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INTRODUCTIONS
Every country has a foreign exchange market. These markets differ from
country to country. Free operations in exchanges markets are not possible.
Therefore, exchange controls of varying intensity become a necessity in
developing countries because the markets operate under a variety of
constraints. The exchange markets in developing countries are accepted to
provide more of services to the import and export trade.
Foreign Exchange Markets in India is regulated through the exchange controls
systems instituted under Foreign Exchange Regulations Act, 1973. It empowers
the governments to assume monopoly of all exchange transactions. The foreign
exchange rates are important parts of financial analysis. Although, the exchange
rates is determined by the supply of and demand for foreign exchange the
complex forces of exports and imports are behind the whole process of
exchange rates determinations.
The Indian foreign exchange markets consist of the buyer, sellers, markets
intermediaries and the monetary authority of India. The main centre of foreign
exchange transactions in India is Mumbai, the commercial capitals 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 communications facilities all these markets were not
linked. But with the developments of technologies, all the foreign exchange
markets of India are working collectively.
The foreign exchange markets India is regulated by the reserve banks of India
through the Exchange Control Departments. At the same time, Foreign
Exchange Dealers Associations (voluntary associations) also provide some help
in regulating the markets.
The Authorized Dealers (Authorized by the RBI) and accredited brokers are
eligible to participate in the foreign exchange markets 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.
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Parts 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, travels agents,
certain hotels and governments shops. The IDBI and EXIM Banks are also
permitted conditionally to hold foreign currency.
Indias Forex markets is a multi- tiered markets where the commercial banks
that quotes the domestic units against the US. Dollars are at the centre of
activity. The rupees are not quoted against any other currency in these rates
discovering markets. Businesses that need to transact in foreign currency, do so
with an authorized dealers (generally a commercial banks) as they are not
permitted to deals directly with each other.
1.1 MEANING:
Foreign Exchange markets are markets for the purchase and sale of foreign
currencies. The need for a foreign exchange markets arises because of the
presence of the multiple currencies such as US Dollar, UK Pound and Sterling,
Euro, Franc, Yen.etc. The purchase of foreign exchange markets is to facilities
internationals trade and investments.
The foreign exchange is converted at a price called the exchange rates. Free
operations in the exchange markets are not possible. The exchange rate is
determined by the supply and the demand for foreign exchange. Foreign
exchange markets differ from country to country
The day to day business of buying and selling foreign exchanges is handled by
the foreign exchange departments of RBI and authorized branches of
commercial banks in India.
Thus, a market for the purchase and sale of foreign currencies is foreign
exchange market. The objectives of these markets are to facilitate international
trade and investments. The need for a foreign exchange markets arises because
of the presences of the multiple international currencies such as US Dollars,
UK Pound< Euro, Franc, Yen and the need for trading in these currencies.
Foreign Exchange Markets does not have a physical place. It is a markets
where trading in foreign currencies takes place through the electronically linked
network of banks, brokers and dealers whose functions is to bring together
buyers and sellers of foreign exchange. The markets is vastly dispersed
throughout the leading financial centre of the world such as London, New York,
Paris, Zurich, Amsterdam, Tokyo, Hong Kong.
1.2 DEFINATIONS:
Foreign Exchange Markets aims at permitting the transfer of purchasing power
denominated in one currency to another whereby trading takes place. It
facilities a settlements between countries in their respective currency units.
Around 95 percent and sales of assets. Only five percents relate to the exportimport activities.
1.3 HISTORY:
The whole foreign exchange markets in India is regulated by the Foreign
Exchange Managements Act, 1999 or FEMA. Before this act was introduced,
the market was regulated by the FERA or Foreign Exchange Regulations Act,
1947. After independence, FERA was introduced as a temporary measure to
regulate the inflow of the foreign capital. But with the economic and industrial
developments, the need for conversions of foreign currency was left and on the
recommendations of the Public Accounts Committee, the Indian governments
passed the Foreign Exchange Regulations Act, 1973 and gradually, this act
became famous as FEMA.
Until 1993, India maintained an administrative exchange rate. From its
independence from the British to 1971, India had a fixed exchange rate against
the currency of its former rulers. This was however done in consultations with
the International Monetary Fund. After the collapse of the fixed exchange rate
system in 1971, the currency was linked to the British pound, but not for long.
As other economics gained prominence in Indias economic relations, there was
a need to maintain stability vis--vis with other currencies too 1975 onwards,
the Indian rupees was linked to a basket of currencies and was devalued from
time to time in order to maintain stability
Following Indias economics Liberalizations in 1991, the currency was
devalued by 18% and administered exchange rate lived side by side the market
too. Also, the Indian currency began being quoted against the US Dollars a
change from its pound based quote. It was only in 1993, that the rupees were
made to float. The Indian was now tradable in the market.
TRANSFER OF PURCHASING POWER:International trade involves different currencies. India require purchasing
power in the form of UK pounds ($) to purchase good & services from that
country. Similarly residents of other countries require Indian currency or any
other acceptable currency for purchasing or investing in India. Foreign
Exchange Market helps transfer purchasing power between the people.
PROVISIONS OF CREDIT INTRUSMENTS AND CREDIT :
For the purpose of transferring credit, credit instruments are used. These are in
form of telegraphic transfer, foreign exchange bill, draft, etc. instruments with
time period i.e. a bill of foreign exchange of 90 days can be discounted before
the due date. Such a provisions enables to obtain credit from the commercial
bank or authorized agents.
COVERAGE OF RISK :
Exporters and importers may cover the possible risk due to a future change in
exchange rate through forward exchange market. The forward exchange
market is where buyers and seller agree to exchange currencies at some
specified day in the future. To understand the functioning of forward exchange
market we must know the participants in this market. The economic agents
involved in the forward markets can be divided into three groups. They are as
follows.
(a) HEDGERS:
These are the agents (usually firms) who enter the forward exchange market to
protect themselves agents the risk arising out of exchange rate fluctuations. To
understand the risk, let us assumes an Indian Importer who imports goods from
USA worth $ 50,000/-, has to make the payments in three months time. The
sports rate at the movements is Rs.45=$1 which requires 22, 50,000/-. Due to
uncertainty of the market, if the importer fears a depreciations of rupees, in that
event he will have to pay more than Rs.45=$1 three months hence. Therefore
he may enter into buying dollars forward today through an agreements with
commercial banks or authorized agents. If he enters into an agreements to
purchase at the rate of Rs.46.00, he does so as he fears the depreciations of
rupees. After three months he requires to pay additional Rs.50,000/- more. If
the spot rate is more than Rs. 46.00 after 3 months then the hedgers stand to
gain. If it turns out to be only Rs. 45.00 or less than that, hedgers are the losers.
The advantages of forward market which provide this facility makes the
importers sure of the money that he has to pay for obtaining $ 50,000.
(b) ARBITRAGEURS:
These are the agents (usually banks) who intend to make a risk less profit out of
discrepancies between interest rate differentials and the forward discount and
forward premium. Arbitrageurs enter into arbitrage. This refers to purchase of
an asset in a low price market and its risk fewer sales in a higher price market.
This process leads to equalizations of price of an asset in all the segment of the
market. Difference in prices if at all, is not more than transport or transaction
cost.
(c) SPECULATORS:
These are agents who intend making a profit by taking the advantage of change
in exchange in exchange rates. They participate in the forward exchange market
entering into forward exchange deal. They do so on the basis of their own
calculation of the difference between the forward rate and the spot rate that may
prevail on a future date. For example: If a speculator enters to sell a dollar at
Rs. 50.00 after three months with expectations of the dollar becoming cheap
and the spot rate after three months is Rs.49 = 1$, the speculator purchases the
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dollar for spot rate (Rs.49) and sales for the agreed forward rate (Rs. 50), thus
making a profit of Rs. 1 per dollar. He may incur loss if the spot rate crosses
Rs. 50. The forward exchange rate is determined by the interaction of hedgers,
arbitrageurs and speculators.
The day to day business of buying and selling of foreign exchange has been
handled by the foreign exchange departments and scheduled commercials
banks. The public have to conduct all their foreign exchange transactions
through the authorized dealers. The dealers have to obtain prior approvals of
the RBI while entering into the foreign exchange transactions except those who
are exempted from such prior approval. Besides the authorized dealer, the RBI
has granted two types of money changers licenses to certain established firms,
hotels, shops and other organizations to deal in currency notes, coins and
travelers cheques to a limited extent.
The foreign exchange market in India is free to operate within prescribed bands
of the RBI rate. The authorized banks are free to deal among themselves in any
currency in both spot and forward maturities against either the rupee or any
other foreign currency. The authorized dealer is expected to buy and sell
currencies to the RBI only after exhausting all avenues for meeting their need
and unloading currencies on the domestic market. The RBI has taken a number
of steps in recent year to develop an orderly, competitive and act as inter-bank
market in foreign currencies so that they are enabled to quote competitive rates
of exchange.
The foreign exchange markets in Mumbai, Kolkata, Chennai and New Delhi
are very active. The objectives of RBI in respect of forward market are that it
should become a useful tool for covering all exchange risk by the importers and
exporters in respect of their firm commitments in the foreign exchange.
The existences of the exchange control system has enabled the RBI to
implements its polices with necessary power. The Government assumes a
monopoly of exchange transactions. The Government dictates the price at
which it will buy and sell foreign exchange, as well as the amounts of and the
purpose for which foreign exchange are made available. It may set a single for
foreign exchange or may set a selling rate substantially higher than the buying
rate.
The exchange control act was imposed under the foreign exchange Regulations
Act, 1973 which came into force on 1st January, 1974. The FERA is
administered by the RBI in accordance with the general policy laid down by the
Government of India in consultations with the bank. The exchange control is
closely related to and supplemented by the trade control imposed by the chief
controller of import and export in terms of imports and exports (control) Act,
1947.
The main objectives of the exchange are to regulate the demand for foreign
exchange for various purposes within the limit set by the available limited
supply. Some of the important features of the foreign exchange in India are as
follows..
I.
GEOGRAPHICAL DISPERSAL:
ELECTRONIC MARKET:
PROVISION OF CREDIT:
The foreign exchange market provides credit through specialized instruments
like bakers acceptances and letter of credit. This credit is much helpful of the
trader in the international market.
MINIMIZING RISKS:
Foreign exchange market help the importers and exporters in the foreign trade
and minimizes their risks in international trade. This is done through the
provisions of Hedging facilities. earn a normal profit without exposure to an
expected change in anticipated profit.
immediate deliveries extended for a period of not exceeding two business days.
Spot transactions account for about 60 percent of the foreign exchange market.
In the forward market, delivery of currencies takes place at a future date and
the contract for buying and selling takes place at the current date. This account
for about 10 percent of the foreign exchange market. Swap market comprises
around 30 percent of transactions the parties exchange a series of cash flows at
specified intervals. The simultaneous purchase and sale of a given amount of
foreign exchange for different value dates are earned out in the swaps.
The Society for World Wide Inter-bank Financial Telecommunications
(SWIFT) is an important mode of trading in a foreign exchange market. It is an
international bank communications network that links electronically all brokers
and traders in foreign exchange market.
any delay receives the foreign exchange proceeds. It is between 0.0025 percent
and 0.08 percent. The rate applied on the purchase of foreign bills is knows as
bill buying rate. The rate quoted has to take the transit period, which would be
the inter-bank rate for one month forward since there is no rate for 15 days
forward. In the case of usance bills, the usance period plus the tansit period has
to be reckoned. The bills buying rate is loaded with forward margin that is
available for period in multiple of a month.
3. NOMINAL EXCHANGE RATE:
The price if one country in terms of other currency is called nominal Exchange
rate. It is the rate prevails at a given time. For example, the Rate between
Indian Rupee and U.S dollar is say Rs, 45. It means one U.S dollar is equal to
Rs.45. The nominal rate is presented in an index from. A rise or fall in nominal
rate not necessarily imply that the country has become more competitive or less
competitive in the inter-national markets.
policies to achieve other goal such as stable domestic prices and economic
growth.
The Global Exchange Market is the oldest, biggest, most active and most
Liquid market in the world. It is the fastest growing market, which has
Geographical spread. The global financial market is an informal, electronically
Linked network of big banks, brokers and dealers. It has been dispread
throughout The world in big as well as small financial centers. The leading
financial markets are London, New York, Paris, Zurich, Tokyo, Milan and
Frankfurt. Trading take place 24 hours a day by telephones, telex, fax, display
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happening.
2) Foreign exchange dealing cross national boundaries and rates move On the basis of
governmental regulations, fiscal policies, political instabilities and a variety of other causes.
3) Foreign exchange rate movements, like the stock market, are influenced by settlements that
may not always be logical.
4) Foreign exchange is traded 24 hours a day at different markets and dealers cannot be in control
at all times.
5) The rating of credit agencies can affect the exchange rate. For instance, when Indias foreign
exchange rating was downgraded by Moodys in the mid-1990, the value of the rupee fell.
Rate move instantaneously and very fast. A hesitation of a few seconds or minutes can change
profi to a loss and vise-versa.
Transaction Risk
Position Risk
Settlement or Credit Risk
Operational risky , Sovereign Risk
Cross-country Risk
TRANSACTION RISK:
Let us assume that an Indian company invoices an export consignment of US$
1 Million and then for the period between the contract date and the date Of
receivable, the exporter has an exporter has an exposure of US$ 5 Million. If
the US dollar was to appreciate by 10% against the Indian rupee during this
Period then there is a realized gain of 10% on the exposure. Thus a change in
the Value of the US dollar may lead to cash gain/loss to the company. In short,
Transaction exposure or risk is the possibility of incurring exchange gains or
losses Upon settlement at a future date on transaction already entered into and
Denominated in a foreign currency.
POSITION RISK:
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Bank dealing with customer continuously, both on spot and forward basis,
result in position being created in the currencies in which these transaction are
denominated . A position risk occurs when a dealer in a bank has an
overbought (long) or an oversold (short) position. Dealers enter into these
position in Anticipation of a favorable movement.
SETTLEMENT OR CREDIT RISKS:
It is important to differentiate between pre-settlement risks and Settlement
risks.
PRE-SETTLEMENT RISK:
Pre-settlement risk means that a customer, with whom the bank has a contract,
may default on a contractual obligations before settlement of the contract. This
risk exist on foreign exchange contract. For instance, in the case of a forward
sale contract with counterparty, the bank may cover its exposure by way of a
forward purchase with a second counterparty. As a result of the default of the
first counterparty, the bank will have an exposure due to the forward purchase
of foreign currency. This exposure will, in turn be covered by a replacement
contract whose Price may be unfavorable. In short, this risk is the economic
cost of replacing the defaulted contract With another one plus the possibility
that the replacement cost may increase due to future volatility.
SETTLTMENT RISKS:
Settlement risk is the risk of a counterparty failing to meet its obligations In a
financial transaction after the bank has fulfilled its obligations on the Date of
settlement of the contract. Settlement risk exposure potentially Exist in foreign
exchange or local currency money market business.
MISMATCH OR LIQUIDITY RISK:
In the foreign exchange business it is not always possible to be in an ideal
Position where sales and purchases are matched according to maturity And
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Open position limits commensurate with customer driven turnover, and the banks appetite for
market risk.
Separate limits to be allocated for each currency, together with an overall cap limit.
Where a bank trades with counterparty other than members of Their own group located in
select countries, settlement and country Limits should be addressed and clearly defined.
Forward foreign exchange mismatch limits.
List of approved instruments. Use of foreign exchange derivatives.
Monitoring and reporting system. Recording and follows up of limit
Excesses.
Impact on P&L of an adverse 10% movement is exchange rates on
Maximum permitted exposure.
Imposition of a Stop Loss limit to restrict or prevent any future
Trading other than client deals and hedging.
OBJECTIVE
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RESEARCH DESIGN
Primary
Secondary
Interview
Books
Telephonic Interview
Working Paper
Mail survey
Web Sites
Primary data are those which are collected a fresh and for the first time and
thus happen to be original in character.
Methods of Primary research:
Interview Method
Telephone Interview
Mail Survey
Questionnaire
Personal Interview:
Personal interview method requires a person known as the interview asking
questions generally in a face-to-face contract to the other persons to persons.
The personal interview of the concerned employee of the banks was conducted
which help to get a clear idea about the products, Pricing, Placing, Promotion
of different banks. The interview was conducted with help of structure
questionnaires containing open and close end questions give more scope for
quantitative and qualitative information for better conclusions.
Secondary Method:
Secondary data means data that are already available i.e. they refer to the data
which have already been collected and analyzed by some else.
Published secondary data was used to get an overall idea about the growth of
services marketing in banking sector after globalizations with the help of
source like:
Books
News Paper
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Website
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SUMMARY
Foreign Exchange Market in India is regulated through the exchange control
system instituted under Foreign Exchange Regulation Act 1973. Foreign
Exchange Market is a matter for the purchase and sale of foreign Currencies.
The need for a foreign exchange arises due to the presence of The multiple
currencies. RBI has an authority to enter into foreign exchange transaction both
on its own accounts and on behalf of the Government. It has authorized dealer
to carry out foreign exchange transaction. The participation in the foreign
exchange market are dealers, brokers, Individuals and Firms, Central Bank and
Treasuries and Speculators and Arbitragers. RBI determine the foreign
exchange regime, and surprises, monitors and control the foreign exchange
market with a view to create an active exchange market at important trading
centres with wide participants. For this purpose, the RBI is required to
intervene in this market from time to time.
The exchange rates used in Indian foreign exchange market are Merchant Rate
and Interbank Rate. Indian Rupees was devalued in 1948, 1966 and 1991. The
value of Indian Rupees per US dollar declined from Rs.3.3082 In 1948 to Rs.
25.98 in 1991. Indian Rupees was devalued
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Transaction Risk
Position Risk
Settlement Risk
Mismatch Risk
Optional Risk
Cross Country Risk etc.
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CONCLUSION
According to my conclusion that Foreign Exchange Market in India is Growing
rapidly. The Foreign Exchange in India is regulated by RBI Through the
exchange control department. There is various activities in Foreign Exchange
Market like hedging, Arbitrage and speculation etc. which play very important
role to maintain The trading activity and also to regulate the risk which arises
due to Foreign Exchange.
There are various policy measure which adopted by RBI in accordance With
the general policy laid down by government of India in consultation With the
bank. The RBI has authority to inter in to the Foreign Exchange Market to
Regulate the demand, supply, exchange rate in the market. There are various
type of change in exchange rate carried out by RBI to Regulate Foreign
exchange market like managed flexible exchange rate, LERMS, convertibility
of rupees etc. There are different kind of risk is face by trader in Foreign
Exchange Market. To minimize the risk RBI has taken various initiatives to
Minimize the risk in Foreign Exchange Market
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BIBLIOGRAPHY
BOOK:
A.D Mascarenhas, Dr. P.A. Johson, Business Economics- II Eight Revised
Edition, Publish by Manan Prakashan 2005, Pg. No. 230 to 231, 235 to 239.
A.D Mascarenhas, Dr. P.A. Johson, Dr. Lina R. Thatte, Sonali Chatterjee,
Policies and Prospectus of Indian Economy Fourth Revised Edition Publish by
for Manan Prakashan 2006, Pg. No.250 to 253.
Dr. P.K.Bandgar, Financial Market Second Revised Edition Publish by N.V.
Maroo for Vipul Prakashan Pg. No. 231 to 250.
WEBSITE:
www.foreignexchangemarketinindia.com
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