1
INTRODUCTION
2
1.1.
Importance:
Exchange rate1 is a rate at which one currency can be exchanged into another currency. In
other words it is the value of one currency in terms of other currency. The currency of
another country circulates as the sole legal tender (formal dollarization), or the member
belongs to a monetary or currency union in which the same legal tender is shared by the
members of the union. Adopting such regimes implies the complete surrender of the
monetary authorities' independent control over domestic monetary policy. Against the
backdrop of international experience, it would be useful to review the management of the
exchange rate in India in a historical perspective. India’s exchange rate policy has evolved
in tandem with international and domestic developments. The period after Independence
in 1947 was followed by a fixed exchange rate regime where the Indian rupee was pegged
to the pound sterling on account of historic links with Britain and this was in line with the
Bretton Woods System prevailing at that time. In the field of exchange management, an
important development was that of the sterling-rupee link as a corollary to India’s
membership of the International Monetary Fund and the declaration of the par value of the
rupee in terms of gold2. The relevant provision of the Reserve Bank of India Act was
suitably amended for the purpose. The Bank was also authorised to buy and sell foreign
exchange, although actually it did not deal in foreign exchange other than sterling and
Pakistan rupees. The main landmark was the devaluation of the rupee, effective September
22, 1949, by 30.5 per cent, that is, to the same extent as that of sterling. Many difficulties
arose consequent on Pakistan’s decision not to devalue her currency simultaneously, which
disrupted trade and the payments arrangements between the two countries and led
1
A History of Money from Ancient Times to the Present Day, Glyn Davies, Cardiff: University of Wales Press,
3rd Edition, 2002.
2
RBI Publication, February 25, 2010, Exchange Rate Policy and Modelling in India, Pami Dua and Rajiv
Ranjan, p. 03
3
ultimately to the introduction of control on financial transactions with that country in
February 1951.
Another major event was the devaluation of the Indian rupee by 36.5 per cent on June 6,
1966.
With the breakdown of Bretton Woods’s system in the early 1970s and the
consequent switch towards a system of managed exchange rates, and with the declining
share of the UK in India’s trade, the INR effective September 1975, was delinked from the
pound sterling in order to overcome the weaknesses of pegging to a single currency. Even
after the rupee was delinked from the pound sterling, the role of the exchange rate
remained muted for quite some time given the widespread rationing of foreign exchange
through an elaborate system of licensing, other quantitative restrictions and exchange
control. During the period of 1975 to 1992, the exchange rate of rupee was officially
determined by the RBI within a nominal band of +/- 5 per cent of the weighted basket of
currencies of India’s major trading partners.
Exchange Rate Mechanism3: There are two types of ER mechanisms, one as Floating
Exchange Rate and the other as Fixed Exchange Rate. Floating exchange rate is one where
there is no intervention by governments or central banks. Whereas fixed exchange rate is
one where officials strive to keep the exchange rate fixed (or pegged) even if the rate that
they choose is not the equilibrium rate. The other category is Management Exchange Rate
or Managed Floating Rate System, which falls in-between these two categories. It is a
hybrid of a fixed exchange rate and a flexible exchange rate system. In this Central Bank
will be the key participant in foreign exchange market and will hold stocks of foreign
currency and these holdings are known as foreign exchange reserves.
3
Kaushik Basu and Annemie Maertens, The concise Oxford Companion to Economics in India, p. 308
4
Fixed Exchange Rate System4was predominant exchange rate system in the world for
most of 20th Century (1900s – 1970s). In a fixed exchange rate system, the value of a
nation’s currency is fixed (pegged) to a fixed amount of a commodity or to another
currency. Commodity will be usually Gold (Gold Standard) or US $ Currency. The three
rules followed when fixing exchange rates to a commodity are - To Fix the value of the
currency unit in terms of gold (fixed exchange rate), Keep the supply of domestic money
fixed in some constant proportion of the gold supply and Countries must be willing to
exchange gold for their own currency. Typically, there are bands set above/below the par
value that allow for some small fluctuation in the exchange rate Governments must act to
counter and appreciation.The Indian market is not yet very deep and broad, and is
characterised by uneven flow of demand and supply over different periods5.
In this
situation, the RBI has been prepared to make sales and purchases of foreign currency in
order to even out lumpy demand and supply in the relative foreign exchange market and to
smoothen jerky movements.
However, such interventions are not governed by a
predetermined target or band around the exchange rate.
INR Appreciation and Depreciation: The exchange rate of the Indian rupee (or INR) is
determined by market conditions. However, in order to maintain effective exchange rates,
the RBI actively trades in the USD/INR currency market. The rupee currency is not pegged
to any particular foreign currency at a specific exchange rate. The RBI intervenes in the
currency markets to maintain low volatility in exchange rates and remove excess liquidity
from the economy. Historically, the Indian rupee was a silver-based currency, while the
major economies of the world were following the gold standard. The value of the rupee
was severely impacted when large quantities of silver was discovered in the US and
4
Op. cit
RBI Publications, February 25, 2010, Exchange Rate Policy and Modelling in India, Pami Dua and Rajiv
Ranjan, p.3
5
5
Europe. After independence, India started following a pegged exchange rate system. The
country was forced to go through several rounds of devaluation from the 1960s to the early
1990s due to war and balance of payments problems. The rupee was made convertible on
the current account in 1993. The global financial crisis exerted pressure on crude oil
prices, which gradually plummeted to below $50 a barrel. Due to this, dollar inflow
declined, with oil companies and investors purchasing more and more dollars. Persistent
outflow of foreign funds increased the pressure on the rupee, causing it to decline. On
March 5, 2009, the Indian currency depreciated to a record low of US$52.06. The US
dollar's gains against other major currencies also weighed on the rupee. At March end, the
rupee stood at INR 50.6402. The value of the rupee depends on PPP (or purchasing power
parity), which reflects the quality of life that can be maintained at a particular standard
level of income.
Political liberalization and economic globalization has provided a worldwide market for
companies willing to operate internationally. Numerous companies increasingly engage in
global activities such as outsourcing, exports, imports and establishment of production and
sales abroad. Since the breakdown of Bretton Woods’s regime (1971), floating exchange
rates have proved tremendously volatile with aggressive short-term fluctuations and also
long over and undervaluation of major currencies such as the US dollar and the English
Pound. In contrast to domestic companies that only operate within a country, multinational
companies (MNCs) face gains and/or losses arising from exchange rate risks caused by the
uncertainty of the exchange rates prevailing in the future. As companies are spreading out
their production facilities and market interest throughout the world, the decision on
whether or not it is necessary and beneficial to hedge the risk of a depreciation of the
foreign currency compared to the home currency becomes more and more urgent.
6
The INR exchange rate6 is an important indicator of investor sentiment and can
significantly impact not only the fortunes of individual firms and sectors but also the
government. The exchange rates were 44.86 on April 24th, 2006 and 44.47 on April 15th
2010; there have been periods of significant volatility. To quote, USD-INR moved from
40 to 51.50 from March 2008 to March 2009. During the 6 months ending December
2010, it traded in a relatively narrow range, between 47.33 and 43.99. It is believed that
there is a significant downside risk to USD-INR exchange rate and this study was carried
to identify the factors for the same.
Automobile Industry7: The automobile industry evolved continuously with changing
times from craft production in 1890s to mass production in 1910s to lean production
techniques in the 1970s. The prominent role played by the US till late 1990s had of late
been cornered by the Japanese auto-makers.
8
The global output from the automobile
industry touched 64.6 million vehicles in 2005, thereby retaining its leadership in
manufacturing activity, providing employment to one in seven people, either directly or
indirectly. This supply mainly catered to meet the demand from households where the
automobiles constituted the second largest expenditure item next only to housing. Thus the
global automobile industry dominated by Europe, US, Japan and of late by China and
India, continued to have a significant influence on economic development and international
trade.
The good performance of Asian countries in the economy front heralded the
emergence of a strong market demand. The future potential of India’s automobile sector is
mainly based on the growing demand and availability of skilled manpower with design and
engineering abilities. The Indian automotive industry is worth around US$ 39 billion in
6
Op. cit
IDC Analyze the Future, Prepared for Department of Scientific & Industrial Research (DSIR), Ministry of
Science & Technology, New Delhi. August 2008.
8
Op. cit
7
7
2009-10 and contributes about 5 per cent of India’s GDP.
9
It produces over 14 million
vehicles and employs – directly and indirectly – in excess of 13 million people. But as of
2010-11 it has a turnover of US$ 73 billion, accounts for 6 per cent of its GDP and is
expected to hit a turnover of US$ 145 billion by 2016. The automobile industry currently
contributes 22 per cent to the manufacturing GDP and 21 per cent of the total excise
collection in the country, according to Mr Praful Patel.10 In 2010-11, the total turnover and
export of the automotive Industry in India reached a new high of US$ 73 billion and US$
11 billion respectively. The cumulative announced investments reached US$ 30 billion
during this period. He also said that the forecasted size of the Indian Passenger Vehicle
Segment is nearly 9 million units and that of 2 wheelers, close to 30 million units – by
2020.
There are two distinct sets of players in the Indian auto industry. Automobile Component
Manufacturers and the vehicle manufacturers also referred to as Original Equipment
Manufacturers (OEMs)11. The former set is engaged in manufacturing parts, components,
bodies and chassis involved in automobile manufacturing, the latter in engaged in
assembling of all these components into an automobile.
Previous empirical studies have focused mainly on developed countries considering top
five automobile companies.
This study looks at the issues from emerging market
perspective by focusing exclusively on INR-USD fluctuation impacts and its influence on
SMEs operating in Pune, India. Considering this the researcher wants to study the impact
9
Rakesh Ramachandran, Managing Director, IBI Consulting, Automobile Sector in India, September 14, 2011
Extract from the Speech of the Minister, Heavy Industries and Public Enterprises.
11
IDC Analyze the Future, Prepared for Department of Scientific & Industrial Research (DSIR), Ministry of
Science & Technology, New Delhi. August 2008.
10
8
of INR and USD fluctuations from 2006 to 2010 and how particularly it has influenced the
SMEs of Auto Units situated in Pune, India.
Hedging12: Risk can be defined as the unexpected changes that have an adverse impact on
a firm’s cash flow, value or profitability. Risks can be divided into firm specific risk,
industry-specific risk and macroeconomic risk.
Macroeconomic risk depends on the
uncertainty in the environment of all companies in a country. It is a risk related to the
movements in macroeconomic factors and cannot usually be taken away by diversification,
whereas firm-specific risk and industry-specific risk can be eliminated through an
appropriate diversification. However by using Hedging strategies, firms have possibilities
and capabilities to actively influence its opportunities in order to profit and /or to avoid the
costs of macroeconomic variations. To create value, companies need to take risks, but they
try to avoid those risks that carry no compensating gain. Any business involving foreign
currency has Foreign Exchange Risk and therefore more and more firms attempt to
measure, monitor and manage the exchange rate exposure through hedging. Hedging is
taking a contract that will rise or fall in value and offset a drop or rise in the value of an
existing position. Thus, the main purpose of a hedge is to reduce the volatility of existing
position risks caused by the exchange rate movements. Many studies show that several
companies create formal risk management policies including hedging strategies to mitigate
the negative impact of exchange rate fluctuations.
Hedging as a tool to manage Foreign Exchange Risk13: There is a spectrum of opinions
regarding foreign exchange hedging. Some firms feel hedging techniques are speculative
or do not fall in their area of expertise and hence do not venture into hedging practices.
Other firms are unaware of being exposed to foreign exchange risks. There are a set of
12
Corporate Governance and the Hedging Premium around the World”, Allayanis and Ofek (2001)
Op. cit
13
9
firms who only hedge some of their risks, while others are aware of the various risks they
face, but are unaware of the methods to guard the firm against the risk, There is yet
another set of companies who believe shareholder value cannot be increased by hedging
the firm’s foreign exchange risks as shareholders can themselves individually hedge
themselves against the same using instruments like forward contracts available in the
market or diversify such risks out by manipulating their portfolio14.
Fisher model, Purchasing Power Parity theory, Forward rate theory are those which are
played under perfect markets under homogeneous tax regimes. The existence of different
kinds of market imperfections, such as incomplete financial markets, positive transaction
and information costs, probability of financial distress, and agency costs and restrictions on
free trade make foreign exchange management an appropriate concern for corporate
manage.
In one of the studies, the researchers15 use a multivariate analysis on a sample of nonfinancial firms and calculate a firm’s exchange-rate exposure using the ratio of foreign
sales to total sales as proxy and isolate the impact of use of foreign currency derivatives on
a firm’s foreign exchange exposures. They found a statistically significant association
between the absolute value of the exposures and the percentage use of foreign currency
derivatives and prove that the use of derivatives in fact reduce exposure.
FOREX Risk Management Framework: Once a firm recognizes its exposure, it then has
to deploy resources in managing it. A heuristic for firms to manage this risk effectively is
through Forecasts, Risk Estimation, Benchmarking, Hedging, Stop Loss and Reporting and
Review16.
14
The Management of Foreign Exchange Risk, Giddy and Dufey, 1992
Corporate Governance and the Hedging Premium around the World”, Allayanis and Ofek (2001)
16
Kshitij Consultancy Services study
15
10
Hedging Strategies / Instruments17: A derivative is a financial contract whose value is
derived from the value of some other financial asset, such as a stock price, a commodity
price, an exchange rate, an interest rate, or even an index of prices. The main role of
derivatives is that they reallocate risk among financial market participants, help to make
financial markets more complete. The hedging strategies using derivatives with foreign
exchange being the only risk assumed are Forwards, Futures, Options, Swaps and Foreign
Debt.
Factors affecting the decisions to hedge foreign currency risk: Research in the area of
determinants of hedging separates the decision of a firm to hedge from that of how much to
hedge.
There is conclusive evidence to suggest that firms with larger size, R & D
expenditure and exposure to exchange rates through foreign sales and foreign trade are
more likely to use derivatives18. The main factors affecting the degree of hedging are Firm
Size, Leverage, Liquidity and profitability and sales growth. The degrees of hedging
analyses carried by researchers19 conclude that the sole determinants of the degree of
hedging are exposure factors (foreign sales and trade).
Hedging in India20: The move from a fixed exchange rate system to a market determined
system as well as the development of derivatives markets in India have followed with the
liberalization of the economy since 1992. In order to understand the alternative hedging
strategies that Indian firms can adopt, it is important to understand the regulatory
framework for the use of derivatives.
21
The economic liberalization of the early nineties
facilitated the introduction of derivatives on interest rates and foreign exchange, Exchange
17
“Corporate Hedging for Foreign Exchange Risk in India”, submitted by Anuradha Sivakumar and Runa
Sarkar, IIT, Kanpur
18
“Corporate Governance and the Hedging Premium around the World”, Allayanis and Ofek (2001)
19
Op. cit
20
Op. cit
21
“Corporate Hedging for Foreign Exchange Risk in India”, submitted by Anuradha Sivakumar and Runa
Sarkar, IIT, Kanpur
11
rates were deregulated and market determined in 1993. By 1994, the rupee was made fully
convertible on current account. The ban on futures trading of many commodities was
lifted starting in the early 2000s. As of October 2007, even corporates have been allowed
to write options in the atmosphere of high volatility22.
With respect to foreign exchange derivatives23 involving rupee, residents have access to
foreign exchange forward contracts, foreign currency-rupee swap instruments and currency
options – both cross currency as well as foreign currency-rupee. In the case of derivatives
involving only foreign currency, a range of products such as Interest Rate Swaps, Forward
Contracts and Options are allowed. While these products can be used for a variety of
purposes, the fundamental requirement is the existence of an underlying exposure to
foreign exchange risk (derivatives can be used for hedging purposes only. The RBI has
also formulated guidelines to simplify procedural/documentation requirements for Small
and Medium Enterprises (SMEs) sector. In order to ensure that SMEs understand the risks
of these products, only banks with which they have credit relationship are allowed to offer
such facilities. These facilities should also have some relationship with the turnover of the
entity. Similarly, individuals have been permitted to hedge up to USD 100,000 on selfdeclaration basis.
The recent five to ten years has witnessed amplified volatility in the INR-US exchange
rates in the backdrop of the sub-prime crisis in the US and increased dollar-inflows into the
Indian Markets. Taking into account the mentioned lines the researcher has tried to bring
out the picture of How India gets affected because of exchange rate fluctuation?, to
investigate the impact of volatility of exchange rate on SMEs of Auto Units in Pune. [The
focus on Auto Units arises from the fact that this business is the largest player in the
22
The Economic Times, October 20, 2007
Keynote address delivered by Smt. Shyamala Gopinath, Deputy Governor at the Euromoney Inaugural
India Derivatives Summit, October 24, 2007
23
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country] and to study the possible hedging strategies that can be used to mitigate exchange
rate exposure.
13
1.2.
Objectives:
The study has been carried with the following objectives.
1.
To study the rupee-dollar exchange rate fluctuations during 2006 to 2010
2.
To identify the factors responsible for the rupee-dollar exchange rate fluctuations
3.
To examine the impact of the fluctuations in the value of rupee on the “Automobile
Units” in Pune
4.
To examine the problems faced by the Automobile units of Pune because of the
fluctuations in the value of rupee
5.
To offer suggestions to mitigate the impact of the fluctuations in the currency value
1.3. Hypotheses:
1.
Commercial Risk24 is a significant determinant of ‘Export Earnings’
2.
Financial Risk25 is a significant determinant of ‘Export Earnings’
3.
Country Risk26 is a significant determinant of ‘Export Earnings’
4.
Foreign Exchange Risk27 is a significant determinant of ‘Export Earnings’
5.
“Cost” is a significant determinant of ‘Export Turnover’
6.
Exchange rate fluctuation is a significant determinant of Export and Competitive
Advantage relations.
24
Refers to Financial Risk assumed by seller when extending credit with-out any collateral
Risk when not having adequate cash flow to meet financial obligation
26
Collection of risk associated with investing in a foreign country (Political risk, economic risk, exchange rate
risk). To be considered when investing abroad.
27
Risk of investment value change due to changes in currency exchange rates
25
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1.4.Scope:
This study concentrates on the fluctuations and the impact on the SMEs of Auto Units in
Pune regarding INR and USD during five years from 2006 to 2010. It concentrates on the
various factors which are responsible for fluctuations of exchange rate and its impact in
general and in particular to Auto Units in Pune, India, coming under the Category of
SMEs. A total of 30 SMEs out of 65 SMEs are considered for the study under random
sampling method.
1.5.Limitations:
Due to constraints of time and resources, the study is likely to suffer from certain
limitations. Some of these are mentioned here under so that the findings of the study may
be understood in a proper perspective. The limitations of the study are:

The study is restricted to Auto SMEs of Pune. Hence, the findings of this study can be
taken as indicative and not imperative

Some of the respondents could not answer the questions on their own due to lack of
availability of data.

Some of the respondents of the survey had to recall the information sought from their
memory and that had its own pitfalls.
15
1.6.Chapter Organization:
This study has been divided into five parts as follows:
Chapter – 1 – Introduction:
Importance, Objectives, Hypotheses, Scope and Limitations are outlined
Chapter – II – Review of Literature:
Literature survey of Exchange rate fluctuations, Hedging and Impact of
exchange rate to Auto Industry are described
Chapter – III – Materials and Methods:
The profile of the study location, data collection method and the sample
given along with the methods and tools employed are stated
Chapter – IV – Results and Discussions:
Analysis of data and testing of hypotheses
Chapter – V – Findings, Suggestions and Conclusion:
The summary of findings, suggestions are given and conclusion is drawn
units
16
REVIEW OF LITERATURE
17
This literature review will bring critical points of current knowledge including substantive
evidence as well as theoretical and methodological contributions to exchange rate
mechanism. The ultimate goal is to bring up to date current literature on the specific
topic.It has been well-structured with logical flow of ideas; current and relevant references
with consistent, appropriate reference style, proper use of terminology and comprehensive
view expressed on the concerned topic.
Growing international trade and the resultant financial integration of the world economy
have led to the study of and debate over exchange rate fluctuations. This chapter has been
divided into various sections which will clearly specify what they have to specify.
2.1. Exchange Rate Regimes28:
The conduct of exchange rate policy in an open economy framework has become
increasingly complex, especially in the presence of increased volatility in international
capital flows that has resulted from the integration of global financial markets. In the past
decade, emerging market economies (EMEs) have been characterized by major features
such as increased capital mobility, greater exposure to exchange rate risk, increased
openness to international trade, and shift in the composition of exports from primary
products towards manufactures and services. Taking into account all the external factors
described above, the choice of an appropriate exchange rate regime has been a challenging
task.
For clarity and convenience the literature can be viewed in the following four regimes:
1.
The Gold Standard (1870 – 1914)
2.
The Interwar Period and the Gold Exchange Standard (1919 – 39)
28
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 1
18
3.
The Bretton Woods System (1944-73) and
4.
Breakdown of the Bretton Woods System and the Flexible Exchange Rate Regime
Gold Standard29: During the period of Gold Standard system exchange rate was fixed
and domestic currency had parity with gold/silver.
Under this system, deficits were
adjusted with internal deflation and surpluses were removed by internal inflation.
Therefore, external disequilibrium was to be corrected by domestic inflation and
unemployment. Thus, the focus was on the external balance. The system worked well
with flourishing trade and finance as there was no uncertainty about exchange rate
movements.
After World War I, the gold standard was abandoned.
The interwar period was
characterized by chaotic conditions with respect to exchange rates. Most countries let their
exchange rates to fluctuate in response to market forces. The importance shifted from
external to internal balance. Trade and tariff restrictions began to expand and the British
Pound Sterling lost its preeminent status. For management of foreign exchange reserves,
interest bearing foreign exchange securities, as an alternative to gold, were used to manage
the fixed parity domestic currency with gold.
The period 1944-71 can be considered as a period of fixed exchange rates. With the
creation of the Bretton Woods System30 in 1944, the fixed exchange rate system became an
officially declared one. The Bretton Woods system sought to secure the advantage of the
gold standard without its disadvantages. Thus, a compromise was sought between the
polar alternatives of either freely floating or irrevocably fixed rates – an arrangement that
sought to gain the advantages of both without suffering the disadvantages of either – while
29
Op. cit
Routledge Encyclopedia of International Political Economy,
http://www.routledge.com/books/details/9780415145329/
30
19
retaining the right to revise currency values on various occasions as circumstances
warranted.
Under the Fixed Exchange Rate System31, fixed parity of the US dollar with gold was US$
35 per ounce and the domestic currency was determined against the US dollar using the
parity. The outstanding features of the Bretton Woods system were an obligation for each
country to adopt a monetary policy that maintained the exchange rate of its currency within
a fixed range in terms of gold and the ability of the International Monetary Fund (IMF) to
bridge temporary imbalances of payments. In the face of increasing financial strain, the
system collapsed in 1971 after the United States unilaterally terminated convertibility of
the dollar to gold. This action caused considerable financial stress in the world economy
and created the unique situation whereby the US dollar became the reserve currency for the
states that signed the agreement.
Since the creation of the IMF at Bretton Woods,32 the international exchange rate regime
has undergone very substantial changes which may be broken down into four main phases.
The first was a phase of reconstruction and gradual reduction in inconvertibility of current
account transactions under the aegis of the Marshall Plan the European Payments Union,
culminating in the return to current account convertibility by most industrial countries in
1958.
The second phase corresponds to the Bretton Woods system, which was characterized by
fixed, though adjustable, exchange rates, the partial removal of restrictions on capital
31
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 2
The United Nations Monetary and Financial Conference, commonly known as the Bretton Woods
conference, was a gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel,
situated in Bretton Woods, New Hampshire, to regulate the international monetary and financial order
after the conclusion of World War II. The conference was held from 1 – 22 July 1944, when the agreements
were signed to set up the International Bank for Reconstruction and Development (IBRD) and the IMF.
32
20
account transactions in the industrial countries, a gold-dollar standard centred on the
United States and its currency, and a periphery of developing country currencies that
remained largely inconvertible.
The third phase33 started after the collapse of Bretton Woods System in 1971. During the
third phase, the US dollar remained firmly at the centre of the system. The 1980s saw the
gradual emergence of a European currency area coupled with increasing capital market
integration and the 1990s witnessed reforms into an increasingly globalized economy of
the developing countries. The exchange rate regime in the third phase was a mixed one,
with independently floating currencies of major industrial countries. At the same time,
there were repeated attempts to limit exchange rate variability among various European
Union countries which culminated in the Exchange Rate Mechanism (ERM) of the
European Monetary System (EMS) and ultimately in the creation of the EURO. The US
dollar, however, remained by far the major international currency in both goods and asset
trade. For developing and (later) transition countries, a mixture of exchange rate regimes
prevailed, with a growing trend toward the adoption of more flexible exchange rate
arrangements.
The birth of the Euro at the beginning of 199934 may mark the fourth phase in the
evolution of the post war exchange rate system, a phase characterized by a high degree of
capital mobility and a variety of exchange rate practices across countries.
33
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 3
Op. cit
34
21
Table.2.1. Resolving the Impossible Trinity
Era
Exchange Rate
Regime
Sacrifice
Activist
Capital
Fixed
Notes
Monetary
Mobility Exchange
Policy
Rate
Gold Standard
Most
A Few
A Few
Broad Consensus
Interwar Period
A Few
Several
Most
Capital controls especially in
Central Europe and Latin
America
Bretton Woods
A Few
Most
A Few
Broad consensus
Float
A Few
A Few
Many
Some consensus except for
hard pegs (currency boards,
dollarization, etc.)
Source: Obstfeld and Taylor (2004), Global Capital Markets: Integration, Crisis and
Growth, Cambridge University Press.
The above table presents the four main phases of the international exchange rate regime, in
context to the sacrifice each one entails from the perspective of the macroeconomic
trilemma (of choice between autonomous monetary policy, free capital mobility, and fixed
exchange rate regime).
Obstfeld and Taylor (2004) have pointed out that the Great
Depression represents a watershed, in the sense that it was a result of the imprudent
primacy accorded to the gold standard (for the exchange rate constraint) over the autonomy
of monetary policy. This, according to them, led to the subsequent evolution of alternative
approaches to deal with the trilemma.
In the years, fixed or pegged exchange rates have been a factor in every major emerging
market financial crisis – Mexico35 at the end of 1994; Thailand, Indonesia and Korea in
1997; Russia and Brazil in 1998; Argentina and Turkey in 2000; and Turkey again in 2001.
35
Op. cit p. 4
22
Emerging market countries without pegged rates – including South Africa, Israel, Mexico,
and Turkey in 1998 –have been able to avoid such crises36.
In an integrated environment, the experience with capital flows has had important lessons
for the choice of the exchange rate regime for the EMEs. The advocacy for corner
solutions – a fixed peg, a la the currency board, without monetary policy independence or a
freely floating exchange rate retaining discretionary conduct of monetary policy – is
distinctly on the decline. The weight of experience seems to be clearly in favour of
intermediate regimes with country specific features and no targets for the level of the
exchange rate.
With the above mentioned, the following lines will picture about the classifications,
regimes and the criteria to choose an exchange rate system suitable for a particular country.
2.2. Exchange Rate RegimesClassification37:
The choice of an appropriate exchange rate regime is one of the most debated issues in
international economies. There is no consensus regarding an ideal exchange rate regime.
The choice of the optimal exchange rate regime varies across countries and through time,
depending upon circumstances. There is a tendency among countries to switch regimes
after eruption of a crisis, which makes their existing regime ineffective, in ensuring
economic stability and growth. Fixed versus floating is a simple approach to analyse an
exchange rate regime. However, between the two poles exists a string of intermediate
arrangements forming a continuum. Broadly, the spectrum for exchange rate arrangements
can be reduced to the three central options of hard pegs, intermediate regimes, and floating
exchange rate regimes, though the IMF’s Annual Report on Exchange Arrangements and
36
RBI Publications, Foreign Exchange Reserves (Part 1 of 2), January 28, 2004.
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 5
37
23
Exchange Restrictions38 (AREAER) classifies exchange rate arrangements maintained by
IMF members into eight categories39:
1. Hard pegs comprising,
a. Exchange arrangements with no separate legal tender and
b. Currency board arrangements
2. Soft pegs consisting of,
a. Conventional pegged arrangements
b. Stabilized arrangements
c. Crawling pegs
d. Crawl-like arrangement
e. Pegged exchange rates within horizontal bands and
f. Other managed arrangement
3. Floating regimes characterized as
a. Floating and
b. Free floating
These categories are based on flexibility of the arrangement and how they operate in
practices, that is, the de facto regime is described, rather than the de jure or official
description of the arrangement.
2.3. Choice of Exchange Rate Regime: Evolution:
There is no consensus regarding an ideal exchange rate regime. The early literature 40 on
the choice of exchange rate regime took the view that the fixed exchange rate regime
38
IMF (2010). The Annual Report on Exchange Arrangements and Exchange Restrictions draws together
information available to the IMF from a number of sources, including during official IMF staff visits to
member countries. There is a separate chapter for each of the 187 countries included, and these are
presented in a clear, easy-to-read tabular format.
39
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 5
24
would serve better the smaller and more open economies (higher ratio of external trade to
GDP). Given the sacrifice of monetary freedom, the protagonists of the fixed exchange
rate regime favoured this system for two main reasons:
i.
Absence of unpredictable volatility, both from the perspective of short-term and
long-term
ii.
Help in restraining domestic inflation pressure by pegging to a low inflation
currency and providing a guide for private sector inflation expectations.
According to its supporters, the most extreme forms of fixed exchange rate regimes,
known as super fixed or hard pegs, provide credibility, transparency, very low inflation,
and financial stability to the economy concerned. By reducing speculation and devaluation
risk, hard pegs are believed to keep the interest rates lower and more stable compared to
any other alternative regime. Currency board, dollarization, and monetary union are some
of the examples of super fixed exchange rate regime.
41
A later approach to the choice of exchange rate regime looks at the effects of the various
random disturbances on the domestic economy. In this framework, the best regime is one
that has a stabilizing impact on various macroeconomic indicators like output, prices, and
consumption. In this approach, ranking of fixed and flexible regimes depends on the
nature and sources of shocks to the economy, policy makers’ preferences, and the
structural characteristic of the economy. This approach was further extended to choice, not
only between purely fixed exchange rate regime and fully flexible exchange rate regime
but a range of possibilities in-between with varying degree of flexibility.
40
RBI Publications, Foreign Exchange Reserves (Part 1 of 2), January 28, 2004
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 8
41
25
Friedman (1953), argued for a case of flexible exchange rate,
“………………instability of exchange rates is a symptom of instability in the underlying
economic structure. A flexible exchange rate need not be an unstable exchange rate. If it
is, it is primarily because there is underlying instability in the economic
conditions………………..”
Mundell (1963) and Fleming (1962) extended views,
“……………….the choice between fixed and floating depended on the sources of shock,
whether real or nominal, and the degree of capital mobility………………..”
International experience reveals that apart from the G-3 countries,42 a number of mediumsized industrial countries, namely, Canada, Switzerland, Australia, New Zealand, Sweden
and the United Kingdom (UK) have also maintained floating exchange rate regimes. The
main disadvantage of a free float is a tendency towards volatility that is not always due to
macroeconomic fundamentals.
This is especially so in emerging markets where the
foreign exchange markets are relatively thin and dominated by a small number of players.
In addition, financial markets may not be deep or broad enough to allow hedging at a
reasonable cost. In the last decade, there has been a general shift away from intermediate
42
The G-3 is a free trade agreement between Colombia, Mexico, and Venezuela that came into effect on 1
January 1995, which created an extended market of 149 million consumers with a combined GDP of US$
486.5 billion. The agreement states a 10 per cent tariff reduction over 10 years (starting in 1995) for the
trade of goods and services among its members. The agreement is a third generation one, not limited to
liberalizing trade, but includes issues such as investment, services, government purchases, regulations to
fight unfair competitions, and intellectual property rights.
26
exchange rate regimes or soft pegs towards either an independent float or very hard pegs.
This has been described as the hollowing out of the middle or the bipolar view.
Table.2.2. Evolution of Exchange Regimes
TYPE OF REGIME
NUMBER OF COUNTRIES
2005
2006
2007
2008
2009
Hard Pegs
48
48
23
23
23
No separate legal tender
41
41
10
10
10
Currency board arrangements
07
07
13
13
13
Soft Pegs
61
60
82
81
65
Conventional Pegged Arrangements
49
49
70
68
55
Pegs to single currency
32
44
49
56
33
Pegs to composite
05
05
07
07
04
Stabilized arrangement
13
Other
14
05
05
Intermediate Pegs
12
11
12
13
10
Pegged exchange rates within horizontal bands
06
06
05
03
04
Crawling pegs
06
05
06
08
05
Crawling bands
00
00
01
02
01
Floating Regimes
78
79
83
84
46
Managed floating
52
53
48
44
13
Independently floating
26
26
35
40
33
Source: IMF (2010), Annual Report on Exchange Regimes and Exchange Restrictions,
Washington DC
The recent information from IMF’s AREAER43 shows that most of the countries were
either in floating regime or had conventional pegged arrangement up to 2009. Further, the
number of countries in currency board arrangements increased by almost double during
43
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 12
27
last three years. Classification of exchange rate arrangements as per the recent AREAER
(2010) is given in the following Table.2.3.
Table.2.3. Exchange Rate Arrangements (Position as of 31 December 2009)
Arrangements
Total Number of Member
Countries with this Feature
Hard Pegs
25
No separate legal tender
12
Currency board arrangements
13
Soft Pegs
96
Conventional Peg
44
Stabilized arrangement
24
Crawling Peg
03
Crawl-like arrangement
02
Pegged exchange rates within horizontal bands
02
Other managed arrangement
21
Floating regimes
68
Floating
38
Free floating
30
Source: IMF (2010), Annual Report on Exchange Arrangements and Exchange
Restrictions 2010. Washington DC
Alternative Regimes and Their Characteristics44:
Studies by IMF indicate that success or failure of an exchange rate regime depends on a
number of critical factors and there is no one size fits all while choosing the appropriate
exchange rate regime. Some of the important factors include:
44
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 12
28

Credibility of economic policy making in the country, aimed at building strong
macroeconomic fundamentals and ensuring health economic governance

The country’s trade policy and degree of financial integration

The country’s capacity to commit convincingly to a sound fiscal and monetary policy (that
is, the country’s ability to have a credible nominal anchor)

The soundness and resilience of the banking sector (that is, the capacity of banks to
withstand shocks)

Robustness of the risk management systems amongst the country’s corporates and the
extent of unhedged exposures

The size of the pass-through coefficient from depreciation to inflation (extent of
increase/decrease in inflation brought about by depreciation/appreciation of local currency)
and the extent of other nominal rigidities (especially in wages)
Dr Bimal Jalan45 has strongly advocated the intermediate exchange rate regime.
According to Dr Jalan, in the aftermath of various currency crises in the recent past there is
a shift in this paradigm. The possibility of having a viable fixed rate mechanism, which
entails loss of monetary control on the part of central bank, has been generally discarded
and the dominant view, now, is that for most countries floating or flexible rates are the
only sustainable way of having a less crisis-prone exchange rate regime. Dr Jalan is of the
opinion that with regard to the desirable degree of flexibility in exchange rates, opinions
and practices vary. According to him, a completely free float, without intervention, is not
a favoured alternative except perhaps in respect of a few global or reserve currencies. In
respect of these currencies also (say the Euro and the US dollar) concerns are expressed at
the highest levels if the movement is sharp in either direction. Studies by the IMF and
45
Extract from Speech “Exchange Rate Management: An Emerging Consensus? – Part I” given at the 14th
National Assembly of FOREX Association of India on August 14, 2003.
29
several experts also show that by far the most common exchange rate regime adopted by
countries, including industrial countries, is not a free float. Most of the countries have
adopted intermediate regimes of various types such as managed floats, with no preannounced path, and independent floats, with foreign exchange intervention, moderating
the rate of change and preventing undue fluctuations. By and large, with a few exceptions,
countries have managed floats i.e. central banks intervene periodically. This has also been
true of industrial countries. In the past, the US, the EU and the UK have also intervened at
one time or another. Thus irrespective of the purely theoretical position in favour of a free
float, the external value of the currency continues to Indian experience of ensuring
development of the FOREX market and maintaining orderly conditions therein and
escaping the contagion effect of most of the currency crisis in the 1990s corroborates the
success of the managed float exchange rate regime46.
India’s Exchange Rate Regime4748: Since March 1993, the exchange rate in India is
largely determined by demand and supply conditions in the market. The exchange rate
policy in recent years has been guided by the broad principles of careful monitoring and
management of exchange rates with flexibility, without a fixed target, or a preannounced
target, or a band, while allowing the underlying demand and supply conditions to
determine the exchange rate movements over a period, in an orderly way. Subject to this
predominant objective, the exchange rate policy is guided by the need to reduce excess
volatility, prevent the emergence of destabilizing speculative activities, help maintain
adequate level of reserves, and develop an orderly foreign exchange market. It is pertinent
to note that the classification of the exchange rate regimes done by IMF is based on the
46
David Snell, AIM Partner, PwC, November 12, 2011.
RBI Publications, Impact and Policy Responses in India: Financial Sector, July 1, 2010.
48
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 25
47
30
country’s de facto regimes, which differ from their officially announced arrangements.
The scheme ranks exchange rate arrangements on the basis of their degree of flexibility
and the existence of formal or informal commitments to the exchange rate path. Under this
classification, India’s exchange rate regime is classified as managed float with no
predetermined path for the exchange rate.
The reason why intervention by most central banks in forex markets has become necessary
from time to time is primarily because of two reasons. A fundamental change that has
taken place in recent years is the importance of capital flows in determining exchange rate
movements as against trade deficits and economic growth, which were important in the
earlier days. The latter do matter, but only over a period of time. Capital flows, on the
other hand, have become the primary determinants of exchange rate movements on a dayto-day basis49. Secondly, unlike trade flows, capital flows in gross terms which affect
exchange rate can be several times higher than net flows on any day. The conduct of
monetary policy and management in the context of large and volatile capital flows has
proved to be difficult for many countries50.
As India liberalized its capital account in a carefully sequenced manner, since the 1990s, it
too has been faced with similar problems51. In general, the EMEs are facing the dilemma
of grappling with the inherently increasing capital flows relative to domestic absorptive
capacity. A freely floating exchange rate is argued to engender the independence of
monetary policy.
49
RBI Publications, Foreign Exchange Reserves (Part 1 of 2), January 28, 2004
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 26
51
Op. cit
50
31
In many developing countries, despite existence of significant inflation differentials, there
is persistent pressure for exchange rate appreciation52. This is due to the fact that positive
forward prospects of the economic growth lead to higher capital inflows, which put upward
pressure on the exchange rate and in turn, create expectations for further exchange rate
appreciation. Therefore, though, in the normal course, exchange rate movements should
correct the capital flows, however, this has not been observed in the recent past 53. On
similar lines, in India, the prevailing higher interest rate along with higher growth rate have
created lower risk perception and given rise to arbitrage opportunities, which has attracted
higher capital inflows. The absorption of capital flows is confined to the current account
deficit, which at present is prevailing at a low level. Given this, large capital inflows are a
stress on the real economy through pressures on exchange rate appreciation and
sterilization. This not only adversely affects the exporters but also affects the profitability
of the corporates through pressure on domestic prices, unless the productivity goes up
commensurately. Since there are limits to sterilization, the capital account management
becomes important.
On the question of the appropriate exchange rate regime, a fixed exchange rate regime
(even with a Currency Board) is clearly out of favour.
54
The Brazilian and Argentinean
crises, after the Asian Crisis, came as a rude shock. Even strong Currency Board type
arrangements of a fixed peg vis-à-vis the dollar were found to be unviable. Soon after the
Asian crisis, the widely accepted theoretical position was that a country had the choice of
either giving up monetary independence and setting up a Currency Board, or giving up the
stable currency objective and letting the exchange rate float freely so that monetary policy
52
Op. cit
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 26
54
Extract of Paper titled “A mirage of Exchange Rate Regimes for Emerging Market Countries”, presented by
Calvo and Mishkin, June 2003.
53
32
could then be directed to the objectives of inflation control. There is a shift in this
paradigm. The possibility of having a viable fixed rate mechanism has been generally
discarded and the dominant view now is that for most countries floating or flexible rates
are the only sustainable way of having a less crisis prone exchange rate regime.
2.4. Exchange Rate Policy55:
The external sector reform process in India has been carried forward by taking into account
the width and depth of the market, the regulatory regime, capability of market participants
to cope with changing regulations, and ease of administering thereof.
India stands
considerably integrated with the rest of the world today in terms of major openness
indicators. Against this backdrop, the following section analyses, in retrospect, India’s
exchange rate story with particular focus on the policy responses during difficult times and
the reforms undertaken to develop the rupee exchange market, during relatively stable
times.
Chronology of Reform Measures56:
A. Prior to 199157:
In the post-independence period, India’s exchange rate policy has seen a shift from a par
value system to a basket-peg and further to a managed float exchange rate system. During
the period 1947 till 1972, India followed the par value system of exchange rate, whereby
the Rupee’s external par value was fixed at 4.15 grains of fine gold. The RBI maintained
the par value of the rupee within the permitted margin of +/- 1% using the Pound Sterling
as the intervention currency. Since the sterling-dollar exchange rate was kept stable by US
55
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 29
RBI Publications, February 25, 2010, Exchange Rate Policy and Modelling in India, Pami Dua and Rajiv
Ranjan
57
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 29
56
33
Fed, the exchange rates of the rupee in terms of gold as well as the dollar and other
currencies were indirectly kept stable. The devaluation of the rupee in September 1949
and June 1966, in terms of gold, resulted in the reduction of the par value of rupee in terms
of gold to 2.88 and 1.83 grains of fine gold, respectively. Since 1966, the exchange rate of
the Rupee remained constant till 1971. The exchange control measures in this fixed
exchange rate regime were guided by the Foreign Exchange Regulation Act that was
initially enacted in 1947 and placed on a permanent basis in 1957. Based on the provisions
of the Act, the RBI, and in certain cases the central government, controlled and regulated
the dealing in foreign exchange payments outside India, export and import of currency
notes and bullion, transfers of securities between residents and non-residents, acquisition
of foreign securities, etc.58
With the breakdown of the Bretton Woods Systems in 197159 and the floatation of major
currencies, the conduct of the exchange rate policy posed a great challenge to central banks
as currency fluctuations opened up tremendous opportunities for market players to trade in
currency volatilities in a borderless market. In December 1971, the rupee was linked with
the Pound Sterling. Sterling being fixed in terms of US dollar under the Smithsonian
Agreement of 1971, the rupee also remained stable against the dollar.
In order to
overcome the weaknesses associated with a single currency peg and to ensure stability of
the exchange rate, the rupee, with effect from September 1975, was pegged to a basket of
currencies. The currencies included in the basket as well as their relative weights were
kept confidential by the RBI to discourage speculation.
58
The Act was later replaced by a more comprehensive legislation, that is, the Foreign Exchange Regulation
Act, 1973.
59
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 30
34
Trading in the foreign exchange market began in 1978, when banks in India were allowed
by the RBI to undertake intra-day trading in foreign exchange and were required to comply
with the stipulation of maintaining ‘square’ or ‘near square’ positions only at close of
business hours each day, unlike all times as previously. During this period, the exchange
rate of rupee was officially determined by the RBI in terms of the weighted basket of
currencies of India’s major trading partners and the exchange rate regime was
characterized by daily announcement, by the RBI, of its buying and selling rates to
Authorized Dealers (ADs), for undertaking merchant transactions. The spread between the
buying and selling rates was 0.5 per cent and the market began to trade actively within this
range. As opportunities to make profits began to emerge, trading volumes began to
increase. For all practical purposes, however, the foreign exchange markets in India till the
early 1990s remained highly regulated with restrictions on external transactions, barriers to
entry, low liquidity, and high transaction costs. The exchange rate during this period was
managed mainly for facilitating India’s imports. The strict control of foreign exchange
reserves through FERA (Foreign Exchange Regulations Act) had the dubious distinction of
creating one of the largest and most efficient parallel markets for foreign exchange in the
world, that is, the hawala (unofficial) market60.
By the late 1980s and the early 1990s, it was recognized that both macroeconomic policy
and structural factors had contributed to the balance of payment difficulties. Devaluations
by India’s competitors had aggravated the misalignment. The weaknesses in the external
sector were accentuated by the Gulf crisis of 1990. The current account deficit widened to
3.2 per cent of GDP in 1990-1 and the foreign currency assets depleted to less than a
60
Op. cit
35
billion dollars by July 1991.
It was against this backdrop that India embarked on
stabilization and structural reforms to generate impulses for growth.
B. During 1991 – 9261:
This phase was marked by wide ranging reform measures aimed at widening and
deepening the foreign exchange markets and liberalization of exchange control regimes. A
conscious decision was taken to honour all debt without seeking rescheduling and several
steps were taken to tide over the crises:

Part of gold reserves were sent abroad to get some immediate liquidity

Non-essential imports were tightened

Macroeconomic stabilization programme was put into place

India Development Bonds (IDBs) were floated in October 1991 to mobilize mediumterm funds from non-resident Indian’s which yielded US$ 1.6 billion

Commitments were made to bring about structural reforms
The Report62 laid the framework for a credible macroeconomic stabilization programme
encompassing trade, industry, and foreign investment, exchange rate, and foreign exchange
reserves. With regards to the exchange rate policy, the committee recommended that
consideration be given to:

A realistic exchange rate

Avoiding use of exchange mechanisms for subsidization

Maintaining adequate reserve levels to take care of short-term fluctuations

Continuing the process of liberalization on the current account

Reinforcing effective control over capital transactions
61
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 31
Report of High Level Committee on Balance of Payments, Chairman being Dr C. Rangarajan
62
36
The key to the maintenance of a realistic and a stable exchange rate is containing inflation
through macroeconomic policies and ensuring net capital receipts of the scale assumed in
Balance of Payments projections.
The initiation of economic reforms saw, among other measures, a two-step downward
exchange rate adjustment by 9 per cent and 11 per cent, between 1 to 3 July 1991, to
counter the massive drawdown in the foreign exchange reserves, to instil confidence in the
investors and to improve domestic competitiveness. The two-step adjustment of July 1991
effectively brought to a close the period of the pegged exchange rate. Following the
recommendations of the Rangarajan Committee to move towards the market determined
exchange rate, LERMS63 (Liberalized Exchange Rate Management System) was put in
place in March 1992, involving a dual exchange rate system in the interim period. The
LERMS was essentially a transitional mechanism and a downward adjustment in the
official exchange rate took place in early December 1992 and ultimate convergence of the
dual rates was made effective from 1 March 1993, leading to the introduction of a market
determined exchange rate regime64. Under the LERMS, all foreign exchange receipts on
current account transactions (exports, remittances, etc.) were required to be surrendered to
the ADs in full.
The rate of exchange for conversion of 60 per cent of the proceeds of these transactions
was the market rate quoted by the Ads while the remaining 40 per cent of the proceeds
were converted at the RBI’s official rate. The Ads in turn were required to surrender to the
RBI 40 per cent of their purchase of foreign currencies representing current receipts at the
63
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 32
RBI Publications, Report of the Internal Working Group on Currency Futures, November 16, 2007
64
37
official rate of exchange announced by the RBI. They were free to retain the balance 60
per cent of foreign exchange for being sold in the free market for permissible transactions.
The dual exchange rate system65 was replaced by unified exchange rate system in March
199366. It was stipulated that all foreign exchange receipts could be converted at market
determined exchange rates.
The restrictions on a number of other current account
transactions were relaxed. The unification of the exchange rate of the Indian rupee was an
important step towards current account convertibility. The RBI, in conjunction with the
Government, also gradually implemented wide ranging reform measures with an objective
to remove market distortions and deepen the foreign exchange market. The experience
with the market determined exchange rate system in India, since 1993, is generally
described as ‘satisfactory’ as orderliness prevailed in the Indian market during most of the
period. Volatility was effectively managed through timely monetary and administrative
measures.
C.
Exchange Rate – Evidences: 1993 – 199867:
The Post reform period is discussed in the following lines in phases.
i. First Phase of Stability – March 1993 to July 1995:
On unification of the exchange rates in 1993, the nominal exchange rate of the rupee
against both the US dollar as also against a basket of currencies got adjusted to a lower
level, which nullified the impact of all previous inflation differentials. The Real Effective
Exchange Rate (REER) of the rupee in the months following the unification represented an
equilibrium situation and this was also borne out by the fact that the current account was
65
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 34
RBI Publications, Exchange Rate Policy and Modelling in India, February 25, 2010
67
RBI Publications, Exchange Rate Policy and Modelling in India, February 25, 2010
66
38
almost in balance in 1993-4. Exchange rate policy in the post-unification period was
aimed at providing a stable environment by giving boost to exports and foreign investment
in line with the envisaged premises of the structural and stabilization programme.
This
period is also marked by the setting up of the Sodhani Committee (1994) which, in its
report submitted in May 1995, made several recommendations aimed at relaxing the
regulations with a view to vitalizing the foreign exchange market.
With the liberalization in the capital account, mainly in the area of foreign direct
investment and portfolio investments, there was a surge in capital inflows during the
financial years 1993-4 and 1994-5. The large inflows exerted appreciating pressure on the
rupee. In order to obviate any nominal appreciation of the rupee which would erode export
competitiveness, the RBI purchased a portion of such inflows and augmented the reserves;
the foreign currency assets of the RBI rose from US$ 6.4 billion, in March 1993, to US $
20.8 billion, in March 1995, representing over seven months of import cover. As a result,
the exchange rate of the rupee reflected a prolonged period of stability and remained stable
at Rs. 31.37 per US dollar from March 1993 to July 1995 68. During this period, the
sterilization operations were on a lower scale, resulting in somewhat larger growth in
monetary aggregates. In other words, the focus of exchange rate policy in 1993-4 was on
preserving the external competitiveness at a time when the economy was undergoing a
structural transformation. The building up of the reserves was also a consideration as the
crisis of 1991 was at the back of the mind of the policymakers.
68
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 35
39
ii. First Phase of Volatility – August 1995 to March 199669:
The prolonged stability in the exchange rate during 1993-5 witnessed some stress starting
from the third quarter of calendar year 1995 in the wake of unfounded expectations about
the external payments situation. Slowing down of capital inflows in the wake of the
Mexican crisis, a moderate widening of the current account deficit on resurgence of
activities in the real sector, and the rise of US dollar against other major currencies, after a
bearish phase, were the main factors contributing to this phenomenon. The downward
pressure on the rupee initially got intensified in October 1995 (exchange rate fell to Rs.
35.65 per US dollar) and further in the first week of February 1996 (rupee touched record
low of Rs. 37.95 per US dollar). During this period, unidirectional expectations of a free
fall of rupee reinforced normal leads and lags in external receipts and payments, vitiating
orderly market activity. A panic demand for cover by importers and cancellations of
forward contracts by exporters created persistent mismatches of demand and supply in both
the spot and forward segments of the market. Forward premia rose sharply from 4 per cent
in September 1995 to more than 10 per cent in October 1995, and further to around 20 per
cent in February 1996. Furthermore, the bid-offer spread widened to about 20 paise with
the spread being as wide as 85 paise on certain days, depicting tremendous buying pressure
in the face of meagre supply. To eliminate the inconsistency of the RBI buying rate, it
stopped publishing its quote on the Reuter screen with effect from 4 October 2005,
offering only a buying quite to banks on specific request.
The RBI in response intervened in the market to signal that the fundamentals were in place,
and to ensure that market correction of the overvalued exchange rate was orderly and
calibrated. Market intelligence and information gathering were strengthened and the RBI
69
Op. cit
40
started obtaining direct price quotes from leading foreign exchange broking firms. Two
basic approaches on intervention were adopted. On days when there was information
about large all round demand, an aggressive stance was taken with intensive selling in
larger lots till the rate was brought down decisively. On other occasions, continual sale of
small / moderate amounts was to be effected to prevent unduly large intra-day variations.
The first approach aimed at absorbing excess market demand, while the latter was aimed at
curbing the ‘ratchet effect’.70
Thus, the 1995-671 experience of volatility showed that while intervention signals the
policy stance, the ‘testing’ of the commitment to the stated policy by the market could be
best addressed by supportive measures as unveiled during October 1995 and February
1996. This period also saw the implementation of some major policy initiatives aimed at
further liberalizing the exchange control measures.
 Ceiling of Rs. 15 crore on the aggregate overnight open position to be maintained by Ads
was removed from January 1996 and Ads were given the freedom to fix their own foreign
exchange overnight open position limits, subject to approval from the RBI.
 NRIs were permitted to invest funds on a non-repatriation basis in the Money Market
Mutual Funds (MMMFs) floated with prior authorization from RBI/SEBI (February 1996)
 The RBI appointed a special committee to process all applications involving Indian direct
investment abroad beyond US$ 4 million or those not qualifying for fast track clearance
(September 1995)
70
The ‘ratchet effect’ means that in a bearish market situation, if the rate falls even due to situational
factors it does not recover easily on reversal of those factors.
71
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 37
41
 The RBI commenced functioning as a single window agency for receipt and disposal of
proposals for overseas investments by Indian corporates, effective from December 1995.
A reporting system for the same was also prescribed
 The RBI set up a Market Intelligence Cell to study and closely monitor the developments
in the Indian Foreign exchange market (October 1995)
iii.
Second Phase of Stability – April 1996 to Mid-August 199772:
The foreign exchange market witnessed remarkable stability during the period April 1996
to mid-August 1997. During this period, the spot exchange rate remained in the range of
Rs. 35.50 – 36.00 per US dollar. The stability in the spot rate was reflected in the forward
premia (six months) as well, which remained range-bound within 6 to 9 per cent during the
financial year 1996-7 and declined further during the first five months of the financial year
1997-8 within a range of 3 to 6 per cent following easy liquidity conditions. From the
second quarter of calendar year 1996 onwards, capital flows were also restored and the loss
of reserves was recouped within a short period of time.
In continuance of the reform process, this period marks the first formal move towards
capital account liberalization whereby a committee on Capital Account Convertibility was
appointed by the RBI on 28 February 1997 that submitted its report in May 1997. The
Committee recommended a phased liberalization of controls on outflows and inflows over
a three year period. The Committee also laid down three crucial preconditions in terms of
fiscal consolidation, a mandated inflation target, and strengthening of the financial sector
for moving towards capital account convertibility.
Also, with a view to moving
progressively towards capital account convertibility, the Union Budget for 1997-8
proposed introduction of a bill in 1997-8 to pass as an Act called the Foreign Exchange
72
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 38
42
Management Act (FEMA) to replace FERA73.
Accordingly, the RBI drafted a new
legislation FEMA74 that was consistent with full current account convertibility and the
objectives of progressive liberalization on the capital account.
Besides, this period also saw the implementation of some important foreign exchange
market policy measures: setting up of Foreign Exchange Market Technical Advisory
Committee (April 1996), Reconstitution of the Foreign Investment Promotion Board
(FIPB), and proposal to set up Foreign Investment Promotion Council (FIPC) to promote
FDI in India (July 1996), permission to ADs to offer a variety of hedging products, for
example, interest rate swaps, currency swaps, forward rate agreements to their clients
without prior approval of the RBI or the Government of India (August 1996), permission
to FIIs to invest in GOI dated securities (March 1997), Ads permitted to offer forward
contracts on the basis of past performance, and declaration of exposure (April 1997) and
relaxation in External Commercial Borrowings (ECB) guidelines.
iv.
Second Phase of Instability – Mid-August 1997 to August 199875:
The year 1997-8 and the first quarter of 1998-9 posed severe challenges to exchange rate
management due to the contagion effect of the South-East Asian currency crisis and other
domestic factors. There were two periods of significant volatility in the Indian foreign
exchange market:
Phase I, from mid-August 1997 to January 1998 and Phase II, May 1998 till August 1998.
Response to these episodes included intervention in both spot and forward segments of the
73
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 38
RBI Notification, FEMA.210/2010-RB, July 19, 2010
75
RBI Publications, Exchange Rate Policy and Modelling in India, February 25, 2010
74
43
foreign exchange market and adoption of stringent monetary and administrative measures,
which were rolled back immediately on attainment of stability.
Phase I76: Despite strong fundamentals, the rupee weakened in the last week of August,
partly as a result of spill over effects of currency turbulence in South-East Asian markets.
With inter-bank spot purchases (excluding sales by the RBI) exceeding inter-bank sales by
a significant margin, the RBI sold foreign exchange worth US$ 979 million in September.
In the forward market, excess demand conditions started emerging from August as
importers rushed for cover to hedge large exposures which had remained uncovered in the
earlier period77 and exporters cancelled forward contracts. In October 1997, the RBI
allowed banks to invest and borrow abroad up to 15 per cent of their unimpaired Tier I
capital7879, which led to the resumption of capital flows and increase in volumes in the
foreign exchange market, particularly in the outright forward and swap segments. This
allowed the RBI to undertake both spot and outright forward purchases and liquidate its
forward liabilities.
Thereafter, however there was persistent excess demand and considerable volatility in the
foreign exchange market.
Market sentiment weakened sharply from November 1997
onwards in reaction to intensification of the crisis in South-East Asia, bearishness in
domestic stock exchanges, and uncertainty. Between November 1997 and January 1998,
the exchange rate of the Indian rupee depreciated by around 9 per cent.
The RBI
undertook wide ranging and steep monetary and administrative measures on 16 January
76
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 39
During late 1996 and early 1997, anticipation of stability, in general, and even appreciation of rupee in
some quarters had led many market participants to keep their oversold or short positions unhedged and
substitute some domestic debt by foreign currency borrowings to take advantage of interest arbitrage. In
the wake of developments in South-East Asia and market perceptions of exchange rate policy, there was a
rush to cover unhedged positions by the market participants.
78
RBI FEMA and Foreign Exchange Notification Blog, February 28, 2012
79
RBI Publications, Policy Environment, October 22, 2009
77
44
1998 in order to curb speculative tendencies among the market players and restore orderly
conditions in the foreign exchange market. As a result of the monetary measures of 16
January 1998, the stability in the foreign exchange market returned and more importantly,
the expectations of the market participants about further depreciation in the exchange rate
of rupee were reversed. The monetary policy measures were successful because they had
the impact of making forward premia prohibitively high and generating supply in the
market, which further reinforced two-way expectations. The volatility in the market, as
measured by month-wise coefficient of variation, reduced from 1.26 in January 1998 to
0.49 in February 1998 and further to 0.08 in March 199880. The exchange rate of the rupee
vs. the dollar which had depreciated to Rs. 40.36/$ as on 16 January 1998 appreciated to
Rs. 39.50/$ on 31 March 1998. The six month forward premia which reached a peak of
around 20 per cent in January 1998 came down to 7 per cent by the end of March 199881.
As normalcy returned in the foreign exchange market, the easing of monetary measures
continued. The interest rate on fixed rate ‘repos’ (now ‘reverse repo’) continued was
reduced to 7 per cent as on 2 April 1998 and further to 6 per cent on 29 April 1998. On 29
April 1998, the export refinance limit was also increased from 50 per cent to 100 per cent
of the incremental export credit eligible for refinance. The Cash Reserve Ratio (CRR) 82
and Bank Rate were also reduced to earlier levels. While it is generally accepted that India
could escape the 1997 crisis unscathed, it need to be recognized that this has been made
possible due to the proactive policy responses taken by the RBI. The RBI acted swiftly to
curb speculative activities and change market expectations. Direct intervention followed
by administrative measures were undertaken initially but when the volatility continued and
80
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 41
RBI Publications, Impact and Policy Responses in India: Financial Sector, July 1, 2010
82
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 41
81
45
sentiment remained unchanged, monetary measures were undertaken to reverse
unidirectional expectations.
Phase II83: Management of the external sector continued to be a major challenge even in
the post-Asian crisis period, particularly during May to June 1998 due to escalation of
South-East Asian crisis, bearish domestic stock exchanges, uncertainties created by
internal developments, and the strengthening of US dollar against major currencies,
particularly the Yen. Furthermore, during this phase, India was confronted with certain
other developments like economic sanctions imposed by several industrial countries,
suspension of fresh multilateral lending (except for certain specified sectors), downgrading
of the country rating by international rating agencies, and reduction in investment by
Foreign Institutional Investors (FIIs). As a result of these developments, the foreign
exchange market again witnessed increased pressure during May-June 1998.
The
exchange rate of the rupee which was Rs. 39.73 per US dollar at the end of April 1998,
depreciated to Rs. 42.92 per US dollar on 23 June 199884.
The RBI announced a package of policy measures on 11 June 199885 to contain the
volatility in foreign exchange market. These include:

Announcement of the Reserve Bank’s readiness to sell foreign exchange in the market to
meet any mismatch between demand and supply.

Allowing FIIs to manage their exchange risk exposure by undertaking foreign exchange
cover on their incremental equity investment with effect from June 12, 1998
83
Op. cit
Op. cit
85
RBI Publications, Exchange Rate Policy Measures, November 2009
84
46

Advising importers as well as banks to monitor their credit utilization so as to meet
genuine foreign exchange demand and discourage undue build-up of inventory

Allowing domestic financial institutions, with the RBI’s approval, to buy back their own
debt paper or other Indian papers from international markets

Allowing banks / ADs, acting on behalf of the FIIs, to approach RBI for direct purchase of
foreign exchange and

Advising banks to charge a spread of not more than 1.5 percentage points above LIBOR86
(London Inter-Bank Offer Rate) on export credit in foreign currency as against the earlier
norm of not exceeding 2 -2.5 percentage points.
Responding to these policy measures, the foreign exchange market returned to normalcy
for some time but again came under stress in August 1998. RBI announced a fresh
package of measures on 20 August 1998 in order to prevent speculative sentiments to build
up pressure on the orderly functioning of the market. These measures include:

Hike in the CRR from 10.0 per cent to 11.0 per cent

Increase in the repo rate from 5 per cent to 8 per cent

Enhancement of forward cover facilities to FIIs

Withdrawal of facility of rebooking the cancelled contracts for imports and splitting
forward and spot legs for commitment and

Allowing flexibility in the use of Exchange Earners Foreign Currency (EEFC) 87 accounts
while restricting the extension of time limit for repatriation of export proceeds due to
exceptional circumstances.
86
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 43
Op. cit
87
47
A distinguishing aspect of the foreign exchange market interventions during the 1997-8
volatility episode was that instead of doing the transactions directly with Ads, few select
public sector banks were chosen as intermediaries for this purpose.
Under this
arrangement, public sector banks would undertake deals in the inter-bank market at the
direction of the RBI, for which it would provide cover at the end of the business hours of
each day88. It was ensured that the public sector banks’ own inter-bank operations were
kept separate from the transactions undertaken on behalf of the RBI. Periodic on site
scrutiny of the records and arrangements of these banks by the RBI was instituted to check
any malpractice or deficiency in this regard. The main reason for adopting an indirect
intervention strategy in preference to a direct one was that this arrangement would provide
a cover for RBI’s operations and reduce its visibility and hence would be more effective.
However, the fact that RBI was intervening in the market through a few other public sector
banks was not disclosed, though in due course of time it was known to the market.
Besides, as a measure of abundant precaution and also to send a signal internationally
regarding the intrinsic strength of the economy, India floated the Resurgent India Bonds
(RIBs) in August 1998 and managed to raise US$ 4.2 billion through the scheme.
D. Relative Stability with Intermittent Event related Volatility – (September 1998 –
March 2003)89:
The measures announced by the RBI coupled with the success of the RIB issue changed
the market sentiment and restored orderly conditions in the foreign exchange market. The
rupee remained generally stable during September 1998 to May 1999 with the exchange
rate varying in the range of Rs. 42.20 to Rs. 42.90 per US dollar. This was also the period
when the European Union countries adopted the Euro as their single currency.
88
Op. cit
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 44
89
48
Consequently, the RBI also started monitoring movement of Rupee vis-à-vis Euro in
addition to the dollar.
The rupee came under slight pressure during June-October 1999 due to the nervousness in
the markets, induced by the heightened tension on the border, resulting in the RBI’s
intervention in the foreign exchange market. In order to reduce the temporary demandsupply mismatches, on 23 August 1999, the RBI indicated its readiness to meet fully/partly
foreign exchange requirements on account of crude oil imports and debt service payments
of the Government. In the period from November 1999 till March 2000, the rupee traded
in a narrow band around Rs. 43.50 per US dollar90. Recovery in exports coupled with
sustained portfolio inflows provided support to the exchange rate. The period since April
2000 till March 2003 generally remained stable with intermittent periods of volatility
associated with certain international developments. In order to reduce uncertainty in the
foreign exchange market, the RBI responded promptly with policy actions. Besides, the
introduction of the Liquidity Adjustments Facility (LAF) effective from 5 June 2000
allowed the RBI an additional lever for influencing the short term liquidity conditions.
Financing through Indian Millennium Deposits (IMDs)91 was resorted to as a pre-emptive
step in the face of hardening of world petroleum prices and the consequent possible
depletion of Indian foreign exchange reserves.
Orderly conditions prevailed in the foreign exchange market for more than a year, from
August 2000 till about early September 2001. The nervous sentiment of the foreign
exchange market in the aftermath of 11 September 2001 terrorist attack in the US resulted
in substantial rupee depreciation during 11-20 September 2001. Along with market sales,
90
Op. cit p. 45
Op. cit
91
49
the RBI responded through a package of measures and liquidity operations during 15.25
September 2001. These measures include92:

Reiteration by the RBI to keep interest rates stable with adequate liquidity

Assurance to sell foreign exchange to meet any unusual supply-demand gap

Opening a purchase window for select Government securities on an auction basis

Relaxation in FII investment limits up to the sectoral cap / statutory ceiling

Special financial package for large value exports of six select products and

Reduction in interest rates on export credit by one percentage point
The exchange rate again came under some pressure following the attack on Indian
Parliament on 13 December 2001. These twin pressures on the market resulted in the
rupee falling below Rs. 48 per US dollar mark during this period. Tightness prevailed in
the foreign exchange market for a short spell during April-May 2002 in view of tensions in
Gujarat, rising crude oil prices, and border tension. The Rupee touched Rs. 49 per US
dollar in May 2002, the lowest exchange rate ever. During rest of the financial year 20023, the Rupee/Dollar exchange rate showed signs of firming up in view of the large foreign
inflows into the economy. With a view to facilitate external payments in a liberalized
regime, the new legislation FEMA was passed, which came into effect from 1 June 2000.
The FEMA, which replaced the FERA, reflected a shift in policy emphasis: from
conservation to management of foreign exchange consistent with the orderly evolution of
trade and payments and the foreign exchange markets; from a ‘citizenship’ basis to a
‘residency’ basis in the conduct of foreign exchange procedures, all under a transparent
framework promoting accountability. The RBI also set up the Clearing Corporation of
92
Op. cit p. 46
50
India Limited (CCIL)93 in 2001. The CCIL, by providing for guaranteed settlement of
transactions, is instrumental in lowering risks in Indian financial markets.
CCIL
commenced settlement of foreign exchange operations for inter-bank Rupee-Dollar spot
and forward trades from 12 November 2002 onwards.
E. Period of Capital Flows (Huge) – 2003-4 to 2007-8:
The Indian foreign exchange market had witnessed a massive surge in capital inflows since
2003-4.
With excess supply conditions prevailing, the Rupee generally exhibited an
appreciating trend against the US dollar during this period. The RBI had resorted to
sterilization operations to tackle the large inflows. Faced with the finite stock of the
Government of India securities with RBI, Market Stabilization Scheme (MSS) was
introduced in April 2004, wherein Government of India Dated Securities/Treasury Bills
was issued to absorb liquidity. Large scale purchases by the RBI to absorb excess supplies
in the foreign exchange market resulted in large accumulation of foreign exchange reserves
since end-March 2002. In addition, a number of other policy initiatives were periodically
taken to offset the expansionary impact of external flows on the domestic money supply.
There were a few instances when the Rupee came under pressure associated mainly with
FII outflows, global oil prices, and behaviour of the dollar in international markets. During
the financial year 2004-5, the Rupee was under pressure from mid-May onwards when the
excess supply situation changed because of the turbulence in equity markets on account of
political uncertainty, leading to outflow by FIIs and rising global oil prices. On 17 May
2004, when the stock market exhibited a record fall, the RBI, in order to avoid any spill
over to other market segments, for example, money, government and forex market,
released two separate press releases indicating the constitution of an Internal Task Force to
93
Op. cit p. 47
51
monitor the developments in financial markets and its willingness to provide liquidity.
These announcements managed to restore orderly conditions in the market on that day.
The rupee continued to remain under pressure almost till August 2004 during which period
it depreciated by 4.3 per cent against the US dollar. The RBI made net market sales of
US$ 2.7 billion during this period.
The pressure on the rupee started easing from
September 2004 onwards with the revival in FII flows, step-up in trade credits, and ECBs
by importers. Remittances from exporters and heavy FII inflows continued to provide
strength to the Rupee against the US dollar in the following months.
During 2005-6, orderly conditions generally prevailed in the foreign exchange market.94
Pressure had built up on the Rupee from end-August 2005 under the impact of oil prices,
sharp increase in the current account deficit and strong US dollar95. The exchange rate
moved to Rs. 46.33 per US dollar on 8 December 2005. With the revival of FII inflows
and weakening of the US dollar in the international markets, the Rupee strengthened
sharply beginning with the second half of December 2005, notwithstanding the IMD
redemptions. Sales of US$ 6.5 billion during December 2005 on account of redemption of
IMDs were recouped by purchases of US$ 10.8 billion during February-March 200696.
During 2006-7, the rupee initially depreciated against the US dollar reaching Rs. 46.97 on
19 July 2006, reflecting higher crude oil prices and FII outflows. The rupee, however,
strengthened thereafter on the back of moderation in crude oil prices, large capital inflows,
and weakness of the US dollar in the international markets to reach Rs. 43.14 per US dollar
on 28 March 2007. The trend of rupee appreciation continued during 2007-8 in view of
continuance of large capital inflows, fed rate cut, weakening of US dollar vis-à-vis other
94
The rupee witnessed some appreciation following the revaluation of the Chinese renminbi on 21 July
2005. The Rupee reached Rs. 43.56 per US dollar on 18 August 2005.
95
RBI Publications, Financial Stability, November 14, 2006
96
RBI Publications, Impact and Policy Responses in India, July 1 2006
52
major currencies and strong performance of the domestic economy. The RBI made net
market purchases of foreign exchange of US$ 26.8 billion during 2006- and US$ 78.2
billion during 2007-8. During January 2008, the RBI made net market purchases of US$
13.62 billion97, the highest purchase during any month in the current decade.
Consequently, the foreign exchange reserves rose substantially to cross US$ 300 billion by
end-March 2008. Since March 2008, however, there were some depreciation pressures on
the rupee-dollar exchange rate in view of rising global oil prices and domestic inflationary
pressures. The RBI, which had sold dollars last in December 2005, sold about US$ 1.5
billion during March 2008, after a gap of almost 27 months (though on a net basis, RBI
made purchases). India’s exchange rate is largely determined by domestic factors as
reflected in the weak correlation between cross-country currency returns.
However,
movement of the rupee vs. the dollar is influenced to a limited extent by the movement in
Euro and Pound Sterling.
The period since 2003-4 saw a number of measures undertaken to deepen the foreign
exchange market and impart flexibility to market participants, for example, residents and
non-residents allowed to book forward contracts and participate in various hedging
instruments for managing risks in foreign exchange market, and new hedging instruments
were made available. FIIs and NRIs98 permitted to trade in exchange traded derivative
contracts subject to conditions and so on. Besides, various liberalization measures were
undertaken with a view to enhance transparency and greater dissemination of information
to public. Simultaneously, procedural formalities were substantially minimized to avoid
paper work and reduce compliance burden, while ensuring that Know-Your-Customer
(KYC) guidelines are in place. Also, reflecting the RBI’s objective of a regulatory shift
97
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 49
Op. cit
98
53
from micro management of foreign exchange transactions to macro management of foreign
exchange flows, the Exchange Control Department (ECD) of the RBI was renamed as the
Foreign Exchange Department (FED) with effect from 31 January 2004.
The strength of India’s external sector along with comfortable foreign exchange reserves
provided the stage for further financial liberalization undertaken during this period: a
comprehensive review of guidelines for ECBs (2004) led to significant liberalization of
ECBs and capital account transactions were further liberalized guided by the Committee on
Fuller Capital Account Convertibility, 2006.
This period has the “Exchange rate pass-through to prices (inflation)” which can be seen in
the following lines in a nutshell.
Exchange Rate Pass-through to Inflation99: An important aspect of the linkage between
exchange rate changes with the domestic economy in the pass-through effect. Exchange
rate pass-through can be defined as the degree of change in domestic prices due to change
in exchange rates. Any movement of exchange rates is reflected as changes in import
prices denominated in the domestic currency. Subsequently, the changes in the import
prices find their way to producer and consumer prices. Pass-through elasticity’s are
defined as the percentage change of domestic prices (import, producer or consumer price)
resulting from a 1 per cent change of the exchange rate. If the response of import prices to
exchange rate movements is one to one, the pass-through is said to be complete or full. If
this condition is not met, then the pass-through is said to be incomplete or partial.
Factors Affecting Exchange Rate Pass-through100: The following are some of the
important determinants of pass-through suggested by literatures:

Low global inflation and its lower volatility
99
Op. cit p. 50
Op. cit
100
54

Volatility of exchange rate

Share of imports in the domestic consumption

Trade to GDP ratio

Composition of imports

Invoicing pattern of trade

Trade distortions from tariffs and quantitative restrictions
Exchange Rate Pass-through to Inflation in India101
Analysis of exchange rate pass-through to domestic prices for the period 1976 to 2004
revealed the following results:

10 per cent depreciation of the exchange rate increases whole-sale price by 0.4 per cent.
Almost 60 per cent of this pass-through takes place within one year while 80 per cent of
pass-through is completed within two years of a shock to the exchange rate

With regard to the sensitivity of inflation to exchange rate movements, it was estimated
that an increase of 10 per cent in import price inflation raises domestic inflation by up to
1.1 percentage points. The effect is the minimum for consumer price index inflation (0.5
percentage points) followed by GDP deflator (0.8 percentage points) and wholesale
inflation (1.1 percentage points)

The study also estimated that exchange rate depreciation has the expected effect of raising
domestic prices and the coefficient of exchange rate pass-through to domestic inflation
ranges between 8-17 basis points, that is a 10 per cent depreciation of the India rupee (visà-vis the US dollar) would, other things remaining unchanged, increased consumer
inflation by less than one percentage point and GDP deflator by 1.7 percentage points.
101
RBI Report on Currency and Finance 2003-04, Expert Committee Review, Chairman: Dr Y V Reddy
55

The import prices in rupee terms can change on account of movements in the import prices
in foreign currency or changes in exchange rate, or a combination of both. Segregating the
influences of import prices in foreign currency on domestic inflation from that of the
exchange rate movements could provide additional analytical insights in understanding the
inflation process. The empirical results from the Report on Currency and Finance 2003-4
showed some differences between the pass-through from import price to inflation and
exchange rate movements to domestic inflation. While import prices impacted domestic
inflation in the same year, the exchange rate movements seemed to affect WPI (Wholesale
Price Index) inflation with a lag of one year (two years in case of consumer price
inflation).

Another difference observed in the study was that the pass through from exchange rates to
inflation was somewhat larger than that of pass-through from import prices.
In this
context, it may be noted that most studies document that pass-through is high in a high
inflation environment

These estimates of the exchange rate pass-through are subject to a number of caveats.
First, the study period has been characterized by a significant opening up of the economy.
Second, the substantial decline in tariffs could have perhaps allowed domestic producers to
absorb some part of the exchange rate depreciation without any effect on their profitability
and non-tariff barriers could have reduced the exchange rate pass-through.

The study notes that the estimates of pass-through would need to be evaluated on an ongoing basis, before a definitive conclusion is reached.
The above results were also confirmed with the findings of a study102carried for the period
August 1991 to March 2005. The study estimated the pass-through coefficients and found
102
Khundrakpam, March 2007, Exchange Rate Pass-through in India.
56
that a 10 per cent change in exchange rate leads to change in final prices by about 0.6 per
cent in the short run and 0.9 per cent in the long run. The statistical tests on temporal
behaviour of pass-through obtained from rolling regressions show that, unlike in the case
of many countries, there was no evidence of decline in pass-through.
However, using the same methodology for the period April 1993 through June 2009, the
estimated results show greater pass-through. For the extended data period, both the shortrun and the long-run pass-through were found to be greater than that found in the earlier
study by Khundrakpam (2007). The result shows a 10 per cent change in exchange rate
increase domestic prices by 0.71 per cent in the short run and 0.99 per cent in the long run.
Based on the results of several studies for India, the exchange rate pass-through to
domestic prices for India is estimated to be ‘small’ can be taken as a result103.
F. Impact of Global Financial Turmoil – 2008-10104:
Financial markets in India, which remained largely orderly from April 2008 to August
2008, witnessed heightened volatility from mid-September in view of concerns on
deepening of the global financial crisis. Bankruptcy/sell-out/restructuring became more
rampant, spreading from mortgage lending institutions to systemically important financial
institutions and further to commercial banks and from the US to many European countries.
Funding pressures developed in the inter-bank money market, equity markets weakened,
and the rupee also came under pressure in the foreign exchange market. With a view to
maintaining orderly conditions in the foreign exchange market, the RBI announced in midSeptember 2008105 that it would continue to sell foreign exchange (US dollars) through
agent banks to augment supply in the domestic foreign exchange market or intervene
103
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 54
RBI Publications, Exchange Rate Policy and Modelling in India, February 25, 2010
105
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 55
104
57
directly to meet any demand-supply gaps. In the foreign exchange market, the Indian
rupee generally depreciated against major currencies during 2008-9. The exchange rate of
the rupee touched Rs. 50.10 per dollar on 27 October 2008 as compared with Rs. 39.99 per
dollar end-March 2008. The RBI scaled up its intervention operations during the month of
October 2008106. Despite a significant easing of crude oil prices and inflationary pressures
in the second half of the year, declining exports, and continued capital outflows led by the
global deleveraging process and the sustained strength of the US dollar against other major
currencies, continued to exert downward pressure on the rupee. With the spot exchange
rates moving in a wide range, the volatility of the exchange rates increased during this
period. However, with the return of some stability in international financial markets and
the relatively better growth performance of the Indian economy, there has been a revival in
foreign investment flows, especially FII investments, since the beginning of 2009-10.
Based on the exchange rate prevailing at the end of the financial year, the rupee
appreciated by around 13 per cent in 2009-10 compared to a depreciation of 21.5 per cent
in 2008-9. During the current year so far, up to 11 June 2010, the rupee depreciated by 3.6
per cent against the US dollar over end-March 2010.
Though there has been some
recovery in the forex turnover during 2009-10, it has not yet picked up to the pre-crisis
levels.
Several measures were undertaken by the RBI to ease the forex liquidity situation. A
rupee-dollar swap facility for Indian banks was introduced with effect from 7 November
2008 to give the Indian banks comfort in managing their short-term foreign funding
requirements. For funding the swaps, banks were also allowed to borrow under the LAF107
(Liquidity Adjustment Facility) for the corresponding tenor at the prevailing repo rate. The
106
Op. cit
Op. cit p. 56
107
58
forex swap facility, which was originally available till 30 June 2009, was extended up to
31 March 2010; however, this was discontinued in October 2009108.
The RBI also
continued with Special Market Operations (SMO) which were instituted in June 2008 to
meet the forex requirements of public sector Oil Marketing Companies (OMCs), taking
into account the then prevailing extraordinary situation in the money and foreign exchange
markets. These operations were largely (Rupee) liquidity neutral. Finally, measures to
ease forex liquidity also included those aimed at encouraging capital inflows, such as an
upward adjustment of the interest rate ceiling on foreign currency deposits by non-resident
Indians, substantially relaxing the ECB regime for corporates and allowing non-banking
financial companies and housing finance companies to access foreign borrowing.

Interest rate ceilings on FCNR (B) and NR (E) RA deposits were increased by 175 basis
points each from 16 September 2008 providing more flexibility to Indian banks to mobilize
higher foreign exchange resources109.

The constraints on external commercial borrowings were eased through relaxing various
conditions as mentioned below
i.
110
Enhancing all-in-cost ceilings for ECBs of average maturity periods of three to five
years and over five years to 300 basis points above LIBOR and 500 basis points above
LIBOR, respectively; subsequently, the requirement of all-in-cost ceilings under the
approval route was dispensed with until December 2009
ii.
Permitting ECBs up to US$ 500 million per borrower per financial year for rupee/foreign
currency expenditure for permissible end-uses under the automatic route
108
Op. cit
RBI Publications, ER Policy and Modelling, February 25, 2010
110
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 56
109
59
iii.
The definition of infrastructure sector for availing ECB was expanded to include the
mining, exploration and refinery sectors
iv.
Payment for obtaining license/permit for 3G spectrum by telecom companies was
classified as eligible end-use for the purpose of ECB111
v.
Dispensing with the requirement of minimum average maturity period of seven years for
ECB of more than US$ 100 million for rupee capital expenditure in the infrastructure
sector
vi.
Permitting borrowers to keep their ECB proceeds offshore or keep it with the overseas
branches/subsidiaries of Indian banks abroad or to remit these funds to India for credit to
their rupee accounts with AD category-I banks in India, pending utilisation for permissible
end-uses
vii.
Allowing non-banking financial companies (NBFCs) exclusively involved in financing of
the infrastructure sector to avail of ECBs under the approval route from multilateral/regional financial institutions and government owned development financial
institutions for on-lending to borrowers in the infrastructure sector, subject to compliance
with certain conditions; and enabling housing finance companies registered with the
National Housing Bank (NHB) to access ECBs subject to RBI approval and compliance to
regulations laid down by NB112

Access to short-term trade credit was facilitated by increasing the all-in-cost ceiling to sixmonth LIBOR plus 200 basis points for less than three years’ tenor.
Furthermore,
systemically important NBFCs not allowed hitherto, were permitted to raise short-term
foreign borrowings
111
Op. cit
Op. cit
112
60

Interest rate ceiling on export credit in foreign currency was increased to LIBOR plus 350
basis points subject to banks not levying any other charges

AD category-I banks113 were allowed to borrow funds from their head office, overseas
branches and correspondents and overdrafts in nostro accounts up to a limit of 50 per cent
of their unimpaired Tier I capital as at the close of the previous quarter or US$ 10 million,
whichever was higher as against the earlier limit of 25 per cent.

Indian companies were encouraged to prematurely buy back their Foreign Currency
Convertible Bonds (FCCBs) under the approval or automatic route, at prevailing discounts
rates, subject to compliance with certain stipulated conditions. Extension of FCCBs was
also permitted at the current all-in-cost for the relative maturity114.
The entire period since 1993, when we moved towards market determined exchange rates,
reveals that as a whole the Indian rupee depreciated against the dollar. The rupee also
depreciated against other major international currencies. Another important feature has
been the reduction in the volatility of the Indian exchange rate during the last few years.
Among all currencies worldwide, which are not on a nominal peg and certainly among all
emerging market economies, the volatility of the rupee-dollar rates has remained lower.
113
Op. cit
Op. cit
114
61
Table.2.4. Movements of Indian Rupee 1993-4 to 2010-11
Year
Range
(Rs per US$)
1993-4
31.21 – 31.49
Average
Exchange
Rate
(Rs per
US$)
31.37
1994-5
31.37 – 31.97
1995-6
Daily
Average
Coefficient
Appreciation/
of
Depreciation Variation
Standard
Deviation
0.03
0.1
0.05
31.40
- 0.11
0.3
0.12
31.37 – 37.95
33.46
- 6.17
5.8
0.56
1996-7
34.14 – 35.96
35.52
- 5.77
1.3
0.21
1997-8
35.70 – 40.36
37.18
- 4.47
4.2
0.37
1998-9
39.48 – 43.42
42.13
- 11.75
2.1
0.24
1999-
42.44 – 44.64
43.34
- 2.79
0.7
0.10
2000-1
43.61 – 46.89
45.71
- 5.19
2.3
0.15
2001-2
46.56 – 48.85
47.69
- 4.15
1.4
0.13
2002-3
47.51 – 49.06
48.40
- 1.48
0.9
0.07
2003-4
43.45 – 47.46
45.92
5.40
1.6
0.19
2004-5
43.36 – 46.46
44.95
2.17
2.3
0.31
2005-6
43.30 – 46.33
44.28
1.51
1.8
0.22
2006-7
43.14 – 46.97
45.28
- 2.22
2.0
0.89
2007-8
39.26 – 43.15
40.24
12.53
2.1
0.83
2008-9
39.89 – 52.09
43.92
- 12.36
7.8
3.58
2009-10
44.94 – 50.54
47.42
- 3.16
2.8
1.34
2010-11
44.03 – 47.58
45.58
4.04
2.3
1.03
2000
Source: Reserve Bank of India (www.rbi.org.in)
62
In recent years, the movement of the Indian rupee has been largely influenced by the
capital flow movements rather than traditional determinants like trade flows. However, the
rupee in real terms witnessed stability over the years despite volatility in capital flows and
trade flows. Thus, as can be observed maintaining orderly market conditions have been the
central theme of RBI’s exchange rate policy115. Despite several unexpected external and
domestic developments, India’s exchange rate performance is considered to be satisfactory.
The RBI has generally reacted promptly and swiftly to exchange market pressures through
a combination of monetary and regulatory measures along with direct and indirect
interventions and has preferred to withdraw from the market as soon as orderly conditions
have been restored.
The various episodes of volatility of the exchange rate have been managed in a flexible and
pragmatic manner. There are no set rules to handle such difficult situations. Rather, the
policy responses have varied depending upon the need of the situation.
mentioned
analysis
also
underscores
the
need
for
central
banks
The above
to
keep
instruments/policies in hand for use in difficult situations116. An important aspect of policy
response in India to the various episodes of volatility has been market intervention
combined with monetary and administrative measures to meet the threats to financial
stability, while complementary or parallel recourse has been taken to communications
through speeches, press releases (Reddy 2006). In line with the exchange rate policy, it
has also been observed that the Indian rupee is moving along with the economic
fundamentals in the post reform period.
115
RBI Publication, Exchange Rate Policy and Modelling in India, February 25 2010
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 59
116
63
Table.2.5. Trend in External Value of the Indian Rupee
Year
Trade Based
Base Year – 2004-5
REER117
% Variation
NEER118
% Variation
2005-6
103.10
- 3.1
102.24
- 2.2
2006-7
101.29
1.8
97.63
4.5
2007-8
108.52
- 7.1
104.75
- 7.3
2008-9
97.80
9.9
93.34
10.9
2009-10 (P)119
94.74
3.1
90.94
2.6
2010-11 (P)
102.04
- 7.7
93.56
- 2.9
Source: Reserve Bank of India and International financial Statistics, IMF 2011
2.5. RBI Intervention to Curb Volatility120:
RBI has been intervening to curb volatility arising due to demand-supply mismatch in the
domestic foreign exchange market as mentioned below
Table.2.6. RBI Intervention in the Foreign Exchange Market (US$ billion)
Year
Purchase
Sale
Net
Outstanding Net Forward Sales
/ Purchase (end-March)
2000-1
28.2
25.8
2.4
- 1.3
2001-2
22.8
15.8
7.1
- 0.4
2002-3
30.6
14.9
15.7
2.4
2003-4
55.4
24.9
30.5
1.4
2004-5
31.4
10.6
20.8
0
2005-6
15.2
7.1
8.1
0
2006-7
26.8
0
26.8
0
2007-8
79.7
1.5
78.2
14.7
2008-9
26.6
61.5
- 34.9
2.0
2009-10
5.1
7.6
2.5
0.4
2010-11
2.5
0.8
1.7
0.0
Source: Reserve Bank of India (www.rbi.org.in)
117
REER – Real Effective Exchange Rate
NEER – Nominal Effective Exchange Rate
119
P – Provisional
120
RBI Publication, Exchange Rate Policy and Modelling in India, February 25 2010
118
64
Sales in the foreign exchange market121 are generally guided by excess demand conditions
that may arise due to several factors. Similarly, the RBI purchases dollars from the market
when there is an excess supply pressure in market due to capital inflows. Demand-supply
mismatch proxied by the difference between the purchase and sale transactions in the
merchant segment of the spot market reveals a strong co-movement between demandsupply gap and intervention by the RBI. Thus, RBI has been prepared to make sales and
purchases of foreign currency in order to even out lumpy demand and supply in the
relatively thin foreign exchange market and to smooth jerky movements. However, such
intervention is generally not governed by any predetermined target or band around the
exchange rate.122
The volatility of rupee-dollar exchange rates123 remained low compared to other major
currencies as the RBI intervenes mostly through purchases/sales of the US dollar as given
below.
Table.2.7. Annualized Volatility124 of India Rupee vis-à-vis Major Currencies
(Per Cent)
Period
Currency
US Dollar
Euro
Pound Sterling Japanese Yen
121
2000
0.14
0.58
0.88
0.61
2001
0.13
0.54
0.77
0.67
2002
0.08
0.43
2.56
0.65
2003
0.14
0.56
0.69
0.52
2004
0.32
0.65
0.71
0.61
2005
0.22
0.47
0.52
0.43
2006
0.26
0.47
0.46
0.49
2007
0.37
0.49
0.47
0.81
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 161
Jalan 1999
123
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 162
124
Volatility is the standard deviation of per cent changes in exchange rates of Indian Rupee.
122
65
2008
0.68
1.03
0.96
1.36
2009
0.60
0.92
0.68
1.12
2010
0.52
0.65
0.65
0.92
Source: Reserve Bank of India (www.rbi.org.in)
Empirical evidence in the Indian case has generally suggested that in the present day
managed float regime of India, intervention has served as a potent instrument in containing
the magnitude of exchange rate volatility of the rupee. The intervention operations do not
influence the level of the rupee much.125 The intervention of RBI in order to neutralize the
impact of excess foreign exchange inflows enhanced the Foreign Currency Assets
(FCA)126 continuously. In order to offset the effect of increase in FCA on the monetary
base, the RBI has been continuously mopping up the excess liquidity from the system
through open market operation. It is however, pertinent to note that RBI’s intervention in
the foreign exchange market has been relatively small in terms of volume (less than 1 per
cent during last few years). The largest gross intervention by the RBI of India was in
2003-4 accounting for about 4 per cent of the turnover in the foreign exchange market127.
The extent of intervention by the RBI in the foreign exchange market also remains low 128
when compared with other EMEs, suggesting the predominant role of market forces in
determination of the external value of the rupee
125
Pattanaik and Sahoo, South Asia Economic Journal, February 7 2001
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 164
127
RBI Publications, ER Policy and Modelling, 2010
128
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 164
126
66
Table.2.8. Extent of RBI Intervention in Foreign Exchange Market
RBI Intervention in FOREX Turnover
Purchase + Sale /
Year
FOREX market
($ Billion)
Turnover
(In Per Cent)129
(Purchase + Sales)
($ Billion)
2005-6
22.3
4413
0.50
2006-7
26.8
6571
0.40
2007-8
81.2
12249
0.66
2008-9
88.1
12092
0.72
2009-10
12.7
10355
0.12
2010-11
3.3
13695
0.02
Source: Reserve Bank of India (www.rbi.org.in)
Another important feature associated with management of exchange rate is the adoption of
prudent foreign exchange reserve management policies. Any change in the level of forex
reserves is largely the outcome of the RBI’s intervention in the foreign exchange market to
smoothen excessive exchange rate volatility and the valuation changes that result from
movements in the exchange rate of the US dollar against other currencies. Large capital
flows witnessed in the current decade are reflected in large accumulation of foreign
exchange reserves. During 2008-9, widening of the current account deficit coupled with
net capital outflows resulted in the drawdown of foreign exchange reserves of US$ 57.7
billion (including valuation), but the reserves increased by US$ 279.1 billion as at endMarch 2010130. The substantial decline in reserves during 2008-9 created some pressure
on the foreign exchange market, but India continued to be one of the leading holders of
foreign exchange reserves among the major EMEs, which helped it deal with severe
external shocks131.
129
Op. cit p. 165
Op. cit
131
Op. cit
130
67
Table.2.9. India’s Foreign Exchange Reserves (US$ million)
As at end
FCA
GOLD
SDRs
RTP
Total
Reserves132
March 1
2000-1
39,554
2,725
2
-
42,281
2001-2
51,049
3,074
10
-
54,106
2002-3
71,890
3,534
4
672
76,100
2003-4
1,07,448
4,198
2
1,311
1,12,959
2004-5
1,35,571
4,500
5
1,438
1,41,514
2005-6
1,45,108
5,755
3
756
1,51,622
2006-7
1,91,924
6,784
2
469
1,99,179
2007-8
2,99,230
10,039
18
436
3,09,723
2008-9
2,41,426
9,577
1
981
2,51,985
2009-10
2,54,685
17,986
5,006
1,380
2,79,057
2010-11
2,74,330
22,972
4,569
2,947
3,04,818
Source: Reserve Bank of India, August 5, 2011 (www.rbi.org.in)
2.6. Forex Structure and Turnover133:
The Indian foreign exchange market is a decentralized multiple dealership market
comprising two segments, the spot and the derivatives market 134. In a spot transaction,
currencies are traded at the prevailing rates and the settlement or value date is two business
days ahead. The two-day period gives adequate bank accounts at home and abroad.
Derivatives market encompasses forwards, swaps and options.
The typical forward
contract is for one month, three months or six months with three months being most
common. Forward contracts for longer periods are not as common because they involve
greater uncertainty. A swap transaction in the foreign exchange market is a combination of
132
Op. cit p. 166
Op. cit
134
Op. cit p. 61
133
68
a spot and a forward transaction in the opposite direction. As in case of other EMEs the
spot market remains an important segment of the Indian Foreign exchange market. With
the Indian economy getting exposed to risks arising out of changes in exchange rates, the
derivative segment of the foreign exchange market has also strengthened and the activity in
this segment in gradually rising. Players in the Indian market include135:
a. ADs, mostly banks who are authorized to deal in foreign exchange136
b. Foreign exchange brokers who act as intermediaries between counterparties,
matching buying and selling orders and
c. Customers, individuals and corporates who need foreign exchange for trade and
investment purposes.
Though customers are a major player in the foreign exchange market, but for all practical
purposes they depend on ADs and brokers. In the spot foreign exchange market, earlier
foreign exchange transactions were dominated by brokers, but the situation has changed
with evolving market conditions as now the transactions are dominated by ADs. Brokers
continue to dominate the derivatives market. The RBI, like other central banks, is a market
participant who uses foreign exchange to manage reserves and intervenes to ensure orderly
market conditions.
The customer segment of the spot market in India essentially reflects the transactions
reported in the balance of payments, both current and capital account 137. During the
decade of the 1980s and 1990s, current account transactions such as exports, imports,
135
Op. cit p. 62
ADs have been divided into different categories: (a) All scheduled commercial banks, which include Public
Sector banks, private sector banks and foreign banks operating in India belong to category I of ADs, (b) All
upgraded full-fledged money changers (FFMCs), and select Regional rural banks and co-operative banks
belong to category II of ADs and (c) Select financial institutions such as EXIM Bank belong to Category III of
ADs.
137
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 63
136
69
invisible receipts and payments were the major sources of supply and demand in the
foreign exchange market. Over the last five years, however, the daily supply and demand
in the foreign exchange market is being increasingly determined by transactions in the
capital account such as foreign direct investment (FDI) to India and by India, inflows and
outflows of portfolio investment138. ECBs and their amortization, non-resident deposit
inflows and redemptions. It needs to be observed that in India, with the government
having no foreign currency account, the external aid received by the Government comes
directly to the reserves and the RBI releases the required rupee funds139140. Hence, this
particular source of supply of foreign exchange, for example, external aid, does not go to
the market and to that extent does not reflect itself in the true determination of the value of
the rupee.
Related Institutional Bodies:
The Foreign Exchange Dealers Association of India
(FEDAI) plays a special role in the foreign exchange market as a developmental agency for
smooth and speedy growth of the foreign exchange market in all its aspects. All ADs are
required to become members of FEDAI and to execute an undertaking to the effect that
they would abide by the terms and conditions stipulated by FEDAI for making foreign
transactions. The FEDAI is also the accrediting authority for the foreign exchange brokers
in the inter-bank foreign exchange market.
The Clearing Corporation of India Limited (CCIL) set up in 2001 is responsible for the
settlement of trades in the Indian financial markets141. It acts as a central counterparty to
the trades done by its members, thereby absorbing their risk exposure from failed trades
138
Op. cit p. 63
RBI FEMA and Foreign Exchange Notification: October 5, 2009
140
RBI’s Master Circular on Risk Management and Inter-Bank Dealings, July 1, 2011
141
RBI Publications, Financial Stability, November 14, 2006
139
70
arising out of defaulters by their counter parties. The CCIL has commenced settlement of
foreign exchange operations for inter-bank USD/INR cash and tom trades from 5 February
2004. CCIL undertakes settlement of foreign exchange trades on a multilateral net basis
through a process of innovation and all spot, cash and tom transactions are guaranteed for
settlement from the trade date.142 The CCIL’s intermediation143 provides to its members
benefits such as risk mitigation with improved efficiency, lower operational cost and easier
reconciliation of accounts with correspondents.
Hedging Instruments144: The foreign exchange market in India today is equipped with
several derivative instruments.
Various informal forms of derivatives contracts have
existed since time immemorial though the formal introduction of a variety of instruments
in the foreign exchange derivatives market started only the post-reform period, especially
since the mid-1990s. These derivative instruments have been cautiously introduced as part
of the reforms in a phased manner, both for product diversity and more importantly as a
risk management tool. Recognizing the relatively beginning stage of the foreign exchange
market then with the lack of capabilities to handle massive speculation, the “underlying
exposure” criteria had been imposed as a prerequisite. Exporters and importers were
permitted to book forward contracts on the basis of a declaration of exposure and past
performance.
142
Every eligible foreign exchange contract, entered into between members, gets novated or replaced by
two new contracts – between CCIL and each of the two parties, respectively. Following the multilateral
netting procedures, the net amount payable to or receivable from CCIL in each currency is arrived at
member-wise. The Rupee leg is settled through the members’ current accounts with the RBI and the USD
leg through CCIL’s account with the Settlement Bank at New York. CCIL sets limits for each member bank
on the basis of certain parameters such as Member’s credit rating, Net Worth, Asset Value and
Management Quality.
143
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 64
144
Op. cit
71
The foreign exchange derivatives products that are available today in India Financial
Markets can be grouped into three broad segments, viz., forwards, options (foreign
currency rupee options and cross currency options) and currency swaps (foreign currency
rupee swaps and cross currency swaps)145. Forwards and foreign exchange swaps are
relatively more popular derivatives instruments in the Indian market. The cancellation and
rebooking of forward contracts and swaps however have been regulated in India with an
intention that excessive cancellation and rebooking should not add to the volatility of the
rupee. The Reserve Bank has been taking measures towards eliminating such regulations.
The use of options in India is gradually picking up, though its volume is not much and bidoffer spreads are quite wide, indicating that the market is not very liquid yet.
In view of the experience gained by market participants in using various hedging
instruments such as forward foreign exchange contracts, swaps and options and
improvements in liquidity and accounting systems relating to these instruments a RBISEBI Standing Technical Committee on Exchange Traded Currency Futures was
constituted to suggest a suitable framework to operationalize currency futures.
Accordingly, guidelines were issued to allow resident individuals to trade currency futures
in recognized stock / new exchanges. The directions permit scheduled commercial banks
(AD Category-I) to become trading /clearing members of the currency derivatives segment
set up by recognized stock exchanges, subject to their fulfilling certain prudential
requirements. The exchange traded currency futures started trading first on the National
Stock Exchange on 29 August 2008, followed by the Bombay Stock Exchange and the
145
Op. cit
72
Multi Commodity Exchange, Stock Exchange (MCX-SX) on 1 October 2008 and 7
October 2008, respectively146.
Rupee Trading Platform147: Spot trading in the Indian foreign exchange market takes
place via the following platforms – FX CLEAR of the CCIL set up since August 2003, FX
Direct a foreign exchange trading platform launched by IBS Foreign Exchange (P) Ltd., in
2002 in collaboration with Financial Technologies (India) Ltd., and two other platform by
the Reuters, the D2 Platform and the Reuters Market Data System (RMDS) trading
platform.
These trading platforms cover the US dollar-Indian rupee (USD/INR)
transactions and transactions in major cross currencies (EUR/USD, USD/JPY, GBP/USD,
etc.), though USD/INR constitutes the majority of the foreign exchange transactions in
terms of value. It is the FX CLEAR of the CCIL that remains the widely used trading
platform in India. In the Forward market, trading takes place both in an Over The Counter
(OTC) and in an exchange traded market with brokers playing an important role. The
trading platforms include FX CLEAR of the CCIL, RMDS from Reuters and FX Direct of
the IBS.
Foreign Exchange Market Turnover148: Trading volumes in the Indian Foreign Exchange
Market have grown significantly over the last few years. The daily average turnover has
seen an almost 10-fold rise during the 10 year period, from 1997-8 to 2007-8, from US$ 5
billion to US$ 48 billion. However, it displayed a declining trend during the crisis period
2008-9 and 2009-10 when the daily average turnover stood at US$ 47.6 billion and US$
10.8 billion, respectively. The details are mentioned in the following table.
146
Op. cit p. 65
Op. cit
148
RBI Publications, Structure of the Indian Foreign Exchange Market and Turnover, February 25, 2010
147
73
Table.2.10. Turnover in Foreign Exchange Market
Merchant
Turnover in
US$ Billion
Inter-bank
Total
1997-8
210
1,096
1,305
57.5
50.4
51.6
1998-9
246
1,057
1,303
51.1
48.6
49.1
1999-2000
244
898
1,142
60.6
49.2
51.6
2000-1
269
1,118
1,387
62.9
43.8
47.5
2001-2
257
1,165
1,422
61.8
38.1
42.4
2002-3
325
1,236
1,560
57.0
42.0
45.1
2003-4
491
1,628
2,118
52.5
48.2
49.2
2004-5
705
2,188
2,892
48.2
50.5
50.0
2005-6
1,220
3,192
4,413
45.0
52.6
50.5
2006-7
1,798
4,773
6,571
46.1
54.1
51.9
2007-8
3,545
8,704
12,249
45.9
51.2
49.7
2008-9
3,231
8,861
12,092
37.7
48.0
45.2
2009-10
2,710
7,645
10,355
38.9
53.9
50.0
2010-11
3,647
10,049
13,695
38.0
53.2
49.2
Year
Share of Spot Turnover in
Per Cent149
Merchant Inter-bank Total
Source: Reserve Bank of India (www.rbi.org.in)
During 2009-10 (April-July)150, the daily average turnover picked up to reach US$ 49.8
billion. The pick-up in foreign exchange turnover has been particularly sharp from 2003-4
onwards, since when there has been a massive surge in capital inflows. A look at segments
in the Indian foreign exchange market reveals that the spot market remains the most
important foreign exchange market segment, accounting for about 50 per cent of the total
turnover. However, its share has seen a marginal decline in the recent past mainly due to a
pick-up in turnover in the derivatives segment. The merchant segment of the spot market
149
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 66
Op. cit p. 67
150
74
is generally dominated by the Government of India, select public sector units such as IOC
(Indian Oil Corporation and the FIIs. It is noteworthy that the increase in foreign exchange
market turnover in India between April 2004 and April 2007 was the highest amongst the
54 countries covered in the Triennail Central Bank Survey of Foreign Exchange and
Derivatives Market Activity conducted by the Bank for International Settlements
(BIS)151. According to the survey, daily average turnover in India jumped more than
fivefold from US$ 7 billion in April 2004 to US$ 38 billion in April 2007. Global turnover
over the same period rose by only 72 per cent from US$ 1.9 trillion to US$ 3.3 trillion.
Reflecting on these trends, the share of India in global foreign exchange market turnover
trebled (threefold) from 0.3 per cent in April 2004 to 0.9 per cent in April 2007. However,
the daily average turnover in India declined to US$ 27 billion in April 2010 with a share of
0.5 per cent of the global turnover152.
Table.2.11. Global Foreign Exchange Market Turnover
(Daily Averages in April, in Billions of US Dollars)
Details
Spot Transactions
2001
386
2004
631
2007
1,005
2010
1,490
Outright forwards
130
209
362
475
Foreign exchange swaps
656
954
1,714
1,765
Currency Swaps
7
21
31
43
FX Options and Other products
60
119
212
207
Estimated gaps in reporting
28
107
129
Total ‘traditional’ turnover
1,239
1.934
3,324
MEMO
151
Op. cit
Op. cit
152
3,981
75
Turnover at April 2010 exchange rates
1,505
2,040
3,370
3,981
Total forex turnover of India
3.4
6.9
38.4
27.4
India’s Share in Percentage
(0.2)
(0.3)
(0.9)
(0.5)
Source: Survey Report on Foreign Exchange and Derivatives Market Activity conducted
by Triennial Central Bank, April 2010.
In April 2010, the average daily global market turnover rose by 20 per cent over April
2007 to US$ 4.0 trillion. It was seen that foreign exchange market activity became more
global, with cross-border transactions representing 65 per cent of trading activity in April
2010 while local transactions accounted for 35 per cent. The percentage share of the US $
has continued its slow decline witnessed since the April 2001 survey, while the Euro and
the Japanese Yen have gained relative to April 2007153. Among the 10 most actively
traded currencies, the Australian and Canadian dollars both increased in market share,
while the Pound Sterling and the Swiss Franc lost ground. The market share of emerging
market currencies increased, with the biggest gains for the Turkish lira and Korean won.
The relative ranking for foreign exchange trading centres has changed slightly from the
previous survey. Banks located in the UK accounted for 36.7 per cent, against 34.6 per
cent in 2007, of all foreign exchange market turnovers, followed by the US (18 per cent),
Japan (6 per cent), Singapore (5 per cent), Switzerland (5 per cent), Hong Kong SAR (5
per cent) and Australia (4 per cent)154.
Within the emerging market countries, traditional foreign exchange trading in Asian
currencies generally recorded much faster growth than the global total between 2004 and
2007. Growth rates for Chinese renmimbi, Hong Kong dollar, Indian rupee, Philippines
153
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 68
Op. cit
154
76
peso and Singaporean dollar exceeded 100 per cent between April 2004 and April 2007 as
shown below155.
Table.2.12. Foreign Exchange Market Turnover in Select Economies Currencies
(Daily Averages in Billions of US $ till April 2010)
Country / Currency
2001
2004
2007
2010
Chinese Renmimbi
0.0
0.6
9.6
19.8
Hong Kong Dollar
68.4
106.0
181.0
237.6
Indian Rupee
3.4
6.9
38.4
27.4
Indonesian Rupiah
3.9
2.3
3.0
3.4
Korean Won
9.8
20.5
35.2
43.8
Mexican Peso
8.6
15.3
15.3
17.0
Philippine Peso
1.1
0.7
2.3
5.0
Russian Rouble
9.6
29.8
50.2
41.7
Singapore Dollar
103.7
133.6
241.8
266.0
Turkish Lira
1.0
3.5
4.1
16.8
Thai Baht
1.9
3.1
6.3
7.4
Source: Survey Report on Foreign Exchange and Derivatives Market Activity conducted
by Triennial Central Bank, April 2010
Looking at some of the comparable indicators, the turnover in the foreign exchange market
has been about 7.2 times higher than the size of India’s balance of payments156. With the
deepening of the foreign exchange market and increased turnover, income of commercial
banks through treasury operations has increased considerable.
155
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 69
Op. cit
156
77
Table.2.13. Foreign Exchange Market Turnover and BOP Size
Foreign Exchange
Market: Annual
Turnover
($ Billions)
BOP Size
($ Billions)
Foreign
Currency
Assets
($ Billions)
Forex
Market /
BOP Size
2000-1
1,387
258
39.6
5.4
Forex
Market /
Foreign
Currency
Assets157
35.0
2001-2
1,422
237
51.0
6.0
28.0
2002-3
1,560
267
71.9
5.8
21.7
2003-4
2,118
361
107.4
5.9
19.7
2004-5
2,892
481
135.6
6.0
21.3
2005-6
4,413
663
145.1
6.7
30.4
2006-7
6,571
918
191.9
7.2
34.2
2007-8
12,249
1,416
299.2
8.7
40.9
2008-9
12,092
1,351
241.4
9.0
50.1
2009-10
10,355
1,369
254.7
7.6
40.7
2010-11
13,695
1,876
274.3
7.3
78.6
Year
Source: Reserve Bank of India (www.rbi.org.in)
Behaviour of Forward Premia158: Apart from the spot segment, the foreign exchange
market in India trades in derivatives such as forwards, swaps and options. The typical
forward contract is for one month, three months or six months with three months being the
most common. Forward contracts for longer periods are not as common because of greater
uncertainty. A swap transaction in the foreign exchange market is a combination of a spot
and a forward in the opposite direction. Foreign exchange swaps account for the largest
share of the total derivatives turnover in India followed by forwards and options159. With
greater opening up of the capital account, the forward premia is gradually getting aligned,
157
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 69
Op. cit
159
Op. cit
158
78
with the interest rate differential reflecting growing market efficiency. However, in the
Indian context, the forward price of the rupee is not essentially determined by the interest
rate differentials, but it is also significantly influenced by160,
a. Supply and demand of forward US dollars
b. Interest differentials and expectations of future interest rates and
c. Expectations of future US dollar-rupee exchange rate.
The deviation of the forward premia from the interest parity condition appears to increase
during volatile conditions in the spot segment of the foreign exchange market. In recent
times, reflecting the build-up of foreign exchange reserves, the strong capital flows and the
confidence in the Indian economy, forward premia have come down and are increasingly
more reflective of the market sentiment.
Empirical studies in the Indian context reveal that foreign exchange premia of US dollar
vis-à-vis the Indian rupee is driven to a large extent by the interest rate differential in the
inter-bank market of the two economies combined in FII flows, current account balance, as
well as changes in exchange rates of US$ vis-à-vis the India rupees.161
Further empirical analysis for the period January 1995-December 2006 has shown that the
ability of forward rates to correctly predict the future spot rates has improved over time
and there is co-integration between the forward rate and the future spot rate.162
Market Efficiency163: With the exchange rate primarily getting determined in the market,
the issue of foreign exchange market efficiency has assumed importance for India in recent
160
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 70
RBI Publications, Report on Currency and Finance, Sharma and Mitra 2006
162
RBI Report on Currency and Finance (RCF 2005-6)
163
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 72
161
79
years. There is evidence of enhanced efficiency in the foreign exchange market as is
reflected in the low bid-ask spreads. The bid-ask spread of Rs/US$ market has almost
converged with that of other major currencies in the international market. On some
occasions, in fact, the bid-ask spread of Rs/US$ market was lower than that of some major
currencies. In the Indian context the spread is almost flat and very low. In India, the
normal spot market quote has spread of 0.25 of a paisa to 1 paisa while swap quotes are
available at 1 to 2 paise spread164. A closer look at the bid-ask spread in the rupee-US
dollar spot market reveals that during the initial phase of market development (that is, till
the mid – 1990s), the spread was high and volatile due to thin market participation with
unidirectional behaviour of market participants.165
Along with the onshore spot and
forward markets, the offshore non-deliverable forward (NDF) market is also assuming
importance.
The NDFs are synthetic foreign currency forward contracts on non-
convertible or restricted currencies traded over the counter outside the direct jurisdiction of
the respective authorities. These derivatives allow multinational corporations, portfolio
investors, hedge funds and proprietary foreign exchange accounts of commercial and
investment banks to hedge or take speculative positions in local currencies.
Today India166 is equipped with several derivative instruments, viz., forwards, options
(foreign currency rupee options and cross currency options) and currency swaps (foreign
currency rupee swaps and cross currency swaps). Various informal forms of derivatives
contracts have existed since time immemorial though the formal introduction of a variety
of instruments in the foreign exchange derivatives market started only in the post-reform
period, especially since the mid-1990s. These derivative instruments have been cautiously
164
Op. cit
Reserve Bank of India – Bid-Ask Spread in Spot Foreign Exchange Market
166
Exchange Rate Policy and Modelling In India (2012), Pami Dua, Rajiv Ranjan, Oxford Press, p. 74
165
80
introduced as part of the reforms in a phased manner, both for product diversity and more
importantly as a risk management tool. Market Infrastructure in terms of the trading
platform has seen considerable improvement. All these have reflected in the market
liquidity that has gone up significantly and market efficiency that has improved over the
years.
2.7. Scope of Hedging - Foreign exchange risks faced by firms167:
Firms dealing in multiple currencies face a risk (an unanticipated gain/loss) on account of
sudden/unanticipated changes in exchange rates, quantified in terms of exposures.
Exposure is defined as a contracted, projected or contingent cash flow whose magnitude is
not certain at the moment and depends on the value of the foreign exchange rates. The
process of identifying risks faced by the firm and implementing the process of protection
from these risks by financial or operational hedging is defined as foreign exchange risk
management.
Kinds of Foreign Exchange Exposure168
Risk management techniques vary with the type of exposure (accounting or economic) and
term of exposure. Accounting exposure, also called translation exposure, results from the
need to restate foreign subsidiaries’ financial statements into the parent’s reporting
currency and is the sensitivity of net income to the variation in the exchange rate between a
foreign subsidiary and its parent. Economic exposure is the extent to which a firm's
market value, in any particular currency, is sensitive to unexpected changes in foreign
currency. Currency fluctuations affect the value of the firm’s operating cash flows, income
167
Giddy, Ian and Dufey (1992), Gunter, The Management of Foreign Exchange Risk, New York University
Op. cit
168
81
statement, and competitive position, hence market share and stock price. Currency
fluctuations also affect a firm's balance sheet by changing the value of the firm's assets and
liabilities, accounts payable, accounts receivables, inventory, loans in foreign currency,
investments (CDs) in foreign banks; this type of economic exposure is called balance sheet
exposure. Transaction Exposure is a form of short term economic exposure due to fixed
price contracting in an atmosphere of exchange-rate volatility.
The most common
definition of the measure of exchange-rate exposure is the sensitivity of the value of the
firm, proxied by the firm’s stock return, to an unanticipated change in an exchange rate.
This is calculated by using the partial derivative function where the dependant variable is
the firm’s value and the independent variable is the exchange rate169.
Necessity of managing foreign exchange risk170
A key assumption in the concept of foreign exchange risk is that exchange rate changes are
not predictable and that this is determined by how efficient the markets for foreign
exchange are. Research in the area of efficiency of foreign exchange markets has thus far
been able to establish only a weak form of the efficient market hypothesis conclusively
which implies that successive changes in exchange rates cannot be predicted by analysing
the historical sequence of exchange rates. However, when the efficient markets theory is
applied to the foreign exchange market under floating exchange rates there is some
evidence to suggest that the present prices properly reflect all available information171.
This implies that exchange rates react to new information in an immediate and unbiased
fashion, so that no one party can make a profit by this information and in any case,
169
“Exposure to Currency Risk: Definition and Measurement”, Financial Management Association
International Journal, Adler and Dumas, Vol. 13, No.2, pp. 41-50, Summer 1984
170
Op. cit
171
Giddy and Dufey, 1992, The Management of Foreign Exchange Risk, New York University
82
information on direction of the rates arrives randomly so exchange rates also fluctuate
randomly. It implies that foreign exchange risk management cannot be done away with by
employing resources to predict exchange rate changes.
Hedging as a tool to manage foreign exchange risk172
There is a spectrum of opinions regarding foreign exchange hedging. Some firms feel
hedging techniques are speculative or do not fall in their area of expertise and hence do not
venture into hedging practices. Other firms are unaware of being exposed to foreign
exchange risks. There are a set of firms who only hedge some of their risks, while others
are aware of the various risks they face, but are unaware of the methods to guard the firm
against the risk. There is yet another set of companies who believe shareholder value
cannot be increased by hedging the firm’s foreign exchange risks as shareholders can
themselves individually hedge themselves against the same using instruments like forward
contracts available in the market or diversify such risks out by manipulating their
portfolio173.
There are some explanations backed by theory about the irrelevance of managing the risk
of change in exchange rates. For example, the International Fisher effect states that
exchange rates changes are balanced out by interest rate changes, the Purchasing Power
Parity theory suggests that exchange rate changes will be offset by changes in relative price
indices/inflation since the Law of One Price should hold174. Both these theories suggest
that exchange rate changes are evened out in some form or the other.
172
“Hedging Strategies against foreign exchange risk using options”, a Management Research Project, 2008
Giddy and Dufey (1992), The Management of Foreign Exchange Risk, New York University
174
“Exposure to Currency Risk: Definition and Measurement”, Financial Management Association
International Journal, Adler and Dumas, Vol. 13, No.2, pp. 41-50, Summer 1984
173
83
Also, the Unbiased Forward Rate theory suggests that locking in the forward exchange rate
offers the same expected return and is an unbiased indicator of the future spot rate. But
these theories are perfectly played out in perfect markets under homogeneous tax regimes.
Also, exchange rate-linked changes in factors like inflation and interest rates take time to
adjust and in the meanwhile firms stand to lose out on adverse movements in the exchange
rates.
The existence of different kinds of market imperfections, such as incomplete
financial markets, positive transaction and information costs, probability of financial
distress, and agency costs and restrictions on free trade make foreign exchange
management an appropriate concern for corporate management175. It has also been argued
that a hedged firm, being less risky can secure debt more easily and this enjoy a tax
advantage (interest is excluded from tax while dividends are taxed). This would negate the
Modigliani-Miller proposition as shareholders cannot duplicate such tax advantages. The
MM argument that shareholders can hedge on their own is also not valid on account of
high transaction costs and lack of knowledge about financial manipulations on the part of
shareholders. There is also a vast pool of research that proves the efficacy of managing
foreign exchange risks and a significant amount of evidence showing the reduction of
exposure with the use of tools for managing these exposures. In one of the more recent
studies, the researchers176 use a multivariate analysis on a sample of S&P 500 nonfinancial firms and calculate a firms exchange-rate exposure using the ratio of foreign sales
to total sales as a proxy and isolate the impact of use of foreign currency derivatives (part
of foreign exchange risk management) on a firm’s foreign exchange exposures. They find a
statistically significant association between the absolute value of the exposures and the
175
Op. cit
Corporate Governance and the Hedging Premium around the World, Allayanis and Ofek, 2001
176
84
(absolute value) of the percentage use of foreign currency derivatives and prove that the
use of derivatives in fact reduce exposure.
Foreign Exchange Risk Management Framework177
Once a firm recognizes its exposure, it then has to deploy resources in managing it. A
heuristic for firms to manage this risk effectively is presented below which can be
modified to suit firm-specific needs i.e. some or all the following tools could be used.
Forecasts178: After determining its exposure, the first step for a firm is to develop a
forecast on the market trends and what the main direction/trend is going to be on the
foreign exchange rates. The period for forecasts is typically 6 months. It is important to
base the forecasts on valid assumptions. Along with identifying trends, a probability should
be estimated for the forecast coming true as well as how much the change would be.
Risk Estimation179: Based on the forecast, a measure of the Value at Risk (the actual
profit or loss for a move in rates according to the forecast) and the probability of this risk
should be ascertained. The risk that a transaction would fail due to market-specific
problems should be taken into account. Finally, the Systems Risk that can arise due to
inadequacies such as reporting gaps and implementation gaps in the firms’ exposure
management system should be estimated.
Benchmarking180: Given the exposures and the risk estimates, the firm has to set its limits
for handling foreign exchange exposure. The firm also has to decide whether to manage its
177
“Exposure to Currency Risk: Definition and Measurement”, Financial Management Association
International Journal, Adler and Dumas, Vol. 13, No.2, pp. 41-50, Summer 1984
178
Op. cit
179
Op. cit
180
Op. cit
85
exposures on a cost centre or profit centre basis. A cost centre approach is a defensive one
and the main aim is ensure that cash flows of a firm are not adversely affected beyond a
point. A profit centre approach on the other hand is a more aggressive approach where the
firm decides to generate a net profit on its exposure over time.
Hedging181: Based on the limits a firm set for itself to manage exposure, the firms then
decides an appropriate hedging strategy. There are various financial instruments available
for the firm to choose from: futures, forwards, options and swaps and issue of foreign debt.
Hedging strategies and instruments are explored in a section.
Stop Loss182: The firms risk management decisions are based on forecasts which are but
estimates of reasonably unpredictable trends. It is imperative to have stop loss
arrangements in order to rescue the firm if the forecasts turn out wrong. For this, there
should be certain monitoring systems in place to detect critical levels in the foreign
exchange rates for appropriate measure to be taken.
Reporting and Review183: Risk management policies are typically subjected to review
based on periodic reporting. The reports mainly include profit/ loss status on open
contracts after marking to market, the actual exchange/ interest rate achieved on each
exposure and profitability vis-à-vis the benchmark and the expected changes in overall
exposure due to forecasted exchange/ interest rate movements. The review analyses
whether the benchmarks set are valid and effective in controlling the exposures, what the
market trends are and finally whether the overall strategy is working or needs change.
181
Op. cit
Op. cit
183
Op. cit
182
86
Hedging Strategies/ Instruments184
A derivative is a financial contract whose value is derived from the value of some other
financial asset, such as a stock price, a commodity price, an exchange rate, an interest rate,
or even an index of prices. The main role of derivatives is that they reallocate risk among
financial market participants, help to make financial markets more complete. This section
outlines the hedging strategies using derivatives with foreign exchange being the only risk
assumed.
Forwards185: A forward is a made-to-measure agreement between two parties to buy/sell a
specified amount of a currency at a specified rate on a particular date in the future. The
depreciation of the receivable currency is hedged against by selling a currency forward. If
the risk is that of a currency appreciation (if the firm has to buy that currency in future say
for import), it can hedge by buying the currency forward. The main advantage of a forward
is that it can be tailored to the specific needs of the firm and an exact hedge can be
obtained. On the downside, these contracts are not marketable, they can’t be sold to
another party when they are no longer required and are binding.
Futures186: A futures contract is similar to the forward contract but is more liquid because
it is traded in an organized exchange i.e. the futures market. Depreciation of a currency can
be hedged by selling futures and appreciation can be hedged by buying futures.
Advantages of futures are that there is a central market for futures which eliminates the
problem of double coincidence. Futures require a small initial outlay (a proportion of the
184
“Exposure to Currency Risk: Definition and Measurement”, Financial Management Association
International Journal, Adler and Dumas, Vol. 13, No.2, pp. 41-50, Summer 1984
185
Allayannis, George, Eli Ofek (2001), Exchange rate exposure, hedging and the use of foreign currency
derivatives, London, Middlesex University Business School.
186
Op. cit
87
value of the future) with which significant amounts of money can be gained or lost with the
actual forwards price fluctuations. This provides a sort of leverage. As mentioned earlier,
the tailorability of the futures contract is limited i.e. only standard denominations of money
can be bought instead of the exact amounts that are bought in forward contracts.
Options187: A currency Option is a contract giving the right, not the obligation, to buy or
sell a specific quantity of one foreign currency in exchange for another at a fixed price;
called the Exercise Price or Strike Price. The fixed nature of the exercise price reduces the
uncertainty of exchange rate changes and limits the losses of open currency positions.
Options are particularly suited as a hedging tool for contingent cash flows, as is the case in
bidding processes. Call Options are used if the risk is an upward trend in price (of the
currency), while Put Options are used if the risk is a downward trend.
Swaps188: A swap is a foreign currency contract whereby the buyer and seller exchange
equal initial principal amounts of two different currencies at the spot rate. The buyer and
seller exchange fixed or floating rate interest payments in their respective swapped
currencies over the term of the contract. At maturity, the principal amount is effectively reswapped at a predetermined exchange rate so that the parties end up with their original
currencies. The advantages of swaps are that firms with limited appetite for exchange rate
risk may move to a partially or completely hedged position through the mechanism of
foreign currency swaps, while leaving the underlying borrowing intact. Apart from
covering the exchange rate risk, swaps also allow firms to hedge the floating interest rate
risk. Consider an export oriented company that has entered into a swap for a notional
principal of USD 1 mn at an exchange rate of 42/dollar. The company pays US 6months
187
Op. cit
Op. cit
188
88
LIBOR to the bank and receives 11.00% p.a. every 6 months on 1st January & 1st July, till
5 years. Such a company would have earnings in Dollars and can use the same to pay
interest for this kind of borrowing (in dollars rather than in Rupee) thus hedging its
exposures.
Foreign Debt189: Foreign debt can be used to hedge foreign exchange exposure by taking
advantage of the International Fischer Effect relationship. This is demonstrated with the
example of an exporter who has to receive a fixed amount of dollars in a few months from
present. The exporter stands to lose if the domestic currency appreciates against that
currency in the meanwhile so, to hedge this; he could take a loan in the foreign currency
for the same time period and convert the same into domestic currency at the current
exchange rate. The theory assures that the gain realised by investing the proceeds from the
loan would match the interest rate payment (in the foreign currency) for the loan.
Choice of hedging instruments190
The literature on the choice of hedging instruments is very scant. Among the available
studies, Géczy et al. (1997) argues that currency swaps are more cost-effective for hedging
foreign debt risk, while forward contracts are more cost-effective for hedging foreign
operations risk. This is because foreign currency debt payments are long-term and
predictable, which fits the long-term nature of currency swap contracts. Foreign currency
revenues, on the other hand, are short-term and unpredictable, in line with the short-term
nature of forward contracts. A survey done191 also points out that currency swaps are
better for hedging against translation risk, while forwards are better for hedging against
189
Op. cit
Allayannis, George, Eli Ofek (2001), Exchange rate exposure, hedging and the use of foreign currency
derivatives, London, Middlesex University Business School.
191
Dictionary of Financial Engineering, John Francis, p. 242, Marshall, 2000
190
89
transaction risk. This study also provides anecdotal evidence that pricing policy is the most
popular means of hedging economic exposures.
These results however can differ for different currencies depending in the sensitivity of
that currency to various market factors. Regulation in the foreign exchange markets of
various countries may also skew such results.
Determinants of Hedging Decisions192
The management of foreign exchange risk, as has been established so far, is a fairly
complicated process. A firm, exposed to foreign exchange risk, needs to formulate a
strategy to manage it, choosing from multiple alternatives. This section explores what
factors firms take into consideration when formulating these strategies.
Production and Trade vs. Hedging Decisions193
An important issue for multinational firms is the allocation of capital among different
countries production and sales and at the same time hedging their exposure to the varying
exchange rates. Research in this area suggests that the elements of exchange rate
uncertainty and the attitude toward risk are irrelevant to the multinational firm's sales and
production decisions194. Only the revenue function and cost of production are to be
assessed, and, the production and trade decisions in multiple countries are independent of
the hedging decision.
192
Allayannis, George, Eli Ofek (2001), Exchange rate exposure, hedging and the use of foreign currency
derivatives, London, Middlesex University Business School.
193
Op. cit
194
“Exchange Rate Volatility and International Trade”, Southern Economic Journal, 66(1), 178-185, Broll,
1993
90
The implication of this independence is that the presence of markets for hedging
instruments greatly reduces the complexity involved in a firm’s decision making as it can
separate production and sales functions from the finance function. The firm avoids the
need to form expectations about future exchange rates and formulation of risk preferences
which entails high information costs.
Cost of Hedging195
Hedging can be done through the derivatives market or through money markets (foreign
debt). In either case the cost of hedging should be the difference between value received
from a hedged position and the value received if the firm did not hedge. In the presence of
efficient markets, the cost of hedging in the forward market is the difference between the
future spot rate and current forward rate plus any transactions cost associated with the
forward contract. Similarly, the expected costs of hedging in the money market are the
transactions cost plus the difference between the interest rate differential and the expected
value of the difference between the current and future spot rates. In efficient markets, both
types of hedging should produce similar results at the same costs, because interest rates
and forward and spot exchange rates are determined simultaneously. The costs of hedging,
assuming efficiency in foreign exchange markets result in pure transaction costs. The three
main elements of these transaction costs are brokerage or service fees charged by dealers,
information costs such as subscription to Reuter reports and news channels and
administrative costs of exposure management.
Factors affecting the decision to hedge foreign currency risk196
195
Op. cit
“Hedging Strategies against foreign exchange risk using Options”, Management Research Report 2008
196
91
Research in the area of determinants of hedging separates the decision of a firm to hedge
from that of how much to hedge. There is conclusive evidence to suggest that firms with
larger size, R&D expenditure and exposure to exchange rates through foreign sales and
foreign trade are more likely to use derivatives197. First, the following section describes
the factors that affect the decision to hedge and then the factors affecting the degree of
hedging are considered.
Firm size198: Firm size acts as a proxy for the cost of hedging or economies of scale. Risk
management involves fixed costs of setting up of computer systems and training/hiring of
personnel in foreign exchange management. Moreover, large firms might be considered as
more creditworthy counterparties for forward or swap transactions, thus further reducing
their cost of hedging. The book value of assets is used as a measure of firm size.
Leverage199: According to the risk management literature, firms with high leverage have
greater incentive to engage in hedging because doing so reduces the probability, and thus
the expected cost of financial distress. Highly levered firms avoid foreign debt as a means
to hedge and use derivatives.
Liquidity and profitability200: Firms with highly liquid assets or high profitability have
less incentive to engage in hedging because they are exposed to a lower probability of
financial distress. Liquidity is measured by the quick ratio, i.e. quick assets divided by
current liabilities). Profitability is measured as EBIT divided by book assets.
197
“Exchange Rate Exposure, Hedging and the use of Foreign Currency Derivatives”, Journal of International
Money and Finance, Vol.20.pp. 273-296, 2001, Allayanis and Ofek
198
Lyna Alami Barumwete and Feiyi Rao (2008), Exchange Rate risk in Automobile Industry: An Empirical
Study of Swedish, French and German Multinational Companies. Pp. 52- 65
199
Op. cit
200
Op. cit
92
Sales growth201: Sales growth is a factor determining decision to hedge as opportunities
are more likely to be affected by the underinvestment problem. For these firms, hedging
will reduce the probability of having to rely on external financing, which is costly for
information asymmetry reasons, and thus enable them to enjoy uninterrupted high growth.
The measure of sales growth is obtained using the 3 year geometric average of yearly sales
growth rates.
As regards the degree of hedging Allayanis and Ofek202
conclude that the sole
determinants of the degree of hedging are exposure factors (foreign sales and trade). In
other words, given that a firm decides to hedge, the decision of how much to hedge is
affected solely by its exposure to foreign currency movements. This discussion highlights
how risk management systems have to be altered according to characteristics of the firm,
hedging costs, nature of operations, tax considerations, regulatory requirements etc. The
next section discusses these issues in the Indian context and regulatory environment.
An Overview of Corporate Hedging in India203
The move from a fixed exchange rate system to a market determined one as well as the
development of derivatives markets in India have followed with the liberalization of the
economy since 1992. In this context, the market for hedging instruments is still in its
developing stages. In order to understand the alternative hedging strategies that Indian
firms can adopt, it is important to understand the regulatory framework for the use of
derivatives here.
201
Op. cit
Op. cit
203
Corporate Hedging for Foreign Exchange Risk in India, Anuradha Sivakumar and Runa Sarkar, IIT, Kanpur,
2007
202
93
The economic liberalization of the early nineties facilitated the introduction of derivatives
based on interest rates and foreign exchange204. Exchange rates were deregulated and
market determined in 1993. By 1994, the rupee was made fully convertible on current
account. The ban on futures trading of many commodities was lifted starting in the early
2000s. As of October 2007, even corporates have been allowed to write options in the
atmosphere of high volatility.
Derivatives on stock indexes and individual stocks have grown rapidly since inception. In
particular, single stock futures have become hugely popular. Institutional investors prefer
to trade in the Over-The-Counter (OTC) markets to interest rate futures, where instruments
such as interest rate swaps and forward rate agreements are thriving. Foreign exchange
derivatives are less active than interest rate derivatives in India, even though they have
been around for longer. OTC instruments in currency forwards and swaps are the most
popular. Importers, exporters and banks use the rupee forward market to hedge their
foreign currency exposure. Turnover and liquidity in this market has been increasing,
although trading is mainly in shorter maturity contracts of one year or less. The typical
forward contract is for one month, three months, or six months, with three months being
the most common. The Indian rupee, which is being traded on the Dubai Gold and
Commodities Exchange (DGCX), crossed a turnover of $23.24 million in June 2007.
Regulatory Guidelines for the use of Foreign Exchange Derivatives205
With respect to foreign exchange derivatives involving rupee, residents have access to
foreign exchange forward contracts, foreign currency-rupee swap instruments and currency
204
Op. cit
RBI Speech Extract “Indian Derivative Market – A Regulatory and Contextual Perspective”, Shyamala
Gopinath, Deputy Governor at the Euromoney Inaugural India Derivatives summit, October 24, 2007.
205
94
options – both cross currency as well as foreign currency-rupee. In the case of derivatives
involving only foreign currency, a range of products such as Interest Rate Swaps, Forward
Contracts and Options are allowed. While these products can be used for a variety of
purposes, the fundamental requirement is the existence of an underlying exposure to
foreign exchange risk i.e. derivatives can be used for hedging purposes only.
The RBI has also formulated guidelines to simplify procedural/documentation
requirements for Small and Medium Enterprises (SME) sector206. In order to ensure that
SMEs understand the risks of these products, only banks with which they have credit
relationship are allowed to offer such facilities. These facilities should also have some
relationship with the turnover of the entity. Similarly, individuals have been permitted to
hedge up to USD 100,000 on self-declaration basis. Authorised Dealer (AD) banks may
also enter into forward contracts with residents in respect of transactions denominated in
foreign currency but settled in Indian Rupees including hedging the currency indexed
exposure of importers in respect of customs duty payable on imports and price risks on
commodities with a few exceptions. Domestic producers/users are allowed to hedge their
price risk on aluminium, copper, lead, nickel and zinc as well as aviation turbine fuel in
international commodity exchanges based on their underlying economic exposures.
Authorised dealers are permitted to use innovative products like cross-currency options;
interest rate swaps (IRS) and currency swaps, caps/collars and forward rate agreements
(FRAs) in the international foreign exchange market. Foreign Institutional Investors (FII),
person’s resident outside India having Foreign Direct Investment (FDI) in India and Nonresident Indians (NRI) is allowed access to the forwards market to the extent of their
exposure in the cash market.
206
Op. cit
95
2.8. Modelling and Forecasting the Exchange Rate207:
A. Theoretical Models208:
The exchange rate is a key financial variable that affects decisions made by foreign
exchange investors, exporters, importers, bankers businesses, financial institutions,
policymakers and tourists in the developed as well as developing world. Exchange rate
fluctuations affect the value of international investment portfolios, competitiveness of
exports and imports, value of international reserves, currency value of debt payments and
the cost of tourists in terms of the value of their currency. Movements in exchange rates,
thus have important implications for the economy’s business cycle, trade and capital flows
and are therefore crucial to understanding financial developments and changes in economic
policy. Timely forecasts of exchange rates can therefore provide valuable information to
decision makers and participants in the spheres of international finance, trade and
policymaking. Nevertheless, the empirical literature is sceptical about the possibility of
accurately predicting exchange rates. Empirical research undertaken since then provides
mixed evidence on the success of economic models to predict exchange rates.
In the literature on international finance, various theoretical models are available to analyse
exchange rate determination and behaviour. Most of the studies on exchange rate models
prior to the 1970s were based on the fixed price assumption.209 With the advent of the
floating exchange rate regime amongst major industrialized countries in the early 1970s, an
important advance was made with the development of the monetary approach to exchange
207
Michael R Rosenberg , Exchange Rater Determination – Model and Strategies for Exchange-rate
Forecasting, McGrawHill, Newyork
208
Op. cit
209
Marshall (1923), Lerner (1936), Nurkse (1944), Harberger (1950), Mundell (1961,62,63) and Fleming
(1962)
96
rate determination. The dominant model was the flexible price monetary model that has
been analysed in many early studies like Frenkel (1976), Mussa (1976, 79), Frenkel and
Johnson (1978) and more recently by Vitek (2005), Nwafor (2006) and Molodtsova and
Papell (2007). Following this, the sticky price or over shooting model by Dornbusch
(1976, 80) evolved, which has been tested amongst others by Alquist and Chinn (2008) and
Zita and Gupta (2007). The portfolio balance model also developed alongside, 210 which
allowed for imperfect substitutability between domestic and foreign assets and considered
wealth effects of current account imbalances.
Non-linear models have also been considered in the literature. Sarno (2003) and Altaville
and Grauwe (2006) are some of the recent studies that have used on-linear models of the
exchange rate.
Overall, forecasting the exchange rates has remained a challenge for both academicians as
well as market participants. In fact, Meese and Rogoff’s seminal study (1983) on the
forecasting performance of the monetary models demonstrated that these failed to beat the
random walk model. This has triggered a plethora of studies that test the superiority of
theoretical and empirical models of exchange rate determination vis-à-vis random walk.
The following are the empirical literature on exchange rate determination which will
highlight the concepts, assumptions and importance of the Theory or Model.
Purchasing Power Parity (PPP) Theory211:
 Earliest and simplest model of exchange rate determination
210
Dornbusch and Fischer (1980), Isard (1980) and Branson (1983, 84)
Michael R Rosenberg , Exchange Rater Determination – Model and Strategies for Exchange-rate
Forecasting, McGrawHill, Newyork
211
97
 It is application of the “law of one price”
 Arbitrage forces will lead to the equalization of goods prices internationally once the prices
are measured in the same currency
 PPP is provided for long-run exchange rate
 Observations are PPP holds equilibrium in the long-run while compared to short-run
Harrod-Balassa-Samuelson Model212:
 Rationalized the long run deviations from PPP
 Productivity differentials are important in explaining exchange rates
 This model relaxes PPP assumptions and allows real exchange rates to depend on relative
price of non-tradable which are a function of productivity differentials.
Flexible-Price Monetary Model213
 It assumes that prices are perfectly flexible
 Changes in the nominal interest rate will reflect changes in the expected inflation rate
 Relative increase in the domestic interest rate compared to the foreign interest rate implies
that the domestic currency is expected to depreciate through the effect of inflation, which
casus the demand for the domestic currency to fall relative to the foreign currency
 Model assumes uncovered interest parity, continuous PPP and the existence of stable
money demand functions for the domestic and foreign economies.
 It implies that an increase in the domestic money supply, relative to foreign money supply
would lead to a rise in domestic prices and depreciation of the domestic currency to
maintain PPP
212
Michael R Rosenberg , Exchange Rater Determination – Model and Strategies for Exchange-rate
Forecasting, McGrawHill, Newyork
213
Op. cit
98
 Further an increase in domestic output would lead to an appreciation of the domestic
currency since an increase in real income creates an excess demand for money.
Sticky-Price Monetary Model214
 Changes in the nominal interest rate reflect changes in the tightness of monetary policy
 Higher interest rate at home attracts a capital inflow, which causes the domestic currency
to appreciate
 This model retains the assumption of stability of the money demand function and
uncovered interest parity but replaces instantaneous PPP with a long-run version
Real Interest Differential Model215
 Drafted to overcome the drawback of the sticky-price monetary model developed by
Dornbusch in 1976
 Model emphasizes the role of expectation and rapid adjustment in capital markets
 Innovation is that it combines the assumption that there are secular rates of inflation
Hooper and Morton (1982)216:
 Incorporated changes in the long-run real exchange rate
 Change in long-run exchange rate is assumed to be correlated with unanticipated shocks to
the trade balance
 Introduced trade balance in the exchange rate determination equation
 A domestic (foreign) trade balance surplus (deficit) indicates an appreciation (depreciation)
of the exchange rate
214
Op. cit
Op. cit
216
Op. cit
215
99
Dua and Sen Model (2009)217:
 Examines the relationship between the real exchange rate, level of capital flows, volatility
of the flows, fiscal and monetary policy indicators and the current account surplus
 Conclusion is that increase in capital inflows and their volatility leads to an appreciation of
the exchange rate
 Theoretical sign on volatility can however be positive or negative
Microstructure Theory Models218:
 Provides an alternative view to the determination of exchange rates
 It suggests that some agents may have access to private information about fundamentals or
liquidity that can be exploited in the short-run
 Asset prices and transactions play a causal role in price determination219
 Casual role arises because transactions convey information that is not common knowledge
 Assumes that information is dispersed and heterogeneous agents have different information
sets
 Trading process in foreign exchange markets is not transparent and features bid-ask
spreads that reflect the costs to market makers/dealers of processing orders and managing
inventories
 Main distinctive feature of these models is the central role played by transactions volume
or order flows in determining nominal exchange rate changes220
217
Op. cit
Op. cit
219
Evans and Lyons 2001, 2007, Exchange rate Theory Models, North-Holland Publishing company
220
Bjonnes and Rime 2003; Medeiros 2005, Exchange Rate Theory and Model Structure, Random House
218
100
B. Empirical Results:
The previous section discusses the theoretical models that potentially determine exchange
rate behaviour. The empirical performance of these theoretical models in forecasting and
explaining exchange rate behaviour is crucial in determining the superiority of one theory
over the other. Some of the empirical findings for the various theoretical frameworks can
be seen in the following lines:
PPP Theory221:
 Frenkel (1976) suggests that PPP holds in the long-run but not in the short-run because of
price stickiness in the goods market
 Johnson (1990), Kong (2000), Lothian and Mc Carthy (2001), Kleijn and Dijk (2001),
Bahrumshah et al (2003) and Diaz (2003) also stick to the view that PPP is for long-run
 Reitz (2002) studies the performance of PPP during periods of central bank intervention
and found that PPP is not strengthened during intervention
Clarida and Taylor (1997)222:
 Examined the ability of forward exchange rate in forecasting exchange rates and argued
that failure of the forward exchange rate in predicting future spot rates does not imply that
forward exchange rates do not contain valuable information for forecasting exchange rates
 Using the linear Vector Error Correction Model (VECM) they extract information from the
term structure of forward premia and produce out-of-sample forecasts that out-perform the
forecasts from the random walk model
221
Michael R Rosenberg , Exchange Rater Determination – Model and Strategies for Exchange-rate
Forecasting, McGrawHill, Newyork
222
Op. cit
101
Dua and Sen (2009)223:
 Finds that increase in both net capital inflows and their volatility lead to an appreciation of
the exchange rate and that they jointly explain a large part of the variations in exchange
rate in the Indian economy
To sum-up several exchange rate models available in the literature have been tested during
the last two-and-a-half decades. No particular model seems to work best at all times.
Monetary models based on the idea of fundamentals driven exchange rate behaviour work
best in the long-run, but lose their predictability in the short run to naïve random walk
forecasts. The volatility of exchange rates also substantially exceeds that of the volatility
of macroeconomic fundamentals, thus providing further evidence of weakening
fundamentals-exchange rate link.
A combination of the different monetary models
however at times has given better results that the random walk. Order flows also play an
important role in influencing the exchange rate.
223
Op. cit
102
2.9. Culmination of INR movements from 2006 – 10:
Table.2.14. INR Fluctuations to US $ from 2006 to 2010224
MONTHS
2006
2007
2008
2009
2010
January
44.2324
44.2117
39.2704
48.7326
45.9216
February
44.2284
44.012
39.6724
49.1914
46.3472
March
44.3378
43.9368
40.1452
51.2062
45.4982
April
44.8245
42.0176
39.9668
50.0596
44.4714
May
45.2226
40.5561
41.8814
48.5497
45.8716
June
45.8886
40.5905
42.7633
47.7459
46.5758
July
46.3675
40.2800
42.7230
48.4358
46.8363
August
46.4461
40.6791
42.9248
48.3314
46.5791
September
46.0281
40.1735
45.4264
48.3606
45.9904
October
45.3582
39.3661
48.6196
46.7192
44.4250
November
44.7209
39.3168
48.7905
46.5619
44.9986
December
44.4781
39.3752
48.4804
46.5987
45.1192
224
www.x-rates.com
103
Graph 2.1. INR fluctuations during 2006225
December
November
October
January
46.5
46
45.5
45
44.5
44
43.5
43
February
March
April
September
INR in 2006
May
August
June
July
During the year 2006 INR was fluctuating between 44 and 46 plus. August was the
highest with 46.4461 and February was the lowest with 44.2284
Graph2.2. INR fluctuations during 2007226
December
January
46
44
February
42
November
March
40
38
October
April
36
September
INR in 2007
May
August
June
July
During the year 2007 INR was fluctuating between 39 and 44 plus. January was the
highest with 44.2117 and November was the lowest with 39.3168.
225
Op. cit
www.x-rates.com
226
104
Graph 2.3. INR fluctuations during 2008227
December
January
50
40
February
30
November
March
20
10
October
April
0
September
INR in 2008
May
August
June
July
During the year 2008 INR was fluctuating between 39 and 48 plus. November was the
highest with 48.7905 and February was the lowest with 39.6724.
Graph 2.4. INR fluctuation during 2009228
December
January
52
February
50
November
March
48
46
October
April
44
September
INR in 2009
May
August
June
July
During the year 2009 INR was fluctuating between 46 and 51 plus. March was the highest
with 51.2062 and November was the lowest with 46.5619.
227
Op. cit
www.x-rates.com
228
105
Graph 2.5. INR fluctuations during 2010
December
January
47
February
46
November
March
45
44
October
April
43
September
INR in 2010
May
August
June
July
During the year 2010 INR was fluctuating between 44 and 46 plus. July was the highest
with 46.8363 and October was the lowest with 44.4250.
Out of the five years during 2006-10, January 2008 had the lowest value of 39.2704 and
March 2009 had the highest value of 51.2062 as compared to US $.
Table.2.15. Chronology of Money [1960-2002]229
Evolution and Breakdown of Bretton Woods Agreement
Year
1935.c-1970
Description
Continuous moderate inflation in Britain
1944-1971
The Bretton Woods Agreement
1950-1970
Japanese Economic Miracle
1952-1967
Mergers and amalgamations of Indian Banks
1960
Population Explosion in Third world countries adding to
inflationary pressure
1960
Primitive money largely superseded [e.g., Cowrie shells and
Manillas]
229
A History of Money from Ancient Times to the Present Day, Glyn Davies, Cardiff: University of Wales
Press, 3rd Edition, 2002.
106
1960
French Currency Reform
1961
Organization for Economic Co-operation and Development
Founded
1961
Lagos Stock Exchange starts operations in Nigeria
1962
West African Currency Board abolished
1963
Repeal of the US Silver Purchase Act
1965-1987
Rapid expansion of US banks abroad
1965-1967
Liberalization of French Financial Markets
1965
Fei stone currency still in us in YAP
1967
Britain devalues Pound against Dollar from $2.80 to $2.40
1968
National Giro set up in Britain
1968
Development Bank of Singapore founded
1969-1983
Five-Fold increases in Number of Banking offices in India
1969
14 Private Banks Nationalized in India
1969
IMF creates Special Drawing Rights
1970
Building society deposits overtakes London clearing banks
1970
American banks in Britain overtakes London clearing banks
1970
US Bank Holding Company Amendment Act
1971
The Bretton Woods Agreement Breaks Down
1971
Britain decimalises its currency
1972
Britain leaves the EEC Snake and floats the Pound
1973
Britain joins the European Economic Community
1973
The US abandons the gold standard
1973-1974
Secondary banking crisis in Britain
1974
OPEC oil shock
1974
Eurodollar market crisis
1976
Maine legalizes entry by banks from other states
1976
British government adopts monetarism
1976
Friedrich Hayek calls for choice in currency and the
denationalization of money
1978-1980
2nd OPEC oil price shock
107
1978
US Humphrey-Hawkins or Full Employment and Balanced
Growth Act
1978
1979-1990
Occidental Petroleum in $20 billion barter deal with Soviet Union
Thatcherism in Britain
1979
European Monetary System Created
1979
Britain abolishes all Foreign Exchange controls
1979
Banking Act increases regulatory powers of the Bank of England
1980
Third world debt crisis
1980
US Depository Institutions Deregulation and Monetary Control
Act
1980
Poland is unable to meet its debt obligations
1982
Mexican debt crisis
1982
US Garn-St Germain Act
1984-1990
Rapid expansion of foreign banks in the US
1984
US Federal Appeals Court legalizes nationwide ATM networks
1985
Savings and Loan Association crisis started
1985
EEC agrees to a Single European Act
1986
Federal Savings and Loan Insurance Corporation declared
insolvent
1986
British building societies get new banking powers
1986
London Stock Exchange’s Big Bang
1987
US Competitive Equality Banking Act
1987
The Great Crash – Fall on Wall Street
1987
Japanese trade surplus reaches $87 billion
1988-1990
Housing boom in Britain
1988
15 countries debts greater than their GNP
1989
US Financial Institutions Reform, Recovery and Enforcement Act
1989
Delors Report on Economic and Monetary Union
1989
Collapse of communism in Eastern Europe
1990
Reunification of East and West Germany
1990
Britain joins the European Exchange Rate Mechanism [ERM]
108
1990
Negative equity as Britain’s housing boom ends
1990
Japanese banks top in world – US has none in top 20
1990
Japanese banks have the largest foreign holdings in London
1990
New Zealand introduces inflation targets
1991
BCCI in world’s biggest banking fraud
1991
The dissolution of the USSR
1992
London maintains position as the world’s leading foreign
exchange centre
1992
Maastricht Treaty on European Union signed
1992
Britain leaves the European Exchange Rate Mechanism [ERM]
1992
European single market comes into effect
1993
Reorganisation of European Exchange Rate Mechanism due to
speculation
1993
Frankfurt chosen as site of European Monetary Institute
1993
Kyowa Credit and Anzen Credit rescued by Japanese Ministry of
Finance
1994
Nippon Trust Bank saved by Mitsubishi Bank
1994
Sumitomo Bank, the world’s biggest – Makes loss
1995
Kobe Earthquake – Downfall of Barings Bank
1995
Barings Bank Fails
1995
Daiwa Bank’s New York branch losses $1.1 billion
1995
90% of transactions in US made electronic
1995
Mondex electronic cash card introduced
1995
Mark Twain Bank adopts Digicash
1997
David Bowie issues Bowie Bonds
1999
European single currency created
2002
New Euro Coins and notes introduced by the European Union
109
2.10. SMALL AND MEDIUM ENTERPRISES (SMEs) Vs. INR and US $:
SME Emergence and Meaning230:
Small and Medium Enterprise (SME) have emerged as an engine of growth in the new
Millennium. The SME sector has already proved its mettle as a dominant player in most of
the developed economies by giving a new dimension to their growth perspectives. It has
helped in generation of large scale employment at lower capital cost, balanced regional
development, and generation of exportable surplus and in the being accepted as key to
sustainable economic growth. Small enterprises exist in the form of factories, workshops,
trading and service organisations and range from the most modern and up-to-date
enterprise to the simple and traditional units.
The operational range varies from
independent enterprises to ancillaries, subcontractors and vendors engaged in catering to
the needs of the markets, extending from the domestic to the global horizon. These
enterprises exist in various forms such as proprietorship, partnership, companies or cooperative sector. Co-operatives are in fact more popular in the service sector or as provider
of common facility service. Though the main objectives of SMEs are almost the same,
they are defined and viewed differently in different countries.
SMEs are a key component in economic life not only because of their number and variety
but because of their involvement in every aspect of the economy, their contribution to
regional development, the complementary role they plan in support of the large sector and
on the ground of innovativeness and adaptability231. They can be seen as a kind of
industrial breeding ground, a source of constant renewal of industry and commerce, and
230
www.smechamberofindia.com
Towards a Vibrant Small Enterprise Economy in India” (2000), Institute of Small Enterprises and
Development. Cochin.
231
110
wellspring of competition and dynamism. Small enterprise could be termed as seed of
industrial growth. The developmental role of small has now been well recognized.
Even in those industrialised countries of Europe and America where the large scale
industries dominated the scene during sixties and seventies, there has been major turn
around since and the SMEs are now on the Centre stage. One of the reasons which have
helped the SME sector in occupying predominant role in the economies of advanced
countries has been as an income distributor in society. To quote from Dr P. M. Mathew’s
book232, “A theoretical articulation of this from a sociological angle has been provided by
the eminent German sociologist, Erhard. He says that, the major problem of Germany in
the post-world war era was the sharp polarisation of the industrial society. In order to
create a balance in society, a strong middle class is necessary. Viewed from this angle,
small businesses have been perceived as an income distributor in society.
According to the Abid Hussain Committee233 on small enterprises “the basic imperfection
which might lead to a less than optimal size of the small scale industries (SSI) lies in the
area of factor markets of both labour and capital……”.
In most economies and in
developing countries in particular capital market imperfections are more basic to the nonoptimal size of the SSI than labour market imperfections.”
There is no universally accepted definition to SMEs. One study has identified more than
50 definitions in 75 countries. Frequently, criterion defining an SME in a country may be
based on the purpose for which the identification is required. Within the same country,
different definitions of SME may be prevalent for different purposes, these could be based
232
“Towards a Vibrant Small Enterprise Economy in India” (2000), Institute of Small Enterprises and
Development. Cochin.
233
Expert Committee on Small Enterprises 1999
111
on turnover or persons employed or capital invested. Such variations make inter-country
comparisons very difficult even when data are available.
In India there exists a clear cut definition for small scale industries (SSI) and the following
is for SMEs. A Small Enterprise is one where the investment in plant and machinery is
more than Rs. 25 Lakh but does not exceed Rs. 5 Crores. Whereas a Medium enterprise is
one where the investment in plant and machinery is more than Rs. 5 crores but does not
exceed Rs. 10 crores. India has a vibrant SME sector that plays an important role in
sustaining economic growth, increasing trade, generating employment and creating new
entrepreneurship in India234.In keeping in view its importance, the promotion and
development of SMEs has been an important plank in our policy for industrial
development and a well-structured programme of support has been pursued in successive
five-year plans for. SMEs in India have recorded a sustained growth during last five
decades. The number of SMEs in India is estimated to be around 13 million while the
estimated employment provided by this sector is over 31 million. The SME sector accounts
for about 45 per cent of the manufacturing output and over 40 per cent of the national
exports of the country235.
Flowering of Auto Industry and Auto Component Industry236:
The automobile industry had evolved continuously with changing times from craft
production in 1890s to mass production in 1910s to lean production techniques in the
1970s. The prominent role played by the US till late 1990s had of late been cornered by
the Japanese auto-makers. The global output from the automobile industry touched 64.6
234
Engineering Review, May 2010, “Understanding the SME Finance
Op. cit
236
IDC Analyze the Future, Department of Scientific & Industrial Research, August 2008
235
112
million vehicles in 2005, thereby retaining its leadership in manufacturing activity,
providing employment to one in seven people, either directly or indirectly. This supply
mainly catered to meet the demand from households where the automobiles constituted the
second largest expenditure item next only to housing. Thus the global automobile industry
dominated by Europe, US, Japan and of late by China and India, continued to have a
significant influence on economic development and international trade.
The good
performance of Asian countries in the economy front heralded the emergence of a strong
market demand. The future potential of India’s automobile sector was mainly based on the
growing demand and availability of skilled manpower with design and engineering
abilities. The Indian automotive industry is worth around US$ 39 billion in 2009-10 and
contributes about 5 per cent of India’s GDP. It produces over 14 million vehicles and
employs – directly and indirectly – in excess of 13 million people. But as of 2010-11 it has
a turnover of US$ 73 billion, accounts for 6 per cent of its GDP and is expected to hit a
turnover of US$ 145 billion by 2016237. The automobile industry currently contributes 22
per cent to the manufacturing GDP and 21 per cent of the total excise collection in the
country, according to Mr Praful Patel, Minister, Heavy Industries and Public Enterprises.
In 2010-11, the total turnover and export of the automotive Industry in India reached a new
high of US$ 73 billion and US$ 11 billion respectively. The cumulative announced
investments reached US$ 30 billion during this period. He also said that the forecasted size
of the Indian Passenger Vehicle Segment is nearly 9 million units and that of 2 wheelers,
close to 30 million units – by 2020238.
237
Rishikesh Ramachandran, MD, IBI Consulting on Automobile Sector in India, September 14, 2011.
http://eprints.soton.ac.uk/view/year/2011.html
238
Op. cit
113
Auto Component Industry239: There are two distinct sets of players in the Indian auto
industry.
Automobile Component Manufacturers and the vehicle manufacturers also
referred to as Original Equipment Manufacturers (OEMs). The former set is engaged in
manufacturing parts, components, bodies and chassis involved in automobile
manufacturing, the latter in engaged in assembling of all these components into an
automobile. The Automotive Component Market Share Product Range in India is240,
Engine parts 31%, Drive Transmission & Steering parts 19%, Body & chassis, 12%,
Suspension & Braking Parts 12%, Equipment’s 10%, Electrical parts 9% and other 7%.
The component industry is the fastest growing sub-sector of the Indian auto industry.
From a low-key supplier providing components to the domestic market alone, the industry
has emerged as one of the key auto components centres in Asia and is today seen as a
significant player in the global automotive supply chain. The industry is still relatively
fragmented with hundreds of small component manufacturers – but the largest players now
have the scale and capability to compete in international markets. 11 Indian auto
component manufacturers have even won the prestigious DEMING award in recognition
of their quality. Global automobile manufacturers today see India as a manufacturing hub
for auto components and are rapidly ramping up the value of components they source from
India. But even as optimism grows, some key concerns are becoming more pressing.
Many of the changes occurring in the global market place today –tightened credit markets
in a capital-intensive industry, declining consumer confidence, increased government
involvement, bankruptcies are combining with familiar industry challenges to create an
environment fraught with risk.
239
www.acmainfo.com
ACMA – Automotive Component Manufacturers Association of India
240
114
IDC241: International Data Corporation has conducted a survey on SMEs in Auto
Component Sector which brings out the following points:
 Indian automotive component industry is small in size compared to the world market (INR
740,000 crores).
 Industry is expected to grow at a rate of 13% over the period of 2006-14.
 Quality of components made in India has improved significantly
 Automotive component exports from India were worth INR 11,200 Crores in 2006-07 and
are expected to reach INR 84,000 Crores in 2016.
 Growth rate of export is expected to grow by 24.4 per cent during 2006-15
 The industry has 500 Medium and large key participants in auto components in the
organized sector along with 6,000 ancillary units.
 Import dependence is estimated to the tune of 13.5 per cent of the domestic demand
 Pune, Delhi and Chennai have traditionally been the most important clusters for the
automotive components segment in India
 Currency fluctuation has impacted export earnings of automotive component
manufacturers
 Appreciation of INR in comparison to the Dollar has affected the profitability of Indian
companies dependent on the US market. Since China is not having the floating rate
currency system, the Chinese industry is insulated from these fluctuations and this has
impacted competitiveness of Indian auto component manufacturers.
 Building “Currency Fluctuation Clauses” to counter further changes in the INR in the
Contract Agreements.
241
Department of Scientific & Industrial Research (DSIR), Ministry of Science & Technology, New Delhi,
August 2008
115
 Manufacturers working under old contracts have asked to revise pricing based on rupee
appreciation.
 Some manufacturers are trying to shift their focus to the Euro from USD
Challenges (Problems) Faced by Indian Auto Component SMEs242
The study brings out the following challenges faced by Indian Auto Component SMEs in
promoting transnationalisation.
 Brand India as a quality-manufacturing destination is weak
 Challenges faced on raw material prices include rising prices, fluctuating prices,
discriminatory higher pricing by foreign vendors for Indian component manufacturers,
custom free import of finished goods from ASEAN countries under FTA.
 South East Asian companies from Thailand, Korea and China are highly competitive and
are over taking Indian auto-component companies.
 Major threat to India’s export is expected to be from Thailand and Taiwan
 Many companies are not able to have dedicated R & D facilities due to financial strength
and so they are not capable to design the products end-to-end and test them.
 High cost of capital for technology upgradation, working capital and expansion of
operations in India and abroad are the key challenges.
 More concentration by financial institutions based on rating by SME Rating Agency of
India Limited.
 Frequent changes in DEPB rates
 Duty draw back are felt as cumbersome and time-consuming by component exporters since
it takes between 3 months to 6 months to get duty drawback amount.
242
Department of Scientific & Industrial Research (DSIR), Ministry of Science & Technology. New Delhi.
116
 Insistence on arbitration by foreign partners of Indian companies in their home country due
to lack of trust in Indian arbitration process.
 Difficulty in navigation of legal documentation since many companies are not aware of
legal experts who can address to their legal documentation requirements keeping the law of
the land of the country where they want to do business.
 SMEs in auto component sector do not have enough resources to create awareness about
their companies and products in even key markets.
 Not aware of buyer-seller meets and neither events nor resources to attend such meet.
 Fund provided by the Government for participating in foreign exhibitions is too meagre
and hence is not of much use
 SMEs find it difficult to get market information about global markets, customers and
potential collaborators.
 Many companies are not able to upgrade technology.
 Retention of skilled manpower is a challenge due to emerging employment opportunities in
new manufacturing units and service industry.
 Due to increase in minimum wages by over 32 per cent in almost many states in India, it
has severe implications on the profitability of the companies employing low wage earning
workers.
 SMEs243 in auto-component sector feel that the current labour laws have resulted in
excessive job security, poor work attitude and poor productivity.
 Inability of existing SMEs to operate in SEZs where tax benefits are available will make
small and medium enterprises in the auto component sector unviable.
243
IDC Analyze the Future, Department of Scientific & Industrial Research, August 2008
117
 Procedures for advance licenses for import are cumbersome, time consuming and difficult
to implement since the license for duty free duty is issued only in Delhi.
 Power shortage is a major concern for many companies
 Poor logistics/ transport infrastructure and seemingly cartelization of transporters are the
areas of concern
 Prominent ports in India are congested and as a result there are delays in shipment of
consignments.
Role of Government of India in Promoting Challenges of Indian Auto Component
SMEs244
The following are the role suggested by DSIR for the problems and challenges faced by
Auto SMEs.
 Consulates of GOI should plan activities in key markets to create awareness about the
prowess of Indian units regarding “Brand India’
 GOI should take steps to reduce raw material price import by ensuring that the prices of
steel do not increase against the global price trends.
 To make Indian auto-component sector competitive vis-à-vis other Asian nations, India
needs to review its policies in a holistic manner and take necessary steps to make the
industry competitive.
 GOI should facilitate and or incentivize the auto-component manufacturers for creation of
shared infrastructure and capacity development for R & D and testing labs.
 GOI should create awareness among SMEs about the need for getting credit worthiness
rating done. It should create awareness among the SMEs about the available low cost
244
IDC Analyze the Future Survey Report. DSIR, Ministry of Science & Technology. New Delhi.
118
institutional equity capital and risk capital funds for expansion plan of SMEs like SVCL
(SIDBI Venture Capital Limited).
 Time taken to provide duty drawback and other incentives should be reduced
 Awareness should be given to smaller companies to create currency fluctuation clause in
their medium and long-term contracts.
 Frequency of DEPB ratio should be minimized
 GOI should create and set-up an independent arbitration centres on the lines of Hong Kong
International Arbitration Centre (HKIAC)245.
 GOI should facilitate pool of resources which should facilitate documentation and
handhold SMEs in initial negotiations.
 Indian Consulates in the countries having export potential for auto components should
facilitate marketing efforts by sharing information about Indian auto component
manufacturing companies.
 GOI should organize buyer-seller meets and events by giving some concession to small
players.
 Awareness given by EXIM bank to SMEs246 should be highlighted more to all groups
 GOI should take initiative and encourage automobile industry professionals from bettermanaged companies to share their experiences with component manufacturers in SME
sector.
 Government should support schools and universities to collaborate with the industry to
come up with short and industry relevant courses to have skilled manpower.
 Government should enact industry friendly labour laws.
245
Dispute resolution body established by a group of leading business people in Hong Kong with a focus on
Asia
246
IDC Analyze the Future, Department of Scientific & Industrial Research, August 2008
119
 Government should create virtual SEZs to minimize the impact of SEZ policy on existing
small and medium auto component manufacturer.
 Industry expects that the committee for advance licence for import should be formed in
some more cities apart from Delhi and should meet at least once a month.
 More improvement is needed in ESI247 and Labour laws and single window clearance for
taxes, duty drawbacks etc.
 Companies feel that the power tariff for the auto component industry should be in line with
the Chinese Government’s support for the auto component industry.
 Should have timely developments of expressways and dedicated corridors to improve
logistics and transport.
 Timely upgradation of the port is must to address the concerns of SMEs
Auto SMEs in Pune
The global financial meltdown only underscored the importance of cost control and
cost effectiveness for auto manufacturers248
The metamorphosis of Pune city over recent decades from a verdant, easy-paced abode of
choice for retirees to a bustling metropolis has been complete and today, although it is a
major information technology hub, the automotive sector occupies pride of place as the
prime mover behind the rapid development of Pune and surrounding areas.
Detroit of India: The proliferation of automobile manufacturing units and component
suppliers that populate the landscape of outer Pune, areas have increasingly earned it the
sobriquet of being the ‘Detroit of India' and it continues to elicit interest and attract
investments despite challenges from the newer auto hubs dotting outer Chennai and
Gurgaon near Delhi. The entry of the heavyweights of Indian automobile industry — Tata
247
IDC Analyze the Future, Department of Scientific & Industrial Research, August 2008
The Hindu, September 13, 2010
248
120
Motors and Bajaj Auto — in the 1960s resulted in and subsequently escalated the
mushrooming of allied industries that catered to the outsourcing requirements of these
principals. While the first original equipment manufacturer (OEM) was Mercedes-Benz in
the 1990s through a joint venture with the Tata’s and later on its own, others followed suit
but only in trickles. However, in this millennium, global heavyweights like General
Motors, Fiat, and Volkswagen and more recently India's largest utility vehicle maker
Mahindra & Mahindra (M&M) have committed large investments in this region and their
entry seems to have opened the floodgates for auto investments here.
The global financial meltdown only underscored the importance of cost control and costeffectiveness for auto manufacturers and further re-affirmed their decision to move to
cheaper manufacturing locations available in India, particularly as quality was not going to
be compromised. Today, the Pune automobile landscape includes the ‘who's who' of
Indian and increasingly international automobile majors249. Tata Motors is the largest
followed by Bajaj Auto, Force Motors, Mahindra Two-Wheelers, Mercedes-Benz, GM,
JCB construction equipment, Volkswagen, M&M, Premier Motors and Fiat.
Inflow of investment: Speaking to The Hindu, Anant Sardeshmukha250 nodal body for
investment in the region, said there was a surge in the period between 2006 and 2008 when
around Rs.12, 000 crore was spent on projects in the region. “However,” he said, “the
period between 2008 and 2013 will see the inflow of around Rs.40, 000 crore in terms of
investment in this sector. “Simultaneously, there is substantial investment proposed from
249
Op. cit
Anant Sardeshmukh, Executive Director General, Mahratta Chamber of Commerce, Industry &
Agriculture (MCCIA). The Hindu.
250
121
auto ancillary and component manufacturers and over the same period an investment of
around Rs.10, 000 crore is proposed by them.
Sardeshmukh also said, The new projects include the Fiat-Tata joint venture at Ranjangaon
with a proposed investment of Rs.4,000 crore, GM's Rs.1,400-crore investment with a
further Rs.900-crore expansion, Volkswagen's project of Rs.3,800 crore, Mercedes' Rs.250
crore investment and Mahindra & Mahindra planning a huge Rs.5,0000-crore investment
by 2012. Bajaj Auto proposes Rs.300-crore investment in two-three wheelers and a further
Rs.1, 000-crore investment in the car plant. Among large auto suppliers are Cummins
Engines which set up shop in the 1960s with Kirloskar and later alone, Kirloskar Oil
Engines and Bridgestone's new Chakan plant for tyres with an investment of Rs.2,600
crore.
Commitment by MNCs : In the last 18 months starting from September 2010, large
multinational auto component suppliers like ZF Group of Germany have committed around
Rs.50 crore, Prembo of Italy is setting up a Rs.100-crore disc brakes facility and Norma of
Germany plans to invest euro 3 million (about Rs.18 crore).
Pune's USP: In addition to the auto OEMs (original equipment manufacturers), Pune has a
range of Tier-1, Tier-2 and infrastructure suppliers, including Bharat Forge, among the top
forging companies in the world and Sandvik's large cutting tools facility. Arun Firodia251
said the easy availability of skilled manpower is the prime reason for the rapid
development of the auto sector in Pune.
Skilled manpower: “At present, one lakh engineers are working in and around Pune, a
figure probably unmatched anywhere in the world. Maharashtra Industrial Development
251
Chairman, Kinetic Group Company.
122
Corporation (MIDC) has created mega industrial estates at Pimpri-Chinchwad, Chakan and
Talegaon on a scale that too is unmatched. These have fostered the growth of automobile
companies. As automobile companies grow, it is but natural that auto component industry
flourishes in Pune.” Concurring with this view, Mr. Sardeshmukh said, “This region has a
steady supply of trained technical manpower with more than 1,000 technical and
engineering institutions dotting the landscape. There is a steady availability of a 3-lakhstrong qualified manpower here.”
Sardeshmukh said the development of Pune's unique selling proposition (USP) is not far to
seek if one looks at the history of this region's industry. “The seeds were sown in the
1960s when Bajaj and the Tata’s invested heavily in their facilities in the region and this
fostered the mushrooming of first generation technocrat promoted units to cater to the
needs of these facilities. These have developed to such an extent that the small and medium
enterprises (SME) segment today can fulfil any component requirement of the auto sector
now, irrespective of the scale.”
What was lacking though is a focussed vendor
development programme and access to quality technical training. That need is now being
directly addressed by interested parties including an aggressive approach by the state
government. The first automobile cluster is Pune although it is not really a cluster because
all the players are not located in a particular demarcated area.
State support: “In fact, Pune was the first to have manufacturing clusters with one being
auto and the other being white goods. There has been funding from the State government
and units have been encouraged to increase capacity and upgrade technology.
“Recently, a joint programme for supplier development was tied up with UNIDO and the
Italian Government.” There is a general lament about the quality of power in Pune city,
123
although there is no doubt that infrastructure in the region is still good compared to other
parts of the country. “The city was the first in the State to give a ‘Pune model' of buying
power from the open market about three years ago and it has been implemented
successfully. The Maharashtra Government is in the process of formulating the new
industrial policy the first draft of which is expected to be announced in the next two
months.
“Industry is confident that issues like quality of power and other infrastructure bottlenecks
will be adequately addressed in the policy,” said Sardeshmukh. Firodia said that although
Chennai and Gurgaon are catching up as alternatives as auto hubs, the USP of Pune would
continue to “attract the best talent from all parts of India and all parts of the world, thanks
to its salubrious climate, fabulous education facilities and superb cosmopolitan cultural
scene.”
124
MATERIALS AND METHODS
125
The previous two chapters would have given an overview of the study. The first chapter
introduction would have highlighted the importance and objectives of the problem studied
and the literature review chapter would have highlighted the trends inthe exchange rate
from historical perspective to the present context.
This chapter deals with the method, selection of sample, preparation of interview-schedule,
method of data collection and statistical tools used for analysis of hypotheses. This chapter
is divided into two parts as follows:
Part – 1: Methods
Part – 2: Profile of Study Location
PART – 1
METHODS
Research Methodology is a way to systematically solve the research problem. Research
Methodology includes the various methods and techniques for conducting a Research.
D. Slesinger and M. Stephenson in the encyclopaedia of Social Sciences define Research
as “the manipulation of things, concepts or symbols for the purpose of generalizing to
extend, correct or verify knowledge, whether that knowledge aids in construction of theory
or in the practice of an art”. Research is, thus, an original contribution to the existing stock
of knowledge making for its advancement. The purpose of Research is to discover answers
to the Questions through the application of scientific procedures.
126
RESEARCH DESIGN
This research is both descriptive and analytical in nature. As a “Descriptive Research”, the
main market characteristics or functions of the problem are studied and stated in the study.
The researcher has no control over the variables. It presents what has already studied.
Thus this study gives an in-depth analysis in review of literature (Chapter –II) regarding
the statement of problem about what is going on the present market context, making it
descriptive in nature.
Apart from the above the researcher studied the problem in depth and has given his views
based on analysis, which makes it “Conclusive Research”. Thus this study can be said
“Descriptive and Analytical Research” in nature.
DATA COLLECTION AND ANALYSIS:
Data Collection: Information has been collected from both Primary and Secondary
sources of data collection.
 Secondary sources: Secondary data are those, which have already been collected by
someone else, which already had been passed through the statistical process. Secondary
data had been collected through books, periodicals, journals, websites, past research papers
and newspapers. The major part of the literature was collected from published documents
of the Ministry of Heave Industries and Public Enterprises, Government of India, Industry
Associations like ACMA, SIAM and other documents available in public domain.
 Primary sources: Primary data are those, which are collected afresh and for the first time
and thus happen to be original in character. Primary data had been collected by conducting
127
surveys through “Interview Schedule”. Five-Point Likert Scale was used in the Interview
Schedule.
Table.3.1. Sample of SMEs considered for the study
Factor
Private
Limited
10
Partnership
firm
33
TOTAL
No. of Respondents
Public
Limited
7
% of Respondents
14
20
66
100
50
Source: Primary Data
The responses were received from all over Pune covering all major auto component
clusters.
This report captures the views, perceptions and challenges faced by the
companies representing all key clusters in the component industry. The findings of the
study are based on the facts and views shared by 50 (70 – 20) auto component companies
having their manufacturing base in Pune.
Many of these companies are already
transnationalised through exports and some of them have foreign collaboration. The mix
of companies selected for the study included old and new companies being in business
from 5 years to 65 years. The sample of the study consists of 33 partnership firms, 10
private companies and 7 public limited subsidiaries. The people who have expressed their
views are mostly top level executives of finance from each sample. The size of companies
selected for the study comprised of different size in terms of employees ranging from less
than 100 employees to 1500 employees. The responses received have fair representation
of companies manufacturing different kinds of products such as engine components, drive
transmission & steering components, body and chassis components, suspension & braking
components, equipment’s, electrical components and other products.
128
Tools of Analysis and Presentation:
Software application of Microsoft Office Excel and SPSS package are used towards
quantified data for analysis. The following are the techniques which are used for the study:
a. Factor Analysis: It is used to examine the Correlations with the intent of creating index
measures for deeper analysis.
b. Regression Analysis: It is used to study the dependent and independent variables and has
been summarized using ANOVA table Multiple Comparisons – Bonferroni Model.
SAMPLING DESIGN
Sampling can be defined as the section of some part of an aggregate or totality on the basis
of which judgment or an inference about aggregate or totality is made. The sampling
design helps in decision making in the following areas: Sample Frame: Sample frame was Small and Medium enterprises in Pune, India.
Sample Unit: Sampling unit is the basic unit containing the elements of the universe to be
sampled. The sampling unit of the present study was SMEs located in Pune city in
Maharashtra.
Sample Size: Sample size is the number of elements to be included in a study. Keeping in
mind all the constraints 50 respondents were selected.
Sampling Techniques: The sampling techniques used were convenience technique and
simple random sampling technique.
129
LIMITATIONS OF THE STUDY:
Due to constraints of time and resources, the study is likely to suffer from certain
limitations. Some of these are mentioned here under so that the findings of the study may
be understood in a proper perspective. The limitations of the study are:

The information given by the respondents might be biased.

Some of the respondents could not answer due to recall bias
PART – 2
PROFILE OF STUDY LOCATION
History of Pune252
The history of Pune (a city in Maharashtra, India) begins in the 6th century, and is closely
linked to the history of Shivaji, the founder of the Maratha empire, and to the Peshwa, the
ministers of the Maratha empire and later the Maratha confederacy. Pune was a part of
Yadava Empire of Deogiri from the 9th century to 1327. It was later ruled by the
Nizamshahi sultans, until it was annexed by the Mughal empire in the 17th century. In
1595, Maloji Bhosale was appointed the jagirdar of Pune and Supe by the Mughals. Pune
was an important centre for the social and religious reform movements that were sweeping
the country. Many prominent reformers lived here, including Mahadev Govind Ranade,
Ramakrishna Gopal Bhandarkar, Gopal Krishna Gokhale, Maharshi Vitthal Ramji Shinde
and Jyotirao Phule. The most important political reformer of this era was Bal Gangadhar
Tilak, who dominated the Indian political scene for six decades. Pune is also associated
with the struggle for Indian independence. Mohandas Gandhi was imprisoned at Yerwada
252
Wikipedia - http://en.wikipedia.org/wiki/History_of_Pune
130
jail several times, and placed under house arrest at the Aga Khan Palace in 1942-44, where
both Kasturba Gandhi, his wife, and Mahadev Desai, his long-time aide and secretary,
died.
After Indian Independence, Pune saw a lot of development, such as the establishment of
the National Defence Academy National Defense Academy at Khadakwasla, National
Chemical Laboratory at Pashan. Pune also serves as the headquarters of the Southern
Command of the Indian Army. Industrial developments started around 1950-1960s in
Hadapsar, Bhosari, Pimpri, and Parvati. Telco (now Tata Motors) started
operations in 1961, which gave a huge boost to the automobile sector. Pune was
referred at that time as “Pensioners’ Paradise” since many government officers, civil
engineers, and Army personnel preferred to settle down in Pune after their retirement. In
July 1961, Panshet dam broke and its waters flooded the city, destroying most of the older
sections, giving a chance for modern town planning concepts to be put into use. This
unfortunate incident however led constructive developments in the city, and the economy
of the city witnessed a boom in construction and manufacturing sectors. By 1966, the City
had expanded in all directions.
After 1970, Pune emerged as the leading engineering city of the country with Telco,
Bajaj, Kinetic, Bharat Forge, Alfa Laval, Atlas Copco, Sandvik and Thermax
expanding their infrastructure. By this time the city had gained the reputation of being
the ‘Oxford of the East’ due to a large number of educational institutes. In 1989, Dehu
Road-Katraj bypass (Western bypass) was completed, reducing traffic congestion in the
inner city. In 1990 Pune began to attract foreign capital, particularly in the information
technology and engineering industries; new businesses like floriculture and food
131
processing begin to take root in and around the city. In 1998, work on the six-lane
Mumbai-Pune expressway began; a huge accomplishment for the country, the expressway
was completed in 2001. In the three years before 2000 Pune saw huge development in the
Information Technology sector, and IT Parks formed in Aundh, Hinjewadi and Nagar road.
By 2005 Pune overtook both Mumbai and Chennai to have more than 2 Lakh (200,000) IT
professionals. In 2006, PMC started BRT (Bus Rapid Transit System) project first among
all Indian cities but due to narrow roads of the city it has not worked properly. However,
PMC is working on glitches in this project and planning skywalks near BRT and other
changes. The year 2008 saw huge development near the Chakan and Talegaon region as
Multinational Corporations (MNCs) like General Motors, Volkswagen, and Fiat have set
up facilities near Pune. Additionally, in 2008 the Commonwealth Youth Games took place
in Pune, which encouraged additional development in the north-west region of the city and
added a few Compressed Natural Gas (CNG) buses on Pune's road. The Pune Metropolitan
Regional Development Authority (PMRDA)'s proposed initiatives will give a huge boost
to the city’s infrastructure and include the development of systems for a metro (rapidtransit rail) and buses, plus effective water and garbage treatment facilities.
Pune an Auto HUB253:
Small enterprises are those companies who have an investment in plant and machinery of
up to INR 5 Crores. Medium enterprises are the ones who have an investment between
INR 5 Crores to INR 10 Crores in plant and machinery. In the absence of data on
investment in plant and machinery by the companies, the latest published turnover was
taken as a surrogate variable for categorizing SMEs in the auto component sector.
Companies having a turnover of up to INR 50 Crores were considered as small company
253
Ramnath Subbu, The Hindu, September 13, 2010
132
and companies with turnover in the range of Rs. 50 to 250 Crores were considered as
medium companies.
The Indian automotive components industry has emerged as one of India's fastest growing
manufacturing sectors and a globally competitive one. The ACMA-McKinsey Vision 2015
document estimates the potential for the Indian auto component industry to be INR
160,000 Crores to INR 180,000 Crores by 2016. In 2006-07 automotive component
exports were worth INR 11,200 Crores and expected to reach INR 72,000 Crores in 2015.
Indian automotive components are now part of many major markets in North America and
Europe. Around 70 per cent of these are exported auto components bought by global
majors such as General Motors, Ford Motor and Daimler (formerly DaimlerChrysler),
among others. India has a strong auto component base for various mechanical, electrical
and electronic components. Many auto component companies are home grown and have a
strong background. When Maruti Udyog started operations, many Japanese companies
formed joint ventures with companies in India and also set up world class manufacturing
facilities in India. Many Indian companies through their association with Maruti upgraded
all facets of their business including productivity, quality, and delivery systems, among
others. Entry of many multi-national vehicle manufacturers from Korea, Europe and US in
India from 1995 onwards enabled global component suppliers to enter India in a big way.
Market overview254
India's component industry has achieved the capability to manufacture the entire range of
auto components, such as engine components, drive and transmission components,
suspension and braking components, electrical components, and body and chassis
254
The Indian Express, May 30, 2010
133
components. Engine components make up nearly a third of all exports of auto components
from India. The automotive component industry caters to three broad categories of the
market:
 Original equipment manufacturers (OEM) or vehicle manufacturers comprise 25 per cent
total demand
 Replacement market that comprises 65 per cent of the total demand
 Export market that comprises primarily of international tier-I suppliers and constitutes 10
per cent of total demand.
Leading manufacturers from across the globe have initiated steps for developing a vendor
base in India by inviting their suppliers to set up manufacturing companies here. Leading
automotive component companies such as Lear Corporation, Delphi, Visteon, Mando, ZF
Steering, and Denso have a strong presence in India and cater to the OEM and the
aftermarket. Some of the major domestic automotive components manufacturing groups in
India include the TVS, Rane, Amalgamations, Kalyani, Sona, Rico, Minda, Amtek, among
others. The two-wheeler market is the largest volume segment in India and automotive
component companies in this segment have well developed technology and quality systems
in place. Many auto component companies apart from catering to the domestic demand
also have strong export operations. It is estimated that 15 to 25 per cent of the turnover of
many large-sized Indian auto component manufacturer is accounted for by exports. A
significant trend in the last 2-3 years is the interest shown by vehicle manufacturers and
global tier-I companies in procuring components from India.
The SME players in the auto components sector are formally organized under the auto
component manufacturers association (ACMA). Many companies present in India, as in-
134
house vendors of vehicle manufacturers, are not part of ACMA and are estimated at nearly
125 in number. A large number of auto component companies cater exclusively to the
aftermarket and are unorganized in nature and these are estimated at 375.
255
The engine and transmission components account for about 50 per cent of the
component output in India. The engine components account for 31 per cent of the total
automotive component production output and transmission and steering components
account for 19 per cent of the output. All engine and transmission components like engine
block, piston, valves, camshaft, crankshaft, gears, and casings are manufactured locally.
Companies in India possess well-established foundries for forged and cast components and
are globally competitive. The quality consciousness of the industry matches the global
standards. This is corroborated by the fact that eleven Indian companies in the automotive
industry have received the coveted Deming Prize, which is the largest number outside
Japan. The auto component suppliers are also embracing modern shop floor practices like
5-S, 7-W, Kaizen, Total Quality Management, 6-Sigma and Lean Manufacturing, as they
graduate to match with world-class industry. A large number of firms in this industry are
also recipients of quality certificates like ISO-9000, TS-16949, QS-9000, ISO-14001 and
OHSAS-18001.
Automotive Clusters in India256:
Mumbai-Pune, Chennai-Bangalore, Delhi-National Capital Region (NCR) are the major
automotive clusters in India where majority of the automotive component manufacturers
are located in these clusters.
Almost 550 plus Manufacturing auto units and auto
component units are situated only in these areas and so exchange transactions emerge only
255
IDC Analyze the Future, August 2008
Op. cit
256
135
from these areas for auto industry. Since Mumbai-Pune is the oldest and largest OEMs and
the researcher too is in Pune it is felt that if this location is selected the study can be done
more effectively. The following table will speak about the manufacturing units in these
areas.
Table.3.2. Number of Major Supplier Manufacturing Units
Location
Major Manufacturing Units
Mumbai – Pune
185
Chennai – Bangalore
120
Delhi – NCR
250
Source: ACMA257 (Automotive Component Manufacturers Association)
As the presence of the major OEMs is in these major clusters, Indian automotivecomponent suppliers have mostly been based in three major clusters. The three clusters —
around Delhi, Mumbai-Pune and Bangalore-Chennai—are areas that have received high
automotive investments in the past and where the prominent OE manufacturers are located.
Infrastructure problems such as poor roads, connectivity and communication issues
resulted in the formation of automotive clusters. There is an on-going expansion in these
regions, as the existing OEMs have increased production capacities and attracted new
suppliers and their product mix and technology requirements have widened. Government
has been proactive with plans to establish vehicle test facilities in each of these automotive
clusters to quicken the homologation procedure.
258
Mumbai-Pune is the oldest and largest cluster with the presence of large OEMs such as
Tata Motors, Fiat, General Motors India, Mahindra, and DaimlerChrysler in passenger
257
www.acmainfo.com
IDC Analyze the Future, August 2008
258
136
cars; Tata Motors and Force Motors in commercial vehicles and Bajaj Auto and Kinetic in
two-wheelers. To support these OEMs in the region, there are a number of large suppliers
including Tata AutoComp, Bharat Forge, Bosch, Lear and a whole lot of smaller
component manufacturers.
The cluster around the National Capital Region (NCR) of Delhi originated with Maruti
establishing its base in Gurgaon and the Suzuki-owned company was subsequently
instrumental in establishing a supplier base for its cars. With most of the OE companies
being Japanese manufacturers or their collaborations, a high percentage of suppliers in the
NCR cluster have Japanese origins, equity or technical inputs. The leading suppliers in this
area are mostly Maruti affiliates like Asahi Glass, Krishna Maruti, Sona Koyo, Jai Bharat
Maruti (JBM), Omaxe and Bharat Seats. Maruti's new investment plans have increased the
investment in the region as existent as well as new suppliers have announced plans to
expand and enter the region. Honda SIEL Motors, based near Delhi also draws from the
suppliers’ cluster in the region. While the NCR region is at a disadvantage because of its
large distance from ports, the Government has responded well by setting up an Inland
Container Depot (ICD) at Tughlakhabad to facilitate exports.
Ashok Leyland in the commercial vehicles space and a small Hindustan Motors facility in
the passenger car sector primarily drove the auto component cluster in the BangaloreChennai sector. However, the early 1990s saw manufacturers like Ford, Hyundai and
Toyota setting up manufacturing facilities there and a resultant inflow of suppliers into the
area. Visteon, Delphi, and Bosch are some of the important suppliers in the cluster. The
proximity to the Chennai port facilitates exports for the suppliers in the cluster. Toyota has
established a supplier park in the Bidadi region near Bangalore. This also has its own
137
transmission components unit under Toyota Kirloskar Auto components. Bangalore is also
the Indian headquarters of India's largest automotive supplier Mico Bosch.
The last decade has seen increased investment in the automotive sector in new
geographical areas. For example, the General Motors plant near Vadodara (Gujarat) and
Sonalika Group’s Car division in the Una district (Himachal Pradesh) has the potential to
attract a number of automotive component suppliers in that region. Tata’s Nano car
manufacturing facility at Singur in West Bengal is likely to attract substantial investment
for the auto component industry in the state259.
From the above lines it is very clear that Pune – Maharashtra dominates in automobile and
is considered as Hub of Auto Industries. Hence the researcher has opted for Pune as
sample.
259
www.acmainfo.com
138
RESULTS AND DISCUSSION
139
SAMPLE (SMEs) CONSIDERED FOR THE STUDY
Table No. 4.1
Private
Limited
10
Partnership
Firm
33
TOTAL
No. of Respondents
Public
Limited
7
% of Respondents
14
20
66
100
50
Source: Primary Data
Graph No. 4.1.
100
66
50
33
7
14
10
20
No. of Respondents
% of Respondents
The responses were received from all over Pune covering all major auto component
clusters. The findings of the study are based on the facts and views shared by 50 (70 – 20)
auto component companies having their manufacturing base in Pune. Many of these
companies are already transnationalised through exports and some of them have foreign
collaboration.
The mix of companies selected for the study included old and new
companies being in business from 5 years to 65 years. The sample of the study consists of
33 partnership firms, 10 private companies and 7 public limited subsidiaries.
140
SMEs HAVING FOREIGN COLLABORATION
Table No. 4.2.
Yes
No
TOTAL
No. of Respondents
50
20
70
% of Respondents
71.43
28.57
100
Source: Primary Data
Graph No. 4.2
SMEs Having Foreign Collaboration
20
70
70
50
Yes
No
TOTAL
From the above it is clear that out of the total of 70 respondents, 71.43 per cent (50
respondents) have foreign collaboration and 28.57 per cent (20 respondents) does not have
foreign collaboration. Hence futher all analysis will be based on 50 respondents only.
141
REVISION OF PRICE BASED ON INR /US $ FLUCTUATION
Table No. 4.3.
Yes
No
TOTAL
No. of Respondents
35
15
50
% of Respondents
70.00
30.00
100
Source: Primary Data
Graph No. 4.3.
Revision of Price due to INR and US $
fluctuation
35
50
15
Yes
No
TOTAL
From the above it is clear that out of 50 respondents 70 per cent (35 respondents) revise
their product price during fluctuations of INR and US $ and 30 per cent (15 respondents)
does not revise price during fluctuations of INR and US $.
142
FREQUENCY OF REVISION OF PRICE DUE TO INR / US $ FLUCTUATION
Table No. 4.4.
Every 6
Once a year
Others
Total
months
No. of Respondents
10
25
0
35
% of Respondents
28.57
71.43
0.00
100
Source: Primary Data
Graph No. 4.4
Revision Frequency
100
71.43
28.57
10
Every 6 months
35
25
0
Once a year
No. of Respondents
0.00
Others
Total
% of Respondents
Out of 50 respondents a total of 35 respondents said that they revise price during
fluctuations (Table.No.4.3.). From the above it is clear that out of 35 respondents who
revise price during fluctuation, 28.57 per cent (10 respondents) revise once in every 6
months and 71.43 per cent (25) revise once a year.
It is to be noted here that maximum number of respondents revise price only once a year.
143
SMEs RE-OPENING OF “KEY SUPPLY CONTRACTS” WITH US BASED
CUSTOMERS DUE TO FLUCTUATION
Table No. 4.5.
Yes
No
TOTAL
No. of Respondents
21
29
50
% of Respondents
42.00
58.00
100
Source: Primary Data
Graph No. 4.5.
SMEs re-opening Key Supply Contracts
29
Yes
50
50
No
TOTAL
21
From the above it is clear that out of 50 respondents, 42 per cent (21 respondents) say that
they re-open “Key Supply Contracts” with US based Customers due to currency
fluctuation and 58 per cent (29 respondents) say they don’t re-open “Key Supply
Contracts” during currency fluctuation.
144
NUMBER OF CUSTOMERS WITH WHOM “KEY SUPPLY CONTRACTS”
HAVE BEEN RE-OPENED
Table No. 4.6.
Below 5
5 to 10
Above 10
Others
Total
customers
No. of Respondents
8
13
0
0
21
% of Respondents
38.10
61.90
0.00
0.00
100
Source: Primary Data
Graph No. 4.6
Number of Customers with whom KSC is
re-opened
100
100
80
61.90
60
38.10
40
20
8
21
13
0
0.00
0
0.00
0
Below 5
5 to 10
customers
above 10
No. of Respondents
others
Total
% of Respondents
Out of the total 50 respondents, 21 have said that they re-open “Key Supply Contracts”
(Table.No.4.5). From the above it is clear that out of the total of 21 respondents, 38.10 per
cent (08 respondents) have re-opened “Key Supply Contracts” with less than 05 customers
and 61.90 per cent (13 respondents) have re-opened “Key Supply contracts” between 05 to
10 customers.
It is to be noted here that maximum respondents revise contracts between 05 to 10
customers.
145
INCLUSION OF “CURRENCY FLUCTUATION CLAUSE” IN OLD
AGREEMENT DUE TO FLUCTUATION
Table No. 4.7.
Yes
No
TOTAL
No. of Respondents
21
29
50
% of Respondents
42.00
58.00
100
Source: Primary Data
Graph No. 4.7.
Inclusion of Currency Fluctuation Clasue
21
50
29
Yes
No
TOTAL
From the above it is clear that out of 50 respondents, 42 per cent (21 respondents) have
included “Currency Fluctuation Clause” in their old agreement for re-negotiation of
contract to counter currency fluctuations and 58 per cent (29 respondents) have not
included the “Currency Fluctuation Clause” in their old agreement for re-negotiation of
contract to counter currency fluctuations.
146
NUMBER OF AGREEMENTS IN WHICH
“CURRENCY FLUCTUATION CLAUSE” IS INCLUDED
Table No. 4.8.
Below 5
5 to 10
Above 10
Others
Total
customers
No. of Respondents
8
13
0
0
21
% of Respondents
38.10
61.90
0.00
0.00
100
Source: Primary Data
Graph No. 4.8.
Number of Agreements for CFC
38.10
61.90
0.00
100
100
8
13
Below 5
5 to 10
customers
0.00
0
0
above 10
others
21
0
No. of Respondents
Total
% of Respondents
Out of 50 respondents, 21 respondents have included “Currency Fluctuation Clasue” in the
agreement.From the above it is clear that out of the total 21 respondents, 38.10 per cent (8
respondents) have revised the clause for less than 05 customers and 61.90 per cent (13
respondents) have revised the clause between 05 to 10 customers.
It is to be noted that maximum number of respondents have included the Clause between
05 to 10 customers.
147
SMEs SHIFTING FOCUS TO OTHER CURRENCY
DUE TO INR / US $ FLUCTUATIONS
Table No. 4.9.
Yes
No
TOTAL
No. of Respondents
18
32
50
% of Respondents
36.00
64.00
100
Source: Primary Data
Graph No. 4.9.
Focus to Other Currency
18
50
32
Yes
No
TOTAL
From the above it is clear that out of the total 50 respondents, 36 per cent (18 respondents)
wants to shift to other currency due to fluctuation of INR and US $ and 64 per cent (32
respondents) don’t want to shift to other currency even though there is fluctuation.
148
FOCUS TO OTHER CURRENCY DUE TO INR FLUCTUATIONS
Table No. 4.10.
Euro
Pound
Others
Total
No. of Respondents
12
0
6
18
% of Respondents
66.67
0.00
33.33
100
Source: Primary Data
Graph No. 4.10.
Other Currency Focus due to Fluctuation
100
66.67
100
50
33.33
0.00
12
0
6
pound
Others
18
0
Euro
No. of Respondents
Total
% of Respondents
Out of the total 50 respondents, 18 respondents said that they want to shift their focus to
other currency (Table.No.09).From the above it is clear that out of the total of 18
respondents, 66.67 per cent (12 respondents) wants to shift to “Euro” and 33.33 per cent (6
respondents) wants to shift to “other currency” other than “Euro and Pound”.
It is to be noted here that maximum number of respondents want to shift to Euro when
compared to other currency.
149
SMEs OBSERVING DEPB RATIO260 WHILE NEGOTIATING ORDERS WITH
FOREIGN CUSTOMERS
Table No. 4.11.
Factor
Yes
No
TOTAL
No. of Respondents
10
40
50
% of Respondents
20.00
80.00
100
Source: Primary Data
Graph No. 4.11.
Observation of - DEPB
10
Yes
No
50
40
TOTAL
From the above it is clear that out of the total 50 respondents, 20 per cent (10 respondents)
says they keep an eye on DEPB ratio while negotiating the orders with foreign customers
and 80 per cent (40 respondents) say they don’t observe DEPB while negotiating with
foreign customers.
260
Duty Entitlement Pass Book
150
IMPACT OF DEPB RATIO261 TOWARDS PROFITABILITY OF COMPANY
Table No. 4.12.
Yes
No
TOTAL
No. of Respondents
2
48
50
% of Respondents
4.00
96.00
100
Source: Primary Data
Graph No. 4.12.
Impact of DEPB
50
Yes
48
50
No
TOTAL
2
From the above it is clear that out of the total 50 respondents, 4 per cent (2 respondents)
feel DEPB ratio will have impact on profitability. Whereas 96 per cent (48 respondents)
feel the other way round.
261
Duty Entitlement Pass Book
151
EUROPE OR US – “EXIM” –INCREASE/DECREASE CONCENTRATION
Table No. 4.13.
No. of Respondents
European
Export
Increase &
US Export
Decrease
5
European
Export
Decrease & US
Export
Increase
5
% of Respondents
10.00
10.00
Not
Applicable
No
Idea
Total
13
27
50
26.00
54.00
100
Source: Primary Data
Graph No. 4.13.
EXIM Increase / Decrease Concentration
100%
10.00
10.00
26.00
54.00
100
13
27
50
50%
5
5
0%
European
export
increase& US
export
decrease
European
Not applicable
export
decrease& US
export increase
No. of Respondents
No idea
Total
% of Respondents
From the above it is clear that out of the total respondents of 50, 10 per cent (5
respondents) concentrates on “European Export Increase and US Export Decrease”,
another 10 per cent (5 respondents) concentrates on “European Export Decrease and US
Export Increase, 26 per cent (13 respondents) say it is not applicable for them and the
balance 54 per cent (27 respondents) say they have no idea regarding this.
It is to be noted here that maximum number of respondents have no idea about their export
and import variation/concentration.
152
INVESTMENT IN HEDGE FUNDS
Table No. 4.14
Yes
No
TOTAL
No. of Respondents
27
23
50
% of Respondents
54.00
46.00
100
Source: Primary Data
Graph No. 4.14
Investment in Hedge Funds
27
50
Yes
23
No
TOTAL
From the above it is clear that out of the total 50 respondents, 54 per cent (27 respondents)
invest in Hedge Funds and 46 per cent (23 respondents) do not invest in Hedge Funds.
153
HEDGING INSTRUMENTS / STRATEGIES ADOPTION MODE
Table No. 4.15
Factor
Foreign
Not
Debt
Answered
Forwards Futures Options Swaps
No. of
Respondents
06
% of
Respondents
22.22
Source: Primary Data
TOTAL
07
09
00
00
05
27
25.92
33.33
00
00
18.53
100
Graph No. 4.15
Hedging Instruments/Strategies Adoption
Mode
100
100
22.22
50
0
33.33
25.93
6
7
Forwards
Futures
9
Options
0.00
0
Swaps
No. of Respondents
18.52
0.00
5
0
27
Foreign
Debt
Not answer
TOTAL
% of Respondents
Out of the total 50 respondents, 27 respondents say that they invest in Hedging funds
(Table.No.4.14).From the above it is clear that out of the total 27 respondents, 22.22 per
cent (6 respondents) adopt “Forwards”, 25.92 per cent (7 respondents) adopt “Futures”,
33.33 per cent (9 respondents) adopt “Options” and 18.53 per cent (5 respondents) have
not answered any option towards adoption of Hedging Strategies / Instruments.
It is to be noted here that maximum number of respondents choose “Options” as their
hedging strategy.
154
For “Factor Consideration” in the following pages the abbreviations
should be read as follows:
VHC
–
Very High Consideration
HC
–
High Consideration
LC
–
Low Consideration
VLC
–
Very Low Consideration
NC
–
No Consideration
For Consideration of “Impact” in the following pages the abbreviations
should be read as follows:
VH
–
Very High Impact
H
–
High Impact
L
–
Low Impact
VL
–
Very Impact
NO
–
No Impact
155
FACTOR CONSIDERATION “PROFOUNDNESS” WHILE
INVESTING IN HEDGE FUNDS
FOR FINALIZING INVESTMENT
1. HEDGE FUND INDUSTRY
Table No. 4.16
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
7
6
8
1
5
27
% of Respondents
25.93
22.22
29.63
3.70
18.52
100
Source: Primary Data
Graph No. 4.16
Consideration of Hedge Fund Industry
120
100
100
80
60
40
20
25.93
7
29.63
22.22
18.52
8
6
1
3.70
27
5
0
VHC
HC
LC
No. of Respondents
VLC
NC
TOTAL
% of Respondents
Out of the total of 50 respondnets, 27 respondents only go for Hedging. So, from the above
it is clear that out of the total 27 respondents, 25.93 per cent (7 respondents) gives very
high consideration, 22.22 per cent (6 respondents) gives high consideration, 29.63 per cent
(8 respondents) give low consideration, 3.70 per cent (1 respondent) gives very low
consideration and 18.52 per cent (5 respondent) gives no consideration regarding “Hedge
Fund Industry” while finalizing Investments in Hedge Funds.
156
2. KEY PLAYERS AND THEIR WORTH IN HEDGE FUND INDUSTRY
Table No. 4.17.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
8
7
4
0
8
27
% of Respondents
29.63
25.93
14.81
0.00
29.63
100
Source: Primary Data
Graph No. 4.17.
Key players and their worth for finalizing
hedge investment
100
8
29.63
VHC
7
25.93
HC
4 14.81
LC
No. of Respondents
0 0.00
VLC
29.63
27
NC
TOTAL
8
% of Respondents
Out of the total 50 respondents, only 27 respondents go for hedging. So, from the above it
is clear that out of the total 27 respondents, 29.63 per cent (8 respondents) gives very high
consideration, 25.93 per cent (7 respondents) gives high consideration, 14.81 per cent (4
respondents) give low consideration, 00 per cent (0 respondent) gives very low
consideration and 29.63 per cent (8 respondent) gives no consideration towards “Key
Players and their worth” in the Hedge fund industry while finalizing Investments in Hedge
Funds.
157
3. OPERATIONAL RISKS262
Table No. 4.18
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
3
5
6
5
8
27
% of Respondents
11.11
18.52
22.22
18.52
29.63
100
Source: Primary Data
Graph No. 4.18.
OPERATIONAL RISKS
100
100
50
3
11.11
22.22
18.52
18.52
29.63
5
6
5
8
HC
LC
VLC
NC
27
0
VHC
No. of Respondents
TOTAL
% of Respondents
Out of the total 50 respondnets, only 27 respondents go for hedge funds. So, from the
above it is clear that out of the total 27 respondents, 11.11 per cent (3 respondents) gives
very high consideration, 18.52 per cent (5 respondents) gives high consideration, 22.22 per
cent (6 respondents) give low consideration, 18.52 per cent (5 respondent) gives very low
consideration and 29.63 per cent (8 respondent) gives no consideration towards
“Operational Risks” while finalizing Investments in Hedge Funds.
It is to be noted here that maximum respondents are not much worried about “Operation
Risks”
262
Risks associated with operating environment including middle and back office functions such as trade
processing, accounting and administration
158
4. PROS AND CONS OF INVESTING IN LONG TERM AND SHORT TERM FUNDS263
Table No. 4.19.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
7
12
5
3
0
27
% of Respondents
25.93
44.44
18.52
11.11
0.00
100
Source: Primary Data
Graph No. 4.19
PROS AND CONS OF INVESTING IN LONG TERM & SHORT TERM
100
FUNDS
100
80
60
44.44
40
20
27
25.93
7
12
18.52
11.11
5
3
0 0.00
LC
VLC
NC
0
VHC
HC
No. of Respondents
TOTAL
% of Respondents
Out of the total 50 respondents, only 27 respondents go for hedge funds. So, from the
above it is clear that out of the total 27 respondents, 25.93 per cent (7 respondents) gives
very high consideration, 44.44 per cent (12 respondents) gives high consideration, 18.52
per cent (5 respondents) give low consideration and 11.11 per cent (3 respondent) gives
very low consideration towards “Pros and Cons of Investing in Long Term and Short Term
Funds” while finalizing Investments in Hedge Funds.
It is to be noted here that maximum gives high consideration for the Pros and Cons before
finalizing investments.
263
Short term fund refers to instruments which are easily convertible to cash
159
TAKING “OPINION OF FINANCIAL ADVISOR” WHILE
INVESTING IN HEDGE FUNDS
Table No. 4.20.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
5
5
3
2
12
27
% of Respondents
18.52
18.52
11.11
7.41
44.44
100
Source: Primary Data
Graph No. 4.20.
Taking Opinion of Financial Advisor
100
44.44
100
18.52
50
18.52
11.11
7.41
5
5
3
2
VHC
HC
LC
VLC
12
27
0
No. of Respondents
NC
TOTAL
% of Respondents
Out of the total 50 respondents, 27 respondents go for hedge funds. So from the above it is
clear that out of the total 27 respondents, 18.52 per cent (5 respondents) gives very high
consideration, 18.52 per cent (5 respondents) gives high consideration, 11.11 per cent (3
respondents) give low consideration, 7.41 per cent (2 respondent) gives very low
consideration and 44.44 per cent (12 respondent) gives no consideration towards “Opinion
of Financial Advisor” while investing in Hedge Funds.
It it to be noted here that maximum number of respondents do not go for opinions.
160
HEDGE FUND AS “INVESTMENT GOALS”
Table No. 4.21.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
13
12
2
0
0
27
% of Respondents
48.15
44.44
7.41
0.00
0.00
100
Source: Primary Data
Graph No. 4.21.
Investment Goals
100%
80%
48.15
44.44
7.41
100
60%
40%
20%
13
12
0%
VHC
HC
0.00
0.00
0
0
VLC
NC
2
LC
No. of Respondents
27
TOTAL
% of Respondents
Out of the total of 50 respondents, 27 respondents only invest in hedge funds. So, from the
above it is clear that out of the total 27 respondents, 48.15 per cent (13 respondents) gives
very high consideration, 44.44 per cent (12 respondents) gives high consideration and 7.41
per cent (2 respondents) give low consideration towards “Investment Goals” while
investing in Hedge Funds.
161
“RISK264 TOLERANCE LEVEL” TOWARDS HEDGE FUND
Table No. 4.22.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
8
12
4
3
0
27
% of Respondents
29.63
44.44
14.81
11.11
0.00
100
Source: Primary Data
Graph No. 4.22.
Risk Tolerance Level
100%
80%
60%
29.63
44.44
14.81
8
12
4
11.11
100
40%
20%
0.00
0%
VHC
HC
LC
No. of Respondents
VLC
NC
TOTAL
% of Respondents
Out of the total of 50 respondents, only 27 respondents go for hedge fund investments. So
from the above it is clear that out of the total 27 respondents, 29.63 per cent (8
respondents) gives very high consideration, 44.44 per cent (12 respondents) gives high
consideration, 14.81 per cent (4 respondents) give low consideration and 11.11 per cent (3
respondent) gives very low consideration towards the factor “Risk Tolerance Level” while
investing in Hedge Funds.
It is to be noted that maximum number of respondents give high consideration for “Risk
tolerance”.
264
Refers to the maximum loss a firm can bear
162
VIEWS FROM PUBLISHED SOURCE FOR HEDGE FUND INVESTMENTS
Table No. 4.23.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
7
10
4
3
3
27
% of Respondents
25.93
37.04
14.81
11.11
11.11
100
Source: Primary Data
Graph No. 4.23.
Views from Published Source
100
100
80
60
25.93
37.04
40
20
14.81
7
10
0
VHC
HC
11.11
11.11
4
3
3
LC
VLC
NC
No. of Respondents
27
TOTAL
% of Respondents
Out of the total 50 respondents, only 27 respondents go for hedge fund investments. So
from the above it is clear that out of the total 27 respondents, 25.93 per cent (7
respondents) gives very high consideration, 37.04 per cent (10 respondents) gives high
consideration, 14.81 per cent (4 respondents) give low consideration, 11.11 per cent (3
respondent) gives very low consideration and 11.11 per cent (3 respondent) gives no
consideration towards the factor “Views from Published Source” while investing in Hedge
Funds.
It is to be noted here that maximum number of respondents give consideration for
“Published source Views”.
163
DISCUSSION WITH HEDGE FUND MANAGERS FOR HEDGE FUNDS
Table No. 4.24
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
5
8
5
2
7
27
% of Respondents
18.52
29.63
18.52
7.41
25.93
100
Source: Primary Data
Graph No. 4.24.
Interaction with hedge fund managers
100
100
80
60
29.63
18.52
40
20
25.93
18.52
27
7.41
5
8
VHC
HC
5
2
7
VLC
NC
0
LC
No. of Respondents
TOTAL
% of Respondents
Out of the total 50 respondents, only 27 respondents go for hedge fund investments. So,
from the above it is clear that out of the total 27 respondents, 18.52 per cent (5
respondents) gives very high consideration, 29.63 per cent (8 respondents) gives high
consideration, 18.52 per cent (5 respondents) give low consideration, 7.41 per cent (2
respondent) gives very low consideration and 25.93 per cent (7 respondent) gives no
consideration towards “Interaction with Hedge Fund Managers” while investing in Hedge
Funds.
164
OPINION FROM BROKER OR LICENSED INVESTMENT CONSULTANT
Table No. 4.25.
YES
NO
TOTAL
No. of Respondents
12
15
27
% of Respondents
44.44
55.56
100
Source: Primary Data
Graph No. 4.25
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
15
55.56
Percentage
Numbers
12
Yes
44.44
No
Out of the total 50 respondents, 27 respondents go for hedge fund investments. So, from
the above it is clear that out of the total 27 respondents, 44.44 per cent (12 respondents)
take opionion from brokers or licensed investment consultants and 55.56 per cent (15
respondents) does not take any opinion from brokers or licensed investment consultants.
It is to be noted here that maximum number of respondents don’t go for opinions.
165
REMITTANCE265TOWARDSHEDGE FUND
Table No. 4.26.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
8
9
8
0
2
27
% of Respondents
29.63
33.33
29.63
0.00
7.41
100
Source: Primary Data
Graph No. 4.26.
Remittance
150
100
100
50
29.63
8
33.33
9
29.63
8
0.00
7.41
2
VHC
HC
LC
VLC
NC
0
No. of Respondents
27
TOTAL
% of Respondents
Out of the total 50 respondents, 27 respondents go for hedge fund investments. So, from
the above it is clear that out of the total 27 respondents, 29.63 per cent (8 respondents)
gives very high consideration, 33.33 per cent (9 respondents) gives high consideration,
29.63 per cent (8 respondents) give low consideration and 7.41 per cent (2 respondent)
gives no consideration towards the factor “Remittance” under “Hedge Fund Terms” while
investing in Hedge Funds.
It is to be noted here that maximum number of respondents give high consideration for
‘Remittance’
265
Process of sending money to remove obligation
166
MANAGEMENT FEE266 TOWARDS HEDGE FUND
Table No. 4.27.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
4
5
11
2
5
27
% of Respondents
14.81
18.52
40.74
7.41
18.52
100
Source: Primary Data
Graph No. 4.27.
Management Fee
100
100
40.74
14.81
18.52
4
5
11
VHC
HC
LC
7.41
50
18.52
27
2
5
VLC
NC
0
TOTAL
Out of the 50 respondents, only 27 respondents go for hedge fund investments. So, from
the above it is clear that out of the total 27 respondents, 14.81 per cent (4 respondents)
gives very high consideration, 18.52 per cent (5 respondents) gives high consideration,
40.74 per cent (11 respondents) gives low consideration. 7.41 per cent (2 respondents)
gives very low consideration and 18.52 per cent (5 respondents) gives no consideration
towards the factor “Management Fee” under “Hedge Fund Terms” while investing in
Hedge Funds.
It is to be noted here that maximum number of respondents give low consideration for the
same.
266
Fee charged on the capital invested
167
PERFORMANCE FEE267 TOWARDS HEDGE FUND
Table No. 4.28.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
5
4
8
3
7
27
% of Respondents
18.52
14.81
29.63
11.11
25.93
100
Source: Primary Data
Graph No. 4.28.
Performance Fee
100
100
80
60
40
20
29.63
18.52
5
14.81
4
25.93
11.11
8
3
27
7
0
VHC
HC
LC
VLC
NC
TOTAL
Out of the total of 50 respondents, 27 respondents only invest in hedge funds. So, from the
above it is clear that out of the total 27 respondents, 18.52 per cent (5 respondents) gives
very high consideration, 14.81 per cent (4 respondents) gives high consideration, 29.63 per
cent (8 respondents) gives low consideration. 11.11 per cent (3 respondents) gives very
low consideration and 25.93 per cent (7 respondents) gives no consideration towards the
factor “Performance Fee” under “Hedge Fund Terms” while investing in Hedge Funds.
It can be said that considertaion given is not much effective since it is more or less equal
towards low consideration and no consideratin.
267
Payment made to Fund Managers for generating positive return
168
WITHDRAWAL AND REDEMPTION FEE268
TOWARDS HEDGE FUNDS
Table No. 4.29.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
4
6
10
2
5
27
% of Respondents
14.81
22.22
37.04
7.41
18.52
100
Source: Primary Data
Graph No. 4.29.
Redemption Fee
100
100
80
60
37.04
40
20
22.22
14.81
4
6
VHC
HC
10
2
7.41
18.52
5
27
0
LC
VLC
NC
TOTAL
Out of the total respondents of 50, only 27 go for hedge fund investments. So, from the
above it is clear that out of the total 27 respondents, 14.81 per cent (4 respondents) gives
very high consideration, 22.22 per cent (6 respondents) gives high consideration, 37.04 per
cent (10 respondents) gives low consideration. 7.41 per cent (2 respondents) gives very
low consideration and 18.52 per cent (5 respondents) gives no consideration towards the
factor “Withdrawal and Redemption Fee” under “Hedge Fund Terms” while investing in
Hedge Funds.
268
Fee collected by investing company for practicing timing (30 days to one year)
169
ACCOUNTANT OPINION TOWARDS TAX IMPLICATIONS
FOR HEDGE FUND
Table No. 4.30.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
13
7
7
0
0
27
% of Respondents
48.15
25.93
25.93
0.00
0.00
100
Source: Primary Data
Graph No. 4.30.
Accountant Opinion
100%
80%
60%
48.15
25.93
25.93
13
7
7
100
40%
20%
0%
VHC
HC
LC
0
0.00
VLC
0
0.00
NC
27
TOTAL
Out of the total 50 respondents, only 27 respondents go for hedge fund investments. So,
from the above it is clear that out of the total 27 respondents, 48.15 per cent (13
respondents) gives very high consideration, 25.93 per cent (7 respondents) gives high
consideration and 25.93 per cent (7 respondents) give low consideration towards the factor
“Accountant Opinion for Tax implications” while investing in Hedge Funds.
It is to be noted here that maximum respondents go for accountant opinion for tax
implications.
170
RECEIVE AND FILE MONTHLY OR QUARTERLY UPDATES OF
INVESTMENTS TO ADVISORS
Table No. 4.31.
VHC
HC
LC
VLC
NC
TOTAL
No. of Respondents
5
4
9
2
7
27
% of Respondents
18.52
14.81
33.33
7.41
25.93
100
Source: Primary Data
Graph No. 4.31.
Filing updates to Advisors
100%
80%
60%
18.52
14.81
33.33
7.41
25.93
100
5
4
9
2
7
27
HC
LC
VLC
NC
40%
20%
0%
VHC
No. of Respondents
TOTAL
% of Respondents
Our of the total 50 respondents, only 27 respondents go for hedge fund investments. So,
from the above it is clear that out of the total 27 respondents, 18.52 per cent (5
respondents) gives very high consideration, 14.81 per cent (4 respondents) gives high
consideration, 33.33 per cent (9 respondents) give low consideration, 7.41 per cent (2
respondent) gives very low consideration and 25.93 per cent (7 respondent) gives no
consideration towards the factor “Receive and File Monthly or Quarterly updates to
advisors” while investing in Hedge Funds.
171
“FIRM SIZE” TO HEDGE
Table No. 4.32
VH
H
L
VL
NO
TOTAL
No. of Respondents
12
8
7
0
0
27
% of Respondents
44.44
29.63
25.93
0.00
0.00
100
Source: Primary Data
Graph No. 4.32
Firm Size
100
100
80
60
44.44
29.63
40
20
12
8
27
25.93
7
0
0.00
0
0.00
0
VH
H
L
VL
NO
TOTAL
Out of the total 50 respondents, only 27 respondents go for hedging. So, from the above it
is clear that out of the total respondents of 27, 44.44 per cent (12 respondents) have said it
will have very high impact, 29.63 per cent (8 respondents) have said high impact and 25.93
per cent (7 respondents) have said low impact for the factor “Firm Size” towards the effect
of decision to Hedge Foreign Currency.
It is to be noted here that maximum respondents feel “Firm Size” will have high impact
towards decision to hedge foreign currency.
172
“LIQUIDITY” TO HEDGE
Table No.4.33
VH
H
L
VL
NO
TOTAL
No. of Respondents
8
7
8
3
1
27
% of Respondents
29.63
25.93
29.63
11.11
3.70
100
Source: Primary Data
Graph No. 4.33.
Liquidity
100
100
80
60
40
20
29.63
25.93
8
7
VH
H
29.63
8
27
11.11
3
1 3.70
VL
NO
0
L
No. of Respondents
TOTAL
% of Respondents
Out of the total 50 respondents, only 27 go for hedging. So, from the above it is clear that
out of the total respondents of 27, 29.63 per cent (8 respondents) have said very high,
25.93 per cent (7 respondents) have said high, 29.63 per cent (8 respondents) have said
low, 11.11 per cent (3 respondents) have said very low and 3.70 per cent (1 respondent)
have said no consideration for the factor “Leverage” towards the effect/impact of decision
to Hedge Foreign Currency.
173
“PROFITABILITY” TO HEDGE
Table No. 4.34.
VH
H
L
VL
NO
TOTAL
No. of Respondents
9
7
9
2
0
27
% of Respondents
33.33
25.93
33.33
7.41
0.00
100
Source: Primary Data
Graph No. 4.34.
Profitability of Firm
100
100
80
60
40
20
33.33
9
25.93
7
33.33
9
27
2
7.41
0 0.00
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
Out of the total 50 respondents, only 27 respondents go for hedging. So, from the above it
is clear that out of the total respondents of 27, 33.33 per cent (9 respondents) have said
very high, 25.93 per cent (7 respondents) have said high, 33.33 per cent (9 respondents)
have said low and 7.41 per cent (2 respondents) have said very low for the factor
“Liquidity and Profitability” towards the effect of decision to Hedge Foreign Currency.
174
“SALES GROWTH” TO HEDGE
Table No. 4.35
VH
H
L
VL
NO
TOTAL
No. of Respondents
3
7
8
3
6
27
% of Respondents
11.11
25.93
29.63
11.11
22.22
100
Source: Primary Data
Graph No. 4.35.
Sales growth
100
100
80
60
40
20
25.93
11.11
3
29.63
11.11
7
3
H
27
8
0
VH
22.22
L
No. of Respondents
VL
6
NO
TOTAL
% of Respondents
Out of the total 50 respondents, only 27 respondents go for hedging. So, from the above it
is clear that out of the total respondents of 27, 11.11 per cent (3 respondents) have said
very high, 25.93 per cent (7 respondents) have said high, 29.63 per cent (8 respondents)
have said low, 11.11 per cent (3 respondents) have said very low and 22.22 per cent (6
respondent) have said no consideration for the factor “Sales Growth” towards the effect of
decision to Hedge Foreign Currency.
175
“RBI AMENDMENTS” AND FLUCTUATION
Table No. 4.36
VH
H
L
VL
NO
TOTAL
No. of Respondents
40
10
0
0
0
50
% of Respondents
80.00
20.00
0.00
0.00
0.00
100
Source: Primary Data
Graph No. 4.36.
RBI Amendments - Impact
100
80.00
100
80
60
40
20
0
40
50
20.00
0.00
10
VH
H
0
L
No. of Respondents
0.00
0.00
0
0
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 80.00 per cent (40
respondents) have said very high and 20 per cent (10 respondents) have said high for the
factor “RBI Amendments” towards the role for rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel RBI amendments have impact
towards currency fluctuations.
176
“INDIAN INFLATATION RATE” AND FLUCTUATION
Table No. 4.37.
VH
H
L
VL
NO
TOTAL
No. of Respondents
11
12
15
12
0
50
% of Respondents
22.00
24.00
30.00
24.00
0.00
100
Source: Primary Data
Graph No. 4.37.
100
100
90
80
70
60
50
50
40
30
20
% of Respondents
30
22
11
24
12
No. of Respondents
24
15
12
10
0 0
0
VH
H
L
VL
NO
TOTAL
From the above it is clear that out of the total respondents of 50, 22.00 per cent (11
respondents) have said very high, 24.00 per cent (12 respondents) have said high, 30.00 per
cent (15 respondents) have said low and 24.00 per cent (12 respondents) have said very
low for the factor “Indian Inflation Rate” towards the role of rupee dollar fluctuations.
177
“GLOBAL FINANCIAL CRISIS” AND FLUCTUATION
Table No. 4.38.
VH
H
L
VL
NO
TOTAL
No. of Respondents
16
15
8
5
6
50
% of Respondents
32.00
30.00
16.00
10.00
12.00
100
Source: Primary Data
Graph No. 4.38.
Global Financial Crisis - Impact
100
100
80
50
60
40
20
32.00
16
30.00
15
8
16.00
5
10.00
6
12.00
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 32.00 per cent (16
respondents) have said very high, 30.00 per cent (15 respondents) have said high, 16.00 per
cent (8 respondents) have said low, 10.00 per cent (5 respondents) have said very low and
12.00 per cent (6 respondent) have said no for the factor “Global Financial Crisis” towards
the role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel global financial crisis has
impact towards currency fluctuations.
178
“FINANCIAL SCAMS IN INDIA” AND FLUCTUATION
Table No. 4.39.
VH
H
L
VL
NO
TOTAL
No. of Respondents
7
4
9
9
21
50
% of Respondents
14.00
8.00
18.00
18.00
42.00
100
Source: Primary Data
Graph No. 4.39.
Financial Scams in India - Impact
100
100
80
60
42.00
40
20
7
14.00
4 8.00
9
18.00
9
18.00
50
21
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 14.00 per cent (7
respondents) have said very high, 8.00 per cent (4 respondents) have said high, 18.00 per
cent (9 respondents) have said low, 18.00 per cent (9 respondents) have said very low and
42.00 per cent (21 respondent) have said no for the factor “Financial Scams in India”
towards the role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel that financial scams in india
does not have a role towards currency fluctuations.
179
“FINANCIAL SCAMS IN OTHER MAJOR COUNTRIES” AND FLUCTUATION
Table No. 4.40
VH
H
L
VL
NO
TOTAL
No. of Respondents
3
7
12
7
21
50
% of Respondents
6.00
14.00
24.00
14.00
42.00
100
Source: Primary Data
Graph No. 4.40.
Financial scams in other countries Impact
100%
80%
6.00
14.00
24.00
14.00
42.00
100
3
7
12
7
21
50
60%
40%
20%
0%
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 6.00 per cent (3
respondents) have said very high, 14.00 per cent (7 respondents) have said high, 24.00 per
cent (12 respondents) have said low, 14.00 per cent (7 respondents) have said very low and
42.00 per cent (21 respondent) have said no for the factor “Financial Scams in other major
countries” towards the role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel that financial scams in other
countries have no impact towards currency fluctuations.
180
“POLITICAL LIBERALIZATION” AND FLUCTUATION
Table No. 4.41.
VH
H
L
VL
NO
TOTAL
No. of Respondents
7
5
6
5
27
50
% of Respondents
14.00
10.00
12.00
10.00
54.00
100
Source: Primary Data
Graph No. 4.41.
Political Liberalization - Impact
100%
14.00
10.00
12.00
10.00
54.00
100
7
5
6
5
27
50
VH
H
L
VL
NO
TOTAL
80%
60%
40%
20%
0%
No. of Respondents
% of Respondents
From the above it is clear that out of the total respondents of 50, 14.00 per cent (7
respondents) have said very high, 10.00 per cent (5 respondents) have said high, 12.00 per
cent (6 respondents) have said low, 10.00 per cent (5 respondents) have said very low and
54.00 per cent (27 respondent) have said no for the factor “Political Liberalization”
towards the role of rupee dollar fluctuations.
It is to be noted here that maximum respondents feel that political liberalization has no
impact towards currency fluctuations.
181
“UNDER VALUATION OF US DOLLAR” AND FLUCTUATION
Table No. 4.42.
VH
H
L
VL
NO
TOTAL
No. of Respondents
21
23
6
0
0
50
% of Respondents
42.00
46.00
12.00
0.00
0.00
100
Source: Primary Data
Graph No. 4.42.
Under valuations of US $ - Impact
100
42.00
50
21
46.00
100
12.00
23
6
0
VH
H
L
No. of Respondents
0.00
0
VL
0.00
0
50
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 42.00 per cent (21
respondents) have said very high, 46.00 per cent (23 respondents) have said high and
12.00 per cent (6 respondents) have said low for the factor “Under Valuation of US dollar”
towards the role of rupee dollar fluctuations.
182
“APPRECIATION OF INDIAN RUPEE VIS-À-VIS $” AND FLUCTUATION
Table No. 4.43.
VH
H
L
VL
NO
TOTAL
No. of Respondents
23
24
2
1
0
50
% of Respondents
46.00
48.00
4.00
2.00
0.00
100
Source: Primary Data
Graph No. 4.43.
Appreciation of INR - Impact
100
100
80
60
40
46.00
23
50
48.00
24
20
2 4.00
1 2.00
0 0.00
VL
NO
0
VH
H
L
No. of Respondents
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 46.00 per cent (23
respondents) have said very high, 48.00 per cent (24 respondents) have said high, 4.00 per
cent (2 respondents) have said low and 2.00 per cent (1 respondent) have said very low for
the factor “Appreciation of Indian Rupee vis-à-vis” towards the role of rupee dollar
fluctuations.
It is to be noted that maximum number of respondents feel that INR appreciation vis-à-vis
$ has more impact towards currency fluctuations.
183
“FOREIGN DIRECT INVESTMENT” AND FLUCTUATION
Table No. 4.44.
VH
H
L
VL
NO
TOTAL
No. of Respondents
13
16
9
5
7
50
% of Respondents
26.00
32.00
18.00
10.00
14.00
100
Source: Primary Data
Graph No. 4.44.
FDI - Impact
100
100
80
50
60
40
20
26.00
13
32.00
16
9
18.00
5
10.00
7
14.00
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 26.00 per cent (13
respondents) have said very high, 32.00 per cent (16 respondents) have said high, 18.00 per
cent (9 respondents) have said low, 10.00 per cent (5 respondents) have said very low and
14.00 per cent (7 respondent) have said no for the factor “Foreign Direct Investment”
towards the role of rupee dollar fluctuations.
184
“FOREIGN INSTITUTIONAL INVESTORS” AND FLUCTUATION
Table No. 4.45.
VH
H
L
VL
NO
TOTAL
No. of Respondents
17
13
10
4
6
50
% of Respondents
34.00
26.00
20.00
8.00
12.00
100
Source: Primary Data
Graph No. 4.45
FII - Impact
34.00
26.00
20.00
8.00
12.00
100
17
13
10
4
6
50
H
L
VL
NO
VH
No. of Respondents
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 34.00 per cent (17
respondents) have said very high, 26.00 per cent (13 respondents) have said high, 20.00 per
cent (10 respondents) have said low, 8.00 per cent (4 respondents) have said very low and
12.00 per cent (6 respondent) have said no for the factor “Foreign Institutional Investors”
towards the role of rupee dollar fluctuations.
It is to be noted that maximum respondents feel that FII has more impact towards currency
fluctuations.
185
“MACRO - ECONOMIC RISKS” AND FLUCTUATION
Table No. 4.46.
VH
H
L
VL
NO
TOTAL
No. of Respondents
7
17
8
2
16
50
% of Respondents
14.00
34.00
16.00
4.00
32.00
100
Source: Primary Data
Graph No. 4.46.
Macro Economic Risks - Impact
100
100
80
34.00
60
16.00
14.00
40
20
32.00
7
8
17
4.00
2
0
VH
H
L
No. of Respondents
VL
50
16
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 14.00 per cent (7
respondents) have said very high, 34.00 per cent (17 respondents) have said high, 16.00 per
cent (8 respondents) have said low, 4.00 per cent (2 respondents) have said very low and
32.00 per cent (16 respondent) have said no for the factor “Macro Economic Risks”
towards the role of rupee dollar fluctuations.
186
“INDUSTRY ECONOMIC RISKS” AND FLUCTUATION
Table No. 4.47.
VH
H
L
VL
NO
TOTAL
No. of Respondents
21
18
8
1
2
50
% of Respondents
42.00
36.00
16.00
2.00
4.00
100
Source: Primary Data
Graph No. 4.47.
Industry Economic Risks - Impact
100
100
50
42.00
36.00
16.00
21
18
8
0
VH
H
L
No. of Respondents
2.00
1
VL
4.00
2
NO
50
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 42.00 per cent (21
respondents) have said very high, 36.00 per cent (18 respondents) have said high, 16.00 per
cent (8 respondents) have said low, 2.00 per cent (1 respondents) have said very low and
4.00 per cent (2 respondent) have said no for the factor “Industry Economic Risks”
towards the role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel industry economic risks have
more impact towards currency flcutuations.
187
“FIRM - SPECIFIC RISKS” AND FLUCTUATION
Table No. 4.48.
VH
H
L
VL
NO
TOTAL
No. of Respondents
23
21
3
2
1
50
% of Respondents
46.00
42.00
6.00
4.00
2.00
100
Source: Primary Data
Graph No. 4.48.
Firm Specific Risk - Impact
100
100
80
60
40
20
0
46.00
23
42.00
50
6.00
21
3
VH
H
L
No. of Respondents
4.00
2
VL
2.00
1
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 46.00 per cent (23
respondents) have said very high, 42.00 per cent (21 respondents) have said high, 6.00 per
cent (3 respondents) have said low, 4.00 per cent (2 respondents) have said very low and
2.00 per cent (1 respondent) have said no for the factor “Firm-Specific Risk” towards the
role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel that firm-specific risk has more
impact towards currency fluctuations.
188
OVERSEAS BUSINESS RISK
“COMMERCIAL RISK269” AND FLUCTUATION
Table No. 4.49.
VH
H
L
VL
NO
TOTAL
No. of Respondents
5
6
8
10
21
50
% of Respondents
10.00
12.00
16.00
20.00
42.00
100
Source: Primary Data
Graph No. 4.49.
Commercial Risk - Impact
100
100
80
60
42.00
40
20
5
10.00
12.00
6
16.00
8
20.00
50
21
10
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 10.00 per cent (5
respondents) have said very high, 12.00 per cent (6 respondents) have said high, 16.00 per
cent (8 respondents) have said low, 20.00 per cent (10 respondents) have said very low and
42.00 per cent (21 respondent) have said no for the factor “Commercial Risk in Overseas
Business Risk” towards the role of rupee dollar fluctuations.
It is to be noted that maximum respondents feel that commercial risk has no impact
towards currency flcutuations.
269
Financial Risk assumed by seller when extending credit with-out any collateral
189
“FINANCIAL RISK270” AND FLUCTUATIONS
Table No. 4.50.
VH
H
L
VL
NO
TOTAL
No. of Respondents
4
7
12
9
18
50
% of Respondents
8.00
14.00
24.00
18.00
36.00
100
Source: Primary Data
Graph No. 4.50.
Financial risk - Impact
100
100
80
50
60
36.00
40
20
24.00
4 8.00
14.00
7
12
9
18.00
18
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 8.00 per cent (4
respondents) have said very high, 14.00 per cent (7 respondents) have said high, 24.00 per
cent (12 respondents) have said low, 18.00 per cent (9 respondents) have said very low and
36.00 per cent (18 respondent) have said no for the factor “Financial in Overseas Business
Risk” towards the role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel that financial risk has no impact
towards currency flcutuations.
270
Risk when not having adequate cash flow to meet financial obligation
190
“COUNTRY RISK271” AND FLUCTUATION
Table No. 4.51.
VH
H
L
VL
NO
TOTAL
No. of Respondents
4
8
6
5
27
50
% of Respondents
8.00
16.00
12.00
10.00
54.00
100
Source: Primary Data
Graph No. 4.51.
Country risk - Impact
100
100
80
54.00
60
40
20
50
27
4 8.00
8
16.00
6
12.00
5
10.00
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 8.00 per cent (4
respondents) have said very high, 16.00 per cent (8 respondents) have said high, 12.00 per
cent (6 respondents) have said low, 10.00 per cent (5 respondents) have said very low and
54.00 per cent (27 respondent) have said no for the factor “Country Risk in Overseas
Business Risk” towards the role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel that country risk will not have
impact towards currency fluctuations.
271
Collection of risk associated with investing in a foreign country (Political risk, economic risk, exchange
rate risk). To be considered when investing abroad.
191
“FOREIGN EXCHANGE RISK272” AND FLUCTUATIONS
Table No. 4.52.
VH
H
L
VL
NO
TOTAL
No. of Respondents
9
9
14
11
7
50
% of Respondents
18.00
18.00
28.00
22.00
14.00
100
Source: Primary Data
Graph No. 4.52.
Foreign exchange risk - Impact
100
100
80
60
40
20
18.00
9
18.00
9
28.00
14
0
VH
H
L
No. of Respondents
50
22.00
11
VL
714.00
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 18.00 per cent (9
respondents) have said very high, 18.00 per cent (9 respondents) have said high, 28.00 per
cent (14 respondents) have said low, 22.00 per cent (11 respondents) have said very low
and 14.00 per cent (7 respondent) have said no for the factor “Foreign Exchange Risk in
Overseas Business Risk” towards the role of rupee dollar fluctuations.
272
Risk of investment value change due to changes in currency exchange rates
192
“GOVERENMENT BUDGETS” AND FLUCTUATION
Table No. 4.53.
VH
H
L
VL
NO
TOTAL
No. of Respondents
17
17
12
0
4
50
% of Respondents
34.00
34.00
24.00
0.00
8.00
100
Source: Primary Data
Graph No. 4.53.
Government Budgets - Impact
100
100
80
34.00
60
40
20
17
34.00
24.00
17
VH
0
H
L
8.00
0.00
12
0
VL
4
NO
50
TOTAL
From the above it is clear that out of the total respondents of 50, 34.00 per cent (17
respondents) have said very high, 34.00 per cent (17 respondents) have said high, 24.00 per
cent (12 respondents) have said low and 8.00 per cent (4 respondent) have said no for the
factor “Government Budgets” towards the role of rupee dollar fluctuations.
It is to be noted that maximum respondents feel that government budget will have more
impact towards currency flcutuations.
193
“BALANCE OF TRADE LEVELS/TRENDS” AND FLUCTUATIONS
Table No. 4.54.
VH
H
L
VL
NO
TOTAL
No. of Respondents
7
8
20
10
5
50
% of Respondents
14.00
16.00
40.00
20.00
10.00
100
Source: Primary Data
Graph No. 4.54
Balance of Trade - Impact
100
100
80
60
40.00
14.00
40
20
7
16.00
8
20.00
20
50
10.00
10
0
VH
5
H
L
VL
NO
TOTAL
From the above it is clear that out of the total respondents of 50, 14.00 per cent (7
respondents) have said very high, 16.00 per cent (8 respondents) have said high, 40.00 per
cent (20 respondents) have said low, 20.00 per cent (10 respondents) have said very low
and 10.00 per cent (5 respondent) have said no for the factor “Balance of Trade Levels and
Trends” towards the role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents fell that balance of trade levels and
trends will have low impact towards currency flcutuations.
194
“INTEREST RATES” AND FLUCTUATIONS
Table No. 4.55.
VH
H
L
VL
NO
TOTAL
No. of Respondents
9
13
12
5
11
50
% of Respondents
18.00
26.00
24.00
10.00
22.00
100
Source: Primary Data
Graph No. 4.55.
Interest rates - Impact
100
100
80
50
60
40
26.00
18.00
20
9
13
24.00
12
5
10.00
22.00
11
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 18.00 per cent (9
respondents) have said very high, 26.00 per cent (13 respondents) have said high, 24.00 per
cent (12 respondents) have said low, 10.00 per cent (5 respondents) have said very low and
22.00 per cent (11 respondent) have said no for the factor “Interest Rates” towards the role
of rupee dollar fluctuations.
195
“SPECULATION” AND FLUCTUATION
Table No. 4.56.
VH
H
L
VL
NO
TOTAL
No. of Respondents
2
1
4
9
34
50
% of Respondents
4.00
2.00
8.00
18.00
68.00
100
Source: Primary Data
Graph No. 4.56.
Speculation - Impact
160
140
120
100
80
60
40
20
0
100
68.00
4
18.00
2.00
8.00
9
H
L
1
2
4.00
VH
No. of Respondents
VL
34
NO
50
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 2.00 per cent (4
respondents) have said very high, 1.00 per cent (2 respondents) have said high, 4.00 per
cent (8 respondents) have said low, 18.00 per cent (9 respondents) have said very low and
68.00 per cent (34 respondent) have said no for the factor “Speculation” towards the role of
rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel that speculation has no impact
towards currency fluctuatuions.
196
“CENTERAL BANK INTERVENTION” AND FLUCTUATION
Table No. 4.57.
VH
H
L
VL
NO
TOTAL
No. of Respondents
18
17
12
1
2
50
% of Respondents
36.00
34.00
24.00
2.00
4.00
100
Source: Primary Data
Graph No. 4.57.
Central bank intervention - Impact
100
100
80
50
60
40
36.00
18
34.00
17
20
24.00
12
1 2.00
2 4.00
VL
NO
0
VH
H
L
No. of Respondents
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 36.00 per cent (18
respondents) have said very high, 34.00 per cent (17 respondents) have said high, 24.00 per
cent (12 respondents) have said low, 2.00 per cent (1 respondents) have said very low and
4.00 per cent (2 respondent) have said no for the factor “Central Bank Intervention”
towards the role of rupee dollar fluctuations.
It is to be noted that maximum number of respondents feel that central bank intervention
gives more impact towards currency flcutuations.
197
INR / US $ FLUCTUATIONS IMPACT TOWARDS AUTO UNITS –
CONSIDERATION PROFOUNDNESS
FLUCTUATIONS AND WORKING CAPITAL
Table No. 4.58
VH
H
L
VL
NO
TOTAL
No. of Respondents
11
13
15
4
7
50
% of Respondents
22.00
26.00
30.00
8.00
14.00
100
Source: Primary Data
Graph No. 4.58.
Working Capital - Impact
100
100
80
50
60
40
20
22.00
11
26.00
13
30.00
15
14.00
4 8.00
7
VL
NO
0
VH
H
L
No. of Respondents
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 22.00 per cent (11
respondents) have said very high, 26.00 per cent (13 respondents) have said high, 30.00 per
cent (15 respondents) have said low, 8.00 per cent (4 respondents) have said very low and
14.00 per cent (7 respondent) have said no towards impact for the factor “Working
Capital” in automobile units due to exchange rate fluctuations.
198
FLUCTUATIONS AND EXPORT EARNINGS(FOREIGN EXCHANGE)
Table No. 4.59.
VH
H
L
VL
NO
TOTAL
No. of Respondents
5
6
24
14
1
50
% of Respondents
10.00
12.00
48.00
28.00
2.00
100
Source: Primary Data
Graph No. 4.59.
Export earnings - Impact
100%
80%
10.00
12.00
48.00
28.00
2.00
100
5
6
24
14
1
50
60%
40%
20%
0%
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 10.00 per cent (5
respondents) have said very high, 12.00 per cent (6 respondents) have said high, 48.00 per
cent (24 respondents) have said low, 28.00 per cent (14 respondents) have said very low
and 2.00 per cent (1 respondent) have said no towards impact for the factor “Export
Earnings” in automobile units due to exchange rate fluctuations.
199
FLUCTUATIONS AND IMPORT
Table No. 4.60.
VH
H
L
VL
NO
TOTAL
No. of Respondents
11
17
14
7
1
50
% of Respondents
22.00
34.00
28.00
14.00
2.00
100
Source: Primary Data
Graph No. 4.60.
Import
120
100
100
80
60
50
34.00
40
20
22.00
11
17
28.00
14
7
14.00
1
2.00
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 22.00 per cent (11
respondents) have said very high, 34.00 per cent (17 respondents) have said high, 28.00 per
cent (14 respondents) have said low, 14.00 per cent (7 respondents) have said very low and
2.00 per cent (1 respondent) have said no towards impact for the factor “Import regarding
Management of Exchange Rate Risk” in automobile units due to exchange rate
fluctuations.
200
FLUCTUATIONS AND TOTAL TURN OVER
Table No. 4.61.
VH
H
L
VL
NO
TOTAL
No. of Respondents
7
12
13
6
12
50
% of Respondents
14.00
24.00
26.00
12.00
24.00
100
Source: Primary Data
Graph No. 4.61.
Turn over
100
100
80
50
60
40
20
26.00
24.00
7
14.00
12
13
H
L
24.00
6
12.00
12
0
VH
10 No. of Respondents
VL
NO
TOTAL
10 % of Respondents
From the above it is clear that out of the total respondents of 50, 14.00 per cent (7
respondents) have said very high, 24.00 per cent (12 respondents) have said high, 26.00 per
cent (13 respondents) have said low, 12.00 per cent (6 respondents) have said very low and
24.00 per cent (12 respondent) have said no towards impact for the factor “Turnover
regarding Management of Exchange Rate Risk” in automobile units due to exchange rate
fluctuations
201
FLUCTUATIONS AND PROFITABILITY
Table No. 4.62.
VH
H
L
VL
NO
TOTAL
No. of Respondents
9
12
8
8
13
50
% of Respondents
18.00
24.00
16.00
16.00
26.00
100
Source: Primary Data
Graph No. 4.62.
Profitability
100
100
80
50
60
40
18.00
20
9
24.00
12
26.00
8
16.00
8
16.00
13
0
VH
H
L
11 No. of Respondents
VL
NO
TOTAL
11 % of Respondents
From the above it is clear that out of the total respondents of 50, 18.00 per cent (9
respondents) have said very high, 24.00 per cent (12 respondents) have said high, 16.00 per
cent (8 respondents) have said low, 16.00 per cent (8 respondents) have said very low and
26.00 per cent (13 respondent) have said no towards impact for the factor “Profitability
regarding Management of Exchange Rate Risk” in automobile units due to exchange rate
fluctuations
202
FLUCTUATIONS AND COST OF PRODUCT
Table No. 4.63.
YES
NO
TOTAL
No. of Respondents
46
04
50
% of Respondents
92.00
8.00
100
Source: Primary Data
Graph No. 4.63.
Cost of Product
4
Yes
N0
46
From the above it is clear that out of the total respondents of 50, 92.00 per cent (46
respondents) say cost of product gets affected in automobile units due to exchange rate
fluctuations and 8 percent (04 respondents) say cost of product does not get affected in
automobile units due to exchange rate fluctuations.
203
FLUCTUATION AND COMPETITIVE ADVANTAGE
Table No. 4.64.
VH
H
L
VL
NO
TOTAL
No. of Respondents
21
18
10
1
0
50
% of Respondents
42.00
36.00
20.00
2.00
0.00
100
Source: Primary Data
Graph No. 4.64.
Competitive advantage
120
100
100
80
60
50
42.00
36.00
40
21
20.00
18
20
10
1
2.00
0
0.00
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 42.00 per cent (21
respondents) have said very high, 36.00 per cent (18 respondents) have said high, 20.00 per
cent (10 respondents) have said low and 2.00 per cent (1 respondents) have said very low
towards impact for the factor “Competitive Advantage regarding Management of
Exchange Rate Risk” in automobile units due to exchange rate fluctuations.
204
FLUCTUATIONS AND CASH FLOWS
Table No. 4.65.
VH
H
L
VL
NO
TOTAL
No. of Respondents
2
6
24
4
14
50
% of Respondents
4.00
12.00
48.00
8.00
28.00
100
Source: Primary Data
Graph No. 4.65.
Cash flows
100
100
80
60
40
20
50
48.00
28.00
24
2 4.00
6
12.00
4 8.00
14
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 4.00 per cent (2
respondents) have said very high, 12.00 per cent (6 respondents) have said high, 48.00 per
cent (24 respondents) have said low, 8.00 per cent (4 respondents) have said very low and
28.00 per cent (14 respondent) have said no towards impact for the factor “Cash Flows
regarding Management of Exchange Rate Risk” in automobile units due to exchange rate
fluctuations
205
FLUCTUATIONS AND PROPORTION OF FOREIGN SALES TO TOTAL SALES
Table No. 4.66.
VH
H
L
VL
NO
TOTAL
No. of Respondents
9
13
14
2
12
50
% of Respondents
18.00
26.00
28.00
4.00
24.00
100
Source: Primary Data
Graph No. 4.66.
Foreign sales to total sales proportion
100
50
18.00
9
28.00
26.00
24.00
14
13
2
VH
H
L
No. of Respondents
4.00
12
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 18.00 per cent (9
respondents) have said very high, 26.00 per cent (13 respondents) have said high, 28.00 per
cent (14 respondents) have said low, 4.00 per cent (2 respondents) have said very low and
24.00 per cent (12 respondent) have said no towards impact for the factor “Proportion of
foreign sales / total sales” in automobile units due to exchange rate fluctuations.
206
FLUCTUATIONS AND MARKET SHARE IN DIFFERENT COUNTRIES
Table No. 4.67
VH
H
L
VL
NO
TOTAL
No. of Respondents
6
7
21
4
12
50
% of Respondents
12.00
14.00
42.00
8.00
24.00
100
Source: Primary Data
Graph No. 4.67
Market share in differnt countries - Impact
100
100
80
50
60
42.00
40
20
6
12.00
7
14.00
24.00
21
4
8.00
12
0
VH
H
L
No. of Respondents
VL
NO
TOTAL
% of Respondents
From the above it is clear that out of the total respondents of 50, 12.00 per cent (6
respondents) have said very high, 14.00 per cent (7 respondents) have said high, 42.00 per
cent (21 respondents) have said low, 8.00 per cent (4 respondents) have said very low and
24.00 per cent (12 respondent) have said no towards impact for the factor “Market share in
different countries” in automobile units due to exchange rate fluctuations.
207
HYPTHESES RESULTS
For Export Earning, Commercial Risk, Financial Risk, Country Risk and Foreign
Exchange Risk (H-1, H-2, H-3 & H-4)
ANOVA - MULTIPLE COMPARISONS – Bonferroni
Independent Variable – Export Earnings
95% Confidence
Dependent Variable
Mean
Std. error
Sig.
difference
1
2
3
4
5
Interval
Lower
Upper
Bound
Bound
COMR
-6.11562*
1.94004
0.015
-11.4005
-0.8307
FINR
-4.58621
3.38753
1.000
-13.8143
4.6418
COUR
4.58621
3.38753
1.000
-4.6418
13.8143
FOXR
1.00000
3.52948
1.000
-8.6147
10.6147
COMR
-5.49290*
1.51544
0.003
-9.6211
-1.3647
FINR
-5.30172
2.64613
0.297
-12.5101
1.9067
COUR
5.30172
2.64613
0.297
-1.9067
12.5101
FOXR
4.63235
2.75701
0.587
-2.8781
12.1428
COMR
-4.99160*
2.40586
0.025
-11.5489
1.5657
FINR
-8.53571
4.18247
0.273
-19.9352
2.8638
COUR
8.53571
4.18247
0.273
-2.8638
19.9352
FOXR
6.25000
4.34833
0.934
-5.6016
18.1016
COMR
-4.18067*
1.23843
0.017
-6.5561
.1947
FINR
-1.35714
2.15295
1.000
-7.2251
4.5108
COUR
1.35714
2.15295
1.000
-4.5108
7.2251
FOXR
6.05882
2.23833
0.053
-0.0419
12.1595
COMR
-4.10714*
1.30075
0.015
-7.6524
-0.5619
FINR
-4.10713
2.26129
0.445
-10.2704
2.0561
COUR
4.10714
2.26129
0.445
-2.0561
10.2704
FOXR
5.05882
2.35097
0.212
-1.3489
11.4665
*The mean difference is significant at the 0.05 level.
208
The above table is drawn considering “Export Earnings” as independent variable and
Commercial Risk (COMR), Financial Risk (FINR), Country Risk (COUR) and Foreign
exchange Risk (FORX) as dependent variable.
Considering the significant level of 0.05, it can be concluded that except commercial risk
all other risks say, financial risk, country risk and foreign exchange risk are significant
determinant of export earnings.
Since Commercial risk does not meet the criteria of
significant level of 0.05 it does not have any significance towards export earnings.
For Cost and Export Turnover (H – 5)
For the mentioned Hypothesis, the result show that “Export Turnover” has a mean of
3.0000 and “Cost” has a mean of 3.0200 and standard deviation is 1.42857 and 1.50496.
Since it has a lower value of standard deviation it indicates that the values of both the
series tend to be around their respective means.
By applying Pearson Correlation (significant at the 0.01 level (2-tailed), the calculated
value is -0.731 which shows a negative correlation between the studied variable at a
significance level of 0.01. The diagonal value is 1. Thus a negative correlation indicates
that the increase in any one of the parameters will inversely affect the other and vice versa.
209
For Exchange rate fluctuations and Export and Competitive Inter-relations (H -6)
For the mentioned Hypothesis, the result show that export has a mean of 2.1400 and
competitive advantage has a mean of 2.3000 and standard deviation is 1.17820 and
1.05463. Since it has a lower value of standard deviation it indicates that the values of
both the series tend to be around their respective means.
By applying Pearson Correlation (significant at the 0.01 level (2-tailed), the calculated
value is 0.668 which shows a positive correlation between the studied variable at a
significance level of 0.01. The diagonal value is 1. Thus a positive correlation indicates
that the increase in any one of the parameters will directly affect the other and vice versa.
210
FINDINGS, SUGGESTIONS AND
CONCLUSION
211
This chapter deals with the findings, suggestions and conclusion of the study.
5.1. Findings:
The following are the Findings of the study
1. Average exchange rate was high during 2009-10 while comparing other years from 2005-6
to 2010-11. (Table.2.4)
2. REER was 108.52 during 2007-8 while comparing other years from 2005-6 to 2010-11.
(Table.2.5.)
3. Volatility of INR to US $ was 0.68 per cent during 2008 while comparing to other years
from 2005 to 2010. (Table.2.7)
4. India’s Foreign exchange reserve in Gold was 22,972 US $ million in 2010-11 while
comparing with other years from 2005-6 to 2010-11 (Table.2.9)
5. India’s Foreign exchange Total reserves was 3,09,723 US $ million in 2007-8 while
comparing with other years starting from 2005-6 to 2010-11 (Table.2.9)
6. Total turnover in foreign exchange market was 13,695 US $ billion in 2010-11 while
comparing with other years from 2005-6 to 2010-11 (Table.2.10)
7. Total Share of spot turnover per cent was 51.9 in 2006-7 while comparing with other years
from 2005-6 to 2010-11 (Table2.10).
8. INR was stable in 2008 while compared with other years from 2006 to 2010.
9. 71.43 per cent of the respondents have foreign collaborations.
10. 70 per cent of the respondents revise price during rupee dollar fluctuations.
11. 28.57 per cent of respondents revise price every six months and 71.43 per cent of the
respondents revise price once a year.
212
12. 42 per cent of the respondents say they re-open the “Key Supply Contracts” with US based
customers due to currency fluctuations.
13. 38.10 per cent of the respondents say they re-open the “Key Supply Contracts” with less
than 5 customers whereas 61.90 per cent say they re-open with 5 and more customers.
14. 42 per cent of the respondents say they include “Currency Fluctuation Clause” in their old
agreement due to currency fluctuations.
15. 38.10 per cent of the respondents say they revise “Currency Fluctuation Clause” with less
than 5 customers whereas 61.90 per cent say they revise with 5 and more customers.
16. Due to fluctuation 36 per cent of the respondents want to shift to other currency.
17. 66.67 per cent of the respondents want to shift to “Euro” due to rupee and dollar
fluctuations.
18. Due to fluctuation of rupee and dollar 10 per cent of the respondents concentrate on
“European Export Increase and US Export Decrease” and 10 per cent concentrates on
“European Export Decrease and US Export Increase. 54 per cent of the total respondents
have said that they have no idea on what to concentrate.
19. Out of the total respondents 54 per cent say that they invest in Hedge Funds in India
20. In adoption of Hedging Instruments / Strategies, 22.22 per cent concentrates on
“Forwards”, 25.92 per cent on “Futures” and 33.33 per cent on “Options”.
21. 25.93 per cent of the respondents give very high consideration and 3.70 per cent gives very
low consideration towards the factor “Hedge Fund Industry”, while finalizing investments
in Hedge Funds.
22. 29.63 per cent of the respondents gives very high consideration and 29.63 per cent does not
give any consideration to the factor “Key Players and their worth” while finalizing
investments in Hedge Funds.
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23. 22.22 per cent of the respondents give low consideration and 29.63 per cent gives no
consideration to the factor “Operational Risks” while finalizing Investments in Hedge
Funds.
24. 44.44 per cent of the respondents give high consideration towards the “positive and
negative factors of investing in long-term and short-term funds”, while finalizing
investments in Hedge Funds.
25. 44.44 per cent of the respondents say they don’t take “Opinion of Financial Advisor” while
investing in Hedge Funds.
26. 48.15 per cent of the respondents say they give very high consideration towards the factor
“Investment Goals” while investing in Hedge Funds.
27. 44.44 per cent of the respondents give high consideration towards the factor “Risk
Tolerance” while investing in Hedge Funds.
28. 37.04 per cent of the respondents give high consideration towards “Views from Published
Source” while investing in Hedge Funds.
29. 25.93 per cent of the respondents say they never “Interact with Hedge Fund Managers”,
while investing in Hedge Funds.
30. 44.44 per cent of the respondents say that they get “Opinion from Broker or Licensed
Investment Consultant” while investing in Hedge Funds.
31. 33.33 per cent of the respondents say they give high consideration towards “Remittance –
Hedge Fund Terms” while investing in Hedge Funds.
32. 40.74 per cent of the respondents say they given low consideration towards “Management
Fee – Hedge Fund Terms” while investing in Hedge Funds.
33. 25.93 per cent of the respondents say they never consider the factor “Performance Fee –
Hedge Fund Terms” while investing in Hedge Funds.
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34. 14.81 per cent of the respondents say they give very high consideration towards
“Withdrawal and Redemption Fee – Hedge Fund Terms” while investing in Hedge Funds.
35. 48.15 per cent of the respondents say they give very high consideration towards
“Accountant Opinion for Tax Implications”, while investing in Hedge Funds.
36. 33.33 per cent of the respondents say they give low consideration towards “Receiving and
filing month or quarterly updates”, while investing in Hedge Funds.
37. 44.44 per cent of the respondents say that the factor “Firm Size” is considered very high
towards the effect of decision to Hedge Foreign Currency.
38. Only 3.70 per cent of the respondents say that the factor “Leverage” is not considered
towards the effect of decision to Hedge Foreign Currency.
39. 33.33 per cent of the respondents say that the factor “Liquidity and Profitability” is
considered very high towards the effect of decision to Hedge Foreign Currency.
40. 22.22 per cent of the respondents say that the factor “Sales Growth” is not considered
towards the effect of decision to Hedge Foreign Currency.
41. 40 per cent of the respondents consider “RBI Amendments” play a major role towards
rupee dollar fluctuations.
42. 32 per cent of the respondents consider “Global financial crisis” play a major role towards
rupee dollar fluctuations.
43. 42 per cent of the respondents consider “Financial Scams in India” does not play a role
towards rupee dollar fluctuations.
44. 42 per cent of the respondents consider “Financial scams in other major countries, does not
play a role towards rupee dollar fluctuations.
45. 42 per cent of the respondents consider “Under valuation of US $”, play a major role
towards rupee dollar fluctuations.
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46. 46 per cent of the respondents consider “Appreciation of Indian Rupee vis-à-vis US $”;
play a major role towards rupee dollar fluctuations.
47. 14 per cent of the respondents consider “Foreign Direct Investment”, does not play a role
towards rupee dollar fluctuations.
48. 34 per cent of the respondents consider “Foreign Institutional Investors”, play a major role
towards rupee dollar fluctuations.
49. 32 per cent of the respondents consider “Macro Economic Risks”, does not play a role
towards rupee dollar fluctuations.
50. 42 per cent of the respondents consider “Industry Economic Risk”; play a major role
towards rupee dollar fluctuations.
51. 46 per cent of the respondents consider “Firm-Specific Risk”; play a major role towards
rupee dollar fluctuations.
52. 42 per cent of the respondents towards “Commercial Risk”, 36 per cent of the respondents
towards “Financial Risk”, 54 per cent respondents towards “Business Risk” and 14 per
cent of the respondents towards “Foreign Exchange Risk” consider that these risks do not
play a role towards rupee dollar fluctuations.
53. 22 per cent of the respondents consider “Interest Rates”, does not play a role towards rupee
dollar fluctuations.
54. 69 per cent of the respondents consider “Speculation”, does not play a role towards rupee
dollar fluctuations.
55. 36 per cent of the respondents consider “Central Bank Intervention”; play a major role
towards rupee dollar fluctuations.
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The following are the findings about the impact profoundness of respective factors
towards automobile units.
56. 22 per cent of the respondents say that “Working Capital” of an organization has very high
impact towards auto units during exchange rate fluctuations.
57. 24 per cent of the respondents say that “Export earnings” of an organization has low
impact towards auto units during exchange rate fluctuations.
58. 17 per cent of the respondents say that “Import” of an organization has high impact
towards auto units during exchange rate fluctuations.
59. 12 per cent of the respondents say that “Turnover” of an organization has no much effect
towards auto units during exchange rate fluctuations.
60. 13 per cent of the respondents say that “Profitability” of an organization has no impact
towards auto units during exchange rate fluctuations.
61. 92 per cent of the respondents say that the factor “Cost of products” has very high impact
towardsauto units during exchange rate fluctuations.
62. 21 per cent of the respondents say that “Competitive advantage” of an organization has
very high impact towards auto units during exchange rate fluctuations.
63. 24 per cent of the respondents say that “Cash Flows” of an organization has low impact
towards auto units during exchange rate fluctuations.
64. 12 per cent of the respondents say that “Proportion of foreign sales to total sales” of the
organization has no impact towards auto units during exchange rate fluctuations.
65. 21 per cent of the respondents say that “Market share in different countries” of the
organization has low impact towards auto units during exchange rate fluctuations.
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5.2. Suggestions:
The researcher gives the following suggestions based on the analysis and findings of the
study.
 The survey clearly says that 70 per cent of the respondents revise their prices during rupee
dollar fluctuations.
Due to price revision, cost of product will increase. Hence Government may give subsidy
or provide alternative methods like having plant in SEZ etc. to control revision of prices
and at the same time to develop the unutilised available sources.
 The survey clearly “Currency fluctuation clause” is included by only 42 per cent of the
respondents.
Government may intervene and make a standard format to see that all companies include
the clause in their agreement in order to have equality.
 36 per cent of the respondents of the survey want to shift to other currency (from US
dollar) due to fluctuations.
Government may frame a logical method to select currency that is beneficial for the units
as well as for the country and can also intervene a “Subsidy Clause” for those who go by
what government says.
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 37.04 per cent of the respondents give consideration towards “Views from published
source” before or while investing in Hedge funds.
Since 1/3 depends on the published source of information, Government should take
measures and see that proper unbiased information are published by the media and other
sources taking into account the development of units and the country
 “Participation in foreign market exhibitions” are not considered or viewed seriously by
Indian auto component manufacturers.
Government should encourage all such SMEs to participate and prove themselves to
develop competitively further. Even if required, Government can waive certain fee for
those component manufacturers who regularly participate and prove themselves.
In
extreme cases Tax Holiday can also be given as a consideration. All these will encourage
more manufacturers to participate for the same.
 From the survey it is clear that only 13 per cent of the respondents feel impact towards
profitability due to currency fluctuations.
Quality consciousness has taken over profitability due to heavy competition and growth in
auto sector. Government and other bodies should support the component manufacturers by
providing, sanctioning loan as and when required and waiver or reducing interest for the
benefit of development.
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 More awareness should be brought to general public about Foreign exchange market, rupee
dollar fluctuation impacts etc. by conducting workshops, seminars in colleges and
institutes, SMEs and all other units so that they know what it is and how it affect each and
every one in the Universe.
 NewSMEs should be given a programme on exchange rate fluctuations conducted by the
Ministry and should be made mandatory for all organizations in order to proceed further
approval for their business.
 Workshops should be organized once a year or once in two years to all SMEs since the
topic is more sensitive and volatile in order to update the current happenings and to hint
about how to proceed in future
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5.3. Conclusion:
The researcher concludes the research by saying the following few lines (even though it is
not so easy to conclude a research like this).
The exchange rate is a key financial variable that affects decisions made by foreign
exchange investors, exporters, importers, bankers, businesses, financial institutions,
policymakers and tourists in the developed as well as developing world. Exchange rate
fluctuations affect the value of international investment portfolios, competitiveness of
exports and imports, value of international reserves, currency value of debt payments and
the cost to tourists in terms of the value of their currency. Movement in exchange rates,
thus have important implications for the economy’s business cycle, trade and capital flows
and are therefore crucial for understanding financial developments and changes in
economic policy. While discussing different exchange rate regimes, it is noted that there is
no consensus regarding an ideal exchange rate regime as it varies from country to country.
The choice of the optimal exchange rate regime varies across countries and through time,
depending upon circumstances. “Optimal” exchange rate system is not an option but rather
a decision determined by the failure of previous systems to deliver stability and sustained
growth.
The foreign exchange market in India today is equipped with several derivative
instruments.
Various informal forms of derivatives contacts have existed since time
immemorial though the formal introduction of a variety of instruments in the foreign
exchange derivative market started only in the post reform period.
These derivative
instruments have been cautiously introduced as part of the reforms in a phased manner,
both for product diversity and more importantly as a risk management tool. The researcher
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feels in the near future it will act as a “tool” for risk management in future. Trading
volume in the Indian foreign exchange market have grown significantly over the last few
years and will grow further in the next few years.
Regarding SMEs the Government should create awareness among SMEs about the need
for getting credit worthiness rating done. There is also a need for creating awareness
among the SMEs about the availability of low cost institutional equity capital and risk
capital funds for expansion plans of SMEs. The relevant departments or the Government
should find the modalities of reducing the time taken in providing duty drawback and other
incentives. India should look into alternative methods to ensure global competitiveness of
the export oriented Indian manufacturing industries including auto component sector. It
will be better if Government create awareness about the need to diversify the client base
and the need for doing business in different and more stable currencies.Government should
focus on reducing the cost of export and import to create global competitiveness for Indian
auto component manufacturers. Government should create opportunities for interaction
between Indian manufacturers with exporters, foreign raw material suppliers, buyers and
Original Equipment Manufacturers. It should organise meets and can also look at sending
small business delegations for aftermarket business. It will be of much use if it makes
available the benchmarking data and the quality assessment in the importing country. Any
relevant information on changing needs and product requirements will be useful to SME
component manufactures. India should look into alternative methods to ensure global
competitiveness of the export oriented Indian manufacturing industries including auto
component sector. It will be better if Government create awareness about the need to
diversify the client base and the need for doing business in different and more stable
currencies.