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THE INDIAN INSTITUTE OF PLANNING

&
MANAGEMENT

INDIAN RUPEE VS Chinese Yuan (CNY)

NAME – Shripal jain

ROLL NOS – 16

FS-2
TABLE OF CONTENTS

Serial No Topic Page No

1 Executive Summary 3

2 Indian Economy 4

3 Chinese Economy 5

4 Currency tracking 9

5 Currency Movement 11

6 Forex Triggers and Impact 12

7 Purchasing Power Parity 14

8 International Fisher’s Effect 15

9 16
Analysis and Conclusion

10 Bibliography and References 17

Executive Summary

Currency Project gains relevance due to the importance of global economy and its
ramifications on the international financial sector. The approach has been to
integrate the theoretical aspects such as PPP Model, International Fisher Effect,
Technical & Fundamental Analysis, and Quantitative applications along with the
practical developments in Multinational Business Finance. The project attempts to
analyses the information and develops an interpretation of the facts which is
characterized by its brevity in representation.

The first part is the snapshot of INR/CNY This is followed by a fundamental


outlook on India and CNY which includes information and analysis on economic
indicators such as GDP, Interest rates, inflation, Balance of Payment/Trade,
Equity markets. The period for which the currencies CNY & INR have been
tracked ranges from 01th May 2010 to 16th July2010. Analysis has been done on the
possible triggers and impact to/on CNY/ INR over a period of 8 weeks. The
currency rates have been analyzed by involving technical views such as Avg. True
Range, Support & Resistance Levels. The projections have been made by taking
GBP/ INR spot on 16TH July 2010 as the base and by using PPP Model & IFE
Model.
ECONOMY OF INDIA
The economy of India is the eleventh largest economy in the world by nominal
GDP and the fourth largest by purchasing power parity (PPP). Following strong
economic reforms from the socialist inspired economy of a post-independence Indian
nation, the country began to develop a fast-paced economic growth, as free market
activities started for international competition and investment, in the 1990s. In the 21st
century, India is an emerging economic power with vasthuman and natural resources, and
a hugeknowledge base. Economists predict that by 2020, India will be among the leading
economies of the world.
India was under social democratic-based policies from 1947 to 1991. The
economy was characterised by extensive regulation, protectionism, public ownership,
pervasive corruption and slow growth. Since 1991, continuing economic liberalisation
has moved the country towards a market-based economy. A revival of economic reforms
and better economic policy in 2000s accelerated India's economic growth rate. In recent
years, Indian cities have continued to liberalize business regulations. By 2008, India had
established itself as the world's second-fastest growing major economy. However, the
year 2009 saw a significant slowdown in India's GDP growth rate to 6.8% as well as the
return of a large projected fiscal deficit of 6.8% of GDP which would be among the
highest in the world.
India's large service industry accounts for 55% of the country's Gross Domestic
Product (GDP) while the industrial and agricultural sector contribute 28% and 17%
respectively. Agriculture is the predominant occupation in India, accounting for about
52% of employment. The service sector makes up a further 34% and industrial sector
around 14%. Major agricultural products include rice, wheat, oilseed, cotton, jute, tea,
sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and fish. Major industries
include telecommunications, textiles, chemicals, food processing, steel, transportation
equipment, cement, mining, petroleum, machinery, information technology enabled
services and software.
India's per capita income (nominal) is $1,030, ranked 139th in the world, while it’s
per capita (PPP) of US$2,940 is ranked 128th. Previously a closed economy, India's trade
has grown fast. India currently accounts for 1.5% of World trade as of 2007 according to
the WTO. According to the World Trade Statistics of the WTO in 2006, India's total
merchandise trade (counting exports and imports) was valued at $294 billion in 2006 and
India's services trade inclusive of export and import was $143 billion. Thus, India's global
economic engagement in 2006 covering both merchandise and services trade was of the
order of $437 billion, up by a record 72% from a level of $253 billion in 2004. India's
trade has reached a still relatively moderate share 24% of GDP in 2006, up from 6% in
1985.
ECONOMY OF CHINA
The economy of the People's Republic of China is the third largest in the world, after
the United States and Japan with a nominal GDP of $4.99 trillion in 2009.[3] It is
the second largest after the U.S. with an economy worth $8.77 trillion when measured
in purchasing power parity. China is the world's fastest-growing major economy, with an
average growth rate of 10%for the past 30 years. The country's per capita income is
at $3,677 (nominal, 97th), and $6,567 (PPP, 98th). China is the second largest trading
nation in the world and the largest exporter and second largest importer of goods.
INTEREST RATE

INDIA INTEREST RATE


India benchmark interest rate stands at 4.00 percent. In India, interest rate decisions are taken by the
Reserve Bank of India's Central Board of Directors. The official interest rate is the benchmark repurchase
rate.

CHINA INTEREST RATE


China benchmark interest rate stands at 5.31 percent. In China, interest rates decisions are
taken by The Peoples's Bank of China Monetary Policy Committee. The PBC administers two
different benchmark interest rates, the benchmark lending rate, which is the one year PBC
lending rate and the benchmark rate of central bank lending that is the rediscount rate. This
page includes:
GDP GROWTH RATE

India GDP Growth Rate:-


The Gross Domestic Product (GDP) in India expanded at an annual rate of 8.60
percent in the last quarter. India Gross Domestic Product is worth 1159 billion
dollars or 1.87% of the world economy, according to the World Bank. India's diverse
economy encompasses traditional village farming, modern agriculture, handicrafts,
a wide range of modern industries, and a multitude of services. Services are the
major source of economic growth, accounting for more than half of India's output
with less than one third of its labor force. The economy has posted an average
growth rate of more than 7% in the decade since 1997, reducing poverty by about
10 percentage points.

CHINA GDP G
RATE
The Chinese economy expanded 10.30 percent over the last year, as measured by
the year-over-year change in Gross Domestic Product (GDP YoY). Unlike the
commonly used quarterly GDP growth rate, the annual GDP growth rate takes into
account a full year of economic activity, thus avoiding the need to make any type of
seasonal adjustment. The China Gross Domestic Product is worth 4327 billion
dollars or 6.98% of the world economy, according to the World Bank.

INFLATION RATE
INDIA INFLATION RATE
The inflation rate in India was 13.91 percent in May of 2010. Inflation rate refers to a general rise in prices
measured against a standard level of purchasing power. The most well known measures of Inflation are
the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of
the domestic economy

CHINA INFLATION RATE


The inflation rate in China was 2.90 percent in June of 2010. Inflation rate refers to a
general rise in prices measured against a standard level of purchasing power. The
most well known measures of Inflation are the CPI which measures consumer prices,
and the GDP deflator, which measures inflation in the whole of the domestic
economy.
CURRENCY TRACKING
Conversion Table: CNY to INR (Interbank rate)
Time period: 06/01/10 to 07/15/10.
Daily averages:
06/01/2010 6.80830 06/24/2010 6.79770
06/02/2010 6.89350 06/25/2010 6.83250
06/03/2010 6.88740 06/26/2010 6.84020
06/04/2010 6.8310 06/27/2010 6.92990
06/05/2010 6.8620 06/28/2010 6.92990
06/06/2010 6.97820 06/29/2010 6.8070
06/07/2010 6.99460 06/30/2010 6.8470
06/08/2010 6.90450 07/01/2010 6.86620
06/09/2010 6.88160 07/02/2010 6.87650
06/10/2010 6.88720 07/03/2010 6.8980
06/11/2010 6.88080 07/04/2010 6.99540
06/12/2010 6.86280 07/05/2010 6.99970
06/13/2010 6.93460 07/06/2010 6.91130
06/14/2010 6.93580 07/07/2010 6.90780
06/15/2010 6.81670 07/08/2010 6.950
06/16/2010 6.82160 07/09/2010 6.91940
06/17/2010 6.80720 07/10/2010 6.90140
06/18/2010 6.79710 07/11/2010 7.03680
06/19/2010 6.76470 07/12/2010 7.03670
06/20/2010 6.74520 07/13/2010 6.90920
06/21/2010 6.87050 07/14/2010 6.91670
06/22/2010 6.73020 07/15/2010 6.90240
06/23/2010 6.77640

Average (45 days): 6.88186


High: 7.03680
Low: 6.73020
China urges the U.S. to lift export restrictions on 24th May

China urged the United States to lift restrictions on exports to China as early
as possible, Commerce Minister Chen Deming said ahead of talks between
the two countries in Beijing. The US wants a change in the valuation of the
Yuan while China has called on Washington to relax its laws on technology
exports to Beijing

China report harms efforts to bolster euro on 26th May

Treasury Secretary Timothy Geithner and Italian Prime Minister Silvio Berlusconi
sought to support the battered euro on Wednesday, but the currency extended its
decline on a report that China was reviewing its euro holdings. Geithner told
Europeans that financial markets want to see euro zone countries put into action
their $1 trillion standby package designed to stabilize the currency, and Berlusconi
called on European partners to follow his lead and impose austerity to help solve
the euro zone debt crisis

China under pressure; will Yuan rise? On 12th June


Like the risk-on, risk-off volatility that has buffeted global markets this year, China's
currency policy has been subjected to bouts of pressure and criticism from abroad
interspersed with periods of calm.

Beijing is once again facing a pressure-on phase in the cycle, as underscored by US


Treasury Secretary Timothy Geithner's harsh words on Thursday about the Yuan.
Here are some questions and answers at the current juncture in the long-running
Yuan
China unshackles Yuan, retains final control on 22nd June
China’s Yuan surged to a five-year peak on Monday, sending stocks higher across
the globe as Beijing signaled ahead of this weekend’s G20 summit that it would
deliver on pledges of greater currency flexibility. China’s central bank has
maintained a de facto peg since the middle of 2008, a controversial policy aimed at
steadying the world’s fastest-growing major economy during the global economic
downturn.
IMF don’t expect any rapid revaluation of the Yuan on 28th June
Dominique Strauss-Kahn also says that a CNY revaluation is not a quick fix for all
global economic imbalances.

China makes haste slowly globalizing the Yuan on 6th July


Each journey of a thousand miles begins with a single step. Yet for the trek of
turning the yuan into a global currency, China is only just lacing up its boots.
According to this skeptical line of thinking, it will take Beijing a generation to make
the yuan a fully convertible currency that can rub shoulders with the dollar and the
euro.
China Q2 slowdown may be faster than expected on 15th July
Reuters are referring to an editorial in an official Chinese newspaper as saying that
the Q2 economic slowdown may be sharper than expected.

THEORIES

CNY INR
INFLATION RATE(CPI) -1.80 9.29
INTEREST RATE(BANK 5.31 3.25
RATE)

PURCHASING POWER PARITY THEORY

Et = [(1+ih) ^t/ (1+if) ^t]*e0

Et = Exchange rate of foreign country

Eo = Exchange rate of home country

ih = Inflation rate of us

if = Inflation rate of Japan

t = Time period

Inflation
Rates
INR CNY

-
11.89 1.80
% %

As on 7/17/2009, 1 INR= 0.13991CNY, where INR is


base/home/domestic currency

et = 0.13991 (1+0. 01189)^t

(1- 0.018)]^t

et = 0.13991 (1.01189)^1

(0.98)^1

1 INR = 0.1441 CNY

The value as on 7/16/2010 was 0.14485 CNY, whereas according to the


forecast, as per PPP it was expected to be 0.1441 CNY.

1. International Fisher Effect


Et = Eo (1+rh) t / (1+rf) t

Et = Spot Exchange rate in period t

Eo = value of one unit of home currency at the beginning of the period

rh = interest rate of home country

rf = interest rate of foreign country

t = time period

Interest
Rates
INR CHY

5.31
3.25% %

As on 7/17/2009, 1 INR= 0.13991CNY, where INR is


base/home/domestic currency

et = 0.13991 (1 + 0.0325)^t

(1 + 0.0531)^t

et = 0.13991 (1.0325)^1

(1.0531)^1

1 INR = 0.1370 CNY

The value as on 7/16/2010 was 0.14485 CNY, whereas according to the


forecast, as per IFE was expected to be 0.1370 CNY.

Conclusion
The observations as per:

1. PPP Theory

a. The difference between the forecasted value and the original


value is very minute. Original exchange rate is 0.14485 CNY,
whereas expected was 0.1441 CNY.

b. The reason behind this is the non-robust behaviour of both the


currencies.
c. Since inflation is considered in this theory, it was observed that
the inflation in both the countries in the last one year has moved
substantially but in a similar ratio i.e. for China form -1.80% to
2.9% and for India from 11.89% to 13.9%.

2. IFE Theory

a. There is an insignificant difference between the forecasted value


and the original value. Original exchange rate is 0.14485 CNY,
whereas expected was 0.1370 CNY.

b. The exchange rates were observed to be quite unwavering.

c. The interest rates in China did not move at all and were recorded
constant at 5.31%. While in India the interest rates fell down by
75 basis points i.e. from 4 to 3.25.

Bibliography

• http://inr.cer24.com/cny/history/?q=365

• http://tradingeconomics.com/

• http://www.xe.com/

• http://www.exchange-rates.org/

• http://www.fxstreet.com/

• http://economictimes.indiatimes.com

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