By:

Sanjay Kumar

Exchange rate and Stock markets

History
 Factors
affecting
Exchange
rates
 Freedom to convert local financial assets into foreign financial
assets at market determined exchange rates

 Unrestricted mobility of capital

 India presently has current account convertibility, which means

that foreign exchange is easily available for import and export for
goods and services.

 India also has partial capital account convertibility

 Case: South east Asian currency crisis

Capital Account Convertibility

 Moneta
ry Forex
Fiscal
exchang reserve Inflatio
deficit
e rate s n rates
needs CRR NPAs Interest
band of should need to
to be needs to be rate to
plus not be be
reduce to be brough be fully
minus less controll
d to 5%
reduce t down deregul
than 6 ed
3.5% of should d to 3% to 5% ated
months betwee
the be import n 3-5%
GDP institute cover
d

To be achieved before CAC

 RBI
Measures

Primary Interest
placement rate

CRR OMO

RBI measures to check Exchange rate

 US Interest rate 2% 6% India Interest rate
       
Exchange rate 44
$ borrowed in US $1,000 Rs. 44,000 Converted to Rs and invested in India
Payback $1,020 Rs. 2,640 Earnings in Rs
    Rs. 46,640 Total
Convert Rs back to dollars
Old calc (If Exchange rate remains same)
US dollar $1,060
Repay loan $1,020
Net Earnings $40
Its not so easy to make money , rate will/might change
45.4 New exchange rate
New calc
US dollar $1,027
Repay loan $1,020
Net Earnings $7

Case to think upon…

 Depends on stage of the economy

 In case of India, USD/INR exchange rate and stock market mostly

has a negative correlation but with other currencies there is no
specific relationship as such.

Movement of exchange rate and

stock market
 Dem Hom Exp
Hig Mor and e
ent for curre orts
h
Investme
Decreas Home Rates
e in
Interest Inve
becomes
currency
hom
supply ncy
settle affe
End
gro
rates
stm
less
e
increases down
appr
cte
attractive

wth ents curre eciat

d
ncy es

Cont…
NIFTY and Exchange rate movement
graphs
 USD/INR
55

50

45

40

35
 GBP/INR
90

85

80

75

70

65

60
 EURO/INR
75

70

65

60

55

50
 YEN/INR
60

55

50

45

40

35

30