3.1,pptx.PPT international parity relationship

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1. 1
International Parity Relationships
There are the following four international parity
relationships:
Interest rate parity (IRP)
Purchasing power parity (PPP)
Forward rates and future spot rates parity
International Fisher effect (IFE).

2. 2
Currency Appreciation and Depreciation
“Wefrequentlyhearthingslike“thedollarstrengthened(orweakened)infinancial
Marketstoday”orthedollarisexpectedtoappreciate(ordepreciate)relativetothe
Rupee.”Whenwesaythatthedollarstrengthensorappreciates,wemeanthatthe
valueofadollarrises,sothatittakesmoreforeigncurrencytobuyadollar.
Whathappenstotheexchangeratesascurrenciesfluctuateinvaluedependsonhow
exchangeratesarequoted.Sincewearequotingthemasunitsofforeigncurrency
perRupee,theexchangeratemoveinthesamedirectionasthevalueoftheRupee:it
risesastherupeestrengthens,anditfallsastherupeeweakens.
RelativePPPtellsthattheexchangeratewillriseiftheIndia’sinflationrateislower
thantheforeigncountry’s.Thishappensbecausetheforeigncurrencydepreciatesin
valueandthereforeweakensrelativetotheRupee.

3. 3
Depreciation of Rupee against US Dollar
1.RupeehasdepreciatedarecordlowofRs.57.32onJune22-2012againstUS
dollar.
2.LossofpotentialEuropeanexportmarket.DuetoEuro-zonedebtcrises.
Financialcrunchandinsolvency.ThemaincountriesareGreece,Ireland,
Portugal,SpainandItalyandFrance.
3.Exportleadstoforeignexchangeinflow.
4.Hugeoilbillsduetoimportofcrudeoil.
5.FII’sturnedbearishduetoimplementationofGAAR*retroactively.
6.TheabovementionedreasonsleadtoscarcityofUSdollaranddepreciated
partiallyconvertiblerupeetoarecordlow.
7.GradualstrengtheningofRupeestartedform4
th
July2012.
8.Offloadingofdollarsbybanksandexporters.
9.Thegovernmentincreasedforeigninvestmentlimitsingovernmentdebtby$5
billionto$20billion.
10.FII’sturnedbullishduetoannouncementthatapplicationofGAARwillnotbe
retrospectively.
*GeneralAntiAvoidanceRuleaimedatpreventingdealsorincomesthatare
structuredtoavoidtaxes