FOREX MARKET Factors that affect Forex Market • Exchange Control • Interest Rate • Inflation • Economic growth - GDP • News and Information • Pattern of Exports & Imports – Trade Deficit
Indian Economy • Growth is slowing down • The supply side of the economy has not kept up with the demand side of the economy • High commodity prices have worsened the situation further • Inflation should moderate in Q4 2012 as slowing demand will lower core inflation • Interest rates have probably not peaked
India’s Foreign Trade • During April-Sept 2011, India's exports grew by 52% to $ 160 bn from $ 105.2 bn in the same period last year. • Such growth in coming months is uncertain, given the worsening global macroeconomic outlook and high interest rate in the domestic market. • During April-Sept 2011, India's imports expanded by 32.4% to $ 233.5 billion. The trade deficit during the April-Sept’ 2011 period stood at $ 73.5 billion. Increasing Trade Deficit further depreciates Rupee. • The recent depreciation of rupee will also push up cost of imports leading to wider trade deficit in coming times.
India’s Economy Outlook • Economy is expected to grow at 7%+ in 2011-12 lower than previous estimate of 9%. All other indicators are pointing downwards. • Weak finances, persistently high inflation and policy inertia has considerably weakened the government position. • RBI raised Repo rate since 2010 from 4.75% to current level of 8.50% mainly to tame inflation even at the cost of short-term growth. • On the external front, exports may not be able to keep the steady 25% growth in the coming months given the weak external demand. • Trade deficit USD 73.5 billion for HY 2011-12.
US Economy • S&P downgrades US credit rating from AAA to AA+ for the first time. • Fed funds rates (0-0.25%) at exceptionally low till mid-2013 acknowledging deterioration in overall market conditions • Fed affirmed its readiness to employ tools to help US economy. • Despite the downgrade any significant rise in the borrowing costs in the US may not be there given the dearth of liquid investment avenues. Dollar is still considered safe heaven
Euro Zone fears rise • The debt crisis in the peripheral European economies have reached to the main economies. • Though the Greek crisis was averted at the last minute, the focus is now on the larger Italian and Spanish economies. • The borrowing costs of these two large economies have already touched unsustainable levels forcing the intervention from ECB. • Italy and Greece have seen the regime change. • The crisis is far from over and may take longer time
FOREX MARKET Global Forex Market • The daily Trade – Close to $4.0 Trillion • 60 times the turnover of NYSE stocks, 15 times U.S. daily GDP Merchant Transaction Less than 5% Indian Forex Market • Small but Rapidly Growing Market • Average Daily Turnover is close to $20 bn High speculation and arbitrage leads to high volatility…
Currency Volatility USD/INR
Currency Volatility EUR/USD
RBI’s recent guidelines ……. • Bank’s Net Overnight Open Position Limit (NOOPL) has been reduced • Intraday open position/ Daylight Limit capped at NOOPL These measures may reduce volatility in the market
GOLD (XAU) • Gold likely to benefit from the widespread Euro zone uncertainties as well as fragile condition of US economy. • Currently trading at around 10% discount to all time high of $ 1920.30/ oz • The volatility has gone up considerably. However, the medium term price trend remains bullish. • Physical demand in India is flat since Deewali due to record high cost. It is likely to be robust again if price drops to Rs.26000-27500 range • Suggested to hedge exposure due to high volatility in price both in USD terms as well as in USD/INR leg.
Strategies • Hedge Your Exposures: • When to Hedge • When Risk Crystallizes • When you are within your costing • How much to Hedge • Keep 20-30% of your exposure open (optional) • Avoid speculation and never leverage your exposures • Understand well before entering into any deal. • Keep track of all outstanding Forward Contracts and suitably advise to Branch • Complete all RBI guidelines viz. Risk Management Policy duly approved by board, ISDA, etc.