The Foreign Exchange Market is by far the largest market in the world with a daily transaction of over $6 trillion. The forex trading volume restricts the trading volume in all the stock markets of the world to an enormous extent. The Forex trading market is among the oldest financial market in the world which makes it the largest. The market is truly global and operates across multiple time zones, offering great liberty to traders. Moreover, the forex market offers benefits with a range of investment options, minimal transaction fees, and zero or negligible commission as flexibility of investment.
In this Expert series, we are going to talk about the foreign exchange market, trends, opportunities and skills required with Dr. Anurag Agnihotri (Assistant Professor at College of Vocational Studies – Delhi University). He has over 15 years of experience in the finance domain and is currently working as a Faculty, the College of Vocational Studies, Delhi University. He has been a member of the Capital Market & Commodity Market Committee, PHDCCI. He has supervised 256 scholars and done 68 research papers, 26 paper presentations, and 5 books. He has also conducted many MDP for Middle and senior-level management. His research report on demonetization was appreciated by the Ministry of Finance.
Q1. What is foreign exchange and its impact on the general population?
Answer: Foreign exchange basically means at what rate foreign currency will be exchanged for domestic currency. Whenever the rate changes, it impacts the market. The forex market is a market which impacts everything, commodity market and capital market are also included, and everything impacts the exchange market also.
Q2. Why Indian rupee devaluate?
Answer: For example, crude oil is going up, from 100$ to 125$ so the price of the dollar and crude oil has gone up. Secondly, the rupee is depreciating in India because now you have to pay more for crude oil. In the rupee term, the value of crude oil has gone much more than has gone in the US market. So the cost of each individual increases. Similarly, the cost of raw material purchase will also have an impact but it has advantages of exchange rate evaluation.
Q3. What are the advantages of exchange rate devaluation?
Answer: If you are an exporter from Gandhi Nagar to foreign countries, when the rupee declines you will be beneficiary by that because when you exported the rate of $ was 67 now it is 78, so you are in profit with 11$. Similarly, the software companies like TCS, Wipro, and Infosys will also be benefitted from that.
Q4. What is the role of Technical analysis in Foreign Exchange?
Answer: Foreign exchange trading has the use of technical collaborations. If an exporter and importer for you, it is not having much value, this is called exchange rate forecasting. Basically, you are forecasting the value of a $ or any other foreign currency. The value of any currency depends on 3 factors –
- Inflation rate in that country as compared to another country.
- Comparative interest rate
- The economic condition of the country.
Technical and fundamental analysis is a very important aspect of foreign exchange. It helps us not only to assess the present situation but also helps us predict what will be the impact of any changes of any economic impact.
Q5. What is the relationship between the interest rate and the inflation rate?
Answer: The Globe is now thinking of another recession because the US has got highest inflation rate in history now of 8.45. Therefore inflation rate and interest rate have a cause and effect relationship.
Q6. What is Stagflation?
Answer: When the interest rate goes up, EMI goes up therefore demand decreases which will lead the economy to a recession, automatically economy goes into the recession which is called stagflation.
India is in a better position, it is only a problem till September because the US will continue to fall by August. As having a look at derivatives data, suggested that it should peak out in August last or September. Whatever steps are taken by FED (central bank of USA), will have results in 2-3months. By September inflation in the USA will cool down and so the inflow which is going out by FII from India will come back. We will be in a stronger position.
Q7. How has the pandemic impacted on foreign exchange market?
Answer: Pandemic was a crisis of its own kind in the last 100 years. We have seen many economic crises, 2008 crises and many other. But at that time it was only the economy which was going down, but today everything is still. It has done destruction in many sectors, but it has also bought new opportunities like online business and technologies. When economy goes down, smaller economies will suffer more due to covid or any other crises. The currency of smaller countries has depreciated and they have seen serious problems, like Venezuela, Sri Lanka. The pandemic has greatly impacted small and medium enterprises and has been damaged hugely as it was difficult to understand and handle the crises.
Q8. Why USD so strong and is it the most accepted currency in the world?
Answer: In 1945, when world war 2 concluded, there was an agreement signed which is known as the “Bretton and Wood agreement”. In the agreement it was signed that 1 ounce of gold will be equal to 35 USD and all other currencies has to be at par plus/minus 1% with USD. So what this agreement actually resulted in was earlier every country has to keep in the reserve the gold but now you have the privilege of keeping the $ too as a reserve because the US has promised it is 100% convertible into gold. This system was efficient by 1973, by the time other countries started developing, the gold price got volatile in the international market. Hence the system got revoked in 1973, in place of this plaga agreement was bought which is flexible and is continuing till date.
Q9. What is petrodollar?
Answer: The US has started with the petrodollar concept. They have aligned with the gulf countries and asked them to sell their crude oil in dollar terms and everybody needs crude oil. The demand for the dollar is there, so every country has to store $ in their terms. The whole world has dollar in its reserve so if the dollar value goes down there are chances of many countries becoming insolvent.
Q10. How did Russia prepare for the forex before going into the Ukraine war?
Answer: They have started holding the gold and collecting the revolt reserve in their country. Once the American country had put restrictions on that they detached their currencies from dollars and put it against gold. Gold and rubal price has gone up in the last 3 months, as they have requisite gold. Whatever the result of this war is, the global economic order will also change, it won’t remain the same dollar oriented.
Q11. What are the impacts of high Indian inflation on INR?
Answer: Rupee or any other country depends on its purchasing capacity. So inflation is reducing the purchasing capacity of that currency. Inflation is increasing because we have got less supply of goods & services, the money supply is more. You are demanding more and more goods and services so the price is automatically going high. Secondly, in the international market, the price of commodities is increasing and the dollar is appreciating so whatever you are importing that price is also going up due that factor. The government here can take a clue from a book called “i do what i do”. Although the government has already started trading into the Indian currency agreement with Japan and other countries. They have to cover deficit of their foreign trade, they should invite and encourage more foreign currency into India. You have to prepare an environment for good FIIs coming to India, as they won’t become by mere invitation.
Q12. Can you help us understand more about RBI MPC’s impact on the Indian economy and forex?
Answer: The main objective of RBI is to have a stable economy. Stable economy implies that inflation should be under control which cannot allow the retail investors that are the on common poverty line, and middle class to go down in the name of inflation. Monitory Policy Committee (MPC) always aims to keep the inflation rate down. They say that growth is a duty but growth is secondary inflation is primary. There are 2 ways of managing the economy, one of them is growth-oriented and savings-oriented. Once running the growth rate economy it becomes very difficult to help the underprivileged in that case. So it is important to keep interest rate should be kept under 5%.
Q13. What are the key tools and technologies needed for forex?
Answer: For having worked in the forex market, giving advice to your client who is an importer-exporter, you need to know excel sheets, be well versed with fundamentals, should know how to contemplate market factors. The moment you come into the trading, here you need to know the technology. As a student, you should know algorithm trading if you are not doing algo, AI, or Blockchain. You may be able to work for the next 2-3 years in the market, but after that, it will become almost impossible for you to work. Therefore, you need to have these technologies like blockchain, AI and algo trading, you should know how to work with this software and apps.
Q14. What is the future of forex and the impact of AI and blockchain
Answer: For example, If you have to find an expected value of the dollar, but after 3 months, so you can take up the interest rate and inflation rate value of India and the US and can use it on an excel sheet and put the formula and can find out what is the expected value and then the demand and supply balance is what you can put in that and find the expected value. So you can give your exporter and importer the expected value that after 3 months it will be 78-80 Rs. If I want to purchase a $ today and sell it tomorrow, I want to go long on that. Here I cannot do an excel sheet as they will change every movement. For that technical charts, you need to go through them accompanied by algo.
Q15. What are the skills and qualifications to be an expert foreign trader?
Answer: In finance, the job role for students is going to be difficult now, it will require full fundamental knowledge of finance, what are the theories working in it, and what is forex management. In theoretical knowledge, you should know algo, python, AI, blockchain and crypto because crypto is coming in a long way in the market to challenge the existing currencies. It is something like the same situation is going to come like in 1574, when the currency notes actually started. So in another 30-40 years, there will be challenges again. So other than the qualifications needed for finance one should also have these 3 important skills – reading charts, being technically proficient and having behavioural knowledge of finances.
Q16. What are the mistakes made by novice foreign traders?
Answer: Generally students mix currency trading with stocks, they use the same principles both ways, and they forget stock value is being determined by the value of the company and the domestic market. whereas, currency value is determined by external and internal factors. There is no fundamental problem with India and India will be a 5 billion economy in the next 5 years. But here the problem is all of a sudden Ukraine is bombarded by Russia and the supply chain got entirely damaged.
Q17. How to have a successful career in forex and forex trading?
Answer: To start with, go through the forex exchange management. Secondly, you need to learn the international economics basics which is very much important. Then be thorough with the technical skill set, you should know how to use the charts, to work with various apps relating to foreign trading. Also, you should know python and algo. And, you should be attentive all the time, in currency market value of trade is so much high, that you need to keep your eyes and ears open 24 hours.
