India's forex reserves down by $1.73 bn

Press Trust of India / Mumbai May 22, 2009, 20:35 IST
India's foreign exchange reserves declined by $1.734 billion to $254.207 billion for the week ended May 15 from $255.941 billion in the previous week.

In the week under review, foreign currency assets (FCA) fell by $1.747 billion to $243.754 billion as against $245.501 billion in the previous week, RBI said in its weekly report.
FCAs, expressed in US dollar terms, include the effect of appreciation or depreciation of non-US currencies (such as euro, sterling, yen) held in reserves, RBI said.
The gold and special drawing rights (SDR) remained unchanged at $9.231 billion and $1 million for the week, the central bank said.
India's reserve position in International Monetary Fund (IMF) increased by $13 million to $1.221 billion in the week compared to $1.208-billion in the previous week.

Forex Achieves New Prominence

The credit crisis has resulted in a collapse in prices for nearly every type of investable asset class (i.e. stocks, bonds, commodities, real estate)- with the notable exception of one: currencies. Of course, this is an inherent quality of forex: a rise in one currency must necessarily be offset by a fall in another currency. While you are probably rolling your eye at the obviousness of this observation, it is still worthwhile to make because it implies that there is always a bull market in forex. Accordingly, capital from both institutions and retail investors continues to pour in to the forex markets, causing daily turnover to surge by 41% (according to one survey), which would imply a total of $4.5 Trillion per day!

Investment banks, especially, are trying to increase their forex business in order to compensate for a decline in other divisions. Said one representative: ”We have probably made more of an aggressive leapfrog in growing our revenue base, which has virtual
ly doubled in 2008 versus 2007. With the situation that has been developing over the past six months, where banks are clearly re-embarking on a new role leading back to basics, foreign exchange has to be one of the products that tops that list.”
Based on New York data, which generally reflects global forex activity, transactions between the Dollar, Euro, and Yen (i.e. not involving outside currencies) now account for more than half of the total.

Contrary to popular belief, however, most foreign exchange transactions involve derivatives, rather than spot trades. In the case of swaps, it is the nominal value of the swap that is reported, which well exceeds the total amount of currency that is exchanged, and thus results in an inflated estimate of total daily turnover. Regardless, all measures point to increasing volume.
One would expect that the increase in both liquidity and the role of derivatives in forex markets would result in a corresponding decrease in volatility. Of course, this is quickly belied by the turbulence of the last six months, in which many currency pairs set daily, weekly, and/or monthly records for fluctuations and volatility.
I recently read an article about so-called “predictive markets,” which use a grassroots approach to make forecasts by “by giving people virtual trading accounts that allow them to buy and sell “shares” that correspond to a particular outcome. Shares in an outcome that is considered more likely to occur then trade at a higher price than those that represent a less likely outcome.” Given that the forex ‘experts’ are almost invariably wrong, I think this idea has tremendous potential to make forex markets even more transparent. Of course, that also means that it will become more difficult to turn a profit, which is why “it’s vitally important to be well-informed when investing in forex so as to enter and exit trades only at levels that are ‘fundamentally’ sound.”