Currency Final Essay

Submitted By jas122
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Pages: 5
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The exchange rate of the USD against the INR had been roughly steady at around 45.00 INR for a long period until after the great recession of 2008. But post the recession; some effects of the crisis, as well as some effects of the responses by regulatory authorities all over the world to the recession led to a fluctuation in the currency exchange rates’, causing it to depreciate sharply in the year 2013 and the same trend was followed in 2014.In December 2012, The Us Federal Reserve announced the QE tapering program which was to be continued until October 2014.This was anticipated by many as a signal of increase in interest rates in US markets and investors started pulling out money from emerging markets with a hope to invest in relatively safer US markets. The foreign investors pulled out a record Rs.620 bn ($10 bn) from the Indian debt and equity markets during June-July 2013 which impacted the Indian economy negatively .The Indian currency has never recovered to its historical range of 35-45 INR/USD ever since.
Moreover, there is a race in the Asian economies to keep their currencies undervalued. China keeps it currency artificially undervalued against the Us dollar in order to boost it exports; Japan has always kept the Yen undervalued against INR and it may be the case that the Reserve bank of India (RBI) is keeping up with the race. There is definitely an incentive for the RBI to do so because considering its over dependence on imports, India cannot risk losing its lucrative exports (Predominantly software and services) and widening its current account deficit even further. India’s import value exceeds its export value by a large amount, thereby leading to the current account deficit (CAD) which surged to a record high of US$88.2 billion (4.8 percent of GDP) in 2012-13.(Kavaljit Singh 2013). This is a matter of growing concern amongst foreign investors and hampers FDI in India leading to stagnation in the economic growth.
However, the most recent depreciation of the INR can be attributed to the decrease in crude oil prices around the globe. India imports 80% of its crude oil in exchange for USD. Indian oil importers are trying to reap the benefits of cheap oil and there is a spike in demand for USD. The Indian rupee depreciates further as the demand for dollars increase because like any other trading the exchange value of currencies are fixed by the supply and demand mechanism in the foreign exchange market. Also, within the last three months the RBI decreased the interest rates twice by 25 basis points each time. The intent of RBI behind this is to pump the economy and reach its inflation control goals set by the finance ministry, but it may lead to depreciation of the currency to a certain extent.
Based on the preliminary analysis I had predicted the currency to depreciate and took a short position by borrowing INR (Feb , 2015), against my available $1M.I borrowed INR against my $1M and sold it immediately with a belief that I will be able to repay my loan at the end of the period by repurchasing the INR at a cheaper rate. Following are the results of the transaction
Date
Transaction transaction amount (USD)
INR/USD Rate
Total
17-Feb-15
Loan
$1,000,000
62.139
$62,139,000
17-Feb-15
Sale
$1,000,000
62.139
$62,139,000

Daily fluctuations of the INR against the USD were observed from February 17th to march 13th of 2015. My speculation about the end of the period currency exchange rates was found to be correct and INR depreciated from 62.139 INR/USD to 63.069 INR/USD (a 1.5% discount) reflecting a gain of $14745.75.

Hedging
For the purpose of hedging I am assuming myself to be an exporter in USA willing to sell bourbon worth $1M to an importer in India. I am also assuming the INR to depreciate by 20% during the 3 months’ time lag between delivery and payment. It is desirable for me to receive the invoice in USD but unfortunately my Indian importer rejects this offer. I do not
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