Institute of Technology and Management

Topic: Indian Currency Market

Presented to : Kashyap Sir

Presented By:
ATUL VAGAL ADITYA JAMBHEKAR PRAFUL AMBRE ANKITA SHAH SNEHA PATEL 03 07 10 20 37

ACKNOWLEDGEMENT
We sincerely thanks KASHYAP SIR, for giving us such an interesting topic. While working on this project we got a lot of knowledge regarding the INDIAN CURRENCY MARKET We gratefully acknowledge and express deep appreciation to many people who have made this project possible and visible. Thank you for your review, comments, corrections and suggestions that have enormously enriched our project.

Introduction
Derivative are financial contract whose value is determined from one or more underlying variables, which can be a stock, a bond, an index, an interest rate , an exchange rate etc. Currency derivatives can be described as contract between sellers and buyers whose values are derived from underlying which in this case is the exchange rate

Foreign exchange rates, like any other asset class move depending on various factors, like demand supply, interest rate parity, trade and capital flows, speculators taking positions, clients hedging risk arising from their trade and capital flows etc. Based on the evolving needs of the market place, NSE introduced trading in exchange traded Currency Derivatives contracts on August 29, 2008. NSE launched USDINR contracts in currency derivatives segment. The product had an impressive debut and has shown consistent growth since inception. Within the span of a year and half the volume crossed the mark of USD 4.3 billion. In the context of growing integration of the Indian economy with the rest of the world and a continuous demand for currency derivatives in other currencies, Securities Exchange Board of India and Reserve Bank of India have permitted trading in futures contracts on new currency pairs. NSE therefore now introduces trading in currency futures based on Euro(EUR)INR, Pound Sterling(GBP) - INR and Japanese Yen (JPY) - INR exchange rates in addition to the existing USDINR contracts.

Contract Specification
Symbol Market Type Instrument Type USDINR N FUTCUR EURINR N FUTCUR 1 - 1 unit denotes 1000 EURO. The exchange rate in Indian Rupees for Euro. GBPINR N FUTCUR JPYINR N FUTCUR

Unit of trading

1 - 1 unit denotes 1000 USD. The exchange rate in Indian Rupees for US Dollars

1 - 1 unit 1 - 1 unit denotes denotes 1000 100000 POUND JAPANESE STERLING. YEN. The exchange rate in Indian Rupees for Pound Sterling. The exchange rate in Indian Rupees for 100 Japanese Yen.

Underlying / Order Quotation Tick size Trading hours Contract trading cycle Last trading day Initial margin

0.25 paise or INR 0.0025 Monday to Friday 9:00 a.m. to 5:00 p.m. 12 month trading cycle. Two working days prior to the last business day of the expiry month at 12 noon. SPAN Based Margin 0.3% of 1% of MTM MTM value value of of gross 0.5% of MTM 0.7% of MTM gross open open value of gross value of gross position position open position open position Daily settlement : T + 1 Final settlement : T + 2 Cash settled in Indian Rupees

Extreme loss margin Settlement Mode of settlement

Daily settlement price Calculated on the basis of the last half an hour weighted (DSP) average price.

Current chart of USDINR

Rupee depreciation cause and effects

Rupee depreciates by over 16% to an all time low of 61.82 against the dollar Well looking at the current situation of the depreciation of the Indian rupee against the dollar the questions that strike my mind are that what has caused such depreciation wherein rupee jumped from the 52 mark to 61.82 in a 4 month period and what have been the effects of such a depreciation on the health of Indian economy and the Indian industry. Talking about the reasons for the depreciation of rupee a series of activities have led to the current scenario. Since the great depression of 2008, the Indian economy had been continuously slowing down. IIP index had been falling and the growth had been perpetually shrinking. All industries were suffering losses and the rate of unemployment in the nation increased. The basic fundamentals of the economy had been vexatious. However, Indians kept on importing from the world market. The high import of gold and crude oil in such a situation burdened the current account deficit and caused it to rise to unreasonably high level of 6.8%. This weakened the Indian position in the international arena. Foreign Institutional Investors (FIIs) lost faith in the Indian economy and started withdrawing money from the Indian markets. Foreign entrepreneurs reduced Foreign Direct Investments (FDIs) in the Indian industry. Thus, the valuable forex which was required to finance the current account deficit did not flow in the system which further worsened the deficit. The major event that triggered the rupee to depreciate by such a pace was the statement of the US Federal Banks chairman Mr. Ben Bernanke wherein he expressed the unwinding of the bond purchase programme in the US. The US had been printing money to bolster its economy. Now with the revival of the economy the Chairman plans to unwind the programme. This statement led to unrest in the US economy and the US investors started withdrawing money from the overseas market. With the increased demand of dollar, the prices of dollar in the global markets rose and the prices of all other currencies weakened against

the dollar, among which rupee was one. But because of the already existing current account deficit and reduced growth the Indian currency was badly hit. Rupee came to an all time low of 61.08 against the dollar. This depreciation of the Indian rupee has impacted the government, the industry and the individuals of the nation. With the depreciation of rupee the imports have become costlier and thus importing crude oil becomes a burden. With every single value fall a burden of Rs.9000 crores is created on the government in the form of subsidy. This has caused the fiscal deficit of the government to increase. At the industry level the cost of borrowing has been increased for the companies which had taken foreign loans. The increased liability has burdened companies which now resort to retrenchment to cut down expenditure. This has led to unemployment in the economy. Further with depreciation, the prices of imported raw material and technology have increased which has caused the overall costs of the companies to increase. At the individual level the prices of all imported goods have increased. Students going broad to study now have to shed 20% extra for every dollar. This has caused the cost of foreign studies to increase which burdens the Indian families. The Government of India, RBI and the Finance Ministry have taken a lot of measures to solve the menace. The import duty on gold has been raised to 8% against the original level of 2% to curb the imports of gold in the nation. According to P Chidambaram India has imported 1017 tonnes of gold in 2013 and he targets to bring it down to 700 tonnes. The interest rates have been increased by the RBI governor to reduce the supply of rupee in the market. This will also ensure that the much needed foreign investments flow in the economy and inflation is checked. RBI also announced open market operations of 12000 crores to restrict the supply of Indian rupee in the market. Government also plans to increase the cap of FDI in various sectors like insurance, defence and retail to attract foreign investors. The conditions which were imposed on Walmart to enter India have now been withdrawn by the government so that it enters India as soon as possible and bring with it the direly required FDI. The finance ministry is also considering the option of bond issue so as to arrest dollars from the market.

Well, according to me apart from the measures already taken the government should now concentrate on increasing exports. SEZs and export houses should be given liberations so that they can sell their product in the market. Loans should be made cheaper for these organisations so that there cost of borrowings reduces enabling them to produce at competitive rates. Power and fuel costs should be reduced for them so that their overall cost of production falls. Further special tax rebates should be given to them. These measures will ensure that the Indian goods become cheaper in the international market which will hence trigger the exports of the Indian products. The government should ensure that trade mispricing is controlled and no one indulges in over or under invoicing to earn superior profits. Proper system should be implemented to by the ministry to keep a check on it. Further, the smuggling of gold should be checked in the nation as with the increase in import duty the act of smuggling has increased. Custom officials should become stricter with the norms and the various regulations. The rupee menace should be systematically tackled by the Indian government and RBI or else it will soon cause the Indian economy to break down. The world will lose faith on the nation and the entire industry will suffer a huge a setback.

Steps taken by RBI

RBI takes further step to stem rupee's slide against USD As expected the Reserve Bank of India (RBI) further curbed the availibility of funds (liquidity) in the markets to stem the rupee's free fall against the US dollar. The central bank will now auction the government of India cash management bills (CMBs) to raise Rs 22,000 crore on every Monday. What is Cash Management Bill (CMB)? It is a kind of short-term debt market instrument, which can be issued by the Union government on ad hoc basis for maturities of less than 91 days. The only difference between treasury bills and CMBs is maturities. T-bills can be upto one year. For the last couple of weeks, the RBI has been conducting auctions of CMBs. Last Monday itself, it mopped up Rs 3,000 crore through seven-dayCMB with a cut-off yield at 9.926 percent. "Over the last two months, RBI has instituted several measures to contain the volatility in the foreign exchange market. On a review of the impact of these measures and for effective liquidity management, it has been decided that the RBI will auction Government of India CMBs for a notified amount of Rs 22,000 crore once every week on Mondays," the Apex bank said in a release on Thursday. First auction on August 12 Next Monday, RBI will sell CMBs of 35 and 34 days, maturing on September 17, 2013. The notified amount is Rs 11,000 crore each issue. How will it work? RBI wants to suck out excess liquidity from the banking system. This will help stop speculative trading in the currency market. Speculators are not

likely to play their game borrowing money from banks. Cash flows will be limited after this CMB move, traders said. "It will definitely impact the exchange rate and drive the rupee to rise above 60," Moses Harding, the executive director - Lakshmi Vilas Bank told moneycontrol.com. "The move will discourage forward import covers while encouraging the same for export covers. The central bank wants to keep short term rates elevated. If sovereign instruments give higher rates, other short term papers will be subscribed at a minimum premium of 50 basis points over and above that. Banks are already paying 10.25 percent in MSF," he said. It is widely alleged that many importers are buying dollars to book long term forwards. They are clung to idea that the US dollar will rise further against the rupee. This speculative nature collectively aggravating the rupee slide against the US dollar. A contraction of fund flows will squeeze this practice. Impact. Next Monday, the CMB cut-off yields are expected to be around 11 percent as against 9.92 percent in the previous auction held on August 6. The 10year (7.16 percent) government bond yield is likely rise 10-15 bps from 8.15 percent, recorded on Thursday, traders said. Banks which issue and subscribe certificate deposits may have to pay higher rate there. CD rates would quote higher than sovereign papers, guaranteed by the government with no chance of default. On every auction, RBI declares a cut-off yield, above which auction participants are not allowed to quote. Rupee slide The Indian rupee dropped more than 7 percent to close at 60.88/USD on Thursday. Earlier, the RBI had issued a raft of measures to tighten liquidity in the market so that it creates demand for rupee-funds and thereby, bring stability in the rupee-dollar rate. Past measures

In July this year, the central bank had raised the Marginal Standing Facility (MSF) rate by 100 basis points to 10.25 percent. MSF is one type of RBI window wherein banks can borrow overnight. Later, the RBI capped banks' borrowing to 0.50 percent of individual total deposits (or net demand and time liability as it is known in banking parlance). That essentially meant, banks would be able to borrow around 32,000 crore in total from the repo window at 7.25 percent. Besides, it had put curbs on gold imports while conducting open market operations of government bonds.

Rupee depreciation: Indian IT cos like Infosys, TCS and Wipro finally have something to cheer about

The Indian technology sector, hobbled by concerns over the US immigration bill, margin pressure due to rising employee and visa cost, lower growth, and deprecation of the rupee, may finally have something to cheer. The rupee has depreciated 9.87%, or Rs 5.35, against the dollar since April this year. According to analysts, this might translate into gains in operating profit by 100 to 250 basis points for the Indian technology companies. Since Indian IT firms do a lot of back-office jobs for overseas entities, they get a substantial chunk of their revenue from the US. So, a rise in the dollar would translate into more revenue for them in rupees. Also, the Indian technology companies, with the deprecation of the currency, are now better placed in global competitive markets to bid aggressively for overseas contracts at a lower price and pass on the benefits to clients. However, despite the positives, the Indian software majors are still worried about the immigration reform bill, under consideration in the US Senate, and if passed, it could potentially hit Indian outsourcing firms with higher visa fees, and eventually rise in employee cost. "At present, the technology sector is being treated as a defensive bet. But the sector is likely to get re-rated as US discretionary spend is seen increasing due to improvement in corporate earnings," said Sonam Udasi, head of research at IDBI Capital. "We expect order flow for companies such as TCS, Infosys, Wipro, and HCL Tech to improve. The technology sector will be preferred by portfolio managers as the risk downside is limited," Udasi added. Around 52% of Tata Consultancy Services' business is centred around North America, while Infosys earns 63% of its total revenue from this region. These companies are likely to benefit most from the currency deprecation, according to analysts.

"We upgrade Wipro to 'buy' from 'hold' due to attractive valuations. We also like HCL Tech among the Tier-I vendors, and prefer NIIT Tech and Hexaware among the Tier-II companies," said Ashish Aggarwal, analyst at Tata Securities. Last time, when the Indian rupee depreciated substantially in the second half of fiscal year 2012, the margin performances of Indian technology companies were mixed. While margins of Tier-I companies' did not improve much, Tier-II vendors fared better. Analysts expect the same trend, this time round too. Tier-I Indian technology companies such as Infosys, TCS and Wipro are likely to plough back gains from the rupee depreciation into their respective businesses

Effect on Infosys
Rupee fall to cushion wage hike impact at Infosys After touching a 52-week high of Rs 3,010 on Mar 7, 2013, Infosys slipped nearly 27 per cent to around Rs 2,200 levels by April-end. Investors dumped the stock after its fourth quarter numbers revealed a meagre 3.4 per cent year-on-year growth in net profit at Rs 2,394 crore and a revenue forecast of 6-10 per cent for FY14, lower than Nasscom's industry growth projection of 12-14 per cent. However, a lot has changed since then. While the rupee's slide against the dollar brought some cheer to information technology (IT) firms at the bourses, Infosys in particular was back in the reckoning after its co-founder, N R Narayana Murthy, returned to the company as executive chairman at a time when the morale of the firm's management was at an all-time low. While Infosys struggled to cope up with these challenges, most of its peers - both in the large- and the mid-cap universe - managed to ride out the storm. US-listed Cognizant, for instance, overtook Infosys, once considered an IT bell-weather in terms of revenues. Since April 26 when the stock hit a low of around Rs 2,200, it has been an outperformer - moving up nearly 8.5 per cent till date, compared to 1.07 per cent fall in the CNX Nifty and 6.9 per cent rise in the S&P BSE IT index. In a latest move, the company has announced an 8 per cent wage hike for its employees in India. Employees located in other geographies who were not given wage hike in February this year, will also get covered in this cycle. They would be given an increase of about three per cent in average. The increments will be effective July 1. However, for its global sales force, the changes will come into effect from May 1, Infosys said in a statement.

Impact At the beginning of the financial year, however, Infosys had highlighted it will be looking to change the wage structures to get a balance between fixed compensation and variable compensation. The changes were expected to be cost-neutral for the firm, with headwinds to margins coming from those given in the middle of last year. Analysts at Motilal Oswal Securities expect the wage hike decision to impact earnings before interest, taxes, depreciation and amortisation (Ebitda) margin by 150 basis points (bps). At our revised assumption of Rs 56 per dollar in FY14, the impact is almost fully offset by wage hikes. Our earlier EBIT (earnings before interest and taxes) margin for FY14 was 24.1 per cent, which remains unchanged following this announcement, on the back of revision in our currency assumption to Rs 56 per dollar for both FY14 and FY15, versus earlier assumption of Rs 54, they point out in a report. We see most of the IT companies benefiting, as the rupee realisations improve significantly due to transaction gains. However, HCL Technologies and Infosys should benefit more than TCS and Wipro, as they would likely book the margin gains due to rupee depreciation, says a recent Deutsche Bank strategy update report. Sandip Agarwal, Omkar Hadkar and Deepansu Jain of Edelweiss suggest that the recent move to bring back Murthy along with other organisational changes and the wage hike announcement are steps in the right direction. While we are not changing our estimates owing to this single event, we like to note that the wage hike being effective a quarter earlier (Q2FY14 versus Q3FY14), our current FY14E Ebitda margin (28.3 per cent) declines by around 40 bps. Maintain BUY/Sector Outperformer recommendation/rating with a target price of Rs 2,928, they mention in a report. We have an OW (overweight) rating on Infosys with a March 2014 price target of Rs 2,700. Our price target is based on a one-year forward P/E (price-earnings ratio) multiple of 15x, at a modest discount to TCS target

multiple of 17x, point out Viju K George and Amit Sharma of JP Morgan in their June 9, 2013 report.

Infosys reaches 5-month high, plunging rupee to become a booster The positive comeback for Infosys continues post NR Narayana Murthys return as Executive Chairman of the IT major. Infosys shares surged their highest mark in nearly five months after brokerage major CLSA gave a positive feedback saying that it may gain another 10 per cent from current levels. Infosys is a medium term opportunity for investors, CLSA said. The brokerage major also said that the sliding rupee in the current fiscal year will come out as a booster for the software giant. Since the rupee plunged to all-time low and have depreciated over 9 per cent since May, it can have a significant impact on the revenue since depreciating rupee will encourage exports. Infosys shares climb 9% after Narayana Murthys return Earlier in June its Shares jumped more than 8 per cent in pre-open trading. The return of Murthy seems a driver for Infosyss stock price in near term.

Infosys, for years an investor favourite for exceeding its earnings targets, has struggled in the past two years as big customers in the United States and Europe cut costs and rivals such as Tata Consultancy Services and HCL Tech take away market share Top five factors why rupee will appreciate vs USD in 2H2013: Deutsche Bank NEW DELHI: Indian currency breached its psychological level against the dollar, fueling fears of more weakness and its possible impact on India Inc and importers. However, Deutsche Bank in its latest report said that the Indian currency will recover in the second half of 2013 supported by the government of India's divestment programme as well as monetary easing by the Reserve Bank of India (RBI). Domestic and global factors are threatening to push the Indian rupee to historic lows, making the import of crude oil and coal more expensive. History suggests that four times since 2008 there have been instances of fears about the rupee-dollar exchange rates disorderly movement. Each time, the episodes were triggered by the rupee heading toward another alltime low against the USD. For the year 2013, along with an EM FX sell-off, the rupee has lost 4 per cent of its value against the USD over May-June 2013, testing the "all-time low" again. "The important thing to note here is that in the 2008 and 2013 sell-offs, the rupee depreciated along with its peers as global risk aversion spiked," the global investment bank highlighted in its report. "In contrast, during the 2011 and 2012 episodes, the rupee was an outlier, showing particular weakness due to its own vulnerabilities while the rest Asian FX rates remained broadly stable," added the report.

The rupee has depreciated considerably against the USD since early 2008; its 30 per cent correction is indeed the highest by far among any Asian currencies. However, this should not be surprising, given the period has been associated with high inflation, declining growth, and a burdensome current account in need to hefty financing. Deutsche Bank highlights five factors why the rupee should appreciate against dollar in 2H2013: Falling Inflation: Inflation has been declining rapidly, pushing up real interest rates and increasing the attractiveness of investing in rupee assets. Current Account Deficit (CAD): Current account is likely to correct substantially as the cost of importing gold and oil is declining, weak growth and policy measures are lowering import demand, and rising real interest rate is reducing the need to hedge against inflation through capital flight. Divestment Program: Inflows outlook is broadly positive with a number of disinvestment programs in the pipeline, and a rate cut cycle, the only one in a major EM economy is likely to keep fixed income investors interested. Risk Aversion: Global risk aversion and associated sell-off are likely to abate as Deutsche Bank believes the ongoing concern about the end of QE has already caused the markets to overshoot.

Weak rupee strengthens Infosys' revenue guidance Indian global software major Infosys Friday projected a higher revenue (13-17 percent) for this fiscal (2013-14) on a weakening rupee in a volatile currency market, though the outlook remains same (6-10 percent) in dollars. "Our consolidated revenue is expected to grow 13-17 percent year-on-year (YoY) in rupee terms this fiscal (FY 2014) and 6-10 percent YoY in dollar terms, as the rupee depreciated about 10 percent during first quarter (AprilJune)," Infosys chief executive Rajiv Bansal told IANS here. For last fiscal (2012-13), the company posted 7.4 billion revenue in dollar terms, registering an increase of 5.8 percent YoY, and 40,352 crore in rupee terms, up 19.6 percent YoY. The rupee weakened to $59.39 from $54.30 during the quarter (Q1) under review for the IT bellwether.

The upward revenue guidance in rupee propelled the company's blue chip scrip (Rs.5 per share) by 11.20 percent to trade at Rs.2,809.75 in the afternoon session on the bourses from an opening price of Rs.2,779.40 and Thursday's closing price of Rs.2,526.75, gaining a whopping 283 points and reversing its declining trend in the past few quarters. "Despite facing an uncertain macro environment, changing regulatory regime and volatile currency environment, we have done well in Q1 (first quarter) and are cautiously optimistic about the rest of the year," Infosys chief executive S.D. Shibulal said in a statement after the company announced its financial results earlier in the day. The IT bellwether has, however, discontinued the practice of giving revenue outlook for the three-month quarterly period since a year. The company posted Rs.2,374 crore net profit for the quarter under review,

registering 3.7 percent increase YoY from Rs.2,289 crore but fractionally (0.8 percent) lower sequentially from Rs.2,394 crore. Consolidated revenue, however, increased 17.2 percent YoY to Rs.11,267 crore from Rs.9,616 crore year ago and 7.8 percent sequentially from Rs.10,454 crore. Under the International Financial Reporting Standard (IFRS), net income at $418 million was fractionally (0.5 percent) up from $416 million year ago but 5.9 percent lower sequentially from $444 million. Similarly, revenue grew 13.6 percent YoY to $1.99 billion from $1.75 billion and 2.7 percent sequentially from $1.94 billion. The company and its subsidiaries added 66 clients during the quarter, taking the total number of active clients to 836 from 798 quarter ago and year ago. "We had a volume growth of 4.1 percent, while pricing remained stable in constant currency but came down marginally (0.7 percent) in volatile currency," Shibulal said. Admitting that discretionary spending remained very challenging, the chief executive said the company was, however, optimistic on growth coming back as evident from seven large outsourcing deals it had signed during first quarter in $50-100 million range. Though the company hired 10,138 employees during the quarter, the net addition was only 575, as a whopping 9,563 techies left since April, taking its attrition level to 16.9 percent on annualised basis, which is the highest in the recent past. The total number of employees went up marginally to 157,263 from 156,688 quarter ago and year ago.

Conclusion
The rupee menace should be systematically tackled by the Indian government and RBI or else it will soon cause the Indian economy to break down. The world will lose faith on the nation and the entire industry will suffer a huge a setback.

THANK YOU