The study explores about the causes of fluctuations in the exchange rate determination of INR vs USD.

It is based on several factors such as Technical and Fundamental analysis with these tools we can know when the rupee is appreciated/depreciated w.r.t dollar, economic position of a country and also supply/demand of domestic currency.

INTRODUCTION
EXCHANGE RATE:
THE PRICE OF ONE CURRENCY IN RELATION TO ANOTHER. TYPES OF EXCHANGE RATES : * FIXED EXCHANGE RATE * FLOATING EXCHANGE RATE

CURRENCY PAIRS:

THE BUYING AND SELLING OF THESE CURRENCIES BASE CURRENCY AND COUNTER CURRENCY.
INR/USD = 0.02 ->SELLING RUPEE S TO BUY DOLLARS. i.e. 1RS = $: 0.023256

USD/INR = 43 -> SELLING DOLLAR TO BUY RUPEES.

i.e. 1$ = RS: 43/-

SELL QUOTE/BID PRICE : THE PRICE AT WHICH YOU CAN SELL THE BASE CURRENCY. BUY QUOTE/OFFER PRICE : THE PRICE AT WHICH YOU CAN BUY THE BASE CURRENCY.

INDUSTRY PROFILE
TYPE : GLOBAL FOREX MARKET

ESTABLISHEMENT

: BRETTON WOODS AGREEMENT IN JULY,1944 BY JOHN MAYNARD KEYNES & HARRY DEXTER (IMF)
: DECENTRALIZED INTERBANK MARKET.

STRUCTURE

PARTICIPANTS
TARDING HOURS MAJOR MARKETS TURNOVER MAJOR CURRENCIES

: BANKS, CORPORATIONS AND INDIVIDUALS.

: 24 HOUR MARKET : LONDON, NEW YORK, TOKYO (50% OF DAILY TURNOVER) : $1.9 TRILLION IN APRIL 2011. : USD, EUR, JPY, GBP, CAD, AUD, NZD, CHF.

HIGHLIGHTS

:
INTERNATIONAL RESERVE CURRENCIES : USD & GBP ONLINE TRADING BEGAN IN 1990s. 80% OF ALL FOREIGN EXCHANGE TRANSACTIONS IS USD

COMPANY PROFILE:
TYPE ESTABLISHMENT : STOCK BROKING COMPANY (INDIA INFOLINE) : OCTOBER 1995

REVENUE
MARKET CAP HEAD QUARTERS KEY EXECUTIVES

: 149.79 (USD IN MILLIONS) IN 2011.

: 2218.125 ( RS. IN MILLIONS) : MUMBAI (MAHARASHTRA) : NIRMAL JAIN ( CHAIRPERSON) R. VENKATRAMAN ( M.D) SUNIL LOTKE ( COMPANY SECRETARY) : EQUITIES BROKING, WEALTH ADVISORY SERVICES AND PORTFOLIO MANAGEMENT SERVICES. : IIFL HAS BEEN AWARDED THE BEST BROKER IN INDIA BY FINANCE ASIA.. A1+ RATING FROM ICRA FOR SHORT-TERM DEBT INSTRUMENT.

SERVICES

HIGHLIGHTS

NEED FOR THE STUDY

TO UNDERSTAND THE GLOBAL ECONOMIC POSITION OF A COUNTRY. TO KNOW THE MARKET MOVEMENTS, IN ORDER TO HAVE INVESTMENT DECISIONS.

SCOPE
THE STUDY IS CONFINED TO UNDERSTAND THE MACRO ECONOMIC ENVIRONMENT, FOREX RESERVES, BANK RATES AND GOVERNMENT POLICIES AND THEIR SYSTEM.

RESEARCH METHODOLOGY
TYPE OF RESEARCH DATA COLLECTION : DESCRIPTIVE RESEARCH : THE STUDY IS CONFINED TO SECONDARY SOURCES LIKE PUBLISHED DATA , BOOKS AND WEBSITES etc., : 06 VARIABLES ( RESERVES, REAL GDP, EXPORTS, IMPORTS, INFLATION AND UN-EMPLOYMENT)

SAMPLE SIZE

DATA ANALYSIS TOOL : CORRELATION AND REGRESSION.

OBJECTIVES
To understand the macro economic determinants of exchange rates. To study the determination of exchange rate. To study the impact of dollar fluctuations in the Indian Economy. To study the reasons for appreciation and depreciation of rupee. LIMITATIONS
The study is confined to the period of 2004 to 2010. The sample size is limited to yearly average data of exchange rate determinants . Everything should be considered at market movements and central bank rates. Only major macro economic factors are going to be considered.

DATA ANALYSIS & INTERPRETATION

1. TO UNDERSTAND THE MACRO ECONOMIC DETERMINENTS:

INTEREST RATES CREDIT COMMODITY PRICES INDUSTRIAL PRODUCTION INFLATION FISCAL POLICY FINANCIAL MARKETS

TRADE ACCOUNT BALANCE GROSS DOMESTIC PRODUCT EMPLOYMENT DATA RETAIL SALES POLITICAL SITUATION MONETARY POLICY GEOPOLITICAL FACTORS AND WARS

2. THE EXCHANGE RATE IS DETERMINED:

INCOME CONSUMPTION

CONSUMPTION INCOME

+
+ + + + + + + +

INCOME
INCOME PUBLIC EXPENDITURE INVESTMENT INCOME

SAVINGS
TAX REVENUE INCOME INCOME
REAL INTEREST RATE

INCOME
EXPORTS INCOME EMPLOYMENT

IMPORTS
INCOME EMPLOYMENT UN-EMPLOYMENT

UN-EMPLOYMENT

WAGES
PRICE LEVEL REAL EXCHANGE RATE NOMINAL MONEY SUPPLY NOMINAL MONEY SUPPLY
NOMINAL EXCHANGE RATE

-+
+
+ + + +

WAGES

PRICE LEVEL
REAL EXCHANGE RATE IMPORTS REAL MONEY SUPPLY
NOMINAL EXCHANGE RATE

REAL EXCHANGE RATE INCOME REAL MONEY SUPPLY

IMPORTS PRICE LEVEL

REAL MONEY SUPPLY

REAL INTEREST RATE REAL EXCHANGE RATE

------

REAL INTEREST RATE

INVESTMENT EXPORTS

TABLE: YEARLY AVERAGE EXCHANGE RATES FOR THE PERIOD OF 2004-2010.

EXCHANGE RATE

45 2004
126

43 2005
136

45 2006
165

41 2007
275

43 2008
256

48 2009
274

45 2010
284

PERIOD
RESERVES

INFLATION
REAL GDP GDP(PPP) EXPORTS IMPORTS POPULATION UN-

4.2
8.10 3319 5200 8000 106 9.57

4.2
9.20 3660 7400 10000 108 8.93

5.3
9.70 4156 9000 12000 109 8.24

6.4
9.90 2966

8.3
6.40 3297

10.9
6.80 3680

11.7
10.40 4060

10000
14000 112 8.32

14000
20000 114 10.57

11500
16000 116 16.28

14500
26000 117

16.78

YEARLY AVERAGE EXCHANGE RATE OF INR VS USD FOR THE PERIOD OF 2004-2010

2005 2006

2007 2008

2009 2010

THE WEAK & STRONG MOVEMENT OF RUPEE: DURING THE PERIOD OF 2004-2010

YEAR

RUPEE/DOLLAR

STRONGEST/WEAKEST

2007

$: 41/-

STRONGEST

2008

$: 43/-

WEAKEST

2009

$: 48/-

ALL TIME LOWEST SINCE2004

2010

$:45/-

BUILDING STRONG

IMPACT OF DOLLAR FLUCTUATIONS ON THE INDIAN ECONOMY

VALUE OF DOLLAR ($)

INDIAN EXPORTS VALUE INCREASES DECREASES

INDIAN IMPORTS VALUE DECREASES INCREASES

INCREASES DECREASES

APPRECIATION / DEPRECIATION OF THE RUPPEE:

VALUE OF THE

SUPPLY

DEMAND

DOMESTIC
CURRENCY

HIGH

LOW

DEPRECIATED

LOW

HIGH

APPRECIATED

FINDINGS
People are entering into market with out fundamental knowledge about currency market and macro economic determinants, it doesnt provide good source of investment decisions. The exchange rate is determined based on the following factors they are:-central bank rates, foreign exchange reserves, GDP growth rate, release of economic data (inflation , un-employment, population etc.) , strength of economy-( FIIs , FDIs ,Trade balance, exports and imports etc.), Natural calamities, News and Innovations etc. During the period of financial crisis (2007- 2009): It shows the less volatility in the period of 2007 to 2008. Its to be RECESSION in 2008. Here: The INR value is strong when compared to USD. It shows the high volatility in the period of 2008 to 2009. Its to be DEPRESSION in 2009. Here: The INR value is weak when compared to USD. Exchange rate fluctuations has a significant impact on the overall economy of a country. If value of $ (dollar) increases: - Indian Exports value Increases and Indian Imports value is going to be Decreases and vice-versa.

Appreciation/Depreciation of the domestic currency depends on the supply of foreign exchange reserves, liquidity conditions in the economy as determined by money supply and central banks policy intentions.
When base currency is appreciating/depreciating it means that our currency is strengthen/weaken and its value is increases/decreases w.r.t dollar.

SUGGESTIONS
As an investor, one must know how exchange rate movement affects the economy. i.e. * In short run: Technical Analysis- Current market positions (buyers and sellers proportion), and update news (downfall and innovations). * In long run: Fundamental Analysis-Here based on concepts with past and present position should be analyzed and need to forecast the future position (good/bad to invest).
Central Bank and Government plays a key role in order to determine the exchange rate, so they need to develop effective administrative system, monetary and fiscal polices. Strong Government, strong currency, strong Rupee makes economy-country stronger

Balanced exchange rate should be maintained by the government; especially in India because is developing country it has equal importance with exports and imports. Abnormal movement in the exchange rate - Rupee vs. Dollar disturbs growth. Weak Rupee benefits exporters, and strong Rupee helps Importers A one per cent rise in the rupee against the dollar will have a 75-80 basis points impact on the operating margins for IT companies (India is mostly depending up on IT service) To manage floating exchange rate system, the government should purchases the home currency/foreign currency in order to maintain the supply/demand in the economy.
Forex trading should be used to speculation for profit or to hedge against currency fluctuations and it should be protected from frauds.

D is for Direction
(What is the market direction?)

DECIDE

E is for Entry
(What are your entry options?)

C is for Chart
(Chart the support and resistance)

I is for Investigate
(Investigate the market environment. Research the hot zones, market correlations, confirmation indicators.)

D is for Deal
(Deal with price action. Let price dictate your trade, in forex quotes are called dealing rates.)

E is for Exit (Plan your exits.)

CONCLUSION
From the above study we conclude that the exchange rate is determined based on the market movements, central bank rates, government regulations and supply/demand available in a country. The appreciation/depreciation of domestic currency is completely based on the strength of the economy and also various factors such as natural calamities, economic, political etc, which are un-controllable.