FOREIGN EXCHANGE MARKET Meaning

Foreign exchange market is a market for the purchase and sale of foreign currencies. The need for a foreign exchange market arises because of the presence of the multiple currencies such as US Dollar, UK Pound, Sterling. Euro, Franc, Yen etc. The purpose of foreign exchange market is to facilitate international trade and investments. The foreign exchange is converted at a price called the exchange rate. Free operations in the exchange markets are not possible. The exchange rate is determined by the supply and demand for foreign exchange. Foreign exchange markets differ from country to country.

TYPES OF FOREIGN EXCHANGE MARKET:

The foreign exchange market is broadly divided into two categories: ^ Retail Market ^ Wholesale market. RETAIL MARKET: The retail foreign exchange market is a secondary price marker wherein travellers, tourist and people who are in need of foreign currency carry out small permitted transactions. WHOLESALE MARKET: The wholesale foreign exchange market is also called the interbank market wherein large transactions of foreign exchange are carried out. The dealers in this market are highly professional and are the primary price makers.

INDIAN FOREIGN EXCHANGE MARKETS

Introduction During 2003-04 the average monthly turnover in the Indian foreign exchange market touched about 175 billion US dollars. Compare this with the monthly trading volume of about 120 billion US dollars for all cash, derivatives and debt instruments put together in the country. and the sheer size of the foreign exchange market becomes evident. Since then, the foreign exchange market activity has more than doubled with the average monthly turnover reaching 359 billion USD In 2005-2006, over ten times the daily turnover of the Bombay Stock Exchange. As in the rest of the world, in India too, foreign exchange constitutes the largest financial market by far. Liberalization has radically changed Indias foreign exchange sector. Indeed the liberalization process itself was sparked by a severe Balance of Payments and foreign exchange crisis. Since

1991, the rigid, four-decade old, fixed exchange rate system replete with severe import and foreign exchange controls and a thriving black market is being replaced with a less regulated, market driven arrangement. While the rupee is still far from being fully floating (many studies indicate that the effective pegging is no less marked after the reforms than before), the nature of intervention and range of independence tolerated have both undergone significant changes. With an overabundance of foreign exchange reserves, imports are no longer viewed with fear and skepticism. The Reserve Bank of India and its allies now intervene occasionally in the foreign exchange markets not always to support the rupee but often to avoid an appreciation in its value. Full convertibility of the rupee is clearly visible in the horizon. The effects of these development s are palpable in the explosive growth in the foreign exchange market in India..

Foreign Exchange Market in India

The Indian foreign exchange market consists of the buyers, sellers, market intermediaries and the monetary authority of India. The main center of foreign exchange transactions in India is Mumbai, the commercial capital of the country. There are several other centers for foreign exchange transactions in the country including Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin. In past, due to lack of communication facilities all these markets were not linked. But with the development of technologies, all the foreign exchange markets of India are working collectively. The foreign exchange market India is regulated by the reserve bank of India through the Exchange Control Department. At the same time, Foreign Exchange Dealers Association (voluntary association) also provides some help in regulating the market. The Authorized Dealers (Authorized by the RBI) and the accredited brokers are eligible to participate in the foreign Exchange market in India. When the foreign exchange trade is going on between

Authorized Dealers and RBI or between the Authorized Dealers and the overseas banks, the brokers have no role to play.Apart from the Authorized Dealers and brokers, there are some others who are provided with the restricted rights to accept the foreign currency or travelers cheque. Among these, there are the authorized money changers, travel agents, certain hotels and government shops. The IDBI exchange market in India is regulated by the Foreign Exchange Management Act, 1999 or FEMA. Before this act was introduced, the market was regulated by the FERA or Foreign Exchange Regulation Act, 1947.

FUNCTIONS:
The main functions of the foreign exchange market are 1. TRANSFER OF PURCHASING POWER: International trade involves different currencies. The residents of one country require the currency of another country to make payments in respect of the following transactions: Import of goods and services Dividend, interest and profit to foreign firms. Unilateral payments. Capital outflow in the form of investments abroad, short / long term lending, etc. This involves transfer of purchasing power from the prayers country to the receivers country. Similarly, the residents of the other country receive the foreign currency in respect of the following transaction. Receipts on account of export of goods and services. Receipt of dividend, interests and profit by firms. Unilateral receipts. Capital inflow in the form of foreign investments in India, NRI deposits, borrowings, etc. Thus foreign exchange market helps transfer purchasing power between people of different countries.

2) PROVISION OF CREDIT INSTUMENTS AND CREDIT: The foreign exchange market facilitates provision of credit for foreign trade through credit instruments like telegraphic transfer, letters of credit, bill of exchange, drafts, etc. Moreover, instruments with time period (eg. Bill of foreign exchange of 90 days or more) can be discounted with commercial banks or authorised agents before due date. 3) COVERGE OF RISK: Exports and imports may cover the risk due to future change in exchange rate through forward exchange market whereby currencies are exchanged (at a fixed rate) at some specified date.