We consider in this project India to be the emerging economy so we will discuss how the currency of India i.e. Rupee has been affected against U.S. dollar during five years ending on 2010.
Definition of Exchange arte
First, we will discuss about the exchange rate. It is the rate between two currencies where one currency is exchanged against another currency.An exchange rate can be either floating or fixed. The floating exchange rate is determined by market forces but the fixed exchange rate is fixed at a specific rate by the government (Dornbush,503)
Effect on Indian Rupee
Since, Indian rupee went through a lot of pressures as foreign investors were interested in the emerging economies like India, so in the year 2005 India started receiving capital inflows in order to balance the current account deficit. An increase in capital inflows resulted in the appreciation of Rupee against the US dollar. But in the year 2007 the inflation started rising leading to the tightening of policy rates by the RBI (Reserve Bank of India) and as the global recession started, capital inflows decreased to a sharp extent from a peak of $107 billion in 2007-2008 to $7.8 billion in 2008-2009 and consequently rupee depreciated sharply from Rs. 39 dollar to Rs.50 per dollar. However, Indian economy recovered fast from the global meltdown. It moved from $7.8 billion to $51.8 billion in the year 2009-2010. The capital inflows increased due to FDI(Foreign Direct investment) and FII(Foreign Institutional Investors) resisting currency depreciation is best done by increasing the supply of foreign currency by expanding market participation" as said by the RBI deputy governor Dr.Subir Gokarn . Thus, investments such as stocks and bonds generated huge returns and provided greater degree of portfolio diversification ("A Journal of Economics and Management", Vol1).
Effect on the Financial Market
Since, the portfolio managers of a country like U.S shop around the world for the assets in the foreign countries that will give them the most attractive yields and one such yield is the ETF or exchange traded Fund. An exchange Traded fund (ETF) is an open ended fund just like a mutual fund that tracks an index, a commodity or a basket of assets traded like a stock on an index. When anybody buys shares of an ETF then they are buying shares of a portfolio that tracks the yield and the return of its native index. In order to protect the country from currency swings against US dollar these ETF are used that help in attracting investors (Dornbush,505).
ETF and its role
America Fund House launched India specific exchange traded funds as the growth potential was promising in emerging market. Among the ETFs Wisdom Tree Earnings Fund (NYSEArca: EPI) is the largest listed in the US index. It provides a weighted index i.e. the holdings of the fund are weighed according to the valuations fundamentals instead of simple company market capitalization. This EPI comprises of mid cap companies (28%) and large cap companies (61%). The largest holding is Reliance Industries which is almost 10% of the AUM (assets under management) followed by Infosys. When you look at our breakdown of AUM by region, we are building a strong and increasingly balanced business" as said by Jonathan Steinberg, CEO and President Wisdom Tree ("Time to Get Into India ETF").
Performance of Wisdom Tree (EPI)
Since, its inception (2007), there has been annual volatility of around 36% relative to S& P 500 where the average volatility of low 20s and sub 20 after the financial crisis and the depreciation of rupee. Investors were in a dilemma but the annual growth of Wisdom Tree (EPI) was 5.4% during the year 2009-2010. The yearend NAV in 2008 was 11.12 and in 2009 was 22.30(Jeremy, Wisdom Tree Research)."
Conclusion
As Indian economy growth rate was at a pace of 9.4% during the years 2005-2008, it declined to 7% in the year 2008-90 which resulted in the devaluation of rupee. However, the factors that encouraged the investors to invest in India are the favorable demographics, rising consumerism, low oil prices. Considering these factors the growth rate of India increased to 8.4 % in 2009-2010.
Works Cited
Dornbush, Rudiger. Macroeconomics. New Delhi: Tata McGraw Hill, 2007.
Singhal, Shelly. “An Analytical Study on Indian Currency Rupee Depreciation Against "US Dollar and its Economic Impact.” A Journal of Economics and Management. 2012 April. Web. Volume1.
. “Time to Get Into India ETF.” www.spa-etf.com/india-etf/
"Macroeconomic and monetary developments". Publications.2008 January 28.https://m.rbi.org.in//Scripts/PPublications.aspx?publication=Annual
" Weak Rupee to affect industry ". The Hindu
www.thehindu.com/business/Economy/weak-rupee-to-affect-industry/
Schwartz Jeremy, "Wisdom Tree 2014 Annual Emerging Markets Balance" Wsidom Tree Market Insights,2014.November
www.wisdomtree.com/resource-library/documents/schwartzcommentary/wt-research
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