case of india and china's exchange rate

1. Exchange Rate volatility
and its impact: Case of
India and China
Group 7

2. Exchange Rate Volatility
 The tendency for foreign
currencies to appreciate or
depreciate in value.
 Measurement of the amount
that these rates change and the
frequency of those changes.

4. Exchange Rate Volatility
 Exchange rate volatility is expected to decrease international
trade due to uncertainty of domestic currency receipts
 Export margins especially for Heckscher-Ohlin goods (labor-
intensive and bulk goods in the context of developing
country exports) are thin
 Hedging in forward markets involves additional costs
 studies show that measure of exchange rate volatility (e.g.
standard deviation) enter a regression equation explaining
trade with a significant estimated negative coefficient
confirming the adverse effects of volatility on trade.• This
effect is over and above the standard effect of exchange
rate on trade, i.e., a depreciated domestic currency in real
terms increases trade.

5. Volatility in the Indian Context
 Volatility can be either in the short run or in the long run. The standard
deviation of the exchange rate of a currency steadily depreciating in
the long run could be as high as (or even higher than) that of a
currency volatile in the short run around a steady long run level.
 Moreover the volatility can be measured either in nominal terms or in
real terms.
 The bilateral nominal exchange rates of the rupee w.r.t. major
currencies exhibits greater volatility than the real effective exchange
rate (REER).•
 In a situation of generalized floating, it is the EER which is more
relevant; and in particular the inflation adjusted EER, i.e., REER
 The Indian Exchange Rate Policy has effectively been to hold the
REER constant over the long run.

6. Exchange Rate Policy
 India follows a managed floating exchange rate regime
 The avowed exchange rate policy of the RBI is that the
rate is basically determined by the market, but since the
market-determined rate tends to be volatile, the RBI
manages the rate to avoid excess volatility in the market
 This implicitly means that the RBI does not influence the
level of the rate

7. Exchange Rate Policy 2
 Yet the Real Effective Exchange Rate of the rupee has
been relatively stable over the entire period
 It can be said that volatility is being avoided not only in
the short run, but also in the long run!
 Apparently, the nominal rate is being managed to
maintain the real rate in the face of higher domestic
inflation compared to the trading partners

9. Impact of Exchange rate volatility on INDIA
 Important for countries that
depend mainly on trade
such as INDIA .
 Increase in the world
exports share, it has risen
from 0.55% in 1991 to
2.1% in 2015.
 Excessive fluctuations in
exchange rate could lead to
instability and the economy
risk - it increases trade
costs and reduces the gain
that could be made in
international trade.

10.  Since 1991 liberliazation Indian currency showing both
appreciation and depriciation trends.
 Also affects capital flows, the rising cross-border trade
 Volatililty affecting the revenue and expenditure of different
business in the short run and the long run as well
 Exchange rate pass-through – (It means the relationship
between price and exchange rate) Indian Exporters use market
power to obtain prices they want when the currency(rupee)
experiences volatility.

12. Rupee Trend Through the Years

13. Impact of Exchange rate volatility on China
• China is world leader for manufacturing, and is
the 2nd largest economy in the world as well as
the largest exporter of finished goods in the
world
• The renminbi is the official currency of China
• As China transitioned from a centralized
economy to market economy, and they have
also increased their participation in foreign
trade, their currency’s value was decreased to
increase the growth and competitiveness of
Chinese industry
• Since 2006, the renminbi exchange rate has
varied between a small range around a fixed
rate which is determined in reference to some
country’s currencies
• Appreciation actions by the Chinese
government and quantitative easing steps
taken by the Federal Reserve have caused
the renminbi to gain 8% of its equilibrium value
by the middle of 2012
• Increase in the exchange rate flexibility of
renminbi and the rapid globalization of its
currency resulted in renminbi to become the
8th most traded currency in 2013.

14. Managed float
 The renminbi moved to a managed floating exchange
rate based on market supply and demand with
reference to a basket of foreign currencies
 In 2005 the renminbi in the interbank foreign exchange
market was allowed to remain within a narrow band of
0.3% around the central parity targeted by the People's
Bank of China
 The stringent management of the renminbi and USD
(annual exchange limit) leads to a bottled-up demand
for exchange from both directions. It used a major tool
to keep the currency peg, preventing inflows of hot
money
 The shift of Chinese reserves into the currencies of
their other trading partners has lead not so great
change in the value of their currency against the USD.
 In 2015 china further devaluated its currency to give
boost to its economy.

16. THE IMPACT OF DEVALUATION OF
YUAN ON INDIAN AND CHINESE
MARKETS
 The devaluation in mid August 2015 was one of the most important
downward shift to the Yuan since early 90’s. Its aim behind this step
was to boost exports and achieve the official reserve currency status.
 On August 10, People’s Bank of China set the reference rate for Yuan
at 6.2298 for 1$, compared to 6.1162 Yuan earlier- which meant a fall
by 1.86%. This step was followed by further devaluations.
 Central to this is a bid to have the Yuan accepted by the International
Monetary Fund into its basket of reserve currencies, placing the Yuan
on par with the Dollar, Euro, Yen and British pound, and boosting
China’s global stature.

17. What it means for India?
 For India, China is its largest trading partner. There is a
significant imbalance of trade between the two countries,
though.
 Over the last ten years, the trade balance has seen an
increase by 33 times. The figure in 2004 was 1.4 billion
dollars, while it is 48.5 billion dollar for 2014.
 In the year 2015, more than 80% of the total imports from
China to India comprised of capital and intermediate
good. With the devaluation of the Yuan, projects based on
supplies from China are facing profits, allowing other
projects to flourish simultaneously.

18. IMPACT ON EXCHANGE RATE BETWEEN INR
AND RMB AFTER THE DEVALUATION

19. THANKS