forex and foreign trade
TRANSCRIPT
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FOREX AND FOREIGN
TRADE
Nitin Singh 06
Bhushan Narsinghani -11
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AgendaWhy Foreign Trade?
Role of Institutions
The journey so farThe Road Ahead
Impact of Global Slowdown on Exports
Principle Commodities
Direction of Trade
Forex Reserves What, Why & How Much?
FEMACAC
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Role of InstitutionsInstitutions dedicated for promoting foreign trade have
played an important role towards enhancing the process of
internationalization of Indian companiesExport-Import Bank of India a.k.a Exim bank
Export Credit Guarantee Corporation a.k.a ECGC
Indian Institute of Foreign Trade a.k.a IIFT
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The journey so far2003 2008-09
Exports US $ 63 billion US $ 168 billion
Global Merchandise
Trade
0.83% 1.45%
Global CommercialServices Export
1.4% 2.8%
Total Share in Goods andServices Trade
0.92% 1.64%
14 million jobs created as a result of augmented exports
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The Road AheadTarget annual export growth rate of 15% with annual target of
US$ 200 billion by March 2011
Export growth path of 25% per annum by 2014.Double export of goods and services by 2014
Market Diversification
26 new countries included under MFS
Africa, Latin America, Oceania, CIS countries
Incentives under MFS increased from 2.5% to 3%Market Linked Focus Product Scheme (MLFPS) expanded by inclusion of
products like pharmaceuticals, textile fabrics, rubber products, glass , etc.
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Trade Balance
Year Exports Growth
Rate (%)
Imports Growth
Rate (%)
Balance of
Trade
2003-2004 293367 15.0 359108 20.8 -65741
2004-2005 375340 27.9 501065 39.5 -125725
2005-2006 456418 21.6 660409 31.8 -203991
2006-2007 571779 25.3 840506 27.3 -268727
2007-2008 655864 14.7 1012312 20.4 -3564482008-2009(P) 766935 16.9 1305503 29.0 -538568
(Values in Rs.Crore)
Exports, Imports and Balance ofTrade
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Impact of Global Slow-down on Exports
Default in payment or delayed realization for exports
Difficulty in executing orders in hand
Difficulty in providing covers for high risk countries/ buyers byExport Credit Guarantee Corporation (ECGC)
Reluctance of exporters to execute orders for fear of defaults
Tougher due diligence by Banks in extending Pre and Post-
shipment credit and insurance cover by ECGC
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24%
16%
14%
11%
11%
24%
Share of Top Five Commodity Groups inIndia's Exports : 2008-09
ENGINEERING GOODS
PETROLEUM PRODUCTS
CHEMICALS & RELATED
PRODUCTSGEMS & JEWELLERY
TEXTILES
OTHER COMMODITIES
Principle Commodities - Exports
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Principle Commodities - Imports
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Direction of Trade - Exports
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Direction of Trade - Imports
11%
7%
7%
6%
4%65%
Major Source of India's Imports : 2008 -09
CHINA
SAUDI ARABIA
UAE
USA
IRAN
REST OF THE WORLD
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What are Forex Reserves?IMF Definition
External assets that are readily available for :
Direct financing of external payments imbalances
Indirectly regulating imbalances through intervention in exchange rates
Forex Reserves refer to :
Foreign reserves in the form of gold assets
Foreign securities held by the issue department
Domestic reserves in the form of bank reserves
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Forex HistoryStandard trading unit - Gold standard
123.27 grains of gold = British pound ( )
1879 US replaced with Gold Standard
1944 $ , new exchange unit (Bretton Woods Aggrement)
Bretton Woods Accord established World Bank & IMF
The Smithsonian agreement (1971) Floating ex rate
1994 - Online Forex Trading was introduced
2002 introduction of Euro
http://en.wikipedia.org/wiki/Pound_signhttp://en.wikipedia.org/wiki/Pound_signhttp://en.wikipedia.org/wiki/Pound_signhttp://en.wikipedia.org/wiki/Pound_sign -
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Why hold Forex Reserves?Technically we can consider 3 motives :-
Transaction
Speculation
Precautionary
Forex reserves are instruments to maintain or manage the
exchange rate
Formal Objective from RBI Act :-
to use the currency system to the countrys advantage and with a view tosecuring monetary stability
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How Much Forex Reserve to Hold?Suggested rules for the adequacy of the reserves :-
The level of reserve :12 months import equivalents
The External Debt : At least equal to external debtLiquidity at Risk : Calculate financial variables like
exchange rate, credit etc.
The Guidotti rule : Reserves > amortization amount.
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Factors Affecting Forex RatesFundamental Factors
Ex: balance of payment surplus favorable exchange rate
Political and Psychological factors
Ex: US Dollar is considered to be a safer haven currency
Technical Factors
Capital Movement
Exchange rate policy and intervention
Others
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Foreign Exchange Management ActEnforced on 1st of June, 2000
FEMA replaced FERA(1973)
ObjectivesPenalties
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Capital Account ConvertibilityIn India, Foreign exchange transactions in foreign currencies are
broadly classified into two accounts :-
Current Account Transactions Capital Account Transactions
Components Transactions which gives rise or spendsnational income.Merchandise /Invisible export & Imports .
Short Term Capital transactionsLong Term Capital transactions
ExamplesImport of refrigerator
Export Of SoftwareExport of steel
Sending money to a child studying in UnitedStates .
Capital Inflows :Indian company taking loan from USbank .Foreign investment in India (FDI)Capital Outflows:Indian Companies buying assets abroad.Ex- Tata for Corus Steel
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ConvertibilityConvertibility Aspect ofCurrent Account
India has Current Account convertibility which means that we are free tobuy foreign exchange for importing goods, in other words rupee is fullyconvertible on current account .
Convertibility Aspect of
Capital Account
Today the rupee is not fully convertible on capital account as there exists
restriction on the money that comes in India or that goes out to buy assetsabroad .
CAC is desirable due to following reasons :-Reduction in Cost of Capital.
Diversify Portfolios Internationally.
Induces Competition against Indian Finance
Reduce size of black economy
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