Forex Currency Trading: How forex rates are determined?–2

This is part II of the article Forex Currency Trading: How forex rates are determined?– I. Please read the first part before proceeding with this one

Another reason for forex rates to move is due to interest rates. Suppose that in Europe, the interest rates are at 4% per annum, while in India, the interest rates are 10%. What will happen on the investments front?

People from Europe (including fund managers, FII, investors) will rush to India and start investing in Indian fixed income products like Bonds, etc. (provided they are convinced about the stability of the country and good returns). This will create a big demand for Indian Rupee, because Indian investments can be made in rupees only. Hence, the forex rates will start changing, so as to accommodate for this demand and supply. The Indian rupee will start becoming stronger as compared to European euro, and the process will continue.

The government of India, the RBI is struggling with this problem at present. The rates in US are at record low – another cut of atleast 25 basis point is expected by today evening. But the interest rates in India are high. So there is a big inflow of dollar in India, which is creating a big demand for Indian rupee and hence the rupee is getting stronger.
The government can as well cut the interest rates, but that will affect lots of economic factors and prices of other basic commodities and primarily, the inflation. Hence, the equilibrium is established automatically by the market factors, the demand and supply of commodities, the interest rates, the inflation and other market forces.

Can anyone predict anything about the future? Atleast I would not claim anything. Right from the prices of commodities, the production of commodities which ultimately depends upon the weather conditions, the government stability and its rise and fall, the interest rates, the entire market and the investors confidence and behaviour. Hundreds of thousands of factors play a role in forex price determination. No body can be certain about anything.

Forex market is said to be the most active market across the globe. It is the only market in the world that runs 24 hours non-stop. Share markets have their timings, bond markets have their timings, but forex markets never sleep. I was in Mumbai last year with a friend of mine who trades in Australian dollars and US dollars for a big investment bank. At 2:30 at night, he got a call from US counterpart, about a possible political issue in Australia. Immediately, he rushed to his office to check his holdings in Australian dollars. Later, the news appeared to be rumour and he returned at 5:30 am, just to return back to the office at 8:30 am. This is what is called the real dynamic market!

All one can do is make a short term prediction for movement of forex rates. It is very easy for me to say “Dollar Rupee will remain in the 39-41 range during this month.” Making long term predictions is difficult.

India has already lost 20 lakh jobs in the different export sectors due to dollar rising – this is the official figure. The unofficial figure can be as high as 50 lakhs. And an export worker loosing the job means a low income family being deprived of its livelihood.

Till last year, IT companies use to make the index like Sensex run. This year, they have pulled it down significantly. Infy trading at 2100 levels touched lows of 1550 – a clear loss of 25%. All courtesy of the Dollar rupee exchange rate. No one can predict the rates and its impact in the long run. All one can do is keep making bets with one’s assumptions and speculations. If you ask me where is the dollar rupee rate headed, my answer would be “I don’t know”. If you want to listen what will make you feel happy, then there are thousands of “investment advisors” and “business experts” waiting to serve you.

Here is an example of how forex rate change collapsed a company, which was run by a noted business tycoon!

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