December’12
Symbiosis Centre for Management
Leadership-Entrepreneurship B-School
About SCMHRD
Leadership-Entrepreneurship B-School SCMHRD was established in 1993. Ever since its inception, SCMHRD has strived to bring Indian ethos, Management concepts and technological advances together in an effort to redefine the management paradigm in the new age. SCMHRD has successfully pioneered the implementation of Kaizen on campus. The practice helps in keeping the campus clean and gives the students a feeling of ownership, inculcating in them a feeling of belonging and camaraderie. The SCMHRD culture provides the students an environment that allows them to think and reflect, to explore and express.
VISION To become a Centre of Excellence for Global leadership and entrepreneurship, the standards of which others are measured by.
MISSION To create leaders and entrepreneurs of tomorrow, their dedication to excellence, absolute.
EDITORIAL Hello everyone, In the last couple of months, the world has seen some big political happenings. People were eyeing elections of world's most powerful nation: USA. While two men, Mitt Romney and Barack Obama were supposed to discuss the reforms, it was a great surprise to witness a strong discussion on China's currency manipulation. This leads us to think “Is it the same world in which we used to live?”Interdependence in the world has increased in such a way that now any event happening in any part of the world has a profound global impact. Globalization has forced organizations to introduce some innovative business practices. Conventionally, companies depend on home currency bond for leverage. Recently, three big Indian companies have raised a huge amount by issuing Foreign Currency Convertible Bonds (FCCBs); eg: In September, Jaiprakash Industries raised $150 million to redeem its FCCBs. This proves that the importance of Forex cannot be undermined. In the same way, investors from different countries have also started investing in more lucrative markets. For the year 2012, SENSEX became one of the favourites for FIIs and was ranked 3rd just behind Thailand's SET and Germany's DAX. The volatility of currency rates have created means to gather quick money, and the amount traded on international Forex market touches a daily $3.98 trillion. This has also added onto the duties of Central Banks and forced them to take a tough stand on the issue. Recently, price of the Rupee depreciated around 32 paisa when oil companies bought dollars in November, which forced RBI to put constraints on their transactions. This has also given much needed importance to hedging as a profession. In such times, we believe no financial magazine would be complete without a discussion on Foreign Exchange. In this issue we have discussed articles on currency manipulation, and in the current scenario of high volatility, the “Future of Rupee”. As always, we have a highly engaging quiz and an interesting crossword. So put on your thinking caps again!! This issue is aimed at providing a holistic view on the foreign exchange market. We welcome your suggestions on the issue!
Happy Reading..!! -Team Finance Club
CONTENTS 1. Impact of Currency Manipulation
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2. Quiz
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3. Future of the Rupee
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4. Crossword
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5. The Great Currency Game!
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6. Expert’s view on Foreign Exchange
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Impact of Currency Manipulation "We have to say to our friend in China ‌ you can't keep on holding down the value of your currency, stealing our intellectual property, counterfeiting our products, selling them around the world, even to the United States." - Mitt Romney's statement in Presidential debate (As issued in the weekly debate on 22nd Oct. 2012) But the statement remained a joke as no US ruling party has dared to declare China a "currency manipulator" since 1994. So what is China doing? Why? And also why is it important to the global economy? Issue at hand So what China does may be termed as a currency intervention if not manipulation. Currency intervention is defined as "the activities conducted by a central bank to alter the appreciation or depreciation of their national currency". So it is basically an act of regulating the currency to suit the needs of the economy as to leverage maximum benefits for the country itself. China's currency regulation obviously serves as an Achilles' Heel for U.S., as for the imbalance of trade between the countries. China deriving a large part of its GDP from exports has trade surplus while U.S. remains a trade deficit with its ever increasing debt. Currency manipulation plays a key role in maintaining the country's exports to the same level as what China does is appreciating the currency at a slower pace than it ought to be and hence providing for better terms to all exporters and maintain the same level of exports (though a
large part may constitute counterfeit products as mentioned in Romney's comment) on which the larger arm of Chinese economy rests. As per report by Cline and Williamson in 2010, it showed that the Chinese Yuan had been nearly 40% undervalued as compared to dollar. This provided benefits to exporters so as to pay less on taxes and make substantial margins through a simple undervaluation. The concept of holding on to the same value of currency through complete regulation against the foreign currency is called “Pegging" in economical terms. In recent times, this practice has been dropped. Still, the Chinese Yuan makes slow movements and appreciates at a turtle's pace while the economy simultaneously grows by leaps and bounds. Recent reports suggest the Chinese currency to be undervalued by at least 20% yet in 2012. Possible impact areas The Chinese government keeps on buying dollars from the market and at the same time printing home currency in abundance so as to keep the currency from appreciating. This helps in creating foreign reserves for China and retaining its currency at low volatility. China draws a large trade surplus through its exports to U.S. This also implies that the U.S. government ends up spending and paying a value more than the purchase is worth. For simpler understanding, we can take an example of a Shinchan toy exported from China to U.S. Thus the product will be priced in dollar at a price of say 20 dollars and 1 Dollar= 6 Yuan then the merchant exporter will make 120 Yuans but if
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the currency appreciates based on market 1 Dollar= 5 Yuan and so he will end up making only 100 Yuans. And so exporters make more money in home currency which acts as an incentive for boosting exports. But if such a simple currency undervaluation can boost exports, why doesn't India follow the same model? Here what is important for China is that undervaluation of Chinese Yuan makes more income for exporters but at the same time the purchasing power remains high though the currency maintained at its low. So the exporter ends up making more real income. While if the same model is followed by developing countries like India, as the currency appreciates the purchasing power increases and vice versa. So if currency maintained at lower level, the purchasing power will be less and hence ultimately it will make no real income for the exporter. And as an extension to the same step, RBI has recently instructed petroleum companies (major players trading in dollars through purchase of crude oil) to regulate the dollar exchange directly under the RBI and have certain amount of control on currency valuation (as per a report dated 16th Dec 2012). But undervaluation doesn't seem to be a sustainable solution for long as it is forecasted that the Chinese Yuan manipulation may lead to inflation in the long run. Inflation will be a result of higher prices due to higher availability of home currency and ultimately leading to deterioration of value of currency. The problem from U.S. perspective is a slightly different one as a step forward to stop currency manipulation will lead to appreciation of Chinese Yuan. But Chinese Yuan may appreciate at the cost of dollar as China can release its $3.3trillion forex
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reserves and lead to a market full of dollars. Its impact being dollar becoming weaker and the American currency's high volatility leading to turbulence in global economy. On the other hand, U.S. itself can weaken the dollar when necessary and by printing more money as and when required. While the latter option remains in control of U.S., the former option seems to weaken the global leader position of U.S. and is also out of its control as there is no estimate as to how much this rivalry with China can cost the U.S. This is the primary reason for all leaders having a clear stand on currency manipulation by China but still not stating it outright. The most alarming issue of currency manipulation is the overvaluation of the currency by several countries in recent times. Nations like Brazil, Canada, New Zealand as well as Australia are believed to have overvalued their currency by nearly 20%. This may lead to overvaluation of the home currency even when the purchasing power remains low. This will have adverse outcomes in the coming times for the country doing so and an obvious loss for those countries exporting to these countries in the overvalued currency. This may be an issue of serious concern as it can lead to an imbalance in the global economy. Way forward Currency manipulation is thus done by several countries to facilitate their own economy and achieve higher growth. This may imply regulating or semi-regulating the currency in one or the other way. Though not a global issue at this point in time, it may become one in the years to come. To avoid any such circumstances, few measures may be undertaken: 3
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I) The volatility of all internationally accepted currencies may be fixed at the same level so that all forex trade may see uniform trends in international trade and less fluctuations due to the currency regulation by major economies of the world thereafter. II) The currency's semi-regulated value also needs to be kept in a certain range of its estimated actual value and if not so the country must allow currency to appreciate/depreciate freely till it is in the suggested range.
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References: i.) Warning Signs from the Chinese Stock Market (Dec '11 Issue) Harvard Business Review ii.) Global Imbalances (2009) by Iwan J Azis iii.) The United States- China Currency Dispute: Is a rise in the Yuan necessary, inevitable or desirable? [Article- Springer (2009)] iv.) European Yearbook of International Economic Law 2010 v.) Other Editorials from: A. NewYork Times B. Economic Times -Bhavik Dave, Dhruv Desai MBA-I, SCMHRD
QUIZ... 1) What is the biggest geographical trading center for FX?
5) Rana Talwar,who is the head of Sabre capital, was formely the CEO of which bank?
2) Suppose demand for Malawi's principal export product, tobacco, increases. Holding other factors constant, what will happen to Malawi's exchange rate (the number of dollars per Malawi kwatcha)
6) Who is behind the current wipro,Britannia,marico and lakme logos?
3) What is the standard settlement cycle of a Spot FX? 4) It is an American think tank organization based in Washington, D.C. that provides information on issues, attitudes and trends shaping the United States and the world. In 1990, Donald S. Kellermann was named to serve as the first director of what was initially known as the Times Mirror Center. It was then part of the opinion polling operation run by Times Mirror, the parent of the Los Angeles Times. It played a significant role in the recent US Presidential Elections.
7) What are illiquid stocks that do not follow sebi rules are called? 8) How many stock exchanges are there in India? Identify the personalities 9)
10)
Answers on page 7
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Future of the Rupee
Indian Currency was the worst performing (FII, FDI, ECB, and FCCB) that the economy currency globally in 2011: it depreciated by more generates. than 18% to levels of 56.70 before staging a recovery on the back of high portfolio investments Over the past 1 year all these parameters have which took it all the way to Rs50/$ in February deteriorated. 2012. Thereafter the currency again came under ? Fiscal Deficit: Government has its finances in a pressure and fell to an all-time low of 57.4 before mess. It has overshot on its subsidy bill by a some sort of stabilization could kick in. This kind of massive 1 lakh crore plus (Main contributor is wild swing in the exchange rate can have major petroleum subsidy). This has been accompanied macroeconomic implications for the Indian by a falling tax collection, especially direct taxes. economy. This article will explore the factors that (Direct tax to GDP ratio of India is amongst the lead to such wild swings in the currency market, lowest in the world). This has translated into a what impact it can have on the economy and bigger fiscal deficit. (Expected to be around 5.5% where is Rupee headed. as against budget estimates of around 5.1% ) Factors: India migrated to a floating exchange rate system ? Current Account Deficit: Indian Current account from Liberalized Exchange Rate Management deficit widened in the last 1 year. This has System (LERMS) in 1993, which essentially means happened because of poor global economic that any movement in the exchange rate will be conditions and high commodity prices. Euro zone due to a demand-supply mismatch. So it is this crises and US economy growing sluggishly has mismatch due to which rupee has shown such a translated into lower Export earnings whereas high level of volatility. This demand supply high Crude oil and Gold prices has translated into mismatch is in turn the result of deficits on 3 high Import bills. Crude oil and Gold being the accounts that Indian economy runs: largest two components of our Import basket have ? Fiscal Deficit: Implying that Government had severe implications on our CAD. In budget revenues are unable to meet the government 2011, subsidy bill was calculated taking crude oil expenditure. prices at $90 per barrel but it averaged at $107? Saving-Investment gap: India has always 108 per barrel. Crude prices have remained stable maintained a savings- investment gap of close to 1around those levels and now it looks like it is 2% of the GDP. forming a base for a serious long term uptrend. ? Current Account Deficit: This implies that our Gold on the other hand witnessed its 14th Export bills are unable to cover for our Import bills. consecutive year of positive returns. It remained at an elevated level and touched a peak of 32000/ 10 So how does Indian economy finance these grams and is trading around those levels. Both deficits? It is done by the Capital Account surplus these factors inflated the import bills. So lower
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? exports and higher imports meant widening of 2011.
CAD. It is expected to go northwards, currently 4% of GDP. What is important to understand is that the rally in gold and crude oil has been because of its safe heaven nature. There has been tremendous liquidity sloshing the system and since gold and crude have emerged as alternate asset classes, there has been a strong rally.
Future of the Indian Rupee With growth rate faltering, government realized that it is also in part responsible for the slowdown. With fiscal deficit at 5.86%, government initiated a slew of reform measures in September 2011 to put its house in order and arrest the fiscal gap. The steps taken were Savings-Investment Gap: This has not been a major ? Raising FDI limit in multi-brand retail to 51% contributor to the wild swing in the exchange rate. ? Raising FDI limit in single brand retail to 100% Although inflation has remained at an elevated level ? Raising diesel prices for quite some time now which implies lower real ? Putting a cap of 6 LPG subsidized cylinders per income and consequently lower savings; at the same connection. time interest rates have also remained at elevated ? Cabinet clearance for FDI in Pension & Insurance levels and that coupled with policy paralysis has ? Cabinet clearance for Cabinet committee on ensured falling rate of investment. So both savings Investments to expedite big ticket Investment and investment have fallen simultaneously. projects. ? In the budget 2012, government also raised These deficits are financed by the Capital Account import duties on gold import. Surplus. All these steps were initiated to restrict the fiscal ? Capital Account Surplus: Slowing economic deficit and increase the capital inflows. growth, policy paralysis, high inflation and interest rates, poor global economic conditions resulted in Outlook on Fiscal Deficit: slowdown in inflow of foreign capital. FII inflows Government has raised diesel prices and put a cap of infact turned negative and they sold shares worth 6 subsidized LPG cylinders per connection. It is also close to $1bn in 2011. FDI inflows also slowed. set to roll out Direct Cash Transfer of benefits by Worsening global economic scenario and chances of leveraging Adhaar Platform with the intention of a European sovereign debt default has transpired minimizing the slippages on subsidy front. into speculative outflows from risky assets to safe Government has also pursued disinvestment heaven assets i.e. Gold and USD. What is interesting agenda aggressively with Hindustan Copper and is that all this has happened despite S&P's NMDC (completed), and several other FPOs are in downgrade of American economy. line. Government has asked ministries to slash non plan expenditure by 10%. It also plans to reduce All these factors culminated into higher demand for planned expenditure by 10%. Although it can have US dollar and lower demand for Indian Rupee. So, short term reward in terms of lower fiscal deficit but the demand supply mismatch resulted into Indian it will end up compromising long term growth currency depreciating sharply against US Dollar in potential of the economy. Although government
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could not garner 40,000 crores that it had budgeted through spectrum auction, the steps that it has taken will ensure that fiscal deficit will definitely fall, may be not to the extent that government had predicted. The general sense is that government will end the year with a 5.5% fiscal deficit. Outlook on Current Account: CAD in the past couple of months has averaged around $20 billion. With crude oil and gold prices remaining stable, there will be sufficient buoyancy in the imports. With economic recovery in US looking fragile coupled with the threats from Fiscal Cliff and Europe still not out of the woods, exports growth will be muted. So, we cannot expect any meaningful correction in the Current Account Deficit. Again, general sense is that CAD will be in excess of 4%. Outlook on Capital Account: Indian markets were available at 20% discount to the 2008 peak. That coupled with nearly 20% depreciation of currency meant that Indian stocks were available at 40% discount for FIIs. FIIs took advantage of that and pumped in close to $21 billion in to the Indian equity markets. In addition to this was the Debt inflow. Given that the government has initiated its reform process and Indian equity is still trading at discount to its historic valuations, and currency trading near all-time lows coupled with the liquidity available around the globe, it can be reasonable to assume that FII inflow would continue to be unabated. In addition Government has also raised the FII ceiling in the debt market by another $10 billion to encourage capital flows. Rate of interest on NRE deposits have also been decontrolled to encourage remittances. With huge liquidity sloshing the banking system in the West and the commitment of the Western Central Banks to keep Interest rates low for a prolonged period of
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time, ECB would also emerge as a preferred mode of financing especially since domestic interest rate is very high. In light of above arguments, it appears that a large part of the global liquidity will find its way to India. Given this outlook on Fiscal, Current & Capital Account, it can be expected that Rupee will trade in a narrow range with positive bias.
Implication of weak rupee: It will adversely affect the already weak macroeconomic indicators by widening the current account deficit and fiscal deficit by raising the cost of importable, especially crude oil. This will transpire into higher inflation (imported inflation) and make the job of cutting interest rates even tougher for the RBI. High interest rates will continue to hurt investment and even consumption (debt based consumption) and will prolong the recovery time for the Indian economy. -Srijan Sinha IFMR Chennai
Answers to the Quiz 1. London, UK 2. Appreciate 3. T+2days 4.Pew Research Centre 5. Standard Chartered PLC 6. Shombit Sengupta 7. Z stocks 8. 23 9. Karl Marx 10. Warren Buffett
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CROSSWORD 1 1 2 3
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Across: 1.Person who has knowledge of trading of various currencies 2.This act replaced Foreign Exchange regulations act in India. It was implemented in order to relax the controls on foreign exchange in India 3.Term used for exchange rates between the currencies of two major economies. 4.Movement of 5 basis point, 5 pips. 5.Which currency you would use to pay at Latitude: 39 degrees 1 minutes North, Longitude: 125 degrees 45 minutes east. (Hint: ISO 4217) 6.Strongest Currency of the world 7.In the EUR / USD currency pair, EUR is base currency and USD is ______ Currency. 8.A price that is neither rising nor declining 9.100 satang = 1 _____ 10.A measure of the number of open buy and sell orders for a security or currency at different prices is called ____ of market. Down:
1.Digital currency created in 1999 2.Identify:
3.It is a stage in currency trading at which a trader completely changes his strategy. 4._____currency is used for the currency which is also traded in other countries. 5.An international type of monetary reserve currency, created by the International Monetary Fund (IMF) in 1969, which operates as a supplement to the existing reserves of member countries 6.Deposits denominated in the currency of one of the technologically advanced countries but held in banks outside the native country 7.Account in a foreign currency on the books of a foreign bank 8.Currency of Bangladesh Answers on Page 12 8
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The Great Currency Game Currency possesses dual value: one in terms of exchange rate and other in terms of its domestic value. The value of the country's currency in terms of exchange rate ideally should be determined by open market based on the demand and supply of US dollars. However, governments usually detour the equilibrium exchange rate value to its preferred value through various mechanisms. This primarily prevents the country to reflect the true value of its currency. The major tactic that countries use for currency manipulation is by buying dollars in the open market and increasing its foreign exchange reserves. This leads to an artificial deficit of dollars in the country and the currency is devalued automatically through non- equilibrium methods. Other methods countries use is by levying taxes, imposing various regulatory policies such as restriction on capital inflows and increasing government spending. These all measures directly affect the country's exchange rate.
expected to move in opposite direction so the overall country's economy remains balanced. But for China, along with huge trade export, capital investment in terms of technology transfer also follows. The surplus dollars result in appreciation of the country's currency. This appreciation acts as counter- productive to the country since the cost of its export increases in addition to the domestic inflation. The high value of the export costs China millions of jobs and dollars which it initially used to bag due to its low cost model. Thus to avert this, the China's central bank buys dollars at fixed rate and issues Renminbi in return. China usually buys dollars by printing fresh Renminbi. Now to sterilize the additional pumping of Renminbi and control inflation, the People's Bank forces other banks to hold high cash reserve requirements or sells special government bonds. The foreign exchange reserve of China is a mammoth nearly 3 trillion dollars.
Figure2: 2011 Foreign exchange reserves as a percentage of GDP
Figure 1: Value of RMB versus USD from the year 2007 to 2011
There are various reasons why countries resort to manipulation. The most important factor usually is 'Inflation'. Let's take the example of China. A country's current and capital account normally are
It is not just China involved in the manipulation gamble. Countries like Hong Kong, Japan, Switzerland, Malaysia and Singapore also feel the brunt. Figure 2 shows the amount of foreign exchange reserves the country holds and the respective increase. Though all these countries are smaller than China, the relative figure of foreign exchange compared to their economic size seems to
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be much larger than China. Singapore's current account surplus as a percentage of GDP was 19% compared to China's 5%. In the year 2011, Switzerland pegged its Franc against Euro. It resorted to manipulation since terrified investors were buying francs in exchange of euro due to the Euro debt crisis. Japan and South Korean use currency manipulator as a tool to keep their currency competitive with that of China. This can be termed as a 'beggar thy neighbors' policy where one is primarily concerned about one's own benefits at the expense of others. The US Government has some policies in place to keep a check on currency manipulation. With respect to the legislation passed in 1988, the Secretary of Treasury needs to evaluate the foreign exchange policies of countries annually and report in case of any discrepancy especially when a country is caught taking strategic advantage of the international trade. Three countries in the past Japan in 1988, Taiwan in 1988 and 1992 and China from 1992 to 1994 have been legally labeled as currency manipulators. According to the Government Accountability Office, with bilateral talks the three countries restructured their foreign policy regime subsequently and their currency appreciated. This legislation however doesn't empower the President to impose punitive measures on the manipulating country. However such measures would violate World Trade Organization policy of settling trade disputes through mutual settlement. In order to overcome the shortcomings of this legislation, the 'Currency Exchange Rate Oversight Reform Act of 2011' came into force. This act allows for imposing high tariff on imports from countries
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whose currency has been kept undervalued by manipulation. According to the Bill, the Treasury department is required to identify the manipulator country and eventually the Customs Department is required to impose the duties. The tariff would be in proportion to the amount the currency is undervalued. The Bill has been passed with overwhelming majority in the Senate. However, it is expected to face opposition in the House. There have been varied speculations about how market dynamics and ties between countries would change once this Bill has been passed. One school of thought is of the view that China could spark a trade war with US which will worsen the current condition of US. To counter US moves, China may slap tariffs on US products. In such a scenario, US would be completely bereft of huge Chinese consumables market. The other school of thought is of the opinion that it will make US products more competitive in the global market. The major heat of currency manipulations is felt by power houses like the US and European nations. Currency manipulation has been alleged to have cost 1 million jobs. With the devalued currency of other countries, it's difficult to sell US products in those countries since the imports would be expensive. Also most of the jobs get outsourced due to the undervalued rate. The cost to the company who outsources the products diminishes by a large amount. The final result to the country facing the manipulation heat is lower sales accompanied by jobs moving overseas. However, the other side of the coin reveals a different story. Currency manipulation are a boon to middle class Americans who get goods at cheaper prices. It also greatly helps the devalued country in terms of development due to the money and technology that pours in. 11
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Answers to Crossword
One needs to address the fact that currency manipulation only adjusts 'trade imbalances' between two countries. Bringing about policies to curb this mechanism will only alter relative growth rate without making any difference to the global growth rate. The most blatant problem of underconsumption by countries remains untouched. The US is trying to use this as a toll to shield it's over dependence on South Asian countries. The real problem of excessive reliance and underconsumption needs to be unearthed. As a matter of fact US has been having current account deficit for the past 40 years. The scapegoat was Germany in 1970s, Japan in 1980s and now China is likely to face the jolt.
Across: 1. Cambrist 2. FEMA 3. Cable 4. Nickel 5. JPY 6. KWD 7. Quote 8. Flat 9. THB 10. Depth Down:
References 1.http://seeingredinchina.com/2011/10/11/whatis-currency-manipulation-and-why-should-icare/{03/11/2012 , 8:30 pm}
1. Bitcoin 2. Bernanke 3. Flip 4. Xeno 5. SDR 6. Euroyen 7. Nostro 8. BDT
2.http://chovanec.wordpress.com/2011/04/26/ta ming-inflation-interest-rates-or-exchangerates/{03/12/2012 , 6:30 pm} 3.http://www.washingtonpost.com/blogs/wonkblo g/wp/2012/10/22/five-facts-you-need-to-knowabout-chinas-currency-manipulation/{04/12/2012 , 9:30 pm} 4.http://www.economist.com/blogs/freeexchange /2012/10/currency-manipulation 5.Http://www.foreignpolicy.com/articles/2012/10/ 17/what_happens_after_you_label_a_country_a_ currency_manipulator{06/12/2012 , 6:30 pm} -Vidhi Shah MBA-I, NMIMS
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INTERVIEW: Prof. Suresh Vaze Professor, International Finance, SCMHRD
Q-1. How many years of experience do you have in Foreign Exchange industry and what in your opinion makes this industry different from others? I have an experience of 27 years in Foreign Exchange department of Bank of India and another 10 years of experience as a consultant and a visiting faculty at various management institutes in Pune. Of all the markets, Forex market is the largest l i q u i d m a r ket , w i t h d a i l y t u r n ove r o f approximately $ 3trillions. It is virtually 24 hours a day market because of the development in technology and different time zones. Because of anomalies in exchange rates of various currency pairs, there could be a possibility of scope for arbitrage. In all these transactions settlement will have to be done in a currency other than home currency of one of the countries. Hence Forex market will get affected. Further due to dynamic nature of Forex market, it is challenging and risky to operate in Forex market. With many countries opting for liberalization, globalization, opening of economies and tremendous improvement in technology, the world is becoming a small village. Hence there is lot of scope and opportunities in Forex market. Q-2. What is your outlook about Euro abolishment and how will it impact global economic scenario? There is a debate going on this issue for a long number of years. There are advantages as well as
disadvantages of Euro abolishment. However in my opinion, Euro should continue and all countries should meet regularly and sort out issues to come out with an appropriate and feasible solution. Abolishment of Euro would be going few steps backwards. Q-3. What do you think about the dollar as a global currency being taken over by Renminbi and do you reckon that Dollar is still the strongest currency in the world? Yes, at present Dollar is a global currency since almost all countries accept Dollar as a currency for settlement of transactions. Almost 60 % transactions all over the world take place in Dollar. It can be taken over by Renminbi, only if China opens it economy and adopts Floating exchange rate system. In short China must take steps to gain the confidence of other countries so that they start accepting Renminbi as a currency for settlement of trade transactions with China. Recently banks in India have been authorized to open / maintain account in Renminbi with banks in China. All this will take a few years. Q-4.How should working professionals or large corporates and governments protect themselves against the idiosyncrasies of the movements in exchange rates? There are various derivatives available in Forex market as well as money market to protect corporates against the idiosyncrasies of the movements in exchange rates. However if companies
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companies follow following steps then they can at least ensure a trading profit. a) In case of exporters in India, the selling price in terms of foreign currency should be on the basis of forward rate and not on the basis of spot rate. Simultaneously the company should book a forward contract with the bank. b) In case of importers in India, the cost of imported goods in terms of Rupee should be on the basis of forward rate and not on the basis of spot rate. Simultaneously the company should book a forward contract with the bank. Q.5. Are of you the opinion that IMF or World Bank should impose restrictions and formulate regulations for the controlling artificial currency manipulations practiced by some nations? Actually International law grants sovereigns the right to manage their currencies. However a country can limit those rights through international agreements. China's membership in the IMF requires the government to “avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.� The IMF agreement, however, is toothless. China claims that it manages its currency to ensure domestic stability, not to cheat trading partners, and there's no venue in which anyone can effectively challenge that claim. This may be possible only if trading partners of such countries put pressure on these countries to revalue the currency or the duty on goods imported from such countries should be hiked.
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elections any political party gets a comfortable majority, and that party carries out reforms in Foreign direct investment, banking and Insurance sectors, then there is an outside chance that we may see exchange rate of Rs. 40 /USD. Q-7.India is a largely importing country, while China a largely exporting one. What should India do to strengthen Rupee, given it will always be dependent on the Gulf for Oil Imports. To sustain gains in the rupee, the Government would need to show concrete action to pare down a fiscal deficit projected at 5.1 percent for the fiscal year ending in March 2013, or open up key sectors such as retail or aviation. Until now all government has managed to do is give lip service about increasing GDP and decreasing fiscal deficit.
Q-6. Do you think India can touch 40 INR/USD in the future? I do not think so. However in case in the next
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THE FINANCE CLUB The Finance Club of Symbiosis Centre of Management & HRD is a student initiative which started in 2005. The Finance Club functions as the interface between the student community and the financial world. Its objective is to enable prolific interactions among the student community, coupled with valuable inputs from the faculty, the academia and representatives from the industry. The club provides a platform for all students to come together and explore the field of finance, leading to awareness amongst students with respect to the current financial aspects surrounding the economy and the industry.
Activities of the Finance Club :
! Finalyst - The Bi monthly Finance Journal of the Finance Club
! Knowledge Series
! BizFluence
! Pre-Budget and Post-Budget Analysis
Past Events:
! Research Seminar on Commodity Markets - Feb 2012
! First Academic Summit on Valuation and Financial Modeling - Nov 2010
! Integrated Risk Management Seminar- 2009
! Banking Conclave - 2005
Upcoming Events:
! A summit on “FOREIGN EXCHANGE� - Jan 2013
SENIOR MEMBERS
JUNIOR MEMBERS
Ashok Reddy Debi Dash Niladri Dey Rishi Shah
Apurva Ghare Dhruv Desai Nidhi jain Rohit Godbole Saumil Pandya Shaily Kukreja Vinay Tripathi
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