➢ Multiple exchange mechanisms evolved – peg, floating, block/unions
➢ Oil shock led floating rate adjustment helped
➢Currency Crisis
➢ Attack to test Governments’ resolve and ability to defend Exchange policy
FX Crises - snapshot
➢1960s US BoP Crisis under Bretton-wood
➢ US gold holding was marginally increasing, while global trade grew rapidly
➢ 1950: BoP swung negative, imposed import quota on oil, etc.,
➢ Countries held USD as proxy for gold – bought at Central bank price vs Open market price
➢ 1961: “London Gold Pool” – 8 countries to intervene in gold open market to correct divergence
➢1994 Mexico Economic Crisis
➢ Excessively expansive fiscal and monetary policy
➢ Govt. guaranteed short term debt denominated in USD
➢ NAFTA led investor confidence – tempted to borrow in USD
➢ Civil issues & political instability worried foreign investors, risk premium widened
➢ Intervention to defect peg was challenged.
➢ Devalued Peso caused capital flight, Interest rate raised, growth impacted, default
➢ Switched to free float, Peso collapsed, inflation to 52%,
➢ Contagion to Other Emerging Economies
FX Crises- snapshot
➢1997 Asian Financial Crisis
➢ Started in Thailand – couldn’t defend Peg
➢ Capital flight followed, spread to other SEA countries with high debt
➢ Indonesia, South Korea, Thailand – severely affected
➢ Foreign Debt-GDP ratio rose from 100% -167% in Large ASEAN 1993-96
➢1998 Russian Financial Crisis
➢ Devaluation and Debt default
➢ Combination of factors – war, high fiscal deficit, intensified by two external shocks
➢ Asian financial crisis and lower oil demand
➢ Political crisis further impacts
➢ To address, interest rates were raised to 150%, IMF package of $22.6 bln.
➢1999-00 Argentine Economic Crisis
➢ Other Crisis triggered economic impact
➢ Defaults
➢ Moved from Fixed to floating exchange rate
FX market Dynamics
➢External
➢ A Bridge to global investors/trade partners
➢ Confidence is key
➢ Exchange Rate mechanism – defend when challenged
➢ Contagion channel
➢Internal
➢ Inflation driver
➢ Growth impacting
➢ Key for Economic stability
➢ Money supply – a tool in toolkit
Exchange Rate Regimes
➢Independently Floating
➢ No controls – both capital and trade flows, Round the clock Dealing, Self adjusting
➢Fixed or Peg
➢ Fixed conversion to another currency (UAE, OMR, QAR, HKD, SAR, etc.)
➢ Floating against other currencies
➢ Low risk mgmt. & cost, trade growth
➢ Interest rate alignment
➢Currency Union - countries with no currency of its own
➢ 19 Countries 1 Currency, No Fiscal union
➢ Sovereign risks vs FX/BOP risk, Common FX policies – wider implications
➢Dirty Peg/ Managed Peg
➢ Peg with Horizontal Band, Crawling peg/band, no predetermined path, etc.,
➢ Restricted movement, Central Bank controls
Managed peg – sample
➢China
➢ 2 Markets 1 Currency
➢ Onshore – CNY (RMB for local use)
➢ Daily range of +/- 2% from CNY Fix Rate
➢ Market forces drive prices to extremes
➢ Next day fix takes market directions
➢ Yuan in Offshore – CNH – more freely traded
➢ Swap arrangement connect offshore-onshore market
➢Singapore
➢ FX driven monetary management – “BBC- Basket, Band, Crawl” - approach
➢ Allows SGD to move in range around trade weighted value of currency basket
➢ Unstated range, MAS management – balances Growth vs Inflation
➢ Money Supply lever ceded for FX management
➢India
➢ No level targeted officially
➢ Active RBI intervention for ‘ excessive volatility’ management
➢ Asymmetric preference – observed curtailing Strenght, accepting controlled weakness
➢ Spot vs forward intervention by RBI – forward premium curve impact & carry trade
Understanding Indian FX Markets
➢Capital Accounts - restricted convertibility
➢Regulatory approach & framework
➢ RBI, FEDAI, AD banks
➢Orderly and well managed, though shallow
➢ RBI intervention and Reserve Building
➢Global integration
➢ Increased Access to non-residents
➢Capital flow characteristics – uniqueness and peculiarities
➢INR denominated flows
➢ INR invoicing, Masala Bonds, INR ECB, etc.,
USDINR VS DXY
1993-95 Post Rate • Huge Capital flows with raise in imports
unification stability • Capital A/c surplus at 3.8% vs 1.6% of CAD
• RBI absorbed, Reserves raised to $20.6 bln from 6.3 bln in mar 93
• Stable exchange rate at 31.37
1995-96 Mexican Crisis • Continued stability for a while
• Contagion impact felt on flows, Rupee weakened to 33.96 & 36.48 by Jan96
• Sterilised intervention and Administrative measures were introduced
• Pressure resumed with lower capital flows
• INR over-valuation on REER (WPI at 12.7%) got corrected
1997-98 South East Asian • SE Asian crisis spread to Brazil, Russia

crisis & Sanction on • India -Sanctions, Rating Downgrade , Suspension of Intl. Bilateral lending
India for Pokran • 39.74 (apr98) – 41.50 (may98) – 42.47 (jun98) - >43 briefly RBI stepped in
Testing • Administrative measures & Resurgent India Bonds ($4.2 bln)
• ~ 42.50 from Aug98-Mar99
2000 Higher import bill • 43.40 (apr00) – 44.28 (may00)

and reduced flows • Strong Intervention and Administrative steps
• CRR & Bank Rate Raised, refinance facility cut by 50%
• India Millennium Deposit flow brought back positive sentiment
• Stabilised around 46.50
1995-96 Mexican Crisis led Volatility
➢Some of the Administrative measures imposed
➢ Imposition of Interest Surcharge on import finance (15%, then to 25%)
➢ CRR requirement reduced by 0.5% on domestic and non-resident deposits
➢ FCY denominated deposits exempt from CRR
➢ Interest on NRE Deposits were increased
➢ Discontinuation of Post Shipment Credit in Foreign Currency
2000 : Import Surge / lower flows
➢Some of the administrative measures imposed
➢ Imposition of Interest Surcharge on import finance (50%)
➢ RBI announced that it would meet partially or fully the Govt. debt service payment
directly as may be needed
➢ RBI will meet partially or fully the requirement for Oil import bill
➢ RBI will sell USD through SBI or intervene directly in order to meet the supply-demand
imbalance
➢ Overdue export bill – 25% interest charge
➢ Window for FII demand to be met directly or instructed to go to market
➢ Bank not to encourage speculative transaction
➢ Raising of CRR (0.5%), Bank Rate (1%), Reduction of 50% of refinance facility for banks
2001 9/11 Terrorist • 47.41 (11-sep) – 48.43 (17sep)
Attacks • Intervention ($894 mio) & Administrative measures
• Rupee remained stable ~48
• Current account surplus by 0.7% of GDP
2008-09 Lehman Crisis • Run up to Crisis :
• Robust flow,
• High GDP growth rate (9% in 2007-08)
• Current Account Deficit (1.3% in 2007-08)
• WPI 4.7%
• Rupee appreciated to 39.99 (mar 08) on strong flows
• Crisis triggered global deleveraging led repatriation
• Rupee breached 50 (27oct), 50.95 (mar09)
• RBI scaled up intervention with a record $ 18.7 bln
• Measures were announced by RBI to restore confidence
• Normal Liquidity in Fx market by Dec2008
• Rupee appreciated to 45.14 by mar2010
2001 : 9/11 Terrorist Attack
➢ Reiteration to keep Interest Rates stable with adequate liquidity
➢ Assurance to sell FCY to meet any demand-supply mismatch
➢ Opening window for purchase of select Government securities on auction basis
➢ Relaxation of FII limits
➢ Special financial package for large value exports of select products
➢ Reduction on export credit financing by 1%
2008 GFC
➢ Announced its intentions - selling USD to meet the demand-supply mismatch
➢ Rupee-Dollar swap facility
➢ was introduced for the Banks to meet their short term foreign funding requirements. LAF
was available for the above for the corresponding tenor. This facility was extended till Sep 2009
➢ Special Market operations
➢ meeting the forex requirement for public sector oil marketing companies continued
➢ Encourage forex inflow
➢ NR deposit interest cap hiked
➢ External Commercial Borrowings guidelines relaxation for corporates
➢ NBFC / HFC to access foreign borrowings
2011-12 European • Debt crisis deepened in Europe and US down graded
Crisis & US • Safe heaven flow into USD
Rating • INR under pressure
downgrade • Announced measures to boost capital account flows & Administrative control
• Rupee gained by 11% to 48,86 (6Feb12) from 54.24 (15dec11)
• Renewed pressure
• Widening trade deficit
• Poor Capital flow
• Further measures were Announced in May 2012
• Rupee stabilised and remained range bound
2011 : European Crisis & US Downgrade
➢Action: RBI announced measures to boost capital account flows & Administrative controls
• NRI INR Deposit Interest Rate - deregulation
• ECB interest cap relaxation
• For Average maturity of 3-5 years
• Cancellation & Rebooking facility – withdrawal
• Past Performance limit for Importers – reduced to 25%
• Mandatory delivery on hedging on Past performance basis
• No cancellation of cash/tom/spot deals
• Drastic cut in Net Overnight Open Position Limit (NOOPL)
• Day light position not to exceed NOOPL
• Banks access to Futures in exchanges curbed
2012 : Additional Measures
➢Action: RBI announced measures more to curb the excess liquidity led FX speculation
➢ Recalibration of MSF Rate to 3% over Repo rate
➢ Limiting overall funding under LAF to 1% of NDTL of the banking system reckoned at Rs. 75k crs
➢ Open Market sales of Gsecs for Rs. 12k cr
2013 Tapering • Excessive QE flows flooded EME in search of yield
Tantrum • Chairman Bernanke Testimony (22may2013)
• Sudden stop and reversal in may 2013 combined with poor fundamentals
• CAD 4.8%
• GDP growth 4.4%
• WPI 7.4%
• Fiscal Deficit 4.9%
• Rupee weakened along with other Emerging market currency
• Jul15 measures with some measures gradually
• FCNR B with concessional swap window – master stroke
• 3.5% rate for 3 year swap (raised $26bln)
2013 : Jul-15th Measures
➢Action: RBI announced additional measures on renewed pressure
➢ Increase in Interest Rate Ceiling on FCNR B deposits
➢ Export credit interest ceiling deregulated
➢ Requirement to convert 50% of EEFC balance mandatorily
➢ ECB end use expanded to include Repayment of Rupee Borrowing for Capital
Expenditure
➢ FII limit for G Secs increased to $ 20mio (from $15mio)
➢ FII investment in Infrastructure debt (with bells and whistles)
2018 Oil rally, US • Emerging markets felt the heat of feds tightening with reduced portfolio
Feds flows to emerging markets
tightening, • Oil rallied to over 80$ on supply concerns on Iran sanctions and venzuela
Trade Tariff supply impact
war • US hiked tariff on china imports and retaliation steps begin
• Rupee weakened along-with other Emerging market currency
• RBI intervention for a controlled weakness
• Brent cooled off with fear of shrinking trade, INR stability returned
Policy Focus
➢Impossible Trinity : Policy Trilemma of Balancing
1. Free Capital Mobility
2. Controlled exchange rate
3. Flexible monetary policy
➢Yield Curve Management

➢ Inflation expectations
➢ Domestic credit growth
➢Forward Curve management

➢ vs Interest Rate Differentials
➢ Carry trade
Drivers in FX Market
➢Demand/Supply driven price movement
➢Valuation
➢ Purchasing Power Parity Theory – Law of One Price
➢ Nominal Effective Exchange Rate (NEER), Real Effective Exchange Rate (REER)
➢ Role of INFLATION on Exchange Rates
➢ Uncovered Interest Rate Parity Theory (UIP) vs Covered Interest Rate Parity (CIP)
➢ Monetary Policy Action & Exchange Rates
➢ Policy Trilemma: Capital Mobility – Exchange Rate – Monetary Policy
➢Flows
➢ Trade, Arbitrage, Speculative, Capital, Remittances
➢Positioning
➢ Hedging – creates lead and lag
Net Intl. Investment Position (NIIP)-India
No. 42: International Investment Position (RBI Bulletin dt 15.12.21)
(US$ Billion)
As on Financial Year /Quarter End
2020 2021
2020-21
Item Jun. Mar. Jun.
Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
1 2 3 4 5 6 7 8
1 Direct Investment Abroad/in India 194 482 186 419 194 482 199 494
1.1 Equity Capital and Reinvested Earnings 123 457 120 396 123 457 125 468
1.2 Other Capital 71 25 65 24 71 25 74 26
2 Portfolio Investment 8 282 4 242 8 282 8 281
2.1 Equity 2 177 1 139 2 177 3 176
2.2 Debt 6 105 3 103 6 105 5 105
3 Other Investment 81 446 54 433 81 446 77 447
3.1 Trade Credit 6 100 1 104 6 100 8 102
3.2 Loan 13 190 7 185 13 190 14 190
3.3 Currency and Deposits 42 142 28 133 42 142 36 142
3.4 Other Assets/Liabilities 19 14 17 11 19 14 19 14
4 Reserves 577 506 577 611
5 Total Assets/ Liabilities 859 1,211 749 1,094 859 1,211 895 1,222
6 IIP (Assets - Liabilities) -351 -345 -351 -327
NIIP-movement
Mar-
Period Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21
19 A/L Ratio%
Net IIP -437 -375 -346 -338 -341 -353 -327 -332
Se… 73.6
A. Assets 642 717 748 803 852 858 895 927
1. Direct Investment 170 183 185 188 191 194 199 203 Ju… 73.2
2. Portfolio Investment 5 4 4 5 6 6 8 9
M… 70.9
2.1 Equity Securities 1 1 1 2 2 1 3 5
2.2 Debt Securities 4 3 4 3 4 5 5 4 De… 71.4
3. Other Investment 54 52 53 65 70 81 77 80
Se… 70.3
3.1 Trade Credits 1 2 1 3 3 6 8 12
3.2 Loans 10 7 7 9 11 13 14 10 Ju… 68.4
3.4 Other Assets 18 17 16 18 18 19 19 17 20… 65.6
4. Reserve Assets 413 478 506 545 586 577 611 635 20… 59.5
B. Liabilities 1079 1092 1094 1142 1193 1211 1222 1259
1. Direct Investment 399 418 419 456 480 482 494 507 20… 60
2. Portfolio Investment 260 247 242 253 274 282 281 276 20… 59.1
2.1 Equity Securities 148 135 139 149 171 177 176 177
2.2 Debt securities 113 112 103 104 103 105 105 99 20… 60.5
3. Other Investment 419 427 433 433 438 447 447 476 20… 58.6
3.1 Trade Credits 105 104 104 102 103 100 102 100
3.2 Loans 168 180 184 180 184 190 190 201 20… 58.4
3.4 Other Assets / Liabilities 15 13 11 13 12 14 14 31
Assets to Liability Ratio (%) 59.5 65.6 68.4 70.3 71.4 70.9 73.2 73.6
NIIP by country (figs in $ bln.)
3675
2870
2154
1942
1343
1008 937 919 877
-339 -403 -524 -668 -670 -699 -706

-1060
✓ Explains why USD-JPY mirrors Risk global investment risk appetite

✓ US figs not included, being a Reserve currency and un-comparable with others. ($13.9 Trln )
FX Reserves – components, movement
No. 32: Foreign Exchange Reserves
2020 2021
Item Unit Nov. 27 Oct. 22 Oct. 29 Nov. 5 Nov. 12 Nov. 19 Nov. 26
1 2 3 4 5 6 7
1 Total Reserves ₹ Lakh Crore or Trillion 42.6 47.9 48.1 47.7 47.7 47.6 47.8
US $ Billion 575 640 642 641 640 640 638
1.1 Foreign Currency Assets ₹ Lakh Crore or Trillion 39.5 43.2 43.3 43.0 42.8 42.8 43.0
US $ Billion 533 577 578 578 575 576 575
1.2 Gold ₹ Lakh Crore or Trillion 2.6 2.9 2.9 2.9 3.0 3.0 2.9
US $ Billion 35 38 39 39 40 40 39
Volume (Metric Tonnes) 672.92 746.63 747.57 748.5 748.5 748.5 750.37
1.3 SDRs SDRs Million 1049 13657 13657 13657 13657 13657 13657
₹ Lakh Crore or Trillion 0.1 1.4 1.4 1.4 1.4 1.4 1.4
US $ Billion 1 19 19 19 19 19 19
1.4 Reserve Tranche Position in IMF ₹ Lakh Crore or Trillion 0.3 0.4 0.4 0.4 0.4 0.4 0.4
US $ Billion 5 5 5 5 5 5 5
* Difference, if any, is due to rounding off.
Note: Exclude investment in foreign currency denominated bonds issued by IIFC (UK), SDRs transferred by Government of India to RBI and foreign currency received under
SAARC SWAP arrangement. Foreign currency assets in US dollar take into account appreciation/depreciation of non-US currencies (such as Euro, Sterling, Yen and Australian
Dollar) held in reserves. Foreign exchange holdings are converted into rupees at rupee-US dollar RBI holding rates.
Balance of Payment Statement – explained
Statement I: Standard Presentation of India's Balance of Payments as per BPM6

(US$ Million)
April-March 2019-20 P
Credit Debit Net
1 Current Account (1.A+1.B+1.C) 6,42,138 6,66,688 -24,550
1.A Goods and Services (1.A.a+1.A.b) 5,33,622 6,06,206 -72,584
1.A.a Goods (1.A.a.1 to 1.A.a.3) 3,20,431 4,77,937 -1,57,506 Trade A/c
1.A.b Services (1.A.b.1 to 1.A.b.13) 2,13,191 1,28,269 84,922 Services Exp, Imp
1.B Primary Income (1.B.1to1.B.3) 25,166 52,446 -27,281 Investment Return
Transfers- personal, Charity,
1.C Secondary Income (1.C.1+1.C.2) 83,351 8,036 75,314 etc
For Non-fin, Non-produced
2 Capital Account (2.1+2.2) 426 1,518 -1,092 assets
3 Financial Account (3.1 to 3.5) 6,09,616 5,84,949 24,668
3.1 Direct Investment (3.1A+3.1B) 77,794 34,780 43,013 FDI - Net
3.2 Portfolio Investment 2,90,741 2,89,337 1,403 FPI EQ + Debt
Financial derivatives (other than reserves) and employee
3.3 stock options 32,899 28,800 4,099
ECB, NRI depo, Trade credit,
3.4 Other investment 2,08,183 1,72,533 35,650 etc.,
3.5 Reserve assets - 59,498 -59,498 BOP SURPLUS
4 Net errors and omissions 1,856 882 974
P: Preliminary. PR: Partially Revised.
Appendix 1: BOP Extract

Balance of Payment IN USD BILLIONS
Current Account Balance Capital Flows
19.1 40.1
15.3
34.3
29.4
6.5
26.9
25.0 25.8
0.6 23.8
22.5
19.3
-2.2 16.9 16.6 17.3
-2.6 16.0
-4.6 13.8 13.7
-6.9 -7.6 12.3
-8.1
-9.6
-13.7-13.0
-15.0 -15.8 -15.0 4.7
-17.7 2.1
-19.0
IN External Trade and Deficit in USD Billions
60
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
Nov- Dec- Feb- Mar- Apr- May- Aug- Sep- Nov- Dec- Feb- Mar- Apr- May- Aug- Sep- Nov-
Oct-19 Jan-20 Jun-20 Jul-20 Oct-20 Jan-21 Jun-21 Jul-21 Oct-21
19 19 20 20 20 20 20 20 20 20 21 21 21 21 21 21 21
Exports 26.2 25.8 27.4 25.4 27.7 21.5 10.4 19.1 21.9 23.6 22.8 27.6 24.9 23.5 27.2 27.5 27.9 34.5 30.6 32.3 32.5 35.4 33.3 33.8 35.7 30.0
Imports 38.0 38.5 38.6 41.1 37.9 31.5 17.1 22.2 21.1 28.5 31.0 30.5 33.6 33.4 42.6 42.0 40.5 48.4 45.7 38.6 41.9 46.4 47.1 56.4 55.4 52.9
Trade Deficit -11.8 -12.8 -11.3 -15.8 -10.2 -10.0 -6.8 -3.2 0.8 -4.8 -8.2 -3.0 -8.7 -9.9 -15.4 -14.5 -12.6 -13.9 -15.1 -6.3 -9.4 -11.0 -13.8 -22.6 -19.7 -22.9
Exports Imports Trade Deficit

India Trade Details – Exports by Countries
$ bn
Rank Country FY19 FY20 FY21 FY22 (APR-OCT) FY22 (ANN)
1 USA 52 53 52 43 74
2 UAE 30 29 17 15 26
3 CHINA 17 17 21 14 24
4 BANGLADESH 9 8 10 8 14
5 HONG KONG 13 11 10 7 12
6 SINGAPORE 12 9 9 7 12
7 UK 9 9 8 6 10
8 NETHERLANDS 9 8 8 5 9
9 GERMANY 9 8 8 5 9
10 NEPAL 8 7 7 5 9
TOTAL 330 314 292 234 401

India Trade Details – Exp. by Commodities
$ bn
1 Mineral Fuel, oil, etc., 48 43 27 35 60
2 Gems and Jewellery 41 37 26 24 40
3 Iron and Steel 10 9 12 14 25
4 Machinery and Parts 21 21 19 14 24
5 Organic Chemicals 18 18 18 13 22
6 Pharmaceutical Products 15 16 19 11 19
7 Vehicles 18 17 14 10 19
8 Electrical, Elec. equipements 13 15 14 10 18
Total Exports 330 313 292 234 401

India Trade Details – Imports by Countries
$ bn
1 CHINA 70 65 65 51 87
2 UAE 30 30 27 24 41
3 USA 36 35 29 24 41
4 SAUDI ARABIA 29 27 16 16 27
5 SWITZERLAND 18 17 18 16 27
6 IRAQ 22 24 14 15 26
7 HONG KONG 18 17 15 11 19
8 INDONESIA 16 15 13 10 17
9 SINGAPORE 16 15 13 10 17
10 KOREA 17 16 13 10 17
TOTAL 514 475 394 328 562

India Trade Details – Imports by Comm.
$ bn
1 Mineral Fuels, Oils, etc 168 154 100 99 169
2 Gems and Jewellery 65 55 55 49 83
3 Electrical Mach. Equip. 52 49 47 32 56
4 Machinery and Parts 44 43 37 28 48
5 Organic Chemicals 22 20 20 16 27
6 Plastic and Pl. articles 15 14 13 11 19
7 Edible Oil 10 10 11 11 18
8 Medical, Surgical Parts 10 9 9 7 12
9 Iron and Steel 13 11 8 7 11
10 Rare earth, inorg chemicals 8 6 7 6 10
TOTAL 514 475 394 328 562

BOP - Trend
Head/ $ BLN Of which, 2016-17 2017-18 2018-19 2019-20 2020-21
Current A/c -15 -49 -57 -25 24

Exports 280 309 337 320 296
Imports -393 -469 -517 -478 -398
Trade Balance -112 -160 -180 -158 -102

Services -Balance 67 78 82 85 89
Software Exports 70 72 78 86 90
Pvt. Transfers 56 62 70 76 73
Capital A/c 36 91 54 85 65
FDI 35 30 30 43 44
FPI 8 22 -0.6 1.4 36
External Com. Loans -6 0.2 10 22 -0.1
ST Trade credit 16.5 14 2 -1 -4
BOP 22 44 -3 59 87
USDINR (PE) in Rs/$ 66.26 65.12 69.19 72.54 74.05
FX Reserves (PE) 370 424 429 481 577
RBI Purchase (Net) 12.4 33.7 15.4 45.1 68.3
RBI Outstanding Forward Positions (Net) 10.8 20.9 -13.8 -4.9 72.8
RBI Intervention
Net $ Purchase
18.6
16.0 15.6
9.8 10.3
8.2
7.2
5.3 5.8
4.4 4.0 4.2 3.7
2.9
0.8
-
-0.1
-1.1 -1.2
-5.7
➢Macro Data – domestic and global
➢ Employment – Non-farm Payroll, Initial Claims, Unemployment rate, Earning growth
➢ GDP
➢ CPI, PMI
➢ Interest Rate decision
➢ Central Bank MPC minutes
➢Geopolitical developments
➢ Cross border –trade/Investment flows impacting
➢Contagion impact
➢ Gold to FX, Brent to FX, Bond to FX,
➢Market Positioning
➢ Hedge ratio
➢ Speculative positioning
Arbitrage & Carry Trade
➢Arbitrage
➢ Onshore-Offshore / OTC – Exchange Traded
➢ Non- deliverable Forwards Offshore curve vs Deliverable Forwards onshore forwards curve
➢ Tax, Cashflow, Capitalisation, etc.
➢Carry Trade
➢ Borrowing on lower interest & investing in higher return yielding asset
➢ Positive Carry on higher yield currencies
➢ Driven by running gains in stable conditions
➢ Interest rate expectations play a dominant role
A virtual visit to a Bank dealing room….
Interbank desk - traders
➢ Quoting prices to Sales dealers for client transactions, ALM for BS risk management
➢ Managing positions - Aggregation, Covering, Running position
➢ Takes momentary view and quick to close/reverse positions
➢ Disciplined -Intra day limits, net option positions limits, focused on profits, stop loss limits as per policy
Sales Desk – Sales dealers

➢ Servicing clients on their FX settlement/hedging needs
➢ Back to back cover of client transactions, no FX open position
➢ Proactive dealers track clients exposure and cross border dynamics, to
➢ service them with timely market news dissemination, analysing key events, etc.,
➢ Provide regulatory changes update,
➢ Constructing and offering suitable and appropriate hedging solutions
Technical Analysis – an Intro

➢Basic Principles
1. Everything is discounted and reflected in market prices
2. Prices move in trends and trends persist
3. Market action is repetitive
➢Driven by collective reaction which follows pattern

➢Factors and drivers will vary, but reactions will have repetitive patterns
➢“Trend is a Friend”
Application and Limitations
➢Powerful tool
➢ For trend identification
➢ Reversal warnings
➢ Acceleration spotting
➢Improves success strike rate
➢ Technical don’t fail, technical analyst do!!
➢Compliments fundamental analysis, not to be used in isolation
➢One of the key modules for successful trading
➢ Temperament, Money management and Trading techniques are others
➢For long term position management with trend visibility
➢Multiple scenarios exist
➢ Recognise, identify alternatives, know point of negation and strategize accordingly
Basic Chart Construction
➢Most Common Chart types
1. Line chart
▪ Only close levels captured
2. Bar chart
▪ Captures Open, High, Low & Close In a bar
3. Japanese candlestick chart
▪ Resembles candles and wicks
▪ Open, High, Low and Close captured
➢ Open and Close forms body of the candle &
➢ Upper and lower shadows denote the high and low beyond the body resp.
➢Chart Interval (OHLC for a period)

▪ Ranging from Minute charts to yearly charts
▪Volume
▪ Help analyse change in volume relative to price changes
Different types of charts
Inference from a chart
➢Open
➢ Vs previous close
➢ Difference is referred to as Gap
➢Extent of High and low
➢ Degree indicates intensity
➢ Bull Bear dominance inferred
➢Close
➢ Sustainability clues
➢ Positioning inferred
➢Volume
➢ Wider/narrower influencers
➢Trend
➢ Reversal, Continuation (up or down), sideways
Analysis - Types
➢Observable Patterns in the Chart
➢ Reversal
➢ Continuation
➢ Gaps
➢Analytical Tools
➢ Trendline and Channels
➢ Support and Resistance
➢ Moving Averages
➢ RSI
➢ MACD
➢ Volume Analysis, Gap, Fibonacci relationships, etc.,
➢Charting Methods and Theory
➢ Japanese Candlestick Charting
➢ Elliott Wave theory – with rules and patterns
✓ Done
Trendline & Channels
Connect two points and extend the line further
➢If there are multiple points sitting on the trendline, it is a valid

trendline
➢Expect market to respect the trendline whenever the prices

come closer to that
➢Can be helpful to have stop and reverse strategies on breakout
➢Later, the trendline functions as resistance (correction on

bearish trend)
Channel
➢2 Parallel trendlines keeping the price within it
➢Otherwise similar to trendlines

Moving Averages
➢Simple, Weighted, Exponential MAs are used

➢Most common is SMA
➢Period of SMA is a choice….usually 20DMA, 50
/ 100/ 200 are used
➢MA as resistance and support
➢MA cross over confirms trend change
➢ Crossing of longer period SMA by shorter
period SMA is crossover
✓ Done
Relative Strength Index (RSI)
➢Relative Strength Index is a measure of

velocity of price movement
➢RSI = 100 - [100 /(1+RS)]
➢ RS= Ave of upward px change / Ave of
downward px change
➢Extreme RSI levels indicate likely trend
completion/reversal
➢ Normally above 70 and below 30
considered overbought or oversold
respectively
➢Price action making new high/low without
RSI making corresponding HIGH/LOWs or vice
versa indicates lack of momentum, called
“Divergence”
Fibonacci Analysis
➢Application of Fibonacci number series identified by mathematician Leonordo
Fibonacci in 13th century
➢Mathematical relationship, expressed as ratios between the numbers are
applied in technical analysis for predicting the distance of a move, support,
resistance, etc.,
➢Fibo numbers are arrived at by adding previous two numbers
➢ i.e., 0, 1, 1, 2, 3, 5, 8,13, 21, 34, 55, ……
➢The ratios are derived from the Fibonacci numbers by dividing & multiplying
the n by (n-1), (n-2), (n-3), then initial results are ignored to identify often
repeated ratios
➢ i.e., 23.6%, 38.2%, 61.8% & 161.8%, 261.8%, 423.6%
Fibonacci Relationship
Fibonacci - Projections
Candlestick Charting
➢Candle has body and shadows
➢ Open to close forms body
➢ High to body forms upper shadow and
➢ Low to body forms lower shadow
➢ While body shows higher close and dark candle for
lower close
➢Observes reversal and continuing patterns

Summary of Candlestick Patterns
Hammer & Hanging Man Engulfing Patterns Dark Cloud Cover
Morning & Evening Star Shooting star Harami Doji

Some Common Patterns
Elliot Wave Theory
Elliot Wave Theory
➢Conventional tools are lagging indicators (after a
formation takes place)
➢Elliot helps analyse and predict far into future
➢ Works on theory that the pattern of wave formation unfolds
itself differently at different stages of the trend
➢Price action is divided into

➢ Impulse waves : moves with the trend
➢ Corrective waves : moves opposite to the trend
➢Further each wave sub-divides into

➢ 5 in impulse waves (labelled 1-2-3-4-5)
➢ 3 in corrective waves (labelled a-b-c)
Elliot Wave – Rules
➢3 Golden Rules
1. Wave 2 should move beyond the origin of wave 1
2. Wave 3 should not be the shortest
3. Wave 4 should not enter the territory of wave 1

Fundamental Concepts
➢Major movement unfolds in 5 wave, then corrected in 3 waves in
opposite direction
➢Numbered phases are known as “impulse wave” and lettered phases are
“corrective waves”
➢Wave 2 corrects wave1, wave 4 corrects wave 5
➢Entire sequence of w-1 to w-5 is corrected by wave a-b-c
➢In macro sense, w-1 to w-5 completes a wave of higher degree.
➢Thus, w-1, w-3, w-5 completes either wave (1), (3) or (5): wave a-b-c
completes either w-2 or w-4
➢In minor degree, wave breaks into smaller waves
➢ Waves 1,3,5 – to have 5 waves
➢ Waves 2,4 – to have 3 waves
➢ Waves a,b,c – depends on the corrective pattern
➢Roman letters, brackets are used to number different degree waves e.g.,
(III), III, (3), 3, (iii), iii
Impulse waves - Variations
➢Extension :
➢ Exaggerated moves – totally out of scale
➢ Usually expect only once in a wave cycle
➢ Mostly probably in 3 wave
➢Diagonal Triangle
➢ Wedge like pattern
➢ Usually converging, rarely expanding
➢ Occurs in 5th wave (also in C wave)
➢ Usually, sub-waves in 3-3-3-3-3
➢ Overlap of 4 into 1 happens, not a rule
➢ Last leg can overshoot or undershoot
➢Failure
➢ 5th wave at times fail
➢ Appears like double top/bottom
➢ Indicates strong reversal
Correction – Basic forms
1. Zig Zag
➢ 3 waves of 5-3-5
➢ Deeper correction
2. Flat Correction
➢ 3 Internal waves of 3-3-5
➢ Waves of equal lengths
3. Irregular Correction
➢ Similar to flat correction 3-3-5
➢ B-extends beyond origin of A wave
➢ Normally C = A, but can extend aswell
4. Triangle Correction
➢ 3-3-3-3-3 wave structure
➢ Numbered as a-b-c-d-e
➢ Only in penultimate wave (w-4, w-b)
FX Trading Desk
➢ Client requirement precede trading
➢Inviting ‘hits’ with Quotes – how done?
➢ Fx Spot Trading
➢ Fx Forward Trading
➢ FX Options Trading
➢ Interest Rate Swaps Trading
➢ Bond Trading
➢Trading Book and Trader’s Position/P&L
➢ Cost of funds
➢ Transfer of Position for round the clock management
➢ Risk cover between desks and risk aggregation
FX Spot trader
➢ Provide covers to
➢ client cover, hedges – advisory support
➢ Option trader - Delta hedging
➢ ALM – Funding in foreign currencies
➢ Swap trader – spot leg of Currency swaps
➢Covers forward premium with forwards trader
➢Funding from ALM
➢NOOP : Net Overnight Open Position
➢ Currency wise position limit – Internal & Regulatory
➢Daily P&L
FX Forward Trader
➢Forward Gap - normally upto 18 months
➢ Aggregate
➢ Individual bucket
➢Provide covers to Sales for Client advisory/hedging requirements

➢Funding from ALM in respective currencies
➢Covers Spot leg with spot trader
➢Arbitrage play
Fx Option Trader
➢Trades in Option Volatility
➢ Vols are traded input into option pricing
➢ indicates the degree of swing in prices
➢ Derived from traded option prices, referred to as “Implied vols”
➢Provides cover to Clients option requirements

➢Covers spot/forward risk and runs vega risk
➢ Vega : Option Greek that denotes the change in option value with change in vols
➢Option on composite prices – correlation risk

➢ Risk in EUR-INR option ≠ Risks in (EUR-USD option + USD-INR option)
Swap Traders
➢Trades in swaps
➢ Interest Rates Swaps, Cross Currency Swaps, Basis Swaps, Principle only Swaps
➢Provides Interest Rate Hedge to ALM, Swap and LTFX quotes Clients’ hedging
➢ LTFX : Long term forward Contracts – normally beyond 18 months upto 10 years
➢ Swaps points derived from Currency Swap Pricing
➢Manages Swap book, measured by “BPV”

➢ Basis Point Value (BPV) measures the value change for 1 basis points of change in
Interest rate (1 bp = 0.01%)
➢Hedge FX spot position with FX spot trader and near term forwards with
forward trader
Swaps and Risk Management
➢Swaps in India – benchmarks and curves
➢ MIBOR-OIS : Pay fixed vs floating overnight rate
➢ MIOIS * : Pay fixed vs floating tenor rate
➢ MIFOR* : Pay fixed vs floating tenor rate
(* Ann fixed vs 3m floating for swaps upto 1yr, and Semi Ann fixed vs 6m floating rate for swaps >1yr)
➢Deriving long terms swaps points from swap curve

➢ MIFOR fix formula
➢ [ { (1+ libor x n/360) x (1 + forward % x n/365) } – 1 ] x (365/n)
➢ MIFOR swap
➢ Pay fixed Rate vs future mifor fixings
➢ Future mifor fixing is determined by Libor & USDINR forwards
➢ USD IRS can help reduce the variability to one factor ie., forwards
➢ Cashflow replication of forward using discounting
FX Trading Desk
➢Traders’ knack!!
➢ Position management – quotes to invite hits to square off by
➢Risk quantification and capital allocation
➢ Value at Risk – measure of risk
➢Code of Conduct and ethical values
➢ Front running, Order Fill transparency,
➢Controls and limits
➢Capital allocation for market risk
➢Regulatory Focus
Swap Traders
➢Trades in swaps
➢ Interest Rates Swaps, Cross Currency Swaps, Basis Swaps, Principle only Swaps
➢Provides Interest Rate Hedge to ALM, Swap and LTFX quotes Clients’ hedging
➢ LTFX : Long term forward Contracts – normally beyond 18 months upto 10 years
➢ Swaps points derived from Currency Swap Pricing
➢Manages Swap book, measured by “BPV”

➢ Basis Point Value (BPV) measures the value change for 1 basis points of change in
Interest rate (1 bp = 0.01%)
➢Hedge FX spot position with FX spot trader and near term forwards with
forward trader
Swaps and Risk Management
➢Swaps in India – benchmarks and curves
➢ MIBOR-OIS : Pay fixed vs floating overnight rate
➢ MIOIS * : Pay fixed vs floating tenor rate
➢ MIFOR* : Pay fixed vs floating tenor rate
(* Ann fixed vs 3m floating for swaps upto 1yr, and Semi Ann fixed vs 6m floating rate for swaps >1yr)
➢Deriving long terms swaps points from swap curve

➢ MIFOR fix formula
➢ [ { (1+ libor x n/360) x (1 + forward % x n/365) } – 1 ] x (365/n)
➢ MIFOR swap
➢ Pay fixed Rate vs future mifor fixings
➢ Future mifor fixing is determined by Libor & USDINR forwards
➢ USD IRS can help reduce the variability to one factor ie., forwards
➢ Cashflow replication of forward using discounting
FX Trading Desk
➢Traders’ knack!!
➢ Position management – quotes to invite hits to square off by
➢Risk quantification and capital allocation
➢ Value at Risk – measure of risk
➢Code of Conduct and ethical values
➢ Front running, Order Fill transparency,
➢Controls and limits
➢Capital allocation for market risk
➢Regulatory Focus
Dodd Frank Act
• New bodies to monitor systemic risk (FSOC and OFR)
• Volcker rule
• Central clearing for OTC derivatives
• More capital for SIFIs
• No use of external ratings
• Oversight of rating agencies
• Originators of asset backed securities must keep “skin in the game”
• Separately capitalized affiliates for more risky business
• All trades reported to a central agency
• …
Value At Risk (VaR)
➢VAR helps compress all the measures into one single figure that indicates
➢How bad the things can get?......
➢VAR = @ X % confidence level, the loss is unlikely to be more than V amount
in time T.
➢Brings method to madness
➢Works out probabilistic likelihood of measuring potential loss at various
confidence level
➢VAR : [Mean – (SD x Z score)]
Probability Distribution
➢Random variable and discrete probability distribution
➢Assessing and mapping scenarios
➢Normal distribution / Bell-curve
➢Assessing area under the curve for likely max lose at different confidence level
➢ Gives an indication of potential max loss for a given trading desk/position
➢ 1 Standard Deviation, 2 standard deviation risk measurement considered
➢Time choice depending on risk nature
VAR Application
➢VAR assesses the likely maximum loss for given confidence level
➢This helps management to decide the max loss that could be absorbed
➢Losses erode capital. Hence allows assess the capital requirement
➢Management, Rating agencies and regulator to assess the likelihood of credit
stress
➢Better risk monitoring in a dynamic environment
➢Helps traders to assess the risk appropriately
VAR – sample
Sample 1
➢The gain from a portfolio during six month is normally distributed with mean $2 million and
standard deviation $10 million
➢The 1% point of the distribution of gains is 2−2.33×10 or − $21.3 million
➢The VaR for the portfolio with a six month time horizon and a 99% confidence level is $21.3
million.
➢It captures an important aspect of risk in a single number

➢It is easy to understand
➢It asks the simple question: “How bad can things get?”
VAR Vs EXPECTED SHORTFALL (ES)
➢VaR is the loss level that will not be exceeded with a specified probability
➢Expected shortfall (ES) is the expected loss given that the loss is greater than
the VaR level (also called Conditional VAR (C-VaR) and Tail Loss)
➢Two portfolios with the same VaR can have very different expected shortfalls
➢Limitation of VAR: FAT TAIL ignored
➢VAR: How bad can things get?

➢ES: If things get bad, what is the expected loss?
VAR vs ES distribution
VaR
Fat tail
VaR
FX Advisory
➢Objective and driver - Credit risk reduction
➢Client exposure
➢ Credit risk (pre-settlement risk)
➢ Settlement Risk
➢CVA – Credit Value Adjustment
➢ Pricing of credit risk in derivatives
➢ Client credit rating based charge using market credit spread
➢Client segmentisation for advisory
➢ Suitability and Appropriateness
➢ 2008 Derivative litigations
➢Emerging Trends in FX Advisory
Risk Mgmt. Controls and Regs.
➢Risk Analysis and Controls
➢ Settlement Risk - Central Clearing
➢Operations Risk and Controls

➢ People, Process, Systems
➢Fraud Risk
➢ Past large frauds in FX markets
➢Code of Conduct and Discipline

➢ Fair Practice, Conflict of Interest, Outside business dealings,
➢Assurance - Internal & external Audit, Supervision

GROUP PROJECTS
➢ Topic: Liquidity Coverage Ratio of Banks – An Analysis
➢ Scope:
➢ Pick any 5 banks (with a mix of private and public sector banks in India)
➢ Analyse their LCR ratio as on 30Sep21, both in terms of (i) change over 31mar21 position and (ii)
compare LCR among the group of banks chosen
➢ Expect the group to also cover the impact of the key business model differences, business strategy
and other financial parameters on the LCR
➢Date of presentation: 19 Jan 22 (Wed)
Group can choose one presenter, who will present the analysis for 7 mins and there will be random
selection of group members who will respond to the discussion points.
➢ Topic: “Foreign Exchange Hedging Strategies at General Motors”
➢ Scope: Group to discuss the high level details of GM’s exposure, approach, challenges, hedging approach,
hedging tools, etc., to bring out how FX hedging program works for a corporate. Case material can be the
sole source of information/data.
Group can choose one presenter who will present it over 7-10 mins and there will be random selection of
group members who will respond to the discussion points.
➢ Topic: “Euro – A common currency for Euro zone”
➢ Scope: Group to discuss the details of Launch history, mechanism and functioning of Euro as a common
currency for Euro zone.
➢Date of presentation: 20 Jan22 (Thu)
➢ Topic: “Indian Rupee Crisis 2013”
➢ Scope: Group to discuss the case study on the topic and highlight the development and policy response in
that episode of currency crisis. Also expect the group to compare and opine on the factors leading to the
crisis to the current condition
➢ Topic: “Turkey : Lira, Inflation & Monetary Policy - understanding developments, cause and effect”
➢ Scope: Sourcing information from public sources, group is expected to take a research approach in
analysing and explaining the peculiar policy reactions during this Pandemic impacted period.
ANNEXURE
REER/NEER
No. 36: Indices of Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) of the Indian Rupee
2020 2021
2019-20 2020-21
Item November October November
1 2 3 4 5
40-Currency Basket (Base: 2015-16=100)
1 Trade-weighted
1.1 NEER 98.00 93.92 93.01 93.60 94.04
1.2 REER 103.20 103.46 104.84 105.27 106.24
2 Export-weighted
2.1 NEER 97.38 93.59 92.98 93.15 93.99
2.2 REER 102.88 102.96 104.63 104.37 105.74
6-Currency Basket (Trade-weighted)
1 Base: 2015-16 = 100
1.1 NEER 94.92 88.47 87.42 86.59 87.60
1.2 REER 103.62 101.88 103.35 102.79 104.61
2 Base: 2018-19 = 100
2.1 NEER 100.78 93.93 92.81 91.93 93.00
2.2 REER 103.32 101.59 103.06 102.49 104.31
Note : Increase in indices indicates appreciation of rupee and vice versa. For 6-Currency index, base year 2018-19 is a moving one, which gets updated every year.
REER figures are based on Consumer Price Index (combined). The details on methodology used for compilation of NEER/REER indices are available in December
2005, April 2014 and January 2021 issues of the RBI Bulletin.

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Treasury Management and Foreign Exchange Markets

SAT ISH KR I S HNAN

◦ Visiting Faculty & Trainer of Bank/Corporate Treasury Executives

◦ Specialised in Elliott Wave Analysis

Price Discovery & its impact on bilaterals

Financial Intermediation business vs Others

Domestic/International Trade & capital Flow enabler

Effectively manage Foreign Exchange assets and liabilities

Interest Rate Risk • Fixed Rate, Floating Rate

Foreign Exchange Rate Risk • FX price, Gap, Derivative position

Compliance Risk • Regulations on Financial Markets, Statutory obligations

Credit Risk • Counterparty, Country, Pre-settlement/Settlement

Other Risks • Operational, Legal, Compliance, Reputational

Domestic Assets and Liabilities

• Dealing and investment – Risk Taking

◦ Visiting Faculty & Trainer of Bank/Corporate Treasury Executives

◦ Specialised in Elliott Wave Analysis

Sound LRM process critical

Maturity mis-matches an inherent risk in banking

• {Borrowing cost – Return on Reserve) * {1/(1-Reserve %)}

➢Buying corporate bonds by private placement counted as part of this

➢Measuring system Liquidity

➢Transient Vs Durable deficit/surplus

Cash in Cir. Increase

➢Measuring system Liquidity

➢Transient Vs Durable deficit/surplus

CORPORATE Risk Management

Term Funding – Domestic & International

➢Key Tools for managing Liquidity

➢Market Risks and Business Integration

➢Factors considered in Risk Management decisions

➢ Foreign Currency financing

➢Domestic Foreign Currency Financing

➢ Local Currency denominated Overseas Borrowing

CORPORATE Risk Management

Term Funding – Domestic & International

➢Key Tools for managing Liquidity

➢Market Risks and Business Integration

➢Factors considered in Risk Management decisions

➢ Foreign Currency financing

➢Domestic Foreign Currency Financing

➢ Local Currency denominated Overseas Borrowing

➢Direct and Indirect Quotes

➢In Crosses rate computation, direct/indirect quotes have to be carefully considered.

➢Spot : most traded, settled on T+2

➢Tom : dealt for T+1 settlement; Spot Rate +/- Tom-Spot

➢Discount : Forward Rate < Spot Rate

➢Direct and Indirect Quotes

➢In Crosses rate computation, direct/indirect quotes have to be carefully considered.

➢Spot : most traded, settled on T+2

➢Tom : dealt for T+1 settlement; Spot Rate +/- Tom-Spot

➢Discount : Forward Rate < Spot Rate

• Fuel: Inflation exp

1997-98 South East Asian • SE Asian crisis spread to Brazil, Russia

2000 Higher import bill • 43.40 (apr00) – 44.28 (may00)

➢Yield Curve Management

➢Forward Curve management

5. EXTERNAL SECTOR STATISTICS

5.1.5. Data Sources 5.1.7. Revisions Policy for India’s Balance of