INDIAN FOREIGN

EXCHANGE MARKET
SHIKHA SALUJA(28)
ABHIMANYU GOYAL(56)
SHWETA RAISETIA(59)
Foreign exchange
As per Foreign Exchange Act, (Section 2), 1947.
"Foreign Exchange" means includes any instrument drawn, accepted,
made or issued under clause (8) of section 17 of the Banking
Regulation Act, 1956, all deposits, credits and balance payable in any
foreign currency, and any drafts, travelers cheques, letters of credit
and bills of exchange, expressed or drawn in Indian currency but
payable in any foreign currency;

Financial Markets and Foreign Exchange
Markets
Financial market
is a place where Resources/funds are transferred from those having
surplus/excess to those having a deficit/shortage.

Foreign Exchange Market
The market where the commodity traded is Currencies.
Price of each currency is determined in term of other currencies.

What is an Exchange Rate ?

Exchange Rate is the price of one country's currency expressed in
another country's currency. In other words, the rate at which one
currency can be exchanged for another.
e.g. Rs. 48.50 per one USD

Major currencies of the World

USD
EURO
YEN
POUND STERLING

What is a Foreign Exchange
Transaction ?

Any financial transaction that involves more than one currency is a foreign
exchange transaction.
Most important characteristic of a foreign exchange transaction is that it
involves Foreign Exchange Risk.

Foreign Exchange Risk

Exposure to exchange rate movement.
1. Any sale or purchase of foreign currency entails foreign
exchange risk.
2. Foreign exchange transaction affects the net asset or net
liability position of the buyer/seller.
3. Carrying net assets or net liability position in any currency gives
rise to exchange risk.



Components of a Standard FX Transaction

Base Currency (USD/INR)
Dealt or Variable Currency
Exchange Rate
Amount
Deal Date
Value Date
Settlement Instructions

Forex Transactions

The Demand Side of inter-bank market
importers buying foreign exchange to finance their imports.
A host of regulations governing imports into India.
Out ward remittances for debt servicing.
Out ward remittances for services.
PTEQ and BTQ, Medical treatment etc.
Remittances on account of education abroad.
Remittances on account medical treatment.
Repatriation of profit of foreign controlled companies and freight collection
etc.
Disinvestment through SCRA.
A host of other invisible payments.


Contd..
The Supply Side of inter-bank market
Exports regulations governing export receipts.
Home remittances.
Foreign Direct Investment.
Capital account receipts.
Investment through SCRA.
A host of other invisible receipts.

PARTICIPANTS IN THE FOREIGN
EXCHANGE MARKET
All Scheduled Commercial Banks
(Authorized Dealers only).
Reserve Bank of India (RBI).
Corporate Treasuries.
Public Sector/Government.
Inter Bank Brokerage Houses.
Resident Indians
Non Residents
Exchange Companies
Money Changers
History
Indias exchange rate policy has evolved over time in line with the
gradual opening up of the economy as part of the broader strategy of
macroeconomic reforms and liberalization since the early 1990s. This
change was also warranted by the consensus response of all major
countries to excessive exchange rate fluctuations that accompanied
the abolishment of fixed exchange rate system. Below is the
chronology of the Indian exchange rate.

Contd..
1947 to 1971 EARLY STAGES
o Par Value system of exchange rate.
o Rupees external par value was fixed in terms of gold with the pound sterling as the
intervention currency
o Devaluation in September 1949 and June 1966
o Stable rate between 1966 1971
o Foreign Exchange Regulations Act (FERA) placed in 1957
o Rupee pegged to Sterling in December 1971
o To ensure stability of the Rupee and to avoid the weaknesses associated with a single
currency peg, September 1975 onwards the Rupee was pegged to a basket of currencies.
Currency selection and weight assignment was left to the discretion of the RBI and not
publicly announced.
Contd
1978 to 1992 FORMATIVE PERIOD
o RBI allowed Banks to undertake intra-day trading but had to maintain square or near square position at
the end of the business hours every day
o Exchange rate determined by RBI against basket peg
o Daily announcement of rates by RBI to ADs with a spread of 0.5 perce
o ADs permitted to trade in cross currency
o Volumes increased as two-way prices against INR and crosses started to be quoted by major banks
o The Guidelines for Internal Control over Foreign Exchange Business were framed in 1981.
o The foreign exchange market was still highly regulated with several restrictions on external transactions,
entry barriers and transactions costs. Foreign exchange transactions were controlled through the FERA.
These restrictions resulted in an extremely efficient unofficial parallel (hawala) market for foreign exchange
Contd..
1992 ONWARDS POST REFORM PERIOD

o In late 80s and 1990-91 India faced acute Balance of Payment (BOP) imbalance that was accentuated by Gulf crisis.
o India then embarked on structural reforms
o Wide ranging reform measures announced
o Two-step INR devaluation by 9% and 11% was done in July 1991
o Effectively pegged exchange rate regime came to an end
o Dual exchange rate system Liberalised Exchange Rate Mechanism System (LERMS) was introduced in March 1992
o In March 1993 dual exchange rate was replaced by a unified exchange rate system
o Restrictions on a number of current account transactions were relaxed
o India finally achieved Current Account Convertibility in August 1994
o Tremendous growth in foreign exchange market volume was witnessed
o Measures towards liberalising the capital account were also implemented
Value of USD/INR over the years
RBIs Role in the Forex Market
To manage the exchange rate mechanism.
Regulate inter-bank forex transactions and monitor the foreign
exchange risk of the banks.
Keep the exchange rate stable.
Manage and maintain country's foreign exchange reserves.
RBI has imposed foreign exchange exposure limits on banks (FE 12
of 1999).
The limits are tied with the Paid up capital of the bank.
Previously banks had NOP limit, which was based on foreign
exchange volume handled by the bank.
15 Years of Indian Forex Reserves
Historical Chart

International Forex reserves are used to settle balance of payments
deficits between countries. International reserves are made up
of foreign currency assets, gold, holdings of SDRs and reserve
position in the IMF.
Contd..
Usually includes foreign currencies themselves, other assets denominated in foreign currencies, and
particular amount of special drawing rights (SDRs).A foreign exchange reserve is a useful precaution for
countries exposed to financial crises. It can be used for the purpose of intervening in the exchange market to
influence or peg the exchange rate.
Indian FOREIGN EXCHANGE RESERVES (in million U.S. dollars)
JAN 2013 JAN 2012 JAN 2011
Foreign currency
assets
262,276 261,062 258,801
GOLD 27,220 27,220 26,620
SDRs 4,433 4,401 4,410
Reserve Tranche
Position
2,324 2,307 2,694
Total 296,252 294,990 292,525