FOREX AND FOREIGN

TRADE

Nitin Singh – 06
Bhushan Narsinghani -
11
Agenda
Why Foreign Trade?
Role of Institutions
The journey so far…The Road Ahead
Impact of Global Slowdown on Exports
Principle Commodities
Direction of Trade
Forex Reserves – What, Why & How Much?
FEMA
CAC
Why Foreign Trade?
Greater variety of goods available for consumption
Economic growth and national development
Better allocation and utilization of resources
Efficiency in production
Stimulation of economic activity
More employment opportunities
Role of Institutions
Institutions dedicated for promoting foreign trade have
played an important role towards enhancing the process of
internationalization of Indian companies
Export-Import Bank of India a.k.a Exim bank
Export Credit Guarantee Corporation a.k.a ECGC
Indian Institute of Foreign Trade a.k.a IIFT
The journey so far…
2003 2008-09
Exports US $ 63 billion US $ 168 billion
Global Merchandise 0.83% 1.45%
Trade
Global Commercial 1.4% 2.8%
Services Export
Total Share in Goods and 0.92% 1.64%
Services Trade

14 million jobs created as a result of augmented exports

The Road Ahead
Target annual export growth rate of 15% with annual target of
US$ 200 billion by March 2011
Export growth path of 25% per annum by 2014.
Double export of goods and services by 2014
Market Diversification
26 new countries included under MFS
• Africa, Latin America, Oceania, CIS countries
Incentives under MFS increased from 2.5% to 3%
Market Linked Focus Product Scheme (MLFPS) expanded by inclusion of
products like pharmaceuticals, textile fabrics, rubber products, glass , etc.
Trade Balance
(Values in Rs.
Crore)
Year Exports Growth Imports Growth Balance of
Rate (%) Rate (%) Trade
2003-2004 293367 15.0 359108 20.8 -65741
2004-2005 375340 27.9 501065 39.5 -125725
2005-2006 456418 21.6 660409 31.8 -203991
2006-2007 571779 25.3 840506 27.3 -268727
2007-2008 655864 14.7 1012312 20.4 -356448
2008-2009(P) 766935 16.9 1305503 29.0 -538568

Exports, Imports and Balance of

Trade
Impact of Global Slow-down on Exports
Default in payment or delayed realization for exports
Difficulty in executing orders in hand
Difficulty in providing covers for high risk countries/ buyers by
Export Credit Guarantee Corporation (ECGC)
Reluctance of exporters to execute orders for fear of defaults
Tougher ‘due diligence’ by Banks in extending Pre and Post-
shipment credit and insurance cover by ECGC
Principle Commodities - Exports
Shareof Top Five Commodity Groupsin
India'sExports : 2008-09
ENGINEERING GOODS

PETROLEUM PRODUCTS
24% 24%

CHEMICALS & RELATED

PRODUCTS
GEMS & JEWELLERY
11%
16%
TEXTILES
11%
14%
OTHER COMMODITIES
Principle Commodities - Imports
Direction of Trade - Exports
Direction of Trade - Imports
MajorSourceof India'sImports: 2008 -09

11%

7% CHINA
SAUDI ARABIA
7%
UAE

6% USA
IRAN
65% 4%
REST OF THE WORLD
What are Forex Reserves?
IMF Definition
External assets that are readily available for :
• Direct financing of external payments imbalances
• Indirectly regulating imbalances through intervention in exchange rates
Forex Reserves refer to :
Foreign reserves in the form of gold assets
Foreign securities held by the issue department
Domestic reserves in the form of ‘bank reserves’
Forex History
Standard trading unit - Gold standard
123.27 grains of gold = British pound ( £ )
1879 – US replaced £ with Gold Standard
1944 – $ , new exchange unit (Bretton Woods Aggrement)
Bretton Woods Accord established World Bank & IMF
The Smithsonian agreement (1971)  Floating ex rate
1994 - Online Forex Trading was introduced
2002 – introduction of Euro
Why hold Forex Reserves?
Technically we can consider 3 motives :-
Transaction
Speculation
Precautionary
Forex reserves are instruments to maintain or manage the
exchange rate
Formal Objective from RBI Act :-
‘to use the currency system to the country’s advantage and with a view to
securing monetary stability’
How Much Forex Reserve to Hold?
Suggested rules for the adequacy of the reserves :-
The level of reserve :12 months import equivalents
The External Debt : At least equal to external debt
Liquidity at Risk : Calculate financial variables like
exchange rate, credit etc.
The Guidotti rule : Reserves > amortization amount.
Forex Rates
Two Ways Of Determining Forex Rates
Fixed
Floating
Fixed Forex Rates Floating Forex Rates

HOW? Value of a currency may be Value of a currency is

set against a key world determined according to the
currency demand/supply trends in the
forex rate market.

WHO? Generally by the central Determined by Private Market

bank.
Factors Affecting Forex Rates
Fundamental Factors
Ex: balance of payment surplus favorable exchange rate
Political and Psychological factors
Ex: US Dollar is considered to be a safer haven currency
Technical Factors
Capital Movement
Exchange rate policy and intervention
Others
Foreign Exchange Management Act
Enforced on 1st of June, 2000
FEMA replaced FERA(1973)
Objectives
Penalties
 Capital Account Convertibility
In India, Foreign exchange transactions in foreign currencies are
broadly classified into two accounts :-
Current Account Transactions Capital Account Transactions

Components Transactions which gives rise or spends Short Term Capital transactions
national income. Long Term Capital transactions
Merchandise /Invisible export & Imports .

Examples Import of refrigerator Capital Inflows :

Indian company taking loan from US
Export Of Software bank .
Export of steel Foreign investment in India (FDI)
Capital Outflows:
Sending money to a child studying in United Indian Companies buying assets abroad.
States . Ex- Tata for Corus Steel
Convertibility
Convertibility Aspect of India has “Current Account convertibility” which means that we are free to
Current Account buy foreign exchange for importing goods, in other words rupee is fully
convertible on current account .

Convertibility Aspect of Today the rupee is not fully convertible on capital account as there exists
Capital Account restriction on the money that comes in India or that goes out to buy assets
abroad .

CAC is desirable due to following reasons :-

 Reduction in Cost of Capital.

Diversify Portfolios Internationally.

Induces Competition against Indian Finance

Reduce size of black economy

Dangers of CAC
Huge Inflow and Enormous Outflow.
Misallocation of Capital inflows.
Export of domestic savings.
Creation of an unequal playing field.