Indian Currency Market

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Critical examination of Indian Currency Market & its Future

by

Abhishek Gupta (4713) Modak Sarda (4719) Nitesh Goyal (4735) Rachit Makker (4716)

Under the guidance of

Mr. Kumar Bijoy

Shaheed Sukhdev College Of Business Studies New Delhi - 110092 25 August, 2009

Critical Examination of Indian Currency Market & its Future

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Executive Summary
The Economy of India is the twelfth largest economy in the world by market exchange rates and the fourth largest by purchasing power parity (PPP) basis. India's large service industry accounts for 54% of the country's GDP while the industrial and agricultural sector contribute 29% and 17% respectively.Economic development in India depends on the various sectors that constitute the Indian economy – these are primarily the agriculture, services and manufacturing industries. Post 1991, Globalization in India has allowed companies to increase their base of operations, expand their workforce with minimal investments, and provide new services to a broad range of consumers. India uses Wholesale Price Index (WPI) to calculate its inflation. In 2009, India saw negative inflation for the first time since 1977-78. Therefore, the Union Budget 2009 aims towards an Inclusive Development. Its main objective is to provide basic amenities and opportunities for livelihood to vulnerable sections. Planning is very important for the smooth functioning of the economy. In India, The Planning Commission is entrusted with the responsibility of the creation, development and execution of the Five Year Plans. Given the rapid growth of the Indian economy, it can assume a significant role in growth of Indian Currency markets. With fast increasing global presence, India is emerging as top destination for Foreign Direct Investments (FDI). India has strengths in information technology, auto components, chemicals, apparels, pharmaceuticals, textile and diamond cutting. Despite a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. The Currency Market or Forex Market is a place where banks and other authorized establishments trade the currencies of various nations. The purpose of the foreign exchange market is to help international trade and investment. Floating Exchange System is used these days by almost all the countries. The Indian Currency Market is highly dynamic and volatile. Bygone are the days of fixed exchange rate system, India now follows Liberalised Exchange Rate Management System (LERMS). This system was implemented post 1991 when India was on the spree of globalization. Comprehensive analysis of the major factors influencing the Indian Currency Market is also undertaken. The key elements of forex market are  Market Size and Liquidity  Market Participants  Determinants of FX rates  Trading and Analysis in Foreign Exchange  Financial Instruments involved  Working of the Forex Market  Benefits and drawbacks of Forex Market Currency futures trading started in India on August 29, 2008 on National Stock Exchange. Currency futures are standardised foreign exchange contracts traded on approved stock exchanges to buy or sell one currency against another on a specified date in the future at a specified price (exchange rate). . The BSE has failed to generate enough interest in this segment and the volumes remain abysmally low on the exchange. Although volatility has ensured that volumes surged after the launch, trading has been Critical Examination of Indian Currency Market & its Future

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concentrated on front-month contracts as majority of users are traders, small exporters and brokers/banks. Capital Account Convertibility is freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This is so local merchants can easily conduct transnational business without needing foreign currency exchanges to handle small transactions. It offers numerous advantages like it helps in...
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