International Corporate Finance

Assignment

Submitted by

DeoMathews J
043021
IMG-4
Analyze trend of Rupee VS Dollar, Rupee Vs Euro, Rupee Vs Ruble, Rupee Vs Yen and Rupee Vs
Pound Sterling for the past 3 months and its impact on the economy. How do you Project the Future
of Dollar in the near future?

Rupee Vs Dollar

Indian Rupees to 1 USD (Past 4 months)

Average rates in the previous months

November 2010 - 44.9986 INR   (22 days average)

December 2010 - 45.1192 INR   (23 days average)
January 2011 - 45.3975 INR   (21 days average)
February 2011 - 45.423 INR   (20 days average)

As the most recent development, the Indian rupee appreciated by five paisa to close at 45.27/28
against the US dollar on the Union Budget day. Some sale of dollars by exporters and a weakness in
US currency overseas too helped the rupee rise. However, higher global crude oil prices forced
importers to buy dollar in small lots, stemming the rupee rise to a certain extent.

The major factors that affect the exchange rate between dollar and rupee are the following.

1) Dollar selling or buying by exporters and corporate.

2) Global price of crude oil.
3) Capital inflows and outflows.
4) Reserve bank.
5) Dollar weakness or strengthening against other currencies.

Rupee Vs Euro

Indian Rupees to 1 USD (Past 4 months)

Average rates in the previous months

November 2010 - 61.4539 INR   (22 days average)

December 2010 - 59.6472 INR   (23 days average)
January 2011 - 60.6803 INR   (21 days average)
February 2011 - 61.9801 INR   (20 days average)

As the graph seems the Indian rupee was continuously appreciating till the first week of January.
After that it took a very high rise and depreciated upto around 62.5 and the trend is continuing.

Rupee Vs Ruble

Indian Rupees to 1 RUB

Average rates in the previous months

November 2010 - 1.45168 INR   (22 days average)

December 2010 - 1.46433 INR   (23 days average)
January 2011 - 1.50868 INR   (20 days average)
February 2011 - 1.55223 INR   (20 days average)

Rupee Vs Yen

Indian Rupees to 1 JPY

Average rates in the previous months

November 2010 - 0.545369 INR   (22 days average)

December 2010 - 0.541745 INR   (23 days average)
January 2011 - 0.549497 INR   (20 days average)
February 2011 - 0.549767 INR   (20 days average)
Rupee Vs Pound Sterling

Indian Rupees to 1 GBP

Average rates in the previous months

November 2010 - 71.8701 INR   (22 days average)

December 2010 - 70.3317 INR   (23 days average)
January 2011 - 71.7955 INR   (20 days average)
February 2011 - 73.2366 INR   (20 days average)

The future of Dollar

1) The turmoil in the Middle East and the resulting spike in oil prices is spooking investors of all
stripes, and currency traders are seeking out safe havens. That is usually good news for the
dollar.
2) The massive U.S. budget deficit is the gravest threat facing the economy, topping high
unemployment and the risk of inflation or deflation.
3) The World is concerned that the dollar cannot play the role of the main reserve currency any
longer after the financial crisis sparked by the collapse of the U.S. mortgage market led to
the worst global recession since the 1930s. The Government’s stimulus packages, financial
bailouts, the need to support liquidity in Treasuries, keeping interest rates at the lowest
level under the circumstances of weak economy, ballooning national debt, high
unemployment and low tax collection make it print more dollars.
4) Nobel Prize winner Paul Krugman states that “a country whose fundamentals are
persistently and predictably deteriorating will necessarily have a [currency] crisis at some
point.”He associated this with the unemployment, national debt, budget deficit, Economic
impact of U.S. international military operations, China’s peg to the dollar etc.

Implications of fall in USD

Dilution of the U.S. dollar from the printing press is certain to result in a much lower U.S. dollar
exchange rate. Bubbles always break. There is not one bubble in the U.S. landscape that has been
properly identified by the bankers who created them. There really is no way of knowing how many
tens of billions of dollars of Treasuries have been secretly bought by the Federal Reserve in previous
“fraudulent” auctions. With the current bubble, as with all bubbles, there is going to be a bursting,
then a drop in price and it will be both painful and rapid when the awareness spreads of this
monetization. Again talking reality, the U.S. Government is bankrupt, just like Citigroup, AIG, Fannie
Mae, Freddie Mac and others. They are being kept afloat by the auspices of the U.S. Government.
The Government has no assets. All they have is borrowing and taxing power, the former being based
on the latter. But the taxing powers of government become useless during a severe economic
contraction. Furthermore, instead of reporting capital gains, people will be reporting capital losses,
and asking for tax refunds. The Government’s huge spending spree is coinciding with a tremendous
fall in tax revenue. Rather than adopt austerity measures as common sense would dictate , the
government is doing the exact opposite–spending beyond their means and increasing the
indebtedness of their citizenry even more. The massive bailouts and deficits incurred to “save” the
financial system will be a HUGE anchor on economic growth for years to come, even if the
depression I call for were to end tomorrow. If there is no real savings (capital), then the depression
will continue.

Implication on NRI savings and investments

Earlier the economic risk of the Indian rupee was typically one-way: downwards. Undoubtedly, the
Rupee was expected to weaken against the Dollar. Thus, most NRIs preferred leaving their money in
foreign currency or FCNR deposits – the low yield on these deposits would be more than made up by
a continually falling Rupee, thereby making the Rupee wealth of NRIs grow with time.
Now, however, the situation has changed. The Indian economy is sitting on large foreign exchange
reserves (> 0 billion). Given that India is now more globally linked than at any other time in its recent
history, the impact on the value of its currency is that it is buffeted by international trends.

NRIs investing back in the US will have major setbacks. Steady erosion in the US Dollar will severely
impact the NRIs. Most of them hold dollar assets – (their future earnings held mostly in dollars)
which on purchasing power parity basis will also diminish. While they enjoyed the ride when the
rupee slipped to Rs 52, they will have to unwillingly give away a fair proportion of these notional
gains. In rupee terms, they would steadily lose a certain portion of their net accumulated wealth
each year.

The depreciating dollar will also increase the cost of living in the US as most of the items of general
consumption are imported from developing countries (India, China, South East Asian nations etc).
The comforting factor is that for Non Resident Indians who have no plans of returning to India- the
dollar rupee equation may not hold much relevance.

Implications of a falling Rupee

 Foreign investors will want bigger returns for their money to compensate for the higher risk.
This means that the Indian government, companies and individuals will have to pay more for
the money they borrow: in other words, higher interest rates.
 It will increase the Indian government's burden of repaying and servicing foreign debt.
 Discourage FII's from pouring funds into the Indian markets. Indian corporates which could
borrow from the overseas markets at cheaper rates to finance their expansion plans will be
badly affected.

Solution
 RBI can sell dollars in the open market to bring down the value of the US greenback, albeit
slightly.
 Monetary Policy to defend the rupee's value. Short-term interest rates changes do impact
the value of the rupee against other currencies. But, the RBI has mostly used the policy to
stabilise internal conditions, like steps to control rising inflation.
 However, if the Indian stock markets boom -- like they did in the last couple of years it could
provide a shot in the arm for more global funds to invest in India thereby strengthening the
rupee as the demand for the dollar in the local markets drops
Performance of Euro

The euro crisis that began in Greece has quickly engulfed Europe and now threatens the future of
the euro. The euro crisis strikes at the heart of the world’s largest trading block and will have
ramifications on the rest of the world, from the United States to emerging economies like Turkey
and India.

Causes of the Crisis

1) Soaring confidence
2) Loss of international competitiveness
3) Inadequate policy response

When the 2008 U.S. financial crisis caused problems in Europe and throughout the world, trade
credit in India began to dry up. The Indian Central Bank had to help, but the government’s large
fiscal deficit and debt deterred adoption of large scale fiscal stimulus. The fall in trade depressed
demand for India’s exports, though since India’s economy remains heavily dependent on domestic
demand, this effect was modes.

Performance of Ruble

In 2010 the ruble did not live up to expectations: In particular, the weak 3Q10 saw a sharp slowdown
in growth (from 5.2%Y in 2Q to 2.7%Y in 3Q), with unexpectedly heavy capital outflows on the
balance of payments in 4Q (US$22.7 billion), which, together with a poor harvest in 2010 (37%Y fall
in the grain harvest), weighed on the ruble. Since November 2010, however, the ruble has been
increasing steadily, fuelled by a rising oil price, and the consequent strong position on the current
account: As of February 16, the ruble has risen against the basket to 33.95, a rise of 7% in nominal
terms and 11% in real terms since the start of November. Economists relate this to two reasons –
Balance of payments and the attitude of the central bank in Russia.

As the most recent development, Russia’s finance minister has indicated a preference for a hike in
interest rates when the board meets on Friday (04-03-2011). Governments are often pro-growth,
with central banks taking the unpopular – and sometimes anti-growth – decisions needed to fight
inflation. Prices have risen 2.9 per cent in the first six weeks of 2011: at that rate, annual
inflation for 2011 would be 25 per cent. Russia hasn’t raised rates since the financial crisis,
and was still cutting till the middle of last year.

Performance of Yen and Pound Sterling

As the most recent development, the yen climbed to 82.23 per dollar from 82.51 in New York, after
touching 82.20, the strongest since February 09, as violence in Libya spurred demand for safe-haven
currencies. These days the Yen limbed to new highs as investors were optimistic about economic
recovery after recent strong earnings reports from US and Japanese companies. The US is a major
market for export-reliant Japan. A stronger yen makes Japanese goods more expensive abroad and
erodes repatriated earnings.

The pound fell the most against the dollar recent days and gilts rose as escalating political instability
in the Middle East and North Africa curbed investor demand for all but the safest assets. The UK
economy has grown faster than expected and now with a split developing within the Bank of
England as to whether quantitative easing should occur; it is likely that as 2011 progresses we will
see sterling further increasing in value. There are regular Bank of England monetary meetings to
decide on whether UK interest rates should rise and it is now believed that this will occur in May
2011 or sooner. If it was decided that UK interest rates increased, sterling would begin to
soar. Originally it was felt that UK interest rates would not rise before 2012 but with inflation rising it
may be necessary to apply some brakes to the economy. UK interest rates rising will see investors
piling into the pound/sterling and with it house prices should increase and savers will earn more
money on their savings.