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RBI INTERVENTION INFOREX MARKET AND
CURRENCYDEPRICIATION
BY-DHARA PATEL(10pgdm011)
SUBMITTED TO :- RAJESH SIR
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MEANING OF RBI INTERVENTION
In the wake of the rupees slide, there has been much talk aboutthe RBIs intervention in the currency markets to support theIndian currency, including a massive sell-off of dollars.
Monetary policy - Management of money supply and interestrates by central banks to influence prices and employment
Expansion or contraction of investment and consumptionexpenditure.
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TYPES OF INTERVENTION
DIRECT INTERVENTION
INDIRECT INTERVENTION
STERILISED INTERVENTION
UNSTERILISED INTERVENTION
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RESERVE BANKS INTERVENTION
AND STERILIZATION
As observed during the various episodes of exchange ratevolatility in India, the Reserve Bank has been intervening in theforeign exchange market to curb volatility arising due to
demand-supply mismatch in the domestic foreign exchangemarket.
Sale of dollars in the foreign exchange market is generally
guided by excess demand conditions that may arise due toseveral factors.
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Cont
Similarly, the Reserve Bank purchases dollars from the market
when there is an excess supply pressure. There is someevidence of co-movement in demand-supply mismatch proxiedby the difference between the purchase and sale transactionsin the merchant segment of the spot market and intervention bythe Reserve Bank.
Thus, the Reserve, Bank has been prepared to make sales andpurchases of foreign currency in order to curb volatility, evenout lumpy demand and supply in the foreign exchange marketand to smoothen jerky movements, while allowing the rupee to
move in both directions.
However, such intervention is generally not governed by anypre-determined target or band around the exchange rate.
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CURRENCY DEPRECIATION
It means that Indian currency is worth lesser now in comparisonwith some other currency.
For India, this other currency is primarily US Dollars.
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INDIAN RUPEE HAS BEHAVED INCOMPARISON TO US DOLLARS FOR
PAST 10 YEARS.
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Indian rupee appreciation against
dollar impacted heavily to the
following:
Exporters
ImportersForeign
investors
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DEMAND SUPPLY RULE
Rupee quotation follows the simple economic rule ofDemand & Supply.
If there is more demand for dollars in India than the supply for it,Rupee would depreciate and vice-versa.
Demand of dollars may be created by Importers requiring moredollars to pay for their imports, FIIs withdrawing theirinvestments and taking the dollars outside India, etc.
Supply is created by exporters bringing in more dollars fromtheir revenues, NRIs remitting more funds, FIIs bringing moredollar in India to drive their investments.
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OIL PRICES
With the increasing price of Oil in international markets, Indiahas to pay an increased amount of dollars to import the samequantity of oil.
Further more, with an increase in the quantity of oil importedinto India, a further pressure is imposed on the demand ofdollars to pay to our suppliers from whom we import Oil.
This increase in demand for dollars depreciates the Rupeefurther.
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http://insight.banyanfa.com/wp-content/uploads/2012/05/BFA-Brent-chart.jpghttp://insight.banyanfa.com/wp-content/uploads/2012/05/BFA-Brent-chart.jpg7/31/2019 10pgdm011 Dhara
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NEGATIVE IMPACT OF CURRENCYDEPRICIATION
Oil Infection
Higher Inflation
Poor Returns For Fiis
Repayment Of Loans
Foreign Education
Foreign Holidays
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http://www.thinkplaninvest.com/wp-content/uploads/2011/09/rupee-symbol.jpg