EXCHANGE RATE

MOVEMENT:
MACROECONOMIC FACTORS
AND IMPLICATIONS FOR
TRADE
CASE STUDY
Dr. Smita Roy Trivedi
 CONTENTS
 What are factors that impact exchange rate

movement- two scenarios?


RUPEE: QUESTIONS?
 Will rupee appreciate/ depreciate? Comparison to
2013?

 Is fundamentally overvalued?

 What happens if RBI intervenes in the market?

Are there limitations to CB intervention?
DEPRECIATION IN MAJOR EMERGING
MARKETS: 2013
VOLATILITY OF CAPITAL INFLOWS

6000.00

5000.00
Capital flows (MAV)

4000.00

3000.00

2000.00

1000.00

0.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
2013
PORTFOLIO INVESTMENT INTO EMERGING
MARKETS
Brazil India Indonesia
Mexico Thailand Russian Federation
China
5.0E+10
Equity, Net Inflows (BOP, CURRENT US$)

4.0E+10

3.0E+10

2.0E+10

1.0E+10

0.0E+00
2008 [YR2008]

2009 [YR2009]

2010 [YR2010]

2011 [YR2011]

2012 [YR2012]

2013 [YR2013]
-1.0E+10

-2.0E+10
Year
INFLATION DIFFERENTIAL BETWEEN INDIA
AND US

0.20

0.10
Inflation differetial (Base Year 2012=100)

0.00
Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov

Nov
May

May

May

May

May

May

May

May

May

May

May

May

May

May

May

May

May

May

May
-0.10
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015

-0.20

-0.30

-0.40

-0.50

-0.60

-0.70

-0.80 Year
COMBINED DEFICIT OF STATE AND CENTRAL
GOVERNMENTS AS PERCENTAGE OF GDP
.
INDIAN IMPORTS
Other Bulk
Items, 9%

2013-14
Others Petroleum,
(Including Crude and
Gold and Products,
Silver), 22% 36.69%

Mainly Capital
Export Goods, 19% Bulk
Related Consumpti
Items, 11% on Goods,
3%
 .

-30
-20
-10
10
20
30
40

Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12

Exports M-o-M % change

Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Exports and Imports: MOM growth

Aug-14
Oct-14
Dec-14
Feb-15
Imports M-o-M % change

Apr-15
Jun-15
DIRECT INTERVENTION IN THE FOREX
MARKET BY RBI (2013)

20000

18000

16000
SALE/PURCHASE OF USD

14000

12000

10000

8000

6000

4000

2000

Axis Title

Foreign currency Purchase Foreign currency Sales

 FDI+ FII Flows : India
25000

20000

15000

10000

5000

0
Mar

Sep

Mar

Sep

Mar
Mar
Sep

Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar

Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep

Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar

Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
19921993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015

-5000
 Volatility of capital flows [5 period]
3000

2500

2000

1500

1000

500

0
Nov
Nov

Nov
Jul

Apr

Jun

Jul

Apr

Jun
Oct

Feb

Apr

Jun

Jul
Oct

Oct

Oct
Feb

Feb
Dec

Sep

Dec

Sep

Dec

Sep

Dec
Mar

Mar

Mar

Mar
May

May

May

May
Aug

Aug

Aug
Jan

Jan

Jan
19921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014
0.40%
Exchange rate : major emerging market currencies

0.30% 0.29%

0.20% 0.18%
0.17%

0.10% 0.08%

0.00%
April, 2013 May, 2013 June, 2013 July, 2013 Aug, 2013 Sept, 2013 Oct, 2013

-0.05%

-0.10% -0.08%

-0.20%
-0.21%

-0.30%

USD/INR USD/BRL USD/RUB

USD/MXN USD/IDR
5.0E+10
Figure 3: Portfolio equity, net inflows (BoP, current
US$)
4.0E+10

China
China
China China
3.0E+10

2.0E+10

1.0E+10 China
China

0.0E+00
2008 [YR2008] 2009 [YR2009] 2010 [YR2010] 2011 [YR2011] 2012 [YR2012] 2013 [YR2013]

-1.0E+10

-2.0E+10 Brazil India

Indonesia Mexico
Thailand Russian Federation
China
CURRENT SITUATION: CMIE
 Economic Growth: Asian Development Bank
(ADB) projects India’s growth a 7.4 per cent in
2016 and 7.8 per cent in 2017. Gross value added
of India at 2011-12 basic prices (GVA) grew by
7.3 per cent during the first quarter of 2016-17.
 Inflation: Retail price inflation for rural
labourers, rose to 6.5 per cent in July 2016 as
compared to 6.1 per cent in the previous month
 Exports declined by 6.8 per cent in June 2016,
after posting a rise of 0.9 per cent in the previous
month. Exports had risen after a gap of 18
months in June: absolute value of exports stood
at USD 21.7 billion in July, the lowest value in
the past three months.
.
 Investment:
 Foreign investment inflows more than doubled to
USD 7.9 billion in July 2016 from USD 3.5 billion in
the preceeding month. Net investment inflows
reached an eight-month high in July 2016.
 Global Developments: Wall Street Journal Asian
shares started the week notably weaker as fears of a
possible U.S. interest-rate increase gripped markets
 Emerging markets in Asia are particularly
vulnerable to a rate increase in the U.S. as better
returns there could prompt a flight of capital from
less-developed areas. But some say strong growth
and the potential for earnings to pick up faster in
Asia will temper any sharp withdrawal
 USD/INR MODELLING AND FORECASTING
 Modelling exchange rate using the monetary model and its
other extensions
 forecasting ability of these models are then tested using the
Root Mean Square Error of the model.
 two models significant: naïve PPP model and expanded
model
 Vector autoregressive (VAR) and framework.

 Tests for nonstationarity, tests for cointegration and

Granger causality
 VAR models are estimated and tested for out-of-sample
forecast accuracy.
 The two models tested is based on the following functional relationships:
 The naïve PPP Model: E(LUSDINR)= f {DINF, MSPLYD]
 The extended model E(LUSDINR)= f {DINF, INT, DINC, MSPLYD, DTB,
MPRE, NETPUR, TURNP, MAVTHREE, CAPFLOW]
 80.00

70.00

60.00

50.00
USD/INR

40.00

30.00

20.00

10.00

0.00

Oct
Oct

Jan
Jan

Jan
Feb

Sep

Feb

Sep

Feb
Jul

Dec

Jul

Dec

Apr
Apr

Jun

Aug

Nov

Apr

Jun

Aug

Nov

Jun
Mar

May

Mar

May

Mar

May
2014 2015 2016
Time

Actual
Forecasted rates (Extended model)
Forecasted Rates (PPP)
.
CHINA CURRENCY: CONTROVERSIES

 Chinese devaluation: Intervention issues

 Looking at the past: Pre-2005 controversy and

implications

 How are other emerging markets likely to be

impacted?
THE LINKAGES : TRADE, CAPITAL FLOWS
AND CENTRAL BANKS

 Why is it relevant?
 Case of Swiss National Bank

 WSJ Jan. 15, 2015 ZURICH—Switzerland’s

central bank triggered turmoil in the markets
Thursday when it unexpectedly scrapped its cap
on the Swiss franc’s exchange rate against the
euro

 The Impossible trinity again…….

MY RESEARCH
 Asia pacific financial markets
http://link.springer.com/journal/10690

Economic Papers
http://onlinelibrary.wiley.com/doi/10.1111/1759-
3441.12148/abstract