Impact of Dollers in Exim for Indian Exporters in COVID-19

[Kishan Barai]

Impact of Dollers in Exim for Indian Exporters in COVID-19 : Everything you need to know about the Dollar and it's current Behavior in the Era of Corona.

According to a report by the International Monetary Fund, the dollar is the most popular currency for trading in international business. Besides that, it represents the majority of the reserves of the world banks.

The reason why most international trade and businesses are managed with the dollar involved is due to the relative strength of the United States economy which represents a support for the value of the dollar. 65% of all dollars is used outside the United States.  When it comes to the currency market, most operations with currency pairs involve the US dollar.

The Dollar as the world currency

The USD is a currency that has never been devalued and its notes have never been invalidated. For countries that are affected by bank failures, devaluation and inflation, working with the stability of the US dollar is the best option, for that reason working with this currency in different businesses is easier. Many times the dollar can circulate more than the official currency of a country [For Eg. China Exports Revenue Bills of a particular category in USD can surpass its Local RMB currency sales if they export more] The British Virgin Islands, British Turks and Caicos Islands also use the U.S. dollar as their official currency of exchange even at the domestic level.

Anonymity and acceptability also play in favour, which is why it has become the world currency of choice. Therefore, USD has become the primary world currency.

The 5 Largest Economies In The World [2019/20]

1. United States is the world’s largest economy with a GDP of $21.44 trillion, constitutes one-fourth [25%] of the world economy.

2. China is the second-largest economy in the world with a GDP of $14.14 trillion, it makes up 16% of the global economy.

3. Japan is the third-largest economy in the world with a GDP of $5 trillion contributes almost 6% to the global GDP.

4. Germany is the fourth-largest economy with a GDP of $3.86 trillion contributes 4% of the global economy. [Largest economy in Europe, Germany is the best financially sound country in EU]

5. India is the fifth-largest economy with a GDP of $2.9 trillion contributes 3% of the global economy.

Latest Rank Referance : https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal) & https://www.nasdaq.com/articles/the-5-largest-economies-in-the-world-and-their-growth-in-2020-2020-01-22

Will India win the #1 Race ? Can India be Super Rich ? ......... we are placed at #5 Now....... Game is ON...........

USD and INR relationship

USD is usually the base currency in a given pair.

However, in the case that two non-USD currencies are exchanged, for example, EUR and INR, said transaction will contain in each currency two pairs of USD and that is when we see the real importance between the USD and the INR (OR really any other currency); In order to obtain the EUR and the INR, you must first buy EURUSD and on the other hand, you must buy USDINR.

When it comes to the foreign exchange market, it is already quite clear that the USD represents 85% of all foreign exchange transactions and there is no other pair to match it. If we look at the main European currencies (EUR, GBP and CHF) these have a direct correlation with the USD, as well as the commodity currencies have theirs, here we talk about the CAD, AUD or NZD. Therefore, if a case arises in which the EURO rises against the USD, then the GBP and the CHF will also. Despite being very stable, the USD can be affected by the financial statements and reports of the US economy, and they will not only affect the dollar but also the other currencies, so if the USD weakens, gold, currencies, etc, are strengthened.

Important things you should know about INR:

- Our INR is the 15th most traded currency in the world.

 -INR daily participation in the foreign exchange market is 0.9%.

 -The INR has only one indication of value which is the USDINR pair, this means that it cannot be presumed that one goes up while the other goes down. In other words, USDINR can be consolidated if only the USD is strengthened worldwide, this also directly influences the economy of India. It is important to understand that all these changes will always depend on the purchase and sale and the movement of the market.

INR and Currency Swaps

First understand the Basics of Currency Swap : https://www.youtube.com/watch?v=uxF7m08cgJk

My View: Regarding currency swaps in India, despite the fact that Indian entities are becoming more aware of hedging instruments for exposures to changes that may arise, they have not yet managed to develop an active derivatives market, it is important to know that the majority of derivatives transactions in India are made with other currencies, such as the dollar.

The Reserve Bank of India also allowed entities in India to have the opportunity to access markets so that they can hedge long-term exposures in foreign currency through swaps with banks in India, also Rupees were allowed to be exchanged for foreign currencies.

Coronavirus and currency swaps in India: 

The coronavirus has had a major impact in all countries, as we said earlier, as far as India is concerned, the Reserve Bank of India (RBI) decided to address the shortage of dollars in the market by proposing the $ 2 swap billion for six months, in this way it seeks to alleviate the pressure on the rupee, which due to the impact of the coronavirus, advances towards its historical minimum.

This means that the RBI will sell dollars on the market now and then buy them six months later.

Coronavirus and its effect on the foreign exchange market: USD and other currencies

As you should already know, the coronavirus, formally known as Covid-19, emerged in China in December 2019. It has killed thousands of people and even hundreds of thousands are infected and in quarantine, unfortunately, the numbers continue to increase rapidly. The impact of the coronavirus on the economy has injected high levels of volatility into EUR / USD.

In the case of the dollar, in the different stages of the coronavirus outbreak, it was affected in different ways, the most important thing to keep in mind is that its value increased due to the fact that demand also did, thus gaining six per cent from its lowest point that was reached in early March.

Something curious also happens with the dollar, which differs from other currencies, this currency can be printed a large number of times without weakening.

In this way, the financial system of the United States has been maintained, according to a report by the United States Federal Reserve, more specifically, they have been injecting multiple trillions of dollars in liquidity and still, the value of the currency has not declined. The dollar also represents an attraction for companies as they are in dire need of cash by depleting their income.

Euro: As for the euro, which is another strong currency, it tends to fall and devalue in times of economic stress. But as the outbreak of this virus spread from China to Europe, the euro in the first instance advanced.

The reason is that many banks and operators were closing short positions they already had against the euro before the outbreak. So when those positions closed, the euro rose. However, the worst is expected, as a business activity has plummeted and many parts of Europe remain closed. As far as official reports and government moves are concerned, the European Central Bank is known to have not cut interest rates.

The Chinese economy and its impact on USD

The economy of each country is closely related to each other, if there is a significant event in an economy as large as that of China, then all the economies of the world will be affected. In this specific case, it appears that around $ 400 billion was removed from the Chinese stock market. It is also important to know that the People's Bank of China has already reduced interest rates and this has led them to introduce an additional 1.2 trillion Yuan in the Chinese banking system, however, the lack of tourism and the limited movement of citizens within and outside the country they represent a growing danger to the world economy. The Yuan has been severely affected, weakening compared to other currencies.

So at the end of the day, I would like to conclude by saying that USD is very strong & has good backup strategies but currencies are totally unpredictable in the era of corona due very low domestic consumption/business, so it would be most advisable for exporters to opt for Forward Cover facilities via Banks, in order to hedge funds at a fix price exchange rates as booked in advanced. Else try to Export in INR. 

Also read: https://edition.cnn.com/2020/03/20/investing/strong-dollar-coronavirus/index.html

HAPPY TRADING IN LOCKDOWN. STAY SAFE. DEAL SAFE

Cordially Yours,

Kishan Barai