Impact Of Exchange Rate

Fluctuation On International
Trade & Credit Appraisal At Axis
Bank SME Centre

Prepared by: Debashish Maity

Roll No: 95/mbm/101010
registration no: 120-1121-0132-10
Department Of Business Management
University Of Calcutta

Acknowledgement
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It is my pleasure to extend my deep gratitude to Prof. Mahua Bhattacharya,

Department of Business Management, University of Calcutta, for the help,
cooperation and guidance received from her throughout the tenure of this winter
internship project.
I would like to take this opportunity to thank all other faculty members at
Department of Business Management, University of Calcutta for their cooperation.
I am deeply indebted to Mr. Partha Basu, Vice President and SME Head of Axis
Bank, Kolkata, for providing a mentally stimulating environment throughout the
project period.
I am grateful to Mr. Manoj Parida, Asst. Vice President, SME Centre, Axis Bank,
Kolkata, who guided me during the internship. His valuable and constructive
suggestions at many difficult situations are immensely acknowledged.
I sincerely thank Mr. Santanu Banerjee, Vice President- HR, for giving me the
opportunity to pursue my winter internship in Axis Bank, SME Centre.
Finally I would like to thank Mr. Mukesh Kumar, Senior Manager and all the staff
of SME Centre who helped me and clarified my doubts during the period.

Debashish Maity

Department of Business Management, University of Calcutta

Objective
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The objective behind taking this topic is to analyze the extent to which fluctuations
in the exchange rate affect the international trade between two countries, especially
in the context of the present scenario of depreciating Indian Rupee, this report will
provide an insight into the relationship between currency fluctuation &
international trade. The project report will also shed light on factors other than
exchange rate fluctuations, which impact the international trade. The findings of
the report will also be helpful for the bank as many of its clients are involved in the
business of export & import which is susceptible to currency fluctuation.
The model of credit appraisal followed at the bank will be helpful in understanding
the practices followed while doing the appraisal of a party & the tools used for
credit rating. The project will be an enriching experience for me as it will give me
a practical exposure to tested & well established banking practices & will also
improve my understanding of the present economic scenario of the country which
is being shaped by the depreciating Indian rupee.

Contents
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A STUDY ON THE IMPACT OF FOREIGN EXCHANGE FLUCTUATION ON INTERNATIONAL

TRADE......................................................................................................................... 7
INTRODUCTION....................................................................................................... 8
Exchange Rate..................................................................................................... 8
Causes of rupee appreciation/ depreciation.........................................................9
Impact of rupee appreciation/depreciation........................................................10
Some Currencies are More Volatile than Others.................................................12
Hedging Against Currency Risk to Avoid the Volatility Trap................................12
Factors Affecting the Demand for Exports.............................................................13
Growth Performance of World Economy and Key Trading Regions.....................13
WTO Agreements............................................................................................... 13
China's Accession to WTO.................................................................................. 13
Preferential Trade Arrangements/Free Trade Arrangements in Rest of the World
........................................................................................................................... 13
Regional/Bilateral Free Trade Arrangements......................................................14
Factors Affecting the Supply of Exports.................................................................14
Infrastructural Bottlenecks................................................................................. 14
Growth of Domestic Demand.............................................................................15
Inflows of Export-oriented Foreign Direct Investment........................................15
Technological Upgrading and Movement along with the Value Chain.................15
WTO Regime...................................................................................................... 16
Supply Constraints on Exports of Knowledge-based Services............................16
Exchange Rates Alignments............................................................................... 16
Factors Affecting the Demand for Imports.............................................................16
India's Growth Performance............................................................................... 16
Trade Liberalization............................................................................................ 17
Crude Prices....................................................................................................... 17
Industrial Restructuring and Rationalization.......................................................17
Study on the impact of rupee fluctuation on International trade between US &
India...................................................................................................................... 18
Aim of the study................................................................................................. 18
Data Collection & Methodology..........................................................................18
Examining the impact of rupee fluctuation on total imports & exports..............19
Examining the impact of currency fluctuation on agricultural exports & import 23

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Examining the impact of currency fluctuation on the exports & imports of

minerals & ores.................................................................................................. 26
Examining the impact of currency fluctuation on the exports & imports of
Beverages & Tobacco......................................................................................... 29
Impact of currency fluctuation on the exports & imports of Apparels &
Accessories........................................................................................................ 31
Impact of currency fluctuation on the exports & imports of computer &
electronic products............................................................................................. 34
Conclusion:............................................................................................................ 37
A small case study Exchange rate appreciation & its impact on IT sector..........38
CREDIT APPRAISAL MODEL AT AXIS BANK................................................................39
SMALL AND MEDIUM ENTERPRISES.......................................................................40
Credit to SME Sector.............................................................................................. 41
Services:............................................................................................................ 43
CREDIT RATING TOOL............................................................................................ 45
Introduction to Credit Risk Management............................................................45
Determinants of Credit Risk...............................................................................46
Credit Rating: Definition..................................................................................... 46
Use in decision-making...................................................................................... 47
Main features of the rating tool:.........................................................................47
Rating Tool for Small and Medium Enterprises (SME)............................................48
References:........................................................................................................... 51

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A STUDY ON THE IMPACT

OF FOREIGN EXCHANGE
FLUCTUATION ON
INTERNATIONAL TRADE

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INTRODUCTION
Exchange Rate
In simple words, exchange rate means how much one currency is worth in terms of another
currency. If we can buy $ 1 with Rs. 46, the exchange rate of the two currencies would be $1 =
Rs. 46.
There are two types of exchange rate: Fixed and Floating. Some countries have fixed exchange
rate systems while some have floating. As the name suggests, the fixed exchange rate doesnt
fluctuate because of government intervention. The floating exchange rate on the other hand
keeps on changing continuously just like the stock market. Thus the government intervention is
almost negligible. So, which type of exchange rate system does India have? In India, we have a
Managed Floating Exchange Rate System. This means that the Indian government intervenes
only if the exchange rate seems to go out of hand by increasing or reducing the money supply
as the situation demands.
Lets first see two very commonly used terminologies: Rupee Appreciation & Rupee
Depreciation (instead of using the word currency we are using rupee for the Indian context
and explain the fluctuation with respect to dollar). When rupee is said to be appreciating it
means that our currency is gaining strength and its value is increasing with respect to dollar.
However, when rupee depreciates it means our currency is getting weaker & its value is falling
with respect to dollar. You can understand it with the following example:
Suppose, currently, the exchange rate is Rs. 45 = $1,
10 months later, either of the following two cases can happen
Case1: The exchange rate is say Rs. 40 = $1. This means rupee has appreciated or gotten
stronger by approx 11% and you would be paying less to for a dollar
Case2: The exchange rate is at Rs. 50 = $1. This means rupee has depreciated or gotten
weaker by approx 11% and you end up paying more for a dollar.

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Causes of rupee appreciation/ depreciation

Rupees appreciation or depreciation against the dollar depends on the change in demand and
supply for both the currencies. If the demand for rupee is comparatively high, rupee appreciates;
if low, it depreciates. The important question here is what factors drive the demand for a
currency? They are:
o

Interest Rate: A demand for a currency is hugely dependent on the interest rate
differential between two countries. A country like India where int. rate is around 7-8%
experiences greater capital inflow as investors get better return than what they might get
in US. (with Interest rates of 2-3%). This results into rupee appreciation.

Inflation Rate: The demand for a countrys goods & services by the foreign buyers
would be more if the inflation rate is lower in that country compared to other countries.
Higher demand for goods & services would mean higher demand for that currency
resulting in the appreciation of that currency. For instance if Indias inflation rate is lower
than that of Zimbabwe then the demand for our goods, services and currency would be
higher than that for Zimbabwes.

Export-Import: If a country is exporting more than its imports from other countries, then
this would mean higher demand for that currency, causing appreciation of that currency
against others.

Trading in currencies in the Forex market: The exchange rate fluctuates minute by
minute because of speculative trading in the Forex market.

Though trading in Forex market causes fluctuations in the exchange rate, over a period the
change is backed by the fundamental factors like the growth potential in the economy, interest
rate differential and the inflation rate existing in different countries.
In a manage floating exchange rate system like India the government purchases rupee in
exchange for the foreign currency to increase money supply in the economy which leads to
depreciation of the home currency. Conversely, it purchases foreign currency in exchange for
rupee to reduce the money supply in the economy leading to appreciation of the home currency.

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Impact of rupee appreciation/depreciation

Impact on foreign investors: If a foreign investor invests in Indian stock market and even if its
value doesnt change in 1 year, hell earn profit if rupee appreciates and make a loss if it
depreciates. You can understand this with an example:
Suppose an FII Invests Re. 1 Cr. in the Indian stock market and at an exchange rate of $1 = Rs.
50. So, the amount invested is $200,000.
Suppose, after 1 year, even if the value of investment doesnt appreciate the foreign investor
can earn a profit if the exchange rate has changed to $1 = Rs. 40 (Rupee appreciation)
If the investor sells his investment and converts the currency, he would get $ 250,000. So, he
would earn $ 50,000 as a profit thanks to a change in the exchange rate i.e. rupee appreciation
So, a continuously appreciating rupee would lead to greater investment by the FIIs.
Impact on industry/companies: Appreciation of the rupee makes imports cheaper and
exports expensive. So, it can spell good news for companies who rely on import of
goods like heavy machinery, technology, micro chips etc. According to reports by Associated
Chambers of Commerce and Industry of India (ASSOCHAM) sectors like Petro & Petro
Products, Drugs & Pharma and Engineering Goods which have import inputs of as much as
77%, 19% and 21% respectively would stand to gain the most if rupee appreciates.They
would have to pay less for the imported raw materials which would increase their profit margins.

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Similarly, a depreciating rupee makes exports cheaper and imports expensive. So, it is
welcome news for sectors like IT, Textiles, Hotel & Tourism etc. which generates revenue mainly
from exporting their products or services. Rupee depreciation makes Indian goods & services
cheaper for the foreign buyers thus leading to increase in demand and higher revenue
generation. The foreign tourist would find it cheaper to come to India thus increasing the
business of hotel, tours & travel companies.
Impact on importers/exporters: Exchange rate volatility can work against an international
company if a payment in a foreign currency has to be made at a future date. There is no way to
guarantee that the price in the currency market will be the same in the future-it is possible that
the price will move against the company, making the payment cost more. On the other hand, the
market can also move in a business' favor, making the payment cost less in terms of their home
currency.
Generally, firms that export goods to other countries benefit when their home currency
depreciates, since their products become cheaper in other countries. Firms that import from
other countries benefit when their currency becomes stronger, since it enables them to
purchase more.
Impact on economy: Rupee appreciation makes imports cheaper and exports more expensive.
According to intelligence reports by the Associated Chambers of Commerce and Industry of
India, sectors like petroleum and petroleum products, drugs and pharmaceuticals and
engineering goods which have import inputs of as much as 77 percent, 19 percent and 21
percent, respectively will gain if the rupee appreciates. They would have to pay less for the
imported raw materials which would increase their profit margins.
Likewise, a depreciating rupee makes exports cheaper and imports expensive. So, it is good
news for industries such as IT, textiles, hotels and tourism which generate income mainly from
exporting their products or services. Rupee depreciation makes Indian goods and services
cheaper for overseas buyers, thus leading to increases in demand and higher revenue
generation. The foreign tourists would find it cost effective to come to India, therefore increasing
the business of hotel, tours and travel companies.
Indias IT sector is dependent on foreign clients, especially the United States, for more than 70
percent of its revenue. When an IT company gets a project from a client, it pre-decides on the
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length of the contract and the cost of the project. The contracts with U.S. clients are usually
quoted in U.S. dollar terms. So, the fluctuation in the exchange rate can bring about a
considerable difference in the performance of a company.
Some companies undertake a range of measures like hedging exchange risks using forwards
and futures contracts. This helps in mitigating some of the losses due to exchange rate
fluctuations, but none-the-less the impact is substantial.
The exchange rate is a significant tool that can be used to examine many key industries; with
fluctuations potentially having a serious impact on the economy, industries, companies, and
foreign investors. Rupee appreciation is generally helpful for industries which rely closely on
imported inputs while depreciation of the rupee is welcome news for industries which are
exporting a majority of their products.

Some Currencies are More Volatile than Others

Business owners with commercial ties to countries experiencing major changes in their
economies are even more vulnerable to currency rate risk. An example of a risky currency is the
Japanese Yen. A rocky economic recovery in Japan and Japanese restrictions on capital outflow
makes the dollar-yen rate very volatile.
If an export/import company conducts business in a volatile market, it is exposed to a higher
degree of currency rate risk. Sudden changes can be disastrous for a company that does not
plan ahead by detracting from its bottom line.

Hedging Against Currency Risk to Avoid the Volatility Trap

So how can a business protect against a risky currency? One way is to avoid the risk by
minimizing their commercial involvement with countries that have volatile currencies like the
Japanese Yen. This is however not a practical solution. Another way is to hedge in the spot
currency market by taking a position that effectively neutralizes the volatility in the pair. The
primary goal when hedging is to protect your company's profits from exchange rate uncertainty
at the lowest possible cost.

Note: Countries which have a managed exchange rate system like India, use the term
devaluation of currency instead of the term depreciation of currency, which is used by
countries maintaining a floating exchange rate system.
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Factors Affecting the Demand for Exports

There is a multitude of factors that are likely to affect the demand for India's exports
of goods and services as seen below.

Growth Performance of World Economy and Key Trading

Regions
The growth rates of the world economy and world trade do influence the overall
demand for India's exports. For instance, the rates of stagnation in the growth rate
of world trade in the period since 1996 have affected the growth of India's exports.
Depending upon the intensities of India's trade relations the growth prospects in
these specific regions may also affect the demand for India's exports. The regions
which may be particularly important for India's exports include North America, the
European Union, Middle East, East and Southeast Asia and South Asia. Therefore, it
will be important to watch the growth outlook and projections for these regions.

WTO Agreements
Since the implementation of the Final Act of the Uruguay Round in 1995, the WTO
Agreements have become important factors in determining the patterns of world
trade. Their full impact is not yet obvious as many provisions of these agreements
are yet to be implemented because of the transition period provided. Most of the
remaining provisions of the WTO agreements would be implemented in the coming
five years. Therefore, the patterns of trade in 2020 would have to be speculated
keeping in mind the impact of full implementation of the WTO agreements.

China's Accession to WTO

One of the important events of the coming years for the world trade may be the
entry of China into the WTO regime. China signed an agreement with the US for its
entry into the WTO in November 1999. It has subsequently been negotiating such
agreements with other WTO members. The accession of China to the WTO and
hence the MFN status that it will receive from other WTO countries may have some
implications for the competitiveness of India's exports. This is because India and
China compete in the international market for a number of labour intensive and
matured technology goods such as textiles and garments, leather goods, light
engineering products, chemicals and pharmaceuticals, among others. China has
already been giving tough competition to Indian exports in many commodities and
markets. There is a view that the accession to WTO may further strengthen Chinas
competitiveness and hence may affect the Indian exports adversely. There is
another view that the accession of China to WTO would force it to follow WTO norms
and procedures, etc. and will bring their trade policy under international
surveillance. State subsidies will be regulated and hence it will make it more
difficult for the Chinese exporters to dump their products in the world market. The
exact impact of the accession of China to the WTO on the India's export prospects
will depend upon these counteracting effects. It is important to analyze the effects
of Chinese accession to WTO on the competitiveness of Indian exports.

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Preferential Trade Arrangements/Free Trade Arrangements

in Rest of the World
The last decade and a half has seen the proliferation of regional trading
arrangements in different parts of the world. The major trading blocks that have
emerged over the years include the European Union, NAFTA, Mercosur, AFTA,
COMESA, among others. Besides, these free trade and common market agreements,
a number of other countries have become integrated with the trading blocks
through a variety of preferential or free trade arrangements. For instance, European
Union has extended free trade agreement treatment to a number of Central Eastern
European Union and Mediterranean countries in anticipation of full membership to
these countries in the EU. These arrangements could also act to divert trade away
from India specially in the labour intensive goods.

Regional/Bilateral Free Trade Arrangements

India has taken several steps to liberalize trade with her trading partners in the
South Asia region on regional as well as bilateral basis. These steps include
participation to SAARC Preferential Trading Arrangements (SAPTA) that came into
being in December 1995. Under this Agreement, India has exchanged trade
concessions with the SAARC member countries for nearly 3000 commodities in the
first three rounds of negotiations. The fourth round of these negotiations is in the
process. It is expected that the process of trade liberalization in the framework of
SAARC will culminate into a South Asia Free Trade Agreement (SAFTA), although, it
may take some time to take shape given the current impasse in the SAARC process.
Besides SAPTA, India has recently signed a bilateral free trade agreement with Sri
Lanka. India already has bilateral free trade agreement with Nepal and Bhutan. A
bilateral free trade agreement is being contemplated with Bangladesh as well.
There are other attempts of regional/sub-regional economic integration which may
also come into being in the coming decade, for instance, BIMST-EC (Bangladesh,
India, Myanmar, Sri Lanka and Thailand Economic Cooperation) which has been
formed recently may adopt a preferential trading arrangement between the
member countries. Although India is also a founder member of the Indian Ocean
Rim Association for Regional Cooperation (IOR-ARC), a preferential trading
arrangement is not contemplated as the Association has adopted the concept of
open regionalism on the lines of APEC. All these attempts at free trade with the
regional partners may open the markets for Indian goods further in the countries
concerned. It is evident that the share of South Asian countries in India's exports
has increased from 2.73 to 4.9 over the period 1990 to 1999. The recent initiatives
in regional/ bilateral trade liberalization may help to divert some trade of the
countries concerned from their other trading partners in favour of India given the
supply capabilities.

Factors Affecting the Supply of Exports

It is widely believed that the major factors constraining Indias exports lie not in the
lack of demand but more in the supply side constraints. Most of the supply side

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factors need to be addressed as a part of the policy towards trade. Some of the
factors that constrain the volume and composition of India's exports are as follows:

Infrastructural Bottlenecks
It is widely accepted that India's export potential remains considerably unfulfilled
because of infrastructure bottlenecks such as power shortages, port handling
facilities, delays in transportation which in turn are due to poor transport links within
the country and poor communication facilities. The inability of Indian exporters in
meeting supply schedules costs dearly in terms of image of India as a reliable
source of supply. Not only that the availability of the infrastructure services is
inadequate but the efficiency and quality of the delivery of what is available is
highly uneven. The ability of the government in removing these constraints in the
coming years will also determine the supply side of Indian exports.

Growth of Domestic Demand

A rapid growth of domestic demand may also affect India's ability to export at least
in certain products, for instance, in tea where the rapid growth of domestic demand
is expected to reduce the export surplus in the coming years. It may also apply to a
number of other agricultural commodities such as rice, cotton, among others.

Inflows of Export-oriented Foreign Direct Investment

Multinational enterprises (MNEs) have played an important role in the rapid growth
of manufactured exports from the East and South-East Asian countries. This is
because the South East and East Asian countries were able to attract export
platform investments from US and Japanese MNEs in the 1970s and 1980s. The
export platform or export-oriented investment arises in the process of relocation of
production by MNEs abroad in order to maintain their international competitiveness
in the face of rising wages and other costs in their home countries. In Malaysia and
Indonesia, for instance, 70 percent of the projects involving FDI have been exportoriented. In China, the share of foreign owned firms in exports has risen from 5
percent in 1988 to 40 percent by 1997. In contrast, the share of foreign affiliates in
India's exports is marginal at 5 to 7 percent. Therefore, India has not been able to
exploit the potential of MNEs for export-oriented production. MNEs can play an
important role in promotion of India's manufacture exports with relocation of export
platform production in the country with their access to global marketing networks,
best practice technology and organizational know-how. To some extent, therefore,
India's ability to attract export-oriented FDI will determine the magnitude of India's
exports in 2020. The studies have shown that export-oriented FDI inflows are of
special type and are determined by different factors than other types of FDI. The
studies also find differences in the nature and determinants of export platform
investments that are geared to MNEs' home markets and those targeting the third
countries. India may make an effort to target the export platform investments of
both types by sharpening her bundle of resource endowments and created assets in
the light of determinants identified by these studies.

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Technological Upgrading and Movement along with the

Value Chain
The Indian export structure has been highly dominated by simple and undifferentiated products where the main competitive advantage lies in cheap labour,
low levels of skills and simple technologies compared to that of China and South
East Asian countries except for recent growth of pharmaceuticals and software
services. Not only these products are slow moving, the export structure is highly
vulnerable to competition. India's competitiveness has also been adversely affected
by the failure to diversify the commodity composition of our exports. In fact the
commodity concentration of India's exports has increased with a 9 percent rise in
the share of top six groups of exports in total and exports between 1987-1988 to
1998-99. In comparison to India, Southeast and East Asian countries have rapidly
diversified their export structure in favour of technologically advanced goods. For
instance, share of technologically advanced goods (differentiated and science based
goods) in Indias manufactured exports rose marginally to about 8 per cent by the
mid-1990s over 5.6 per cent in the mid-1970s; in China, this proportion increased
from 8.8 per cent to 23 per cent over the 1987-95 period, and for Malaysia from 12
per cent to 57 per cent over the 1980 to 1995. The markets for low technology
undifferentiated goods are highly price competitive and margins are kept under
pressure by constant competition by entry of new low wage countries.

WTO Regime
Some of the WTO Agreements also have the provisions that are likely to affect the
supply of Indias exports.

Supply Constraints on Exports of Knowledge-based

Services
India has emerged as a significant supplier of certain knowledge intensive services
such as custom software and other IT enabled services over the past few years.
Software exports over the past five years have grown at a compound annual growth
rate of over 50 percent. Sustainability of such a rapid growth of these exports is
critically dependent upon our ability to increase the supply of engineering
manpower. The growing scarcity of the engineering talent in the recent years is
compounded by growing brain drain. In response to the growing scarcities of trained
manpower for their IT industry, many countries have relaxed their immigration
policies allowing their companies to recruit Indian engineers. However, currently
some of these workers who emigrated are returning back because of slow down of
the US economy. This, however, is a temporary phase. The rapid rise of software
industry has suddenly caused general scarcity of engineers in all disciplines leading
to a sharp rise in their salaries. The engineering industry in the country is finding it
difficult to find an adequate number of engineers for their requirement. The impact
of rising salaries on the competitiveness of the engineering and other industries
that compete for the engineering talent with the software industry is not clear but is
likely to be significant. Side by side the growing scarcity of engineering and IT
trained manpower, India's educational system is churning out masses of
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conventional science and social science graduates who can not find adequate job
opportunities. There is an immediate need for re-engineering the educational
system geared for the presence times. IT education should integrated in school and
college curricula and traditional disciplines such as fine arts which could feed the
growing needs for Computer Aided Design personnel. Some steps have been taken
recently to augment the supply of engineering manpower as a part of the IT Action
Plan which includes expanding the capacity of IITs and upgradation of REC to the IIT
levels. Some new institutes of IT have been set up besides promotion of private
sector training. It remains to be seen how far this expansion can be achieved
without affecting the quality of the education.

Exchange Rates Alignments

The competitiveness of Indias exports is also likely to be affected by the alignments
in the exchange rates. The future trends in the parities of not only the major
currencies such as dollar, euro and yen but also currencies of Indias major
competitors in specific product / market segments will affect the competitiveness of
Indias exports.

Factors Affecting the Demand for Imports

The demand for India's imports will be largely determined by the overall growth of
the economy, the changing patterns of growth and the ongoing process of trade
liberalization.

India's Growth Performance

The magnitude of imports to a large extent is linked to the size of the economy. The
changing pattern of the economy in favour of tradable goods in future may also
affect the overall import requirements for the country. The import to GDP ratio has
increased from an average of 7.7 percent for the 1980s to 10 percent in the 1990s
as a result of increasing import dependence of the Indian economy in the wake of
trade liberalization and changing patterns of development. It is of interest to
speculate on the projected growth rate of the economy in the next two decades and
emerging patterns of demand and import intensity of the economy.

Trade Liberalization
As a result of the trade liberalization attempted since July 1991 maximum tariff
rates applicable in India have come down from a peak of 355 percent in 1990-91 to
50.8 percent by the year 1998-99. The average weighted tariff rate has come down
from 87 percent to 20 percent from the same period. The non-tariff measures for
most of the commodities have also been phased from 1 st April 2001. The process of
trade liberalization is still not completed. It is expected that the tariff rates will be
lowered further in the coming years in the context of regional and bilateral
preferential trade arrangements as well as future WTO negotiations. Given the fact
that demand for many of the items of imports is price elastic, the future tariff
reductions may lead to higher imports. In particular, consumer goods imports may
be highly sensitive to liberalization.

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Crude Prices
The year 2000 witnessed extreme volatility in the crude oil prices that hit the roof at
$ 35 per barrel in September 2000 from about $ 12 per barrel a year ago. Although
these prices have since declined to a level of $ 26 per barrel, they have hardly
stabilized. OPEC has decided to cut the oil output by 1.5 million barrels a day in an
effort to raise the prices in mid-January 2001. It has been estimated that $ 1 per
barrel variation in the international prices of crude results in $ 500 million change in
India's oil import bill on an annualized basis at the current level of imports. Given
the determination of OPEC to keep the prices at high levels by cutting production,
the oil prices may rule around $ 25 per barrel in the coming years, although
international organizations are more optimistic. The volatility of oil prices is a highly
destabilizing factor for the Indian economy.

Industrial Restructuring and Rationalization

The process of liberalization is likely to provoke a trend of efficiency seeking
restructuring of Indian industry where some of the indigenous intermediate inputs
may be substituted by imported materials to enhance the overall efficiency and
competitiveness of the manufacturing process. This rationalization of production
may lead to increased demand for imports of a number of products at the cost of
local production.

Study on the impact of rupee fluctuation on

International trade between US & India
Aim of the study: The purpose of the study is to explore any relation between
currency fluctuation & international trade between US & India.

Data Collection & Methodology: The following monthly data from September
2007 to November 2011 has been collected:

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a) Monthly average of exchange rates i.e. average of INR with respect to 1 USD. (Source:
http://www.x-rates.com)
b) Total monthly exports & imports. (Source: http://www.census.gov)
c) Monthly export & import index. (Source: http://data.bls.gov)
The abovementioned 3 types of data are the primary data for the study & also act as the source
from which secondary data for the study has been derived.
Since the export & import data are nominal in nature hence we have also obtained the monthly
export & import indices in order to deflate these nominal values into real values. Hence the real
values of export & import have been arrived at by deflating the nominal values by the index
value in order to nullify the effect of inflation. Inflation is the rise in the general level of prices of
goods & services in an economy, therefore this rise in the price of goods increases the value of
international trade in terms of currency but it is the volume of international trade which actually
matters when it comes to determining the impact of rupee fluctuation on the international trade
hence we find out the real value of the international trade by dividing the nominal by the import
export price index. Therefore this gives rise to the following secondary data:
d) Monthly deflated imports & exports.
Thereafter we have all the possible types of data to find out the relation between currency
fluctuation & international trade, hence we proceed to ascertain the relationship with the help of
tools such as Microsoft excel & SPSS.
After this we proceed to examine the impact of currency fluctuation on the international trade of
the following few selected sectors in the same way as the above:
a)
b)
c)
d)
e)

Agricultural products
Minerals & Ores
Tobacco & Beverage products
Apparel & Accessories
Computer & Electronic products

Data collection is done from the same sources & its treatment is also done in the same way.
The tools utilized in these cases are also the same.

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Examining the impact of rupee fluctuation on total imports

& exports

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month
Sep07
Oct-07
Nov07
Dec07
Jan-08
Feb-08
Mar08
Apr-08
May08
Jun-08
Jul-08
Aug08
Sep08

Exchan
ge rate
40.173
5
39.366
1
39.316
8
39.375
2
39.270
4
39.672
4
40.145
2
39.966
8
41.881
4
42.763
3

42.723
42.924
8
45.426
4
48.619
Oct-08
6
Nov48.790
08
5
Dec48.480
08
4
48.732
Jan-09
6
49.191
Feb-09
4
Mar51.206
09
2
50.059
Apr-09
6
May48.549
09
7
47.745
Jun-09
9
48.435
Jul-09
8
Aug48.331
09
4
Sep48.360
09
6
46.719
Oct-09
2
Nov46.561
20 09
| Page 9
Dec46.598
09
7
45.921
Jan-10
6

Export
1468.
60
1630.
30
1387.
10
1454.
20
1046.
60
1226.
20
1446.
00
1104.
60
1444.
10
1828.
30
1823.
70
1863.
90
2030.
90
1640.
40
1204.
40
1023.
00
1139.
80
1046.
80
1123.
50
1268.
80
1507.
50
1397.
90
1658.
00
1677.
80
1641.
60
1502.
90
1070.
00
1406.
70
1296.
90

Import
1928.
10
2404.
10
2207.
00
1871.
40
2275.
60
2103.
60
2251.
20
2127.
10
2183.
90
1877.
40
2066.
10
2222.
60
2393.
60
2441.
80
1914.
20
1847.
40
1833.
50
1579.
00
1773.
00
1799.
20
1580.
80
1564.
20
1824.
80
1643.
70
2069.
00
1989.
80
1724.
10
1784.
60
2080.
50

ExpInd
ex

ImpInd
ex

Deflat
ed
Export
s

Deflat
ed
Import
s

116.7

121.8

12

15

117.6

123.6

13

19

118.7

127.5

11

17

119.3

127.3

12

14

120.7

129.2

17

121.8

129.5

10

16

123.8

133.5

11

16

124.4

137.3

15

124.8

141.2

11

15

126.1

145.5

14

12

128.0

147.5

14

14

125.9

143.0

14

15

124.9

137.8

16

17

122.3

129.6

13

18

118.4

120.0

10

15

115.8

114.5

16

116.6

113.0

16

116.3

113.0

13

115.5

113.6

15

116.1

114.8

10

15

116.6

116.8

12

13

117.8

120.0

11

13

117.4

119.3

14

15

118.1

121.1

14

13

117.9

121.3

13

17

117.9

122.3

12

16

118.9

124.1

13

119.7

124.4

11

14

120.7

125.9

10

16

The above figures of export & import are in millions of USD.

Figure 1

Figure 2 (in millions of USD)

21 | P a g e

Figure-1 shows the fluctuation in the monthly average value of INR with respect to 1 USD &
Figure-2 shows the fluctuation in the imports & exports from USA to India. These values of
imports & exports have been arrived at by deflating the nominal imports & exports by the export
& import price indexes in order to nullify the effect of inflation. Observations:
1) Exchange rate fluctuation doesnt have much impact on the volume of international
trade. Although the rupee fluctuation influences the foreign trade but the influence is very
limited. An attempt was made to fit the exchange rate data & volume of trade data in
regression models which did not produce results convincing enough to state that there is
any relationship between the two. This is chiefly because of following factors:
a) Hedging involved in foreign trade which insulates it from foreign exchange
fluctuations to a great extent.
b) Foreign trades are bound by long-term contracts which reduces the scope of any
kind of adjustments in the light of fluctuating exchange rates.

Variable Processing Summary

Variables
Dependent
DflatedExport
Number of Positive Values
Number of Zeros
Number of Negative Values
Number of Missing Values

User-Missing
System-Missing

Figure 3

22 | P a g e

Independent

DflatedImport

ExchangeRate

51
0
0
0

51
0
0
0

51
0
0
0

Model Summary and Parameter Estimates

Dependent Variable:DflatedExport
Model Summary
Equation

R Square

df1

Parameter Estimates
df2

Sig.

Constant

b1

b2

b3

Linear

.000

.003

49

.959

12.073

-.005

Logarithmic

.000

.003

49

.957

11.032

.218

Inverse

.001

.026

49

.873

12.491

-28.369

Quadratic

.143

3.994

48

.025

-120.399

5.962

-.067

Cubic

.139

3.887

48

.027

-74.776

2.931

.000

The independent variable is ExchangeRate.

Figure 4

Figure-3 & Figure-4 shows the number of observations

considered for the regression models, independent variable(exchange rate), dependent
variables(deflated exports & deflated imports) & their relationship with each other. We can see
that for all the regression models, the value of R Square is not very high & the level of
significance is also not close to 0.005, which indicates that imports & exports are not much
dependent on the rupee fluctuations.
2) Figure-1 & figure-2 shows that with an appreciation in the value of dollar or depreciation
in the rupee value, the gap between the imports & exports is increasing. This gap
between the imports & exports is known as Balance of Payment (BOP). The trend line of
the exchange rate from September 2007 to November 2011 indicates an upward trend in
the value & the trend lines of imports & exports indicate a widening gap between the
imports & exports or an increase in the Balance of payment.
3) Figure-2 also indicates an upward trend both in imports & exports but the rate of
increment of import is higher than that of export as the slope of the trend line of import is
greater than that of export & this can be attributed to the fact that imports increase &
exports decrease with an appreciation in the currency, although in this case both are
increasing but imports are increasing at a higher rate. Here the reason for the increase
in exports despite the increase in exchange rate might be, firstly the necessity goods
which have to be imported despite higher costs involved & secondly, an increase in
consumption due to the slight recovery of US economy from the recession which started
in September 2008.

23 | P a g e

.000

Examining the impact of currency fluctuation on

agricultural exports & import

Month
Sep07
Oct-07
Nov07
Dec07
Jan-08
Feb08
Mar08
Apr-08
May08
Jun-08
Jul-08
Aug08
Sep08
Oct-08
Nov08
Dec08
Jan-09
Feb09
Mar09
Apr-09
May09
Jun-09
Jul-09

Exchan
ge rate
40.173
5
39.366
1
39.316
8
39.375
2
39.270
4
39.672
4
40.145
2
39.966
8
41.881
4
42.763
3
42.723
42.924
8
45.426
4
48.619
6
48.790
5
48.480
4
48.732
6
49.191
4
51.206
2
50.059
6
48.549
7
47.745
9
48.435
8

24 | P a g e

Agri
Export
s

Agri
Import
s

AgriEx
p
Index

AgriIm
p
Index

50533

28589

142.5

119.6

30222

23982

153.9

121.8

37127

26117

155.7

123.0

37331

25753

163.1

122.3

34995

32448

175.7

135.4

28263

29738

187.5

127.8

26170

35407

197.4

137.1

26483

41537

187.1

137.8

24687

43429

183.8

138.4

19044

34066

188.4

139.2

12900

37930

206.8

144.0

49821

47620

174.7

146.0

75975

35479

175.2

143.4

40795

36476

152.5

135.7

28981

27672

142.7

128.8

19202

29590

131.8

154.0

20043

31054

147.3

153.1

26845

20022

141.7

141.7

25743

28610

131.9

136.4

19544

29366

142.4

147.7

35743

27086

149.4

143.8

29940

22133

157.3

142.5

28519

23886

144.5

135.4

Deflat
ed
AgriEx
p
354.0
0
196.0
0
238.0
0
228.0
0
199.0
0
150.0
0
132.0
0
141.0
0
134.0
0
101.0
0
62.00
285.0
0
433.0
0
267.0
0
203.0
0
145.0
0
136.0
0
189.0
0
195.0
0
137.0
0
239.0
0
190.0
0
197.0
0

Deflat
ed
AgriIm
p
239.0
0
196.0
0
212.0
0
210.0
0
239.0
0
232.0
0
258.0
0
301.0
0
313.0
0
244.0
0
263.0
0
326.0
0
247.0
0
268.0
0
214.0
0
192.0
0
202.0
0
141.0
0
209.0
0
198.0
0
188.0
0
155.0
0
176.0
0

Aug09
Sep09
Oct-09
Nov09
Dec09
Jan-10
Feb10
Mar10
Apr-10
May10
Jun-10
Jul-10
Aug10
Sep10
Oct-10
Nov10
Dec10
Jan-11
Feb11
Mar11
Apr-11
May11
Jun-11
Jul-11
Aug11
Sep11

48.331
4
48.360
6
46.719
2
46.561
9
46.598
7
45.921
6
46.347
2
45.498
2
44.471
4
45.871
6
46.575
8
46.836
3
46.579
1
45.990
4

45909

30524

144.7

138.0

61394

29281

134.7

139.9

49735

26725

135.6

139.8

50195

20573

144.2

143.4

63533

29041

148.1

145.5

52245

34840

152.3

152.0

36844

25039

140.1

149.9

31697

26778

145.6

153.7

30889

32289

144.0

154.7

30077

27589

146.6

161.3

23027

30705

144.9

153.5

34639

30279

143.9

152.7

44467

38974

155.4

160.9

63683

30138

161.8

159.4

44.425
44.998
6
45.119
2
45.397
5

38537

27758

168.2

163.5

35242

30506

192.4

167.3

46859

29739

197.9

170.7

53181

32443

209.0

176.8

45.423
44.969
9
44.395
4
44.937
7
44.842
6
44.415
1

49312

28182

223.1

177.5

54625

37591

229.4

197.0

49444

55159

224.7

207.2

35674

48680

220.3

199.8

31712

42171

222.1

185.9

37755

49574

206.5

188.1

45.365
47.658
5

25952

64315

211.6

181.9

79011

63580

216.2

185.5

25 | P a g e

317.0
0
455.0
0
366.0
0
348.0
0
428.0
0
343.0
0
262.0
0
217.0
0
214.0
0
205.0
0
158.0
0
240.0
0
286.0
0
393.0
0
229.0
0
183.0
0
236.0
0
254.0
0
221.0
0
238.0
0
220.0
0
161.0
0
142.0
0
182.0
0
122.0
0
365.0
0

221.0
0
209.0
0
191.0
0
143.0
0
199.0
0
229.0
0
167.0
0
174.0
0
208.0
0
171.0
0
200.0
0
198.0
0
242.0
0
189.0
0
169.0
0
182.0
0
174.0
0
183.0
0
158.0
0
190.0
0
266.0
0
243.0
0
226.0
0
263.0
0
353.0
0
342.0
0

Oct-11
Nov11

49.285
6
50.791
1

45543

49661

191.3

183.9

41356

42807

199.5

181.4

238.0
0
207.0
0

270.0
0
235.0
0

The above figures of export & import are in thousands of USD.

Figure 5

Figure 6 (in thousands of USD)

The above two figures show the trends in the international trade of agricultural products vis--vis
currency fluctuation. Again this is the data of US exports & imports to India & these trends
26 | P a g e

indicate that in the short run (within a period of 1-3 months) the exports can go as high as 450
thousand USD & as low as 50 thousand USD, similarly the imports also move within the upper
limit of 360 thousand USD & lower limit of 140 thousand USD but when we look at the bigger
picture or the trends in the long run, we observe that the imports & the exports of agricultural
products remain within 250 to 200 thousand USD, which means that there is a uniformity in the
volume of international trade of agricultural products. Agricultural products fall in the category of
necessity goods for which the demand generally remains stable explaining this uniformity in its
volume of international trade. Therefore even if the currency fluctuates it doesnt generally affect
the international trade volume of agricultural products.
The demand for necessity goods is not related to income or they have a low income elasticity of
demand which is in contrast to luxury goods which have a high income elasticity of demand.
Therefore whether the income rises or falls as a result of exchange rate fluctuation, the demand
for necessity goods, in this case agricultural goods, remains more or less stable.
There are also other factors which reduce the dependency of trade in agricultural products on
currency fluctuations, such as the government subsidies & tariffs which have a direct influence
on the international trade hence the government policies of India & USA with regard to the trade
of agricultural goods contribute to its reduced dependency on exchange rate fluctuations.

Examining the impact of currency fluctuation on the

exports & imports of minerals & ores

month
Sep07
Oct-07
Nov07
Dec07
Jan-08
Feb08
Mar08
Apr-08
May08

Exchan
ge rate
40.173
5
39.366
1
39.316
8
39.375
2
39.270
4
39.672
4
40.145
2
39.966
8
41.881
4

27 | P a g e

Minerals
/ores
Export

Minera
ls /ore
Import

Min/or
e
Export
Index

Min/or
e
Import
Index

Deflat
ed
Min/Or
e
Export

9714.00
16726.0
0

793.00

97.5

103.5

99

993.00
4873.0
0

100.4

104.2

166

100.1

104.6

96

46

889.00

99.5

106.9

94

817.00
1180.0
0

99.0

109.2

165

100.6

108.8

10

615.00
5208.0
0

102.1

109.9

228

99.7

123.1

42

777.00

100.0

122.9

772

9611.00
9379.00
16404.0
0
867.00
23322.0
0
736.00
77286.0
0

Deflat
ed
Min/or
e
Import

Jun-08
Jul-08
Aug08
Sep08
Oct-08
Nov08
Dec08
Jan-09
Feb09
Mar09
Apr-09
May09
Jun-09
Jul-09
Aug09
Sep09
Oct-09
Nov09
Dec09
Jan-10
Feb10
Mar10
Apr-10
May10
Jun-10
Jul-10

42.763
3
42.723
42.924
8
45.426
4
48.619
6
48.790
5
48.480
4
48.732
6
49.191
4
51.206
2
50.059
6
48.549
7
47.745
9
48.435
8
48.331
4
48.360
6
46.719
2
46.561
9
46.598
7
45.921
6
46.347
2
45.498
2
44.471
4
45.871
6
46.575
8
46.836
3

28 | P a g e

7480.00
20714.0
0
71798.0
0
46557.0
0
67495.0
0
46159.0
0
828.00
26860.0
0
43594.0
0
35467.0
0
48363.0
0
2203.00
53258.0
0
23050.0
0
9456.00
37002.0
0
44504.0
0
27419.0
0
13213.0
0
38312.0
0
30746.0
0
11392.0
0
84861.0
0
54843.0
0
52598.0
0
40344.0
0

505.00
2182.0
0

99.1

122.8

75

100.2

124.0

206

17

468.00
2646.0
0
4988.0
0

101.6

126.3

706

99.0

128.8

470

20

96.0

130.2

703

38

711.00
1838.0
0
1515.0
0
3950.0
0

91.6

129.0

503

90.8

128.0

14

84.6

130.5

317

11

84.3

131.0

517

30

431.00
3225.0
0
1724.0
0

86.8

129.6

408

88.5

129.2

546

24

87.0

128.6

25

13

598.00

88.2

129.6

603

327.00

86.6

127.5

266

673.00

88.6

128.7

106

431.00
2185.0
0

89.5

129.7

413

92.4

131.5

481

16

399.00

92.6

130.2

296

323.00

93.5

128.9

141

304.00
2415.0
0

96.6

128.4

396

94.3

130.0

326

18

598.00

98.9

131.9

115

810.00
2369.0
0
3750.0
0
1202.0
0

108.2

132.2

784

126.8

133.9

432

17

127.7

139.1

411

26

125.7

140.3

320

Aug10
Sep10

46.579
1
45.990
4

Oct-10
Nov10
Dec10

44.425
44.998
6
45.119
2
45.397
5

Jan-11
Feb11
Mar11
Apr-11
May11
Jun-11
Jul-11
Aug11
Sep11
Oct-11
Nov11

45.423
44.969
9
44.395
4
44.937
7
44.842
6
44.415
1
45.365
47.658
5
49.285
6
50.791
1

53862.0
0
20809.0
0
41747.0
0
31463.0
0
49019.0
0
16082.0
0
141831.
00
93816.0
0
145257.
00
61232.0
0
141495.
00
67618.0
0
41813.0
0
6908.00
72186.0
0
101767.
00

945.00

130.0

139.2

414

828.00
3218.0
0

133.1

139.3

156

134.8

139.2

309

23

829.00

137.0

140.3

229

549.00

130.6

140.5

375

471.00

132.4

145.2

121

410.00

134.6

146.1

1053

630.00

136.4

147.9

687

707.00
5476.0
0

139.0

153.5

1045

141.7

155.1

432

35

881.00
1335.0
0

140.0

154.9

1010

147.2

155.3

459

744.00

149.2

157.7

280

946.00
5109.0
0
6577.0
0

147.6

156.1

46

144.5

155.0

499

32

143.5

150.6

709

43

The above figures are in thousands of USD.

29 | P a g e

Figure 7

Figure 8

Foreign exchange fluctuation doesnt have any influence on the import & export of minerals &
ores whatsoever. Normally when the currency of a country appreciates, exports decrease &
imports increase but in this case although the value of USD with respect to INR is appreciating,
the exports are increasing which is in contrast to the general rule, hence it can be said that there
are several other factors involved in determining the volume of international trade in minerals &
ores, this contrast in trend can be attributed to the fact that USA is rich in minerals & ores.
After the recession in which US was worst hit & India was among the few countries which was
comparatively less affected, hence US needed to export more in order to get its economy back
in shape & India being a developing country needed more supply of minerals & ores to support
its growing consumption.

30 | P a g e

Therefore here also it can be concluded that the volume of foreign trade in this sector between
both the countries doesnt depend just on the exchange rates but also other factors such as the
foreign trade policies of India & USA.

Examining the impact of currency fluctuation on the

exports & imports of Beverages & Tobacco

month
Sep07
Oct-07
Nov07
Dec07
Jan-08
Feb08
Mar08
Apr-08
May08
Jun-08
Jul-08
Aug08
Sep08
Oct-08
Nov08
Dec08
Jan-09

Exchan
ge rate
40.173
5
39.366
1
39.316
8
39.375
2
39.270
4
39.672
4
40.145
2
39.966
8
41.881
4
42.763
3
42.723
42.924
8
45.426
4
48.619
6
48.790
5
48.480
4
48.732
6

31 | P a g e

Bevera
ge
/tobacc
o
Produc
t
Export
314
471
294
540
487
48
280
331
85
455
279
396
625
500
155
52
136

Bevera
ge
/tobacc
o
Import
1258.0
0
2529.0
0
1847.0
0
1420.0
0
2351.0
0
1336.0
0
1008.0
0
1800.0
0
1054.0
0
1050.0
0
1426.0
0
1671.0
0
1492.0
0
3319.0
0
2371.0
0
2410.0
0
1882.0
0

Bevg/
Tob
Export
Index

Bevg/
Tob
Import
Index

Deflat
ed
BevgT
ob
Export

Deflat
ed
BevgT
ob
Import

102.9

103.2

12

103.7

103.5

24

103.6

103.9

17

103.8

104.4

13

103.7

105.1

22

104.5

104.9

12

105.6

104.6

106.5

105.2

17

106.6

105.6

106.8

105.9

106.6

106.1

13

105.7

106.2

15

104.4

106.2

14

104.0

106.1

31

103.4

105.8

22

103.4

106.3

22

103.5

106.7

17

Feb09
Mar09
Apr-09
May09
Jun-09
Jul-09
Aug09
Sep09
Oct-09
Nov09
Dec09
Jan-10
Feb10
Mar10
Apr-10
May10
Jun-10
Jul-10
Aug10
Sep10
Oct-10
Nov10
Dec10
Jan-11
Feb11
Mar11

49.191
4
51.206
2
50.059
6
48.549
7
47.745
9
48.435
8
48.331
4
48.360
6
46.719
2
46.561
9
46.598
7
45.921
6
46.347
2
45.498
2
44.471
4
45.871
6
46.575
8
46.836
3
46.579
1
45.990
4

19
42
24
325
202
613
161
279
365
203
102
255.00
422.00
74.00
195.00
275.00
703.00
499.00
238.00
371.00

44.425
44.998
6
45.119
2
45.397
5

486.00

45.423
44.969
9

107.00

32 | P a g e

298.00
490.00
345.00

272.00

979.00
2091.0
0
1381.0
0
2214.0
0
1220.0
0
1512.0
0
1812.0
0
2369.0
0
1303.0
0
1492.0
0
1127.0
0
1608.0
0
1168.0
0
1661.0
0
1326.0
0
1091.0
0
1943.0
0

104.1

106.6

105.4

106.9

19

105.4

107.0

12

105.7

107.1

20

107.0

107.0

11

106.9

107.3

14

107.0

107.3

16

107.0

107.4

22

108.0

107.7

12

108.0

108.2

13

107.7

108.8

10

107.8

108.8

14

106.7

109.3

10

105.7

109.3

15

103.5

109.2

12

105.8

109.0

10

107.8

108.1

17

878.00
1747.0
0
1773.0
0
1531.0
0
1758.0
0
1093.0
0
1384.0
0

109.8

108.2

111.3

108.7

16

112.6

108.6

16

114.9

109.1

14

115.2

110.2

15

114.8

110.3

114.2

109.9

12

980.00
1464.0
0

114.5

110.0

115.2

110.4

13

Apr-11
May11
Jun-11
Jul-11
Aug11
Sep11
Oct-11
Nov11

44.395
4
44.937
7
44.842
6
44.415
1
45.365
47.658
5
49.285
6
50.791
1

404.00
473.00
483.00
424.00
298.00
427.00
546.00
641.00

1031.0
0
1667.0
0
1285.0
0
1915.0
0
1089.0
0
985.00
1103.0
0
1652.0
0

116.0

110.8

116.3

110.6

15

118.9

110.7

11

115.5

112.1

17

114.6

111.6

115.7

111.7

114.1

111.9

116.1

112.0

14

Above figures of export & import are in thousands of USD.

Figure 9

33 | P a g e

Figure 10

While looking at the trends of foreign trade between India & USA in the beverages & tobacco
sector again we can make out that it doesnt have any relation with the currency fluctuation &
here also the same conclusion follows as in the case of agricultural goods because to a certain
extent beverages & tobacco also fall in the category of necessity goods & have a low income
elasticity of demand, so the currency fluctuations may increase or decrease the income of the
parties involved but the volume of trade will more or less remain the same.
It can also be said that beverages & tobacco are independent of currency fluctuation because
generally these items are addictive & consumers are ready to pay more even if there is a slight
increase in its price as a result of exchange rate fluctuation.

Impact of currency fluctuation on the exports &

imports of Apparels & Accessories

mont
h
Sep07
Oct07
Nov07
Dec07

Excha
nge
rate
40.173
5
39.366
1
39.316
8
39.375
2

34 | P a g e

Apparel/
Accesori
es
Export
108
462
105
87

Apparel/
Accesori
es
Import
224890.
00
248956.
00
223369.
00
206771.
00

Apparel/
Accesso
ries
Export
Index

Apparel/
Accesso
ries
Import
Index

Deflat
d
Appar
el/
Accesr
Export

Deflat
d
Appar
el/
Accesr
Import

100.5

102.1

2202

100.5

102.1

2438

100.5

102.1

2187

100.3

102.2

2023

Jan-08
Feb08
Mar08
Apr08
May08
Jun08
Jul-08
Aug08
Sep08
Oct08
Nov08
Dec08
Jan-09
Feb09
Mar09
Apr09
May09
Jun09
Jul-09
Aug09
Sep09
Oct09
Nov09
Dec09
Jan-10
Feb10

39.270
4
39.672
4
40.145
2
39.966
8
41.881
4
42.763
3
42.723
42.924
8
45.426
4
48.619
6
48.790
5
48.480
4
48.732
6
49.191
4
51.206
2
50.059
6
48.549
7
47.745
9
48.435
8
48.331
4
48.360
6
46.719
2
46.561
9
46.598
7
45.921
6
46.347
2

35 | P a g e

229
179
114
676
127
183
195
288
283
129
216
323
202
236
158
390
95
156
300
294
110
483
310
344
104
290

305766.
00
314686.
00
354194.
00
322785.
00
257758.
00
254509.
00
255887.
00
230381.
00
233393.
00
249689.
00
223946.
00
211420.
00
280376.
00
287239.
00
315988.
00
280534.
00
251074.
00
231666.
00
248200.
00
222029.
00
230793.
00
206801.
00
182411.
00
216499.
00
256388.
00
282306.
00

100.9

102.3

2988

101.1

102.3

3076

101.0

102.4

3458

101.0

102.4

3152

101.0

102.1

2524

101.1

102.1

2492

100.9

102.2

2503

101.2

102.3

2252

101.3

101.8

2292

101.5

101.9

2450

101.5

101.9

2197

101.6

102.4

2064

101.6

102.4

2738

101.9

102.5

2802

102.2

102.6

3079

102.3

102.5

2736

102.2

102.2

2456

102.3

102.2

2266

102.6

102.0

2433

102.6

102.0

2176

102.7

101.9

2264

102.8

101.8

2031

102.8

101.7

1793

102.4

100.9

2145

102.4

101.2

2533

102.4

101.2

2789

Mar10
Apr10
May10
Jun10
Jul-10
Aug10
Sep10
Oct10
Nov10
Dec10
Jan-11
Feb11
Mar11
Apr11
May11
Jun11
Jul-11
Aug11
Sep11
Oct11
Nov11

45.498
2
44.471
4
45.871
6
46.575
8
46.836
3
46.579
1
45.990
4
44.425
44.998
6
45.119
2
45.397
5
45.423
44.969
9
44.395
4
44.937
7
44.842
6
44.415
1
45.365
47.658
5
49.285
6
50.791
1

36 | P a g e

306
432
394
256
367
450
463
259
1,009
390
1,764
409
1,316
2,505
717
505
997
545
912
1,763
1,085

324854.
00
319699.
00
283648.
00
281508.
00
260682.
00
251309.
00
235810.
00
285552.
00
234748.
00
216237.
00
314202.
00
294447.
00
393894.
00
334286.
00
340221.
00
286216.
00
299314.
00
277021.
00
260413.
00
250193.
00
222346.
00

102.9

101.5

3200

102.2

101.5

3149

102.2

101.2

2802

104.7

101.3

2778

104.7

101.6

2565

104.7

101.7

2471

105.6

101.7

2318

105.6

102.2

2794

105.1

102.6

2287

104.7

103.3

2093

107.4

104.3

16

3012

110.4

104.9

2806

110.5

105.7

11

3726

110.5

106.8

22

3130

111.2

107.3

3170

113.9

109.0

2625

114.2

110.0

2721

114.2

111.1

2493

114.3

111.2

2341

114.4

111.6

15

2241

114.4

111.5

1994

Figure 11

Figure 12 (in thousands of USD)

USA imports a substantial portion of its apparel & accessories demand from India & its exports
in the same sector to India is negligible. This is one of the few cases where the exports &
imports are following the general rule wherein the imports are increasing with the appreciation in
the value of USD. Apparels & Accessories fall in the category of luxury goods to a certain extent,
especially when these are imported despite of their availability in the home country, therefore
being luxury goods they have a high price elasticity of demand & is inversely related to price.
Therefore as the dollar is appreciating, the imports are becoming cheaper & with cheaper rates
the quantity being demanded is increasing, hence the imports are increasing overtime as shown
in the trend line in figure 12.

37 | P a g e

Impact of currency fluctuation on the exports & imports of

computer & electronic products

mont
h
Sep07
Oct07
Nov07
Dec07
Jan-08
Feb08
Mar08
Apr08
May08
Jun-08
Jul-08
Aug08
Sep08
Oct08
Nov08
Dec08
Jan-09
Feb09
Mar09
Apr09
May09

Exchan
ge rate
40.173
5
39.366
1
39.316
8
39.375
2
39.270
4
39.672
4
40.145
2
39.966
8
41.881
4
42.763
3
42.723
42.924
8
45.426
4
48.619
6
48.790
5
48.480
4
48.732
6
49.191
4
51.206
2
50.059
6
48.549
7

38 | P a g e

Comput
er /
Electroni
cs
Export

Comput
er /
Electroni
cs
Import

Comp/
Electro
nix
Export
Index

Comp/
Electro
nix
Import
Index

Deflate
d
Comp/
Electro
nx
Export

Deflate
d
Comp/
Electro
nix
Import

181,155

63,128

96.1

94.9

1885

665

163,884

62,919

96.1

94.7

1705

664

156,109

60,304

96.2

94.6

1622

637

196,433

61,001

96.4

94.5

2037

645

152,393

64,767

96.2

93.9

1584

689

144,533

79,280

96.2

93.6

1502

847

200,626

78,647

95.7

93.5

2096

841

165,950

76,183

95.6

93.6

1735

813

170,369

82,652

95.4

93.6

1785

883

186,550
155,141

67,747
84,702

95.8
95.0

93.1
92.6

1947
1633

727
914

168,826

95,478

94.6

92.4

1784

1033

169,250

80,711

94.3

92.1

1794

876

186,662

100,160

93.4

91.8

1998

1091

156,038

95,793

93.1

91.3

1676

1049

201,195

86,011

92.9

90.7

2165

948

166,418

69,494

92.8

89.8

1793

773

154,427

77,975

93.3

89.5

1655

871

192,073

61,508

93.1

88.9

2063

691

141,609

57,064

93.6

89.0

1512

641

151,130

55,212

93.7

89.2

1612

618

Jun-09
Jul-09
Aug09
Sep09
Oct09
Nov09
Dec09
Jan-10
Feb10
Mar10
Apr10
May10
Jun-10
Jul-10
Aug10
Sep10
Oct10
Nov10
Dec10
Jan-11
Feb11
Mar11
Apr11
May11
Jun-11
Jul-11

47.745
9
48.435
8
48.331
4
48.360
6
46.719
2
46.561
9
46.598
7
45.921
6
46.347
2
45.498
2
44.471
4
45.871
6
46.575
8
46.836
3
46.579
1
45.990
4

159,763

58,780

93.7

89.0

1705

660

155,461

72,259

93.5

89.0

1662

811

145,169

60,850

93.7

89.0

1549

683

166,969

65,412

94.0

89.0

1776

734

157,771

74,849

93.2

89.0

1692

841

140,922

77,722

93.4

88.9

1508

874

200,395

78,321

93.0

88.6

2154

883

163,405

91,993

92.6

88.2

1764

1043

157,314

74,280

92.3

88.1

1704

843

217,868

79,495

92.5

87.8

2355

905

150,343

80,447

92.9

87.6

1618

918

179,763

83,748

92.5

87.7

1943

954

207,342

90,678

91.8

87.3

2258

1038

198,616

86,430

91.6

86.6

2168

998

153,945

114,481

91.4

86.2

1684

1328

159,117

111,637

91.5

86.3

1738

1293

44.425
44.998
6
45.119
2
45.397
5

167,010

107,489

91.1

85.7

1833

1254

135,836

97,966

91.2

85.5

1489

1145

204,158

104,486

91.5

85.1

2231

1227

189,670

80,967

91.2

84.5

2079

958

45.423
44.969
9
44.395
4
44.937
7
44.842
6
44.415
1

165,789

94,690

90.7

84.6

1827

1119

233,123

113,077

90.3

84.5

2581

1338

182,454

93,108

89.9

84.1

2029

1107

160,272

105,403

89.7

83.9

1786

1256

175,924

98,988

89.6

83.7

1963

1182

199,110

104,265

89.6

83.3

2222

1251

39 | P a g e

Aug11
Sep11
Oct11
Nov11

45.365
47.658
5
49.285
6
50.791
1

170,028

108,962

89.6

83.2

1897

1309

198,114

99,197

89.5

83.1

2213

1193

187,363

99,030

89.6

82.6

2091

1198

163,481

100,768

89.5

82.5

1826

1221

Above figures of export & import are in thousands of USD.

Figure 13

Figure 14

40 | P a g e

After plotting the graph for deflated imports & exports of computer & electronic products, we find
that both the imports & exports are increasing despite the appreciation in the value of dollar
which should act as a setback for the exports but after observing the trend line of both the
imports & exports, it can be said that the appreciating dollar is acting as a hindrance in the way
of rising exports because the exports are rising but at a slower rate than that of imports. Since
USA is technologically far more advanced country than India, in fact it is among the most
technologically advanced countries in the world, therefore automatically it also becomes one of
the principal exporters of computer & electronic products not only to India but to many other
countries as well, hence India being a developing country, its demand for computer & electronic
products is ever increasing which explains the upward trend in US exports to India despite the
appreciation in dollar but the imports of US are also increasing & the slope of the trend line of
imports is greater than the slope of the trend line of exports. This is because the appreciating
dollar is trying to hold back the exports & giving an upward push to the imports by making the
imports cheaper.

After performing the detailed analysis of the impact of currency fluctuation on

imports & exports taken as a whole as well as on a sectoral basis, we have seen
one common happening in all the cases, that the currency fluctuation has almost
no influence on the volume of exports & imports, which has been confirmed after
performing a regression analysis for all the cases separately by taking exchange
rate as the independent variable & deflated imports & exports as dependent
variables. This is mainly due to one common reason i.e. Recession, which led to
fluctuations in income level & these fluctuations in income level had a much more
deep impact on the volume of international trade which overshadowed the
influence of currency fluctuation during this period, therefore in all the above
cases, we have not been able to link currency fluctuation with that of the variation
in International trade.

Conclusion:
After performing analysis on the primary & the secondary data, the following inferences can be
made:
1) There are several other factors which have a direct influence on the imports & exports of
a country & these factors make the impact of currency fluctuation less obvious.
2) All the above data were fed into the SPSS software & an attempt was made to estimate
the extent to which the deflated import & export depends on the currency fluctuation & it
was found that it is not much dependent on the exchange rate fluctuations.
3) It was found that necessity goods were much less dependent on exchange rate
fluctuations than luxury goods.
4) When the currency of US appreciates with respect to the Indian currency, the opposite
happens with the Indian currency, i.e. it depreciates, hence the imports of US increase &
the exports of India will also increase but the foreign trade policies of most of the
41 | P a g e

5)

6)

7)

8)
9)

countries try to encourage their exports in order to have a favourable balance of trade
which many a times will try to inhibit the imports from other countries. Therefore the
foreign trade policy also is a factor which determines the volume of international trade &
in many cases restrains the importers from taking advantage of the appreciating home
currency.
The recession in the US which started in late 2008 had a significant impact on the
consumption pattern of the US consumers. Their consumption as well as the production
in the economy had dropped by a significant amount but later on as the condition
improved, the consumption & production pattern also improved. This improvement in
production gave rise to the surplus & the exports increased. Hence recession also made
the impact of currency fluctuation on foreign trade less obvious.
As can be seen that both the imports & exports are increasing in computer / Electronic
products segment & apparel / accessories segment, this might be due to the increase in
both consumption & production in the US economy post 2009 when the economy
improved to a certain extent. Increase in consumption increases imports & increase in
production increases surplus which inturn increases exports.
It can also be seen that the imports are decreasing drastically & exports are increasing
slowly in the beverage & tobacco product segment despite the appreciation in USD. This
unusual phenomenon can also be explained by recession, as the production &
consumption increases post recession, the increase in production exceeds that of the
increase in consumption, hence the surplus produced not only meets the increasing
consumption thereby reducing the imports drastically but also produces enough to
increase the exports to a certain extent.
In the minerals & ores segment also the exports are increasing despite the appreciation
in USD & this is also due to the increase in production post 2009.
The agricultural sector is seen responding slightly to the exchange rate fluctuation
because they fall in the category of necessity goods & here also the exports are
increasing & imports are decreasing which is again due to improved economic activity
post recession.

A small case study Exchange rate appreciation &

its impact on IT sector
Indian IT sector is dependent on foreign clients, especially US, for more than 70% of its
revenue. When an IT company gets a project from a client it pre-decides on the length of the
contract and the cost of the project. The contracts with US clients are usually quoted in dollars
term. So, the fluctuation in the exchange rate can bring a considerable difference in the
performance of a company.
Take the example of Infosys results between 2007 and 2008 to understand the impact that the
fluctuation in exchange rate can have on the performance of a company. The income of Infosys,
in 2008, increased by 34.1% to $ 3912 million but because of rupee appreciation of 11.2%, from
Rs. 45.06 to Rs. 40, in rupee terms, its income increased only by 19%.

42 | P a g e

Every 1% movement in the Rupee against the US Dollar has an impact of approximately
50 basis points on operating margins Infosys Annual Report
However the IT sector does not just sit idle and let exchange rate play the spoil sport. It
undertakes various measures like hedging exchange risks using forward and future contracts.
This helps them in mitigating some of the loss due to exchange rate fluctuation but none the
less the impact is substantial.
Exchange rate is thus an important tool that can be used to analyze many key industries like IT,
Textiles etc. Fluctuating exchange rate has a significant impact on the economy, industries,
companies, foreign investors etc. Rupee appreciation is beneficial for industries which rely
heavily on imported inputs while depreciation of rupee is good news for industries which are
exporting majority of their production.

43 | P a g e

CREDIT APPRAISAL
MODEL AT AXIS BANK

SMALL AND MEDIUM ENTERPRISES

In the Indian context, the small and medium enterprises (SME) sector is broadly a term used for
small scale industrial (SSI) units and medium-scale industrial units. Any industrial unit with a
total investment in its fixed assets or leased assets or hire-purchase asset of upto Rs 10 million,
can be considered as an SSI unit and any investment of upto Rs 100 million can be termed as a
medium unit. An SSI unit should neither be a subsidiary of any other industrial unit nor be
owned or controlled by any other industrial unit.
An SME is known by different ways across the world. In India, a standard definition surfaced
only in October 2, 2006, when the Ministry of Micro, Small and Medium Enterprises,
Government of India, imposed the Micro, Small and Medium enterprises Development
(MSMED) Act, 2006.

44 | P a g e

Small & medium enterprises (SME) sector is the future of India. In order to sustain the economic
growth and development of the country, it is essential that the SME sectors play their role
without which the growth story of India will be dampened.

With the advent of planned economy from 1951 and the subsequent industrial policy followed by
Government of India, both planners and Government earmarked a special role for small-scale
industries and medium scale industries in the Indian economy. Due protection was accorded to
both sectors, and particularly for small-scale industries from 1951 to 1991, till the nation adopted
a policy of liberalization and globalization. Certain products were reserved for small-scale units
for a long time, though this list of products is decreasing due to change in industrial policies and
climate.

The small-scale sector produces a wide range of products, from simple consumer goods to
highly precision and sophisticated end-products. As ancillaries, it produces a variety of parts
and components required by the large enterprises. The sector has emerged as a major supplier
of mass consumption goods like leather articles, plastics and rubber goods, fabrics and readymade garments, cosmetics, utensils, sheet metal components, soaps and detergents,
processed food and vegetables, wooden and steel furniture and so on. More sophisticated
items manufactured by the small scale sector now include television sets, electronic desk
calculators, microwave components, air conditioning equipment, electric motors, auto-parts,
drugs & pharmaceuticals.
Although Small and Medium Enterprises (SMEs) are today recognized as a priority in almost all
countries it is estimated that half to two -third of businesses all over the world are SMEs. They
comprise a widely divergent spectrum of establishments, engaged in economic activities
ranging from engaged in economic from micro and rural enterprise to modern industrial units
using sophisticated technologies. Such enterprises exist in the form of factories, workshops,
trading and service organizations. Ownership patterns range from proprietorship and
partnership to companies and co-operatives. Due to their contribution to their respective
national economies, the importance and emphasis on SMEs has been accentuated in the minds
of policy makers.

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Credit to SME Sector

AXIS bank provides credit to SME sector under following Schemes:

SME Schematic (Fast Track): It includes structured products basically to

provide fast services to clients. It includes various products like:
1. Mpower OD and Mpower Term Loan: The product aims at to provide both
Working capital and Term finance requirements of a trade enterprise. The facility is
in the form of a Cash Credit (for Working Capital requirements) and Term Loan
(Financing Capital expenditure). The facility is secured by hypothecation of
Working Capital assets and further collateralized by charge over an immovable
property/ financial asset. Non-Fund based facilities can also be granted under the
product. The maximum Loan amount under the product is Rs. 2.50 Crs.
2. Business Loan for Property: The product is aimed at providing finance to
business enterprises for acquition of an immovable property. The facility is in the
form of a Term Loan repayable by EMIs. The maximum Loan amount under the
product is Rs. 5 crores.
3. Power Rent: The product generally known in market parlance as Lease Rental
Discounting is aimed at providing a Term Loan to owners of properties against
their lease rental receivables. The Loan amount is assessed on the basis of the net
present value of the rental receivables over the lease period (after deducting
margin and taxes). The lease rentals are hypothecated in banks favor and the
Loan is further collateralized by charge over the property. The product specifies a
minimum-security coverage of 1.5 times. Maximum Loan amount under the product
is Rs. 20 crores.
4. Power Trade: The product aims to provide both working capital and Term finance
requirements of a trade enterprise. The facility is in the form of a cash credit (for
working capital requirements) and Term Loan (financing capital expenditure). The
facility is secured by hypothecation of working capital assets and further
collateralized by charge over an immovable property/ financial asset. Non- fund
based facilities can also be granted under the product. The maximum Loan amount
under the product is Rs. 2.5 crores.

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5. Zero Collateral Loans (ZCL) to MSE under CGS: This product facilitates the
MSEs and software/IT related services to avail both working capital and term
finance from bank. The facility is secured by guarantee cover of credit guarantee
fund trust for micro and small enterprises (CGTMSE) and there is no collateral
security to be taken in such cases. Maximum loan amount under the product is Rs.
1.00 crore.
6. Card Power: This is a scheme for financing credit/debit card receivables of units
installing pour EDC machines. Both demand loan & term loan facilities are offered
to the borrowers, subject to a maximum of Rs. 2.5 crores. All trading/ retailing
activities (with a few exceptions like liquor, tobacco, seasonal business etc.), where
credit/ debit cards are used are eligible for the loans.
7. Enterprise Power: This product has been developed to meet the credit needs of
the Micro and small enterprises covering both manufacturing and the service
sectors. The facilities offered include CC Rupee export credit; pre & post shipment
credit & non-fund based facilities like LC & BG. The maximum limit is restricted to
Rs. 1.00 Crore.
8. Business Power: Business Power is an unsecured Term Loan (Maximum loan
amount under the product is Rs. 35 lacs) to be repaid by way of EMIs over a
maximum period of 4 years
SME- Non Schematic (Standard): For a business on the growth phase with a
wide range of opportunities to explore, timely availability of credit is an integral ingredient
needed to scale new heights. Axis Bank understands this and endeavor to be not just a
bank but also financing partner, so that focus on business needs becomes possible
whereas Bank cater to meet financing needs.
Their services ranging from Funded to Non-Funded, from Short Term to Long Term and
from Credit to Trade Services ensures to get finance the way it is best suited for
business.

Services:

Cash Credit:

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Bank offer Cash Credit facilities to meet day-to-day working capital needs. Cash
Credit is provided against the primary security of stock, debtors, other current assets,
etc., and/or collateral security of movable fixed assets, immovable property, personal
or corporate guarantee, etc. Interest is charged not on the sanctioned amount but on
the utilized amount

Working Capital Demand Loan:

Bank also provides working capital facilities in the form of Working Capital Demand
Loan instead of cash credit facility. The primary or collateral security will be as
mentioned in cash credit facility. Here also interest is levied on the amount drawn
rather than on the amount utilized.

Export Finance:
Bank provides finance for export activities in the form of Pre-Shipment Credit against
firm order and or Letter of Credit and Post shipment credit. Credit is available for
procuring raw materials, manufacturing the goods, processing and packaging the
goods and shipping the goods. Finance is provided in Indian or foreign currency
depending upon the need of the borrower.

Short Term Loan:

Bank provides Working Capital facilities to meet day-to-day working capital needs
and Term Loan for capex. However there may be occasions where there is need of
ad hoc or short-Term finance for general corporate purposes, meeting temporary
mismatches in working capital or for meeting contingent expenses. In such situations
it provides Short Term Loans for tenure up to a year to ensure that business runs
smoothly.

Term Loan:

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When there is need of long-Term funds for capex or capacity expansions or plant
modernization and so on. Keeping these requirements in mind Bank provides Term
Loans up to acceptable tenor with suitable moratorium, if required, and repayment
options structured on the basis of customers estimated cash flows. These Loans are
primarily secured by a first charge on the fixed assets acquired through the Loan
amount. Suitable collateral security is also taken whenever required.

Clean Bill Discounting:

Bank provides clean bill discounting facilities to fund receivables. Bank discount bills
or receivables and provide credit against that. This facility is provided for a period of
3-6 months depending upon the tenor of the bill.

LC Backed Bill Discounting: Bank discount trade bills drawn under Letters of
Credit issued by reputed banks to fund receivables. This facility is provided for a
period of 3-6 months depending upon the tenor of the bill or Letter of Credit.

Co-Acceptance of Bills:
Bank also provides co-acceptance of trade bills depending upon the need of the
borrower.

Credit Facilities against Guarantee or Stand By Letter of Credit issued by

Foreign Banks:
Various foreign companies set up subsidiary in India. Bank provides funding to such
companies against guarantees or SBLCs of acceptable foreign banks.

Letter of Credit:
Apart from fund based working capital facilities Bank provides a range of Non-Fund
Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc.
Letter of Credit is provided to meet trade purchases. These are generally provided

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for 3-6 months depending upon Trade cycle. Apart from this it provides Import Letter
of Credit for importing machinery or capital goods. Such LCs are for tenure ranging
from 1-3 years depending upon the need of the borrower.

Bank Guarantee:
Bank provides Bank Guarantee on behalf of its client to various other entities such as
Government, quasi government bodies, corporate and so on. it provides a range of
guarantee such as Performance guarantee, financial guarantee, EPCG etc. The
tenure of Bank Guarantee ranges from 1 year to 10 years depending upon the
purpose of the guarantee.

Solvency Certificates: Bank also provides solvency certificate (Mukherjee, 2006)

CREDIT RATING TOOL

Introduction to Credit Risk Management
Definition
Of all different types of risks that a bank is subject to, credit risk can be defined as the risk of
failure on the part of the borrower to meet obligations towards the bank in accordance with the
terms and conditions that have been agreed upon. Inability and/or unwillingness of the borrower
to repay debts may be the cause of such default.
The bank aims at minimizing this risk that could arise from individual borrowers or the entire
portfolio. The former can be addressed by having well-developed systems to appraise the
borrowers; the latter, on the other hand, can be minimized by avoiding concentration of credit
exposure with a few borrowers who have similar risk profiles. Credit risk management becomes
even more relevant in the light of the changes that have been brought about in the economic
environment, including increasing competition and thinning spreads on both sides of the
balance sheet.

Determinants of Credit Risk

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Factors determining credit risk of a banks portfolio can be divided into external and internal
factors. The bank does not have control on external factors. These include factors across a wide
spectrum ranging from the state of the economy to the correlation among different segments of
industry. The risk arising out of external factors can be mitigated via diversification of the credit
portfolio across industries especially in light of any expectations of adverse developments in the
existing portfolio.
Given that the banks have very little control over such external factors, the bank can minimize
the credit risk that it faces mainly by managing the internal factors. These include the internal
policies and processes of the bank like loan policies, appraisal processes, monitoring systems
etc. These internal factors can be taken care of, partly, via effective rating and monitoring
systems, entry level criteria etc. These processes would enable improvement in the quality of
credit decisions. (Corporate Credit Policy,2010)
This would effectively improve the quality (and hence profitability) of the portfolio. While
monitoring systems are useful tool at post-sanction stage, rating systems act as important aid at
the pre-sanction stage.

Credit Rating: Definition

Credit rating is the process of assigning a letter rating to borrowers indicating the
creditworthiness of the borrower. Rating is assigned based on the ability of the borrower
(company) to repay the debt and his willingness to do so. The higher the rating of a company,
the lower the probability of its default. The companies assigned with the same credit rating have
similar probability of default.

Use in decision-making
Credit rating helps the bank in making several key decisions regarding credit including:
Whether to lend to a particular borrower or not; what price to charge
What are the products to be offered to the borrower and for what tenor
At what level should sanctioning be done
What should be the frequency of renewal and monitoring

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It should, however, be noted that credit rating is one of the inputs used in taking credit decisions.
There are various other factors that need to be considered in taking the decision (e.g.,
adequacy of borrowers cash flow, collateral provided, relationship with the borrower). The rating
allows the bank to ascertain a probability of the borrowers default based on past data.

Main features of the rating tool:

i) Comprehensive coverage of parameters.
ii) Extensive data requirement.
iii) Mix of subjective and objective parameters.
iv) Includes trend analysis.
v) 13 parameters are benchmarked against other players in the segment. The tool contains the
latest available audited data/ratios of other players in the segment. The data is updated at
intervals.
vi) Captures industry outlook.
vii) Eight grade ratings broadly mapped with external credit rating agencys ratings prevalent in
India.

Rating Tool for Small and Medium Enterprises

(SME)
The SME rating tool has been developed for the purpose of assigning a credit rating to the SME
borrower of the Bank. The aim of the tool is to provide a standardised system for the bank to
evaluate the credit risk of different borrowers. It should, however, be noted that this tool is not
the standalone exercise for the purpose of sanctioning of loan to a SME borrower. It should be
supplemented with other inputs important in the sanctioning process.
The following broad areas have been considered for deterMining the rating of borrowers in the
SME category:

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 Financial

performance: The tool in its current form uses various parameters for

rating a borrower on its financial strength. These various sub-parameters give us an idea of the
different sources of risk being faced by a company in different areas.
The parameters under this are:
1) (a) Audited Net Sales in Last Year (L) (Rs crores)
(b) Audited Net Sales in Year before Last (L-1) (Rs crores)
(c) Audited Net Sales in 2 Years before Last (L-2) (Rs crores)
(d) Audited Net Sales in 3 Years before Last (L-3) (Rs crores)
(e) Estimated/Projected Net Sales in next year (L+1) (Rs crores)
2) Net Sales Growth Rate (%)
3) PBDIT Growth Rate (%)
4) PBDIT/Net Sales (%)
5) ROCE (%)
6) (a) TOL/TNW (Adjusted)
(b) TOL/TNW (Unadjusted)
7) Current Ratio
8) DSCR
9) Interest Coverage Ratio
10) Foreign Exchange Risk
11) Realisability of debtors
12) Operating Cash Flow
13) Trend in Cash Accruals

Business

performance: Operational efficiency of a borrower is important in

deterMining the generation of cash for repayment of its debt obligations. The parameters in this
category assess the borrowers competence in its primary activities.
The parameters under this are:
1)
2)
3)
4)
5)
6)
7)
8)
9)

Inventory Turnover
Credit Period Allowed (Days)
Credit Period Availed (Days)
Working Capital Cycle (Times)
Product Related Risk
Price Related Risk
Sustainability of sales and Operating profit
No. of Years in Business
Nature of Clientele base

Industry

outlook: In order to undertake the credit rating of any borrower, it is

important to assess the riskiness of the industry to which that borrower belongs. Borrowers,
which are similarly ranked in terms of financial performance, operating performance of business

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and quality of management may have different credit ratings due to the risks inherent in their
industry.
Quality

of management: Quality of the management of a borrower unit has a

direct impact on the performance of the unit. Also, it would have a direct impact on the integrity
of the borrower especially in terms of its willingness to repay its debt.
The parameters under this are:
1)
2)
3)
4)
5)
6)
7)

HR Policy/track record industrial unrest

Track record in payment of Statutory and other dues
Market Report of Management Reputation
Too Optimistic Projections of Sales and Other Financials
Capability to raise resources
Technical and Managerial Expertise
Repayment Track Record

Conduct

of account (after roll out of the Monitoring tool)

The grading scale and the scoring band under SME rating are as follows:

(User Manual- SME Rating Tool, 2003)

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References:
1) US Census Bureau: http://www.census.gov/econ/overview/mt0100.html
2) United States Department of Labor, Bureau of Labor Statistics: http://data.bls.gov
3) X-Rates: http://www.x-rates.com/d/INR/USD/hist2011.html
4) Planning commission of India: http://planningcommission.nic.in
5) Stocks Shastra: http://stockshastra.moneyworks4me.com
6) GOCURRENCY.com: www.gocurrency.com/import-risk.htm
7) Corporate Credit Policy. Axis Bank
8) (2003). User Manual- SME Rating Tool. Axis Bank.

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