OVERVIEW OF FOREIGN EXCHANGE

PRESENTATION
BY Dr. NEELAM TANDON

3/18/2013

OVERVIEW OF FOREIGN EXCHANGE

FOREIGN EXCHANGE IS THE SETTLEMENT AND ARRANGEMENT OF FUNDS AROUND THE WORLD, BY BUYING AND SELLING CURRENCIES.
MORE THAN US$ 1.5 TRILLION IS EXCHANGED DAILY BY THOUSANDS OF BANKS AND FOREIGN CURRENCY TRADERS ALL OVER THE WORLD.

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Role of International Banking Division

CALCULATION OF EXCHANGE RATES (CARD RATES) AND ITS CIRCULATION TO AUTHORIZED BRANCHES.

TO MAINTAIN POSITION AND TO UNDERTAKE COVER OPERATIONS. TO MAINTAIN NOSTRO ACCOUNTS IN FOREIGN CURRENCIES WITH FOREIGN BANKS.
TO ISSUE GENERAL GUIDELINES TO AUTHORIZED BRANCHES AND BE A LINK BETWEEN RBI AND THESE BRANCHES. MANAGEMENT OF FOREIGN CURRENCY ASSETS AND 3/18/2013 LIABILITIES FOR THE BANK.

AUTHORIZED PERSONS

RBI AUTHORIZES FOLLOWING CATEGORIES TO DEAL IN FOREIGN EXCHANGE: AUTHORIZED DEALERS MONEY CHANGERS OFFSHORE BANKING UNITS

AUTHORIZATION CAN BE REVOKED IF RBI INSTRUCTIONS/ PROVISIONS OF FEMA ARE NOT FOLLOWED
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CORRESPONDENT RELATIONSHIP
AGENCY ARRANGEMENTS WITH VARIOUS FOREIGN BANKS ON RECIPROCAL BASIS. NOSTRO ACCOUNT : AN ACCOUNT MAINTAINED BY AN INDIAN BANK WITH A BANK ABROAD IN FOREIGN CURRENCY. VOSTRO ACCOUNT : AN ACCOUNT OPENED BY A FOREIGN BANK WITH AN INDIAN BANK IN RUPEES. LORO ACCOUNT : OBC IS HAVING AN ACCOUNT WITH CHASE. WHEN BOB REFERS TO THIS A/C WHILE CORRESPONDING WITH CHASE, IT WOULD 5 BE3/18/2013 REFERRED AS LORO A/C.THEIR A/C WITH YOU

FOREX TRANSACTIONS
FOREIGN CURRENCY IS LIKE A COMMODITY THAT IS PURCHASED AND SOLD BY A BANK. PURCHASES THE BANK ACQUIRES A FOREIGN CURRENCY AND PARTS WITH HOME CURRENCY. SALES THE BANK PARTS WITH FOREIGN CURRENCY AND ACQUIRES HOME CURRENCY.
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FOREIGN EXCHANGE MANAGEMENT ACT,1999 (FEMA)

IS A LAW TO REPLACE FERA 1973 AN OFFENCE IN FERA WAS A CRIMINAL OFFENCE LIABLE FOR IMPRISONMENT FEMA SEEKS TO MAKE OFFENCES RELATING TO FOREIGN EXCHANGE CIVIL OFFENCES UNDER FERA NOTHING WAS PERMITTED UNLESS SPECIFICALLY PERMITTED. TONE AND TENOR OF FERA VERY DRASTIC. UNDER FEMA, A PERSON IS PRESUMED INNOCENT UNLESS PROVED GUILTY
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EXCHANGE RATE SYSTEM

BUYING / SELLING RATES
WHEN A BANK BUYS FOREIGN EXCHANGE FROM THE CUSTOMER, IT SELLS THE SAME IN THE INTERBANK MARKET AT A BETTER RATE AND TRIES TO MAKE A PROFIT OUT OF THE TRANSACTION.

IN THIS WAY, THE INTERBANK BUYING RATE FORMS THE BASIS FOR QUOTATION OF BUYING RATE BY THE BANK TO ITS CUSTOMER. LIKEWISE, WHEN THE BANK SELLS FOREIGN EXCHANGE TO THE CUSTOMER, IT PURCHASES THE REQUIRED FOREIGN EXCHANGE FROM THE INTERBANK MARKET. THEREFORE, THE INTERBANK SELLING RATE FORMS THE BASIS FOR 3/18/2013 8 QUOTATION OF SELLING RATE TO THE CUSTOMER.

.BUYING / SELLING RATES

TELEGRAPHIC TRANSFER BUYING RATE ANY TRANSACTION WHERE NO DELAY INVOLVED IN ACQUIRING THE FOREIGN EXCHANGE WILL BE DONE AT TT BUYING RATE. FOR EXAMPLE: PAYMENT OF DEMAND DRAFTS; MAIL TRANSFERS; TELEGRAPHIC TRANSFERS WHERE BANKS NOSTRO ACCOUNT IS ALREADY CREDITED. FOREIGN BILLS COLLECTED - THE BANK PAYS THE EXPORTER ONLY WHEN THE IMPORTER PAYS FOR THE BILL AND BANKS NOSTRO ACCOUNT HAS BEEN CREDITED. IN TRANSACTIONS INVOLVING CANCELLATION OF FOREIGN EXCHANGE SOLD 3/18/2013 EARLIER, TT BUYING RATE WILL BE APPLICABLE.9

.BUYING / SELLING RATES

BILL BUYING RATE WHEN A FOREIGN BILL IS PURCHASED, BILL BUYING RATE IS APPLIED. SINCE THE USUAL TRANSIT PERIOD AND USANCE PERIOD ARE TAKEN INTO CONSIDERATION WHILE CALCULATING THE BILL BUYING RATES, THESE ARE WORKED OUT ACCORDINGLY. THE FOREIGN EXCHANGE IN THESE TRANSACTIONS IS AVAILABLE AFTER A PERIOD.
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.BUYING / SELLING RATES

TT SELLING RATE IN TRANSACTIONS, WHICH DO NOT INVOLVE HANDLING OF DOCUMENTS, TT SELLING RATE IS APPLICABLE. FOR EXAMPLE: ISSUE OF DEMAND DRAFTS; MAIL TRANSFERS; AND TELEGRAPHIC TRANSFERS OTHER THAN FOR RETIREMENT OF IMPORT BILL CANCELLATION OF FOREIGN EXCHANGE PURCHASED EARLIER. WHEN AN EXPORT BILL PURCHASED EARLIER IS RETURNED UNPAID BEFORE ITS DUE 3/18/2013 THE BANK WILL APPLY TT SELLING RATE.11 DATE,

.BUYING / SELLING RATES

BILLS SELLING RATE THE BILLS SELLING RATE IS APPLICABLE ON ALL TRANSACTIONS, WHICH INVOLVE HANDLING OF DOCUMENTS BY THE BANK. FOR EXAMPLE, PAYMENT AGAINST IMPORT BILLS.

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CONVERTIBILITY OF RUPEE
CONVERTIBILITY OF A CURRENCY REFERS TO ITS CONVERSION TO ANY FOREIGN CURRENCY AS DESIRED BY THE HOLDER. THE CURRENCY CAN BE SAID TO BE FULLY CONVERTIBLE IF THE HOLDER CAN CONVERT IT INTO ANY OTHER CURRENCY AT RATES DETERMINED BY THE MARKET FORCES OF DEMAND AND SUPPLY WITHOUT ANY INTERFERENCE FROM THE GOVT. BASICALLY, IT COVERS TWO ASPECTS: RATES SHOULD BE DETERMINED BY THE MARKET FORCES AND NOT BY THE REGULATOR. THERE SHOULD NOT BE ANY RESTRICTION ON THE REPATRIATION OF THE CURRENCY. RUPEE IS NOW FULLY CONVERTIBLE ON CURRENT ACCOUNT 3/18/2013 13 TRANSACTIONS WITH EFFECT FROM AUGUST 1994.

.CONVERTIBILITY OF RUPEE
CURRENT ACCOUNT: FULL CONVERTIBILITY ON CURRENT ACCOUNT CAN BE PLACED IN 4 CATEGORIES: PROHIBITED CATEGORY THAT INCLUDES TRANSACTIONS WITH NEPAL AND BHUTAN, EARNINGS FROM LOTTERY/RACING. SCHEDULE II TRANSACTIONS, REQUIRING GOVT. APPROVALS TRANSACTIONS IN SCHEDULE III WHERE ADs CAN ALLOW REMITTANCE UP TO THE PRESCRIBED LIMITS. ALL OTHER CURRENT ACCOUNT TRANSACTIONS THAT THE ADS CAN ALLOW REMITTANCE WITHOUT 3/18/2013 14 MONETARY LIMIT.

.CONVERTIBILITY OF RUPEE
CAPITAL ACCOUNT:
TRANSFER OF MONEY AND OTHER CAPITAL ITEMS (SUCH AS FOREIGN INVESTMENT IN INDIA, LOANS, COMMERCIAL BORROWINGS, SHORT TERM CREDITS ETC.,). FEW EXAMPLES ARE: INVESTMENT IN FOREIGN SECURITIES TRANSFER OF IMMOVABLE PROPERTY OUTSIDE INDIA. LOANS AND OVERDRAFTS TO A PERSON RESIDING OUTSIDE INDIA AND REMITTANCE OUTSIDE INDIA OF CAPITAL ASSETS OF AN INDIAN RESIDENT. ISSUING GUARANTEES IN FAVOUR OF OR ON 3/18/2013 OF INDIAN RESIDENTS. 15 BEHALF

FINANCING OF EXPORTS
GENERALLY, TWO KINDS OF FACILITY TO EXPORTERS PRE-SHIPMENT OR PACKING CREDIT TO PROCURE, PROCESS AND MANUFACTURE, PACK AND PREPARE GOODS FOR EXPORT. IN RUPEES POST-SHIPMENT FROM THE TIME GOODS ARE SHIPPED AND TILL EXPORT PROCEEDS ARE REALIZED
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FINANCING OF IMPORTS
NEEDS OF IMPORTERS ARE MET THROUGH FOLLOWING METHODS: OPENING LETTERS OF CREDIT ADVANCE REMITTANCE BILLS FOR COLLECTION IMPORT LOANS AND GUARANTEES IMPORT TRUST RECEIPTS
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FREE TRADE ZONE(FTZ)

FTZ OR EXPORT PROCESSING ZONES ARE THOSE INDUSTRIAL ESTATES CORDONED OFF FROM DOMESTIC TARIFF AREAS. TRADE BARRIERS APPLICABLE TO THE REST OF THE ECONOMY DO NOT APPLY. WHERE EXPORT-ORIENTED UNITS CAN OPERATE FREE OF IMPORT DUTIES OR QUANTITATIVE RESTRICTIONS. UNITS ARE GIVEN OTHER ADVANTAGES INCLUDING TAX EXEMPTIONS.
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SPECIAL ECONOMIC ZONE (SEZ)

PERMITTED EXTERNAL COMMERCIAL BORROWING FOR TENURE OF LESS THAN 3 YEARS. UNITS IN SEZ WILL HAVE FULL INCOME TAX EXEMPTION ON EXPORT PROFITS FOR THE FIRST FIVE YEARS OF OPERATION AND 50% OF THE EXPORT PROFITS FOR THE NEXT 2 YEARS WOULD GET TAX EXEMPTION

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OFFSHORE BANKING UNITS

IT IS A PLACE WHERE INTERNATIONAL BANKING BUSINESS IS ATTRACTED BY OFFERING MANY CONCESSIONS INCLUDING RELAXATIONS FROM RESTRICTIONS ON OPERATIONS. OBU IN SEZS. AS PER RBI POLICY, THE BRANCHES OF INDIAN BANKS LOCATED WITHIN SEZS WILL BE VIRTUALLY FOREIGN BRANCHES - OFFSHORE BANKING UNITS. RBI GRANTS EXEMPTION FROM CRR REQUIREMENTS TO THE PARENT BANK WITH REFERENCE TO ITS OBU BRANCH. OBUs WILL EXERCISE ANTI MONEY LAUNDERING MEASURES. WILL BE REGULATED AND SUPERVISED 3/18/2013 20 BY RBI

FEDAI
FEDAI WAS ESTABLISHED IN 1958. ALL AUTHORIZED DEALERS NUMBERING ABOUT 70 ARE ITS MEMBERS. THE MAIN FUNCTIONS OF FEDAI ARE: TO FRAME RULES FOR THE CONDUCT OF FOREIGN EXCHANGE BUSINESS IN INDIA. THE RULES COVER VARIOUS ASPECTS LIKE HOURS OF BUSINESS, CHARGES FOR FOREIGN EXCHANGE TRANSACTIONS, INTER-BANK DEALINGS ETC. AUTHORIZED DEALERS HAVE GIVEN AN UNDERTAKING TO THE RBI TO ABIDE BY THE FEDAI GUIDELINES.
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F FE ED DA AI
TO COORDINATE WITH RBI IN ADMINISTRATION OF FOREIGN EXCHANGE PROPER

TO CIRCULATE INFORMATION AMONGST ITS MEMBERS WHICH IS LIKELY TO BE OF INTEREST TO THEM.

FEDAI ACTS AS A MOUTHPIECE OF THE AUTHORIZED DEALERS AND REPRESENTS THEIR VIEWS TO THE RBI AND OTHER INTERNATIONAL AGENCIES.
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EE UU RR OO
ON JAN 1, 2002, 12 NATIONS OUT OF 15 MEMBERS OF EUROPIAN UNION ADOPTED THE PHYSICAL FORM OF THE NEW CURRENCY - EURO. CRITERIA FOR BECOMING MEMBERS WAS: INFLATION NOT EXCEEDING 1.5% INTEREST RATES NOT MORE THAN 2% GOVT. DEBT NOT TO EXCEED 60% OF GDP BUDGET DEFICIT NOT TO EXCEED 3% OF GDP INDIAN BANKING SYSTEM HAS RESPONDED POSITIVELY TO THE EMERGENCE OF EURO.

The euro is the currency of 13 European Union countries: Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Slovenia and Finland. 3/18/2013 23

ENCASHMENT OF TRAVELLERS CHEQUES INSTRUMENTS INTRODUCED NEARLY 100 YEARS

AGO. WIDELY USED AS A SUBSTITUTE TO CASH / CURRENCY. BRANCH SHOULD BE FAMILIAR WITH SECURITY ASPECTS OF TCs. NORMAL ENCASHMENT UPTO US$2,000. AMOUNTS BEYOND, SATISFACTION OF AD A MUST. TT BUYING RATE APPLIED ON ENCASHMENTS.
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ENCASHMENT OF TRAVELLERS CHEQUES

WATCH

CUSTOMER SHOULD COUNTERSIGN IN THE PRESENCE OF PASSING OFFICIAL. SIGNATURE OF CUSTOMER / ISSUING BANK OFFICIALS SHOULD BE COMPARED. VERIFY THE LIST OF LOST / STOLEN TCs. TC SHOULD HAVE NOT BEEN ALTERED, ERASED OR TRACED OVER. NO DISTRACTIONS WHILE HANDLING TCs. NEVER 3/18/2013 ENCASH TCs IN A HURRY. 25

HANDLING OF CLEAN INSTRUMENTS

FOREIGN CURRENCY INSTRUMENTS RECEIVED BY RESIDENTS AS EXPORT PROCEEDS, GIFTS AND DONATIONS CAN BE BROADLY CLASSIFIED AS:
DRAFTS/PAY ORDERS PAYABLE IN FGN. CURRENCY o PAYABLE ABROAD o PAYABLE IN INDIA o o o o o PERSONALCHEQUES DRAWN IN FGN.CURRENCY ENCASHMENT OF FGN. CURRENCY TRAVELLERS CHEQUES. ENCASHMENT OF FOREGIN CURRENCY. RUPEE DRAFTS DRAWN FROM BANKS/OFFICES ABROAD. RUPEE DRAFTS ISSUED BY EXCHANGE HOUSES ON BANKS IN INDIA
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HANDLING OF CLEAN INSTRUMENTS

PRECAUTIONS

TO BE ACCEPTED GENERALLY FROM CUSTOMERS OF THE BRANCH. TO BE LODGED WITH BRANCHES STATING THE CURRENCY, AMOUNT, PURPOSE, NAME AND ADDRESS OF REMITTER. RUPEE INSTRUMENTS SHOULD BE HANDLED LIKE INLAND COLLECTIONS. FOREIGN CURRENCY INSTRUMENTS WILL BE FORWARDED TO THE BANK CONCERNED. IF REMITTANCE OVER Rs. 1 LAC, THE PURPOSE OF REMITTANCE SHOULD BE ASCERTAINED.
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HANDLING OF CLEAN INSTRUMENTS

PRECAUTIONS:

WHERE REIMBURSEMENT ALREADY PROVIDED TO OUR NOSTRO A/C, NO INTEREST OR OTHER CHARGES TO BE RECOVERED. WHERE REIMBURSEMENT HAS TO BE CLAIMED AFTER PAYMENT, 10 DAYS INTEREST PLUS EXCHANGE TO BE LEVIED. INSTRUMENTS WHERE CREDITS ARE TO BE RECEIVED INTEREST AT MAXIMUM RATE FOR 15 DAYS PLUS EXCHANGE MARGIN TO BE CHARGED. NO INTEREST TO BE CHARGED FOR DELAYED REALISATION AFTER 15 DAYS. IN CASE OF RETURN OF CHEQUES INTEREST 28 TO3/18/2013 BE CHARGED UPTO THE DATE OF RECOVERY.

VARIOUS TERMS USED IN FOREIGN EXCHANGE

ARBITRAGE: An act of simultaneous buying and selling in two different markets, for taking advantage of the temporary differential that exists between two prices. CALL OPTION: An option which gives the holder the right, but not the obligation, to buy an amount of fgn. currency at a specific price on or before maturity date. CURRENCY OPTION: Gives the buyer the right but not the obligation to sell, a specific amount of currency at a specified exchange 3/18/2013 29 rate, on or before a future date.

VARIOUS TERMS USED IN FOREIGN EXCHANGE EUROPEAN OPTION:

That can be exercised only on the date of expiry and not before that. PUT OPTION: That gives the holder the right, but not the obligation, to sell amount of foreign currency at a specific price on or before a specific maturity date. SWAP: Means simultaneous sale at spot and purchase forward of fgn. currency or the converse.
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VARIOUS TERMS USED IN FOREIGN EXCHANGE

SPOT: Exchange rate between one currency against another is quoted either spot or forward.Time limit for spot transactions may be same day, the following day or within two working days. FORWARD CONTRACT: Currency will be delivered, and another received, at the same time in future. HEDGING: The protection of a fgn. exchange exposure either by a forward contract or by borrowing in the local 3/18/2013 31 currency. Purpose is to retain the net position at zero.

VARIOUS TERMS USED IN FOREIGN EXCHANGE

LIBOR(LONDON INTER-BANK OFFERED RATE): Interest rate at which prime banks offer to lend foreign currency to other prime banks as on a given date. MARK- TO- MARKET: The valuation of the portfolio with reference to the current prices.

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