Rate of Exchange and Foreign Investment

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Project report

On

Rate of Exchange and Foreign Investment

The Indian case from 2009-10 to 2011-12

Acknowledgement

As a part of PGDM curriculum at Birla Institute of Management Technology, the preparation of this project report has been a unique and rewarding experience. Apart from our efforts, the success of any project depends largely on the encouragement and guidelines of many others. We take this opportunity to express our gratitude to the people who have been instrumental in the successful completion of this project. First and foremost, we would like to thank Birla Institute of Management Technology for providing us with this wonderful opportunity.

We would also like to thank Prof. J. Shettigar and Prof. M.L. Pandit for guiding us all through the course of this project. We are grateful for their directions and support which helped us prepare this extensive project whilst we carried out our intensive learning through this project at the institute. We hope to succeed in this endeavour and uphold the name of our institution.

Our thanks and appreciations also go to the people in developing the project and who have willingly helped us out with their abilities.

Introduction

From last few decades, the Foreign Direct Investment (FDI) is considered as an important source of inflows in many countries, particularly in emerging developing economies. It is widely believed that the foreign direct investment plays an important contribution in the economic growth of a country. The foreign investment may be in different forms such as direct investment, portfolio investment, private capital flows, etc. The components of FDI defined by UNCTAD include equity capital, re-invested earnings and other capital. A country receiving FDI is not only receiving the direct benefits of foreign inflows but also indirectly it can be able to get the benefits of sharing knowledge, skills, experiences, technology, etc.

Since the beginning of the nineties, India has opened up more and more to foreign capital inflows. Of this total inflow, Foreign Portfolio Investment (FPI) has registered a gradual increase in its share in total inflows. The quantum of FPI has increased from USD 4 million in 1991 to USD 32375 million in 2009. Since FPI do not add to the productivity of investment, it does not contribute to the growth of the nation. On the other hand, the sudden capital inflows and outflows that the country has experienced from time to time has resulted in much volatility in interest rate and in the exchange rate. Also, sudden capital inflows often tend to appreciate the exchange rate, detrimentally affecting the export sector. The foreign investors come in the domestic economy with the expectation of return; however, they are exposed to many type of risks as well. The risks may include exchange rate risk, political risk, legal risk, etc. The re-investment of earnings depends upon the level of risks faced by the investors, amount of return and future expectations.

In this project we try to find the relation between volatility of exchange rate and foreign inflows and outflows. We first explain the two terms and their scope in isolation. Thereafter, an attempt is made to understand the ways in which they affect each other. The INDIAN context is seen from 2009 till date in perspective of changing exchange rates and foreign investment scenario. An attempt has also been made to elucidate the spree of reforms initiated by INDIAN Govt. in September, 2012 pertaining to permitting FDI in retail and others. The last section aims to evaluate these on a methodical basis and possible reasoning behind these.

RATE OF EXCHANGE
Exchange Rate between two currencies refers to the rate at which these currencies will be exchanged for one another. It is also regarded as the value of one country’s currency in terms of another currency. Exchange rates are determined in the foreign...
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