PRESENTATION ON FOREIGN DIRECT INVESTMENT

INTRODUCTION
The transaction in the foreign exchange market,

viz, buying and selling foreign currency take place at a rate is called Exchange rate . DEFINATION Exchange rate is a price paid in the home currency for a unit of foreign currency. The exchange rate can be quoted in 2 ways ,viz.., 1 unit of foreign money to a number of units of domestic currency A certain number of units of foreign currency to 1 unit of domestic currency. For example :- 1 US $ = Rs50 or Re 1 = $0.02

EXCHANGE RATE DETERMINATION

Exchange rate in a free market is determined by

the demand for and the supply of exchange of a particular country. The equilibrium exchange rate is the rate at which demand for foreign exchange and the supply of foreign exchange are equal. Equilibrium exchange rate can be determined by 2 methods: The exchange rate b/w US dollar and Indian Rupees can be determined by demand for and supply of us dollars in India or by Indians. The price of US $ is fixed in Indian Rupees.

CONTINUED: The exchange rate b/w Indian Rupees and US

dollars can also be determined by demand for and supply of Indian Rupees by Americans or in the USA . The price of Indian Rupee is determined in US dollars. THE PRICES ARE THE SAME IN BOTH THESE METHODS

Types of foreign exchange rate: FIXED EXCHANGE Flexible exchange rate:-

RATE: IMF member

Flexible exchange rate

governments used to fix or determine exchange rates by pegging operations and /or by resorting to exchange control. Under this system, the governments used to fix the exchange rate and the central bank to operate it by creating exchange stabilization fund. the central bank of the country purchases the foreign currency when the exchange rate falls and sells the

are also called floating or fluctuating exchange rates. Flexible exchange rates are determined by market forces like demand and supply of foreign exchange.

Why do countries go for the fixed exchange rate system?

The countries follow fixed exchange rate due to its advantages. They are: Fixed exchange rate ensure certainty and confidence and thereby promote international business. Fixed exchange rates promote long-term investments by various investors across the globe. Fixed exchange rate result in economic stabilisation. Fixed exchange rates stabilise international business and avoid foreign exchange risk.

Why are some countries against the fixed exchange rate?

As mentioned above, some countries are not in favour of the fixed exchange rate system due to its disadvantages. They are: Fixed exchange rate system may result in a largescale destabilizing speculation in foreign exchange markets. Long-term foreign capital may not be attracted as the exchange rates are not pegged permanently. Most of the economies in recent years are liberalised and globalised. These economies prefer flexible exchange rate system Deficit of the balance of payments of most of the countries increases under a fixed exchange rate system.

Advantages of flexible exchange rate

This system is simple to operate. This system

does not result in deficit or surplus of foreign exchange. The exchange rate moves automatically and freely. The adjustment of exchange rate under this system is a continuous process. The system helps for the promotion of foreign trade. This system permits the existence of trade and convertible currencies an a continuous basis.

Disadvantage of flexible exchange rate

Market mechanism may fail to bring about an

appropriate exchange rate. It is rather difficult to define a flexible exchange rate. Under the flexible rate system, speculation adversely influences fluctuations in supply and demand for foreign exchange. Under this system a reduction in exchange rates leads to a vicious circle of inflation.

Conclusion: Despite the advantage of fixed exchange rate and

the disadvantages of floating exchange rate system , it is viewed that the flexible exchange rate system is suitable foe the globalization process.