Let us first understand what is "Exchange Rate". Exchange rate is the conversion rate between two currencies. In other words, Exchange rate is the price of one currency in terms of another currency. The conversion could be quoted in two ways - one is direct quote where the price of a unit of Foreign currency is expressed in terms of the domestic currency ( Eg US 1 $ = INR 66.11 ) whereas, under indirect quote, the price of a unit of domestic currency is expressed in terms of foreign currency ( Eg INR 1 = US $ .015 ).
It would make sense to comprehend Appreciation and Depreciation terms. When foreign currency inflows into India is greater than the outflows then Indian Currency is likely to appreciate i.e. say US 1 $ will be equal to INR 65 whereas Foreign Currency outflows from India outnumber inflows then Indian Currency would depreciate. Another question that would come to mind "Who determines the Exchange Rate?", It is not the RBI nor the Government that decides the Exchange rate rather market forces i.e. demand and supply of the foreign currency would determine the exchange rate. Rarely does RBI intervenes in the volatile currency markets to prevent INR from steep appreciation or depreciation.
The domestic currency breached the level of INR 66 against US dollar on Friday, to close the day at INR 66.11. The fall in domestic currency could be attributed to rising crude oil prices, petroleum and petroleum products, which has touched US $ 74 a barrel. India's reliance on crude oil import is almost 80% of its requirement. The oil import bill is likely to be around US $ 88 billion in the total import bill of US $ 460 billion in 2017-18. Every US dollar change in the price of Crude oil impacts the country's import bill by US $ 0.13 billion (INR 823 crores).
The hardening of interest rates in US led to an outflow of funds from Equity markets. The bond yield in US had touched a high of 2.94% in the recent past when we witnessed Foreign Portfolio Investors (FPIs) taking out funds from Indian Equity markets. In other words, global cues also played a catalyst in funds outflow.
Post announcement of 10% Long Term Capital Gain Tax (LTCG) on Equities & Equity-linked schemes in the budget applicable for the current financial year, we have seen outflow of funds from Indian Equity Markets as it dampened the investor sentiments.
Monitory Policy Committee ( MPC ) minutes released yesterday saw bond and currency crashed as one of the RBI officials and member of MPC indicated tightening of interest rate in the forthcoming MPC meeting slated in first week of June 2018. The Indian bond market yield rose to 7.80% before settling down at 7.70%. This month has witnessed debt investors selling US $ 1.25 billion ( INR 7,729 crores ) worth of securities in bond markets.
Post PNB fiasco on Letter of undertaking (LoU) front, RBI abruptly banned the instrument (Buyer's credit), which led to buying of dollars by importers directly from the currency markets, thereby adding a few billions to US dollar demand.
Keep watching this space for more interesting updates on economy!
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