Foreign currency (simply money) refers to the currency of another country and is directly related with Exchange-Traded Fund (ETF) which is realized in developing countries where the majority of the world's emerging markets invest. Brazil, Mexico, India, Russia, and China are among the most common emerging markets. Investors are flocking to such countries because they may acquire exposure to multiple currencies without having to deal with cumbersome foreign exchange accounts. This article will concentrate on a study of foreign money and an Evaluation of India as an emerging market in the global economy. It will also give a summary of a macroeconomic analysis and the comparison of Indian Rupee against the U.S dollar.
Comparison of Indian Rupee against the U.S dollar has been found to behave differently due to the ever-changing markets in the economy. The exchange rate between the two countries is very flexible as it is determined by the demand and supply of foreign exchange. It is clear and evident that Indians sell rupees in exchange for dollars and Americans do the vice versa and this is what determines their exchange rates. Demand for dollars in India increased from 2005 due to the fact that all the individuals, parastatals or organizations who buy goods and services to India from U.S.A had increased in numbers. Indians also had a chance to travel and further their studies in U.S.A and this could enhance them to have a demand for the dollar to cater for their education and travel expenses.
Indians wanted to invest in equity shares of US as well as investing directly in business ventures all over the US. Holding all other factors constant, a fall in the price of a dollar as compared to rupees signifies that the rupees required to buy a dollar reduce implicating that there is an appreciation in the case of a rupee. US goods become cheaper to be bought and this automatically increases the demand for American goods and services by the Indians. The exchange rate between rupee and the US dollar is defined as ‘the rupee price of a basket of goods in India’ and it is computed as RER=NER (Pus/Pin), where RER is the real exchange rate and NER is the nominal exchange rate, equivalent to the price in the US divided by that of India.
In the exchange rate history of the Indian rupee against the US dollar, there have been noticeable fluctuations since 2005 as illustrated in the figure below.
Year USD (average) USD (end year)
2005-06 64.4898 64.2566
2006-07 67.2538 65.8289
2007-08 62.6506 65.7307
2008-09 71.2770 76.1742
2009-10 73.7333 68.533
With Indian economy being in the eleventh position regarding overall GDP in the world, it is rated as the 4th largest as far as the measurement of Purchasing Power Parity (PPP) is concerned. Within a span of approximately 5-6 years, India will be in a position to increase its contribution to the global market from 1.1% to 1.5% and is expected to be among the leading in the world come 2020. Demographic factors have also contributed to the development and gradual change in the economy, marking about 50% of the population to be below 25 years which is the most productive age in any arena. Those below the age of 35 are the majority with approximately 65%. Wherever there is a growth in the economy, there must be various challenges in the macroeconomic level as it is the case in India.
The research for the Indian currency and a macroeconomic analysis came up with several indicators in the market as they will be discussed below.
Macroeconomic Indicators
The analysis will be focused on the major indicators and the macroeconomic level in India namely; monetary policies, unemployment, fiscal policy, Gross Domestic Product and exchange ratio.
Gross Domestic Product
From 2005, the GDP of India has been growing in a consistent manner admirable by other nations. There has been proper management of the recession pressures which could have otherwise abated the economy although it once dropped steadily but has not yet deteriorated past the least achieved economy ever. From 2010, the economic balancing and advancements have been positive, and since then there has never been a reduction in the overall GDP of the nation. This is because the country majored on the service provision sector which contributes the highest in the GDP although it has not employed many workers like the agricultural sector which has absorbed more than half of the nation’s total employed people. People have even started dumping agriculture and engaging in other productive activities hence reducing its overall yield to the economy of the nation.
Monetary Policies
Monetary policies implemented in the state of India have impacted the overall economic performance and can be well understood if broken down into three levels over the period of 3 years. The first level is known as the pre-global slowdown which is characterized by higher levels of inflation and a noticeable increase in the RBI over all the specified phases. The second level is the actual slowdown phase where the inflation features remain at a high level and now becomes inversely proportional to the movement of RBI meaning that it decreases in this case in all the three rates with the increase in inflation. The last level is known as the post-global slowdown with the rates of RBI found to be increasing gradually and trying to diminish the inflation where necessary monetary measures are applied.
Fiscal Policy
Between 2008 and 2010, the government of India introduced measures to expand the fiscal status of the economy, aiming at generally enhancing and increasing the expenditure of the public. This was to enable a boost in the demand and catalyze the overall development and in reviving the economy which had already begun to sabotage. This strategy alone enabled India to record and economic growth of 7.4% between 2009 and 2010. The revenue receipts also reduced because the government also had reduced the indirect taxes in all the country’s operations, simply aiming at protecting the most vulnerable sectors in the overall economy.
Due to the increased level of spending which was brought about by the reduced receipts from the revenue base, an increased fiscal deficit of about 6.8% was realized, with the gross tax from GDP decreasing from 12% to 10.9% and 10.3% in 2008-09 and 2009-10 respectively. An increase in the total expenditure to GDP ratio increased from 14.4% to 15.9% and 16.6% simultaneously. The economic structure was therefore improved in 2009 through financial management and improvement reforms, without putting any player in the economy at risk through whichever means.
In order to achieve the development goals and objectives as well as becoming the topmost contributor in the global market, the government of India has been able to set up a five year plan from 2007 to 2010, basing their concentration on four key dimensions which include improvement in the quality of lives of the people, generation and provision of employment opportunities, regional balance and enhancing self-dependence and reliance among the citizens and the business-oriented people.
Unemployment
Structural issues and instability in the governance of India have led to high levels of unemployment. The leading sector in employing people in India is the agriculture, but it does not remunerate well like the service sector. This has enabled investors to shift from agriculture to the service sector which is best performed through self-employment. The rising population is also contributing to unemployment since there are limited job opportunities to accommodate the unlimited seekers all over the country. India is characterized by seasonal unemployment because the larger percentage depends on agriculture and in case we put consideration to the other sectors, they lack the required educational skills and experience.
Exchange Ratio
What matters a lot in the exchange rate is the stability which directly contributes to the country’s economic strength. In case there is a fall or a rise in the overall rates, the balance of payments is the most affected in the whole economy of a country. Up to March of 1992, India had remained under a fixed exchange rate, and the economy and the rate of exchanging Rupee was under the custody and supervision of the Central Bank (RBI). The adjustments of Rupee were done in a common pool of currencies which comprised of the important partners in the trade like Britain, US, and Japan among others.
Capital inflows in the country have been feared to sabotage the economy and may bring destabilization in the macroeconomic management. They cause a lot of pressure on the economy and these results to challenges in the monetary and management systems of exchange rates. Both inflow and outflow of money within India has had a lot of impacts, both negative and positive depending on the value of a currency in other neighboring countries and partners in business. In the case of the carry trade, India becomes the first and the most preferred destination for business people and investors, with the USA dropping to 0% in the same.
In the case of inflationary issues, Indian Rupee has a lot of markets, and thus there is much outflow of the currency as compared to the inflow, a factor which leads to increased prices of commodities in the country which automatically results to the increased rate of inflation. On the other hand, any inlet-outlet which enables appreciation of the currency automatically reduces the level of competitiveness of the rupee in the market. This becomes a disadvantage to the new exporters who get that their products change to larger amounts of US dollars since the value of the rupee is relatively high compared to that of the dollar. Whenever the liquidity of the cash is enhanced in the market due to the releasing of a lot of money in the market, the chances of contributing to inflation are very high.
Exchange Traded Fund (ETF) acts as a security that captures an index of a certain good or a combination of assets just like the index fund. They are defined as passive schemes, mostly relied upon by the fund managers to extract final financial reports. General performance of the Indian ETFs is examined, analyzed and determined as per the basis of the returns made and the market features. It mostly acts as a stock in an exchange, more so internationally. Unlike the mutual fund, ETF does not have its net asset value (NAV) calculated on a daily basis. There is noticeable diversification on the side of an index fund, and it is acceptable to purchase even a single share in the market. Some of the advantages associated with ETFs in India include paying lower expense ratios compared to those paid in the mutual fund.
In India, there was a noticeable growth of 37% annually from the year 2006 to 2011 marking a surplus returns of 3% p.a as against CNX NIFTY. An average of about 1.4% of the total industry assets was comprised of the Indian ETFs. The figure below is an illustration of the annual returns of ETFs in India for a period of % years from 2006 as at 31st December of the given years (Figures in percentage).
SI. No.
Name of Fund
2006
2007
2008
2009
2010
Average
1
Bank BeES
33.62
65.34
-48.63
77.78
31.37
31.90
2
Junior BeES
28.63
75.12
-63.26
122.70
17.83
36.20
3
S & P BeES
41.18
55.83
-50.73
75.45
19.36
28.21
4
Nifty BeES
41.49
55.97
-51.28
74.57
18.78
27.91
5
ICICI SENSEX Pru. ETF
47.69
46.78
-51.12
78.41
18.77
28.11
Average
38.52
59.51
-53.00
85.72
21.22
The Exchange Traded Fund in India was introduced in the year 2001 by Benchmark Mutual Fund and in 1993 in the United States. It was bought and sold in the market just like other stock and had all the specifications of an index fund. By 2013, there were about 35 ETFs, and they had dominated the country in some way. They are mostly dominated by retail investment perspective and unable to extend their boundaries to the developed nations as there are a set of legal requirements and thus they do not allow products which seem to be a bit complicated to their economy. They are argued to be very conservative and dynamic to accept outsiders enter their market.
For the trade of ETFs to be effective in India, investors need to look for broking accounts first, but unfortunately, Indian investors are not used to them. The main reason as to why they evade such brokers is because they fear being added to additional charges concerning regulation and scrutiny. Discouraging investors in the nation has had several setbacks as it led to the Indian rupee to reduce its value to the US dollar. In the comparison of the two, the coefficient of differential inflation rates (DIFR) was positive and had consistency with the theory of the purchasing power. The ending of quantitative operations by the US Federal Reserve geared towards the depreciation of the Indian currency against the US dollar in 2013.
Work Cited
Mirchandani, Anita. "Analysis of macroeconomic determinants of exchange rate volatility in India." International Journal of Economics and Financial Issues, no. 3(1), 2013, pp. 172.
