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Foreign Exchange Market in India

Srinivasulu, Economy Expert, Govt Degree College Lecturer.
Foreign Exchange (Forex) is an important economic aspect to be understood properly for an economic agent like consumer, producer, government etc., in the present day Globalisation era. It is a powerful tool which facilitates all the international transactions of various goods/services.
  • The theories of International Trade of Economics by Adam Smith (Absolute Advantage Theory) and David Ricardo (Comparative Cost Theory), have been the basis of present day Globalisation. Trade between two countries needs the support of Forex Market due to variations in their currencies and necessitates a reasonable common forex value of their individual currencies.
  • Generally, we get forex through our Exports to Foreign Countries and Foreign Investments in our country and International Loans. The Foreign Exchange Department of RBI in India is the leader in Forex management arena. SEBI and RBI collectively control the Forex Markets in India.
  • According to 22nd September, 2017 RBI's weekly data, our Forex reserves are 402.246 billion US dollars.
  • The much criticised Liberalisation, Privatisation, Globalisation (Economic Reforms) in one way helped our economy to get more forex reserves today.
  • Due to its limited availability, Forex has been a controlled commodity in India for many years despite huge inflow of Forex after LPG (economic reforms) in 1991. But, even today due to many National and International economic uncertainties, the Indian Forex System is not yet ready for Capital Account Convertibility.

FOREX in India has been controlled by various acts from time to time like..
  1. Defence of India Rules on September 3, 1939.
  2. Foreign Exchange Regulation Act (FERA) of 1947, which was subsequently replaced by a more comprehensive Foreign Exchange Regulation Act, 1973.
  3. The Indian Rupee was de-linked from the Pound Sterling in September 1975.
  4. In March 1992, Liberalised Exchange Rate Management System (LERMS) involving the dual exchange rate was instituted. A unified single market-determined exchange rate system (USMERS) based on the demand for and supply of foreign exchange replaced the LERMS effective March 1, 1993.
  5. The FERA Act was amended as a new Foreign Exchange Regulation (Amendment) Act in 1993.
  6. Foreign Exchange Management Act (FEMA) was enacted in 1999 to replace FERA.
  7. FEMA became effective from June 1, 2000.

Masala Bonds (RDBO):
Generally, the rupee denominated Bonds (overseas) under External Commercial Borrowings (ECB) policy of RBI, are known as Masala Bonds. To encourage the overseas Rupee bond market, banks are being permitted to issue Rupee bonds overseas (Masala Bonds) for their capital requirements and for financing infrastructure and affordable housing.

To avoid (hedge) exchange rate fluctuation risk, under the guidance of RBI, SEBI permitted all recognised stock exchanges to offer cross currency derivatives (futures and options) in Forex Market. Exporters and Importers of foreign goods and services can minimise their losses by this initiative.

  • Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorised Dealer Category - I bank i.e. a bank authorized to deal in foreign exchange.
  • It is a facility provided to the foreign exchange earners, including exporters, to credit 100 per cent of their foreign exchange earnings to the account, so that the account holders do not have to convert foreign exchange into Rupees and vice versa, thereby minimizing the transaction costs.

It means that there is no restriction on conversion of the domestic currency into a foreign currency to enable a resident to acquire any foreign asset or on conversion of a foreign currency to the domestic currency to enable a non-resident to acquire a domestic asset. Only Current account convertibility (conversion of currency for simple trading of goods and services) is permitted now.

The Special Drawing Rights (SDRs) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies.

It is the situation, in which one country reduces voluntarily its currency value (on its own), in terms of gold or foreign exchange value. Generally, this step is taken to improve exports in the global markets. On the other hand, currency depreciation or appreciation are the regular movements of the forex value due to changes in its demand and supply in the financial markets.

During the Bretton Woods regime of IMF, exchange rate was fixed by the government in terms of gold or US dollar value to maintain stability in the economy to help foreign trade. (and pegged (maintained) the market value of exchange rate within reasonable limits of the par (defined) value). But, during the era of LPG, now a days, Foreign Exchange Rate is being determined by the Market forces.. demand and supply of foreign exchange and depends on market conditions.

These are known as Virtual Currencies (VCs), but not permitted by RBI in India. They are basically the electronic records and claimed to be "Decentralised Digital Currency" or "Virtual Currency" (VCs), such as, Bitcoins and litecoins, bbqcoins, dogecoins etc., (all these are known as alt coins - alternate crypto currencies).

Money Laundering is the process in which people take up the financial transactions of illegal money (earned by unauthorised and criminal actives) to make it legal.

Illegal market for exchanging rupees and foreign currencies.
Published date : 05 Oct 2017 03:09PM

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