Foreign Exhange Final Project

FOREIGN EXCHANGE MARKET IN INDIA

Chapter-1

Foreign Exchange

Content:-

Definition Foreign Exchange Market Characteristics Advantages Participants of FOREX Market

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What is foreign exchange?

The term also covers the method by which a currency of one country is exchanged

for another, the cause which renders such exchanges necessary, the forms in which

such exchange are conducted & the ratio or equivalent values at which they are

affected.

If a bank is said to buy or sell foreign exchanges, it means it buys or sells foreign

currencies. You would have come across popular columns in your favorite

newspaper which furnish tables- ratios rates of exchange at which currencies are

exchanged for one another...

Definitions:-

Foreign Exchange is defined in term of Section 2 of FEMA, 1999 as foreign

including:

1. All deposits, credits, balance of payment in any foreign currency;

2. Any drafts, travelers cheques, letter of credit & bill of exchange expressed or

drawn in Indian currency & payable in foreign currency;

3. Any instruments giving anyone the option of making it payable either partly

or fully in a foreign currency.

Here, the term currency in ‘foreign currency’ includes coins, bank notes, postal

notes, postal order & money orders.

In other words, foreign exchange includes all kind of claims of the residents of a

country to foreign currency payable abroad.

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The Foreign Exchange Market:-

The Indian rupee has been convertible on the trade account since August 1994.

Capital inflow on one side and the Reserve Bank of India on the other have kept it

sandwiched at 31.37 INR to the US dollar since around August 1992. The spot

market is incredibly liquid, but this is largely a consequence of there being a last

resort buyer (the Reserve Bank of India) and supply generally exceeding demand.

However, even on exceptional days, it is fairly easy to buy USD 100 million or so

during the day. Selling is not a problem at all, as the Reserve Bank has been the

last resort buyer.

There is an active forward market which is fairly liquid in the first month and

quotes are easily available up to six months. Since July 1993, a lot of one year

deals have also been taking place. The Reserve Bank permits banks to deal in the

USD repo market within India, but access to the international market is very

restricted. This, and the fact that there is really no properly developed term market

in INR repos, means that the connection between FX swaps and interest rates is

tenuous at best. However, this is also steadily improving; most dealers foresee a

very active market up to one year soon.

Both these markets exist only within India. The Reserve Bank prohibits any

international speculative access to the Rupee. However, there is practically

complete freedom to hedge any existing exposure arising out of commercial

activity.

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The organization of FEM:-

At present there are 84 banks in India who have been authorized to deal in foreign

exchange they are known as Authorized dealers (Ads) & the public has to conduct

all their foreign exchange transactions through them. Foreign banks & bigger

Indian banks are more active, giving two way quotes. The market operates from

the major centers such as Mumbai, Delhi, Calcutta, Chennai, Bangalore, Kochi, &

Ahmadabad, with Mumbai accounting for the major part of the transactions.

These Ads have formed an organization called FEDAI which sets the ground rules

for fixation of commission & other charges. Banks, financial institution such as

IDBI, ICICI, IFC, etc. have been given license to undertake forex transactions

incidental to their main business activities. A large part of inter-bank transactions

conducted through 40exchanges brokers who are specialists in matching supplies

& demand of banks, & who work for a commission.

Foreign Exchange Transaction:-

The foreign exchange market in India is growing in both volume and depth.

Various kinds of transaction are facilitated by the banks both on a spot and on a

forward basis. These include hedging transaction such as currency swaps and

interest rate swaps.

Foreign and Indian banks also assist in offshore loan syndication. Other services

provided include, financing of foreign trade, arranging the most economical source

of supplier credit, etc. banks also assist in foreign exchange management such as

currency management strategies and designing, assessing of liability structures

Vis-a vis swaps, interest rates, income, etc.

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Main foreign exchange market turnover, 1988 – 2007, measured in billions of

USD. Presently, the foreign exchange market is one of the largest and most liquid

financial markets in the world. Traders include large banks, central banks, currency

speculator, corporation, government, and other financial institution. The average

daily volume in the global foreign exchange and related market is continuously

growing. Daily turnover was reported to be over US$3.2 trillion in April 2007 by

the bank for International Settlements. Since then, the marker has continued to

grow. According to Euro money’s annual FX Poll, volume grew a further 41%

between 2007 and 2008.

The purpose of the foreign exchange market is to help international trade and

investment. A foreign exchange market help businesses convert one currency to

another. For example, it permits a U.S. business to import European goods and pay

Euros, even through the business’s income in the U.S. dollar.

In a typical foreign exchange transaction a party purchases a quantity of some

currency by paying a quantity of anther currency. The modern foreign exchange

market started forming during the 1970s when countries gradually switched to

floating exchange rates from the previous exchange rates regime, which remained

fixed as per the Breton woods system.

As such, it has been referred to as the market closest to the ideal perfect

competition, not withstanding market manipulation by central banks. According to

the bank for international settlements, average daily turnover in global foreign

exchange market is estimated at $3.98 trillion. Trading in the world’s main

financial market accounted for $3.21 trillion of this. This approximately $3.21

trillion in main foreign exchange market turnover was broken down as follows:

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$1.005 trillion in spot transaction

$362 billion in outright forwards

$1.714 trillion in foreign exchange swaps

$129 billion estimated gaps in reporting

Characteristics of Forex Market:-

Being the world’s largest financial market, the foreign exchange (or forex) market

offers unmatched benefits and advantages to the prospective investor. With

superior liquidity and leverage compared to stock and future markets, the forex

market is arguable the best financial investment you can find.

What makes the forex market an excellent financial market?

The characteristics that make the forex market a good one are lower trading costs,

excellent transparency, superior liquidity and very strong market trends.

Lower Trading costs:-

Ask anyone dealing in stock and they will tell you that they have to shell thousands

of dollars to get started. Not so with the forex market. With just a few hundred

dollars (often $250 or less), you can open mini forex account and start trading…

The lower trading costs in the forex market have made it possible for even small,

individual investors to make decent profit from forex trading. With lower costs, the

possible losses are also much lower. You will discover that forex trading usually

has no commission fees unlike in other investments. The cost of forex trading re

limited to the spread or the difference between the selling and buying prices for a

particular pair.

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Excellent Transparency:-

Transparency means the free access to information. Forex trading is a transparent

process because the trader has full access to market data and information that re

necessary to perform successful transactions. The excellent transparency of the

forex market means that forex trader have more control over their investment and

can decide what to-do based on the information available.

Superior Liquidity:-

In a forex market, traders are free to buy and sell currencies of their own choosing.

The superior liquidity of the forex market enables traders to easily exchange

currencies without affecting the prices of the currencies being traded.

So weather you trade a few thousand dollars or several millions, you can be

assured of the same currencies prices during the time an order was placed and then

expect at the time you made the trade.

The advantages of the foreign exchange market:-

The daily volume of business delta with on the foreign exchange market in1998

was estimated to be over $2.5 trillion dollars. (Daily volume on New York stock

exchange is bout $20billion) today (2006) it may be bout $5 trillion dollars. The

daily volume of the foreign exchange market in north America in October 2005

was bout $440 billion. The foreign exchange market expanded considerably since

precedent Nixon closed the gold window and currencies were left flat vis-à-vis

other currencies and speculators could profit from their transactions.

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Until recently, this market was used costly by banks, who fully appreciated the

excellent opportunities to increase their profits. Today, it is accessible yon y

investor enabling him to diversify his portfolio.

The emergence of yen as a major currency, and new euro, in addition to the dollar

beside many other currencies, and the frequently fluctuations in relative value of

these currencies provide q great opportunity to generate substantial profits. Chinese

Renminbi is convertible, which is not likely to occur until 2020 or later, it will

fundamentally affect the foreign exchange market due to its sheer volume.

The foreign exchange market operates 24 hours a day permitting intervention

in the major international foreign exchange market at any point in time.

Market participants:-

Unlike a stock market, where all participants have to the same prices, the foreign

exchange market is divided into levels of access. At the top is the interbank

market, which is made up of the largest investment banking firms. Within the inter-

bank market, spreads, which re the difference between the bid and ask price, are

razor shape and usually unavailable, and not know to players outside the inner

circle. The difference the bid and ask price widens (from 0-12 pip to1-2 pips for

some currencies such as the EURO).

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This is due to volume. If a trader can guarantee large numbers of transitions for

large amount, they can demand smaller differences between the bid and ask price,

which is referred to as a better spread. The levels of access that make up the

foreign exchange market are determined by the size of the “line” (the amount of

money with which they are trading).

The top-tier inter-bank market account for 53% of all transactions. After that there

are usually smaller investment banks, followed by large multi-national

corporations (which need to hedge risk and pay employee in different countries), to

Galati and Melvin, “pension funds, insurance companies, mutual funds, and other

institutional investors have played an increasingly important role in financial

market in general, and in FX markets in particular, since the early 2000s. “ ( 2004 )

in addition, he notes, “ Hedge funds have grown markedly over the 2001 – 2004

period in terms of both number and overall size” central banks also participates in

the foreign exchange market to align currencies to their economic needs.

Banks :-

The interbank market caters for both the majority of commercial turnover and large

amount of speculative trading every day. A large bank may trade billions of dollars

daily. Some of this trading is undertaken on behalf of customers, but much is

conducted by proprietary desks, trading for the banks own account. Until recently,

foreign exchange brokers did large amounts of business, facilitating interbank

trading and matching anonymous counterparts for small fees. Today, however,

much of this business has moved on to more efficient electronic systems. The

broker squawk box lets traders listen in on ongoing interbank trading and is heard

in most trading rooms, but turnover is noticeably smaller then just a few years ago.

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Commercial Companies :-

An important part of this market comes from the financial activities of companies

seeking foreign exchange to pay for goods or services. Commercial companies

often trade fairly small amounts compared to those of banks or speculators, and

their trades often have little short term impact on market rates. Nevertheless, trade

flows are an important factor in the long – term direction of a currency’s exchange

rate. Some multinational companies can have an unpredictable impact when very

large positions are covered due to exposures that are not widely known by other

market participants

Central Banks :-

National central banks play an important role in the foreign exchange markets.

They try to control the money supply, inflation, and / or interest rates and often

have official or unofficial target rates for their currencies. They can use their often

substantial foreign exchange reserves to stabilize the market. Milton Friedman

argued that the best stabilization strategy would be for central bank to buy when

the exchange rate is too low, and to sell when the rate is too high- that is, to trade

foreign trade profit based on their more precise information. Nevertheless, the

effectiveness of central bank “stabilizing speculation” is doubtful because central

bank does not go bankrupt, if they make large losses, like other traders would, and

there is no convincing evidence that they do make a profit trading.

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The mere expectation or rumor of central bank intervention might be enough to

stabilize a currency, but aggressive intervention might be used several times each

year in countries with a dirty float currency regime. Central bank does not always

achieve their objectives. The combined resources of the market can be

overwhelming any Central bank. Several scenarios of this nature were seen in the

1992-93 ERM collapse and in more recent time in Southeast Asia.

Hedge fund as speculators:-

About 70-90% of the foreign exchange transactions are speculative. In other

words, the person or institution that bought or sold the currency has no plan to

actually take delivery of the currency in the end; rather, there were solely

speculating on the movement of that particular currency. Hedge funds have gain

reputation for aggressive currency speculation since 1996. They control billions of

dollars of equity and may borrow billions more, and thus may overwhelm

intervention by central bank to support almost any currency, if the economic

fundamentals are in the hedge funds favor.

Investment Management firms:-

Investment management firms (who typically manage large accounts on behalf of

customers such as pension funds and endowments) use the foreign exchange

market to facilitate transactions in foreign securities. For example, an investment

manager bearing an international equity portfolio needs to purchase and sell

several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency

overlay operations, which manage client’s currency exposures with the aim of

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generating profit as well as limiting risk. Whilst the number of this type of

specialist is quite small, many have a large value of asset under management

(AUM), and hence are generated large traders.

Retail foreign exchange brokers:-

There are 2 types of retail brokers offering the opportunity for speculative trading:

retail foreign exchange brokers and market makers. Retail traders (individuals) are

a small fraction of this market and may only participate indirectly through brokers

or banks. Retail brokers, while largely controlled and regulated by the CFTC and

NFA might be subject to foreign exchange scams. At present, the NFA and CFTC

are imposing stricter requirements, particularly in relation to the amount of net

capitalization required of its members. As a result many of the smaller, and

perhaps questionable brokers are now gone.

It is not widely understood that retail brokers and market makers typically trade

against their clients and frequently take the other side of their trades. This can often

create a potential conflict of interest and give rise to some of the unpleasant

experiences some trades have had. A moved towards NDD (No Dealing Desk) and

STP (Straight Through Processing) has helped to resolve some of this concern and

restore trader confidence, but cautions is still advised in ensuring that all is as it is

presented.

Non-bank foreign exchange companies:-

Non-bank foreign exchange companies offer currency exchange and international

payments to private individuals and companies. These are also known as foreign

exchange brokers but are distinct in that they do not offer speculative trading but

currency exchange with payment. i.e., there is usually physical delivery of

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currency to a bank account. Send money home offer in depth comparison into the

services offered by all the major non-bank foreign exchange companies.

It is estimated that in the UK, 14% of the currency transfer/payment are made via

foreign exchange companies. These company’s selling point is usually is that they

will offer better exchange rate or cheaper payment than the customers bank. These

companies differ from money transfer/remittance companies in that they generally

offer higher value services.

Money transfer/remittance companies:-

Money transfer companies/remittance companies perform high value low value

transfers generally by economic migrants back to their home countries. In 2007,

the AITE group estimated that there were $369 billion of remittance (an increase of

8% on the previous year). The four largest markets (India, China, Mexico and the

Philippines) received $95 billion. The largest and best known provider is western

union with 345,000 agents globally.

Send money home is an international money transfer price comparison site that

allows consumers assess to a range of alternative products/ rates available when

remitting (transferring) money worldwide. Provides impartial and unbiased advice

for those looking to send money overseas.

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Chapter-2

Rate of Exchange

Content:-

Cause affecting Rate of Exchange FERA FEMA Exchange Control in India

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Rate of exchange :-

The rate of exchange is the price of one currency in term of another. The number

of units of one currency which exchange for a given number of units of another

currency is the rate of exchange this rate varies from time to time, day to day. You

would be surprised to know that exchange rate of active currencies fluctuate every

four second.

Causes affecting rate of exchange :-

The main causes of fluctuation in the exchange rate are demand & supply of a

currency, i.e. the amount generally offered for sale or purchase at any given

movement.

If the general demand for a currency at any movement exceeds the current supply,

the exchange value of that currency appreciates, since the buyers must offer to

accept fewer of units the wanted country, in order to bring out fresh sellers when

the existing supply has been absorbed.

The factors affecting the supply & demand for currencies are numerous & varied.

Some are even psychological affecting the supply & demand. The supply &

demand depends upon balance of trade & balance of payment position of a

country. The political outlook in a country is also a potent factor. Speculation plays

a large part in accelerating the effects of economic factors, which normally are

manifest only after lapse of some time & that such speculation, may operate to

prevent full normal effect of the cause from taking place or may produce effects in

the excess of the normal.

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Exchange rates are quoted:-

For selling & buying transaction

In two methods- direct & indirect

For different periods- spot & forward

Foreign exchange regulation act (FERA):-

FERA was first enacted in 1947, at the time when there was scarcity of foreign

exchange. It was inherited from the British government, which has passed laws

controlling foreign exchange, to keep control over its colonies. India needed the

law in the early years of the foreign exchange scarcity. Therefore, FERA was a

sacrosanct necessity.

The FERA act, 1973 was drafted with the objective of introducing the necessary

changes for the effective implementation of the government policy & removing the

difficulties faced in the working of the previous enactment.

The basic statute of FERA empowered the government & the RBI to regulate,

allow or prohibit transaction. Under FERA, almost all transactions, which were

permitted, were based notification & circulars.

FERA was formulated to obtain the RBI permission in respect of most of the

regulations. In order to understand the operative part of the regulation, one had to

refer to the Exchange Control Manual as well as the various notifications issued by

the RBI & central government.

FERA contained 81 sections of which 32 sections were related to the operational

part & the rest covered penal provision, authority, powers of the Enforcement

Directorate.

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Foreign exchange management act(FEMA):-

The much awaited FEMA came into force from 1.6.2000 amidst eager expectations

from all quarters of trade, commerce & industry of the country. FEMA had several

special liberalized features, unlike its more stringent predecessor, FEMA. It is a

right step toward the liberalization of economic laws in India, which have become

inevitable in the current globalized economic scenario.

Exchange control in India:-

Exchange control was introduced in India on September 3, 1939 at the outbreak of

the Second World War by virtue of the emergency powers derived under the

financial provision of the defense of India Rules, to conserve the non-sterling

currencies & utilize them for essential purposes. In the post war period, control

over the foreign exchange transactions made prudent use of the foreign exchange

reserves. The FEMA was enacted in 1947. It has been replaced by the FEMA in

1999.

In India exchange control is administered by the RBI. The exchange control is

related to & supplementary by trade control & is the responsibility of the Director

General of Foreign trade in the Ministry of Commerce. The exchange control is

comprehensive & covers supervision over the settlement of financial transactions

related to export & import as well as invisible & capital transactions.

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Chapter-3

Global Foreign Exchange Market

Content:-

Introduction Structure of FOREX Market Types of Risk in FOREX Market

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Global Foreign Exchange Market

Global FEM is said to be the oldest, biggest, most extensive or geographically

spread, more active & quick, fastest growing & most liquid market in the world.

FEM is not an informal electronically linked network of big banks foreign

exchange brokers 7 dealers whose function is to bring buyer & seller together. It is

dispersed throughout big & small financial centers in the world. The trading in

FEM is usually done 24 hours a day by telephones, display monitors, telex & fax

machine 7 the satellite communication network called society for world wide

international financial telecommunication 9SWIFT, which is a computer base

communication system.

Each participating bank has a separate “foreign exchange” trading room & most

transaction is based on oral communication. There exists an informal code of moral

conduct which has given a status of a bond to the world given by exchange dealers.

The FEM operates on very narrow spreads between buying & selling prices they

can be smaller than a tenth of percent of the value of the currency traded and they

are about one fiftieth or less of the spreads faced on bank notes by international

travelers. The volume of transaction involved is huge, trader in FEM stand to make

huge profit or losses.

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Structure of foreign exchange market:-

The organization & structure of FEM is depicted in diagram like other markets, it

has two parts wholesale & retail.

Retail market:-

The exchange of bank notes, bank drafts, currency, and ordinary & travelers

cheque between private customer, tourist & bank takes place in the retail market.

RBI has granted two types of money changers license to certain established firms,

hotels, shops & other organization to deal in currency notes, coins & travelers

cheques to limited extent.

Wholesale market:-

The wholesale market is primarily an inter bank market in which major banks trade

in currencies held in different currency dominate Bank account. i.e. They transfer

bank deposit from seller to buyers accounts. This market is far larger than the bank

notes market. The head office and regional offices of the major commercial banks

are the markets makers in the wholesale market. Most of the small banks and the

local offices of even the major banks do not deal directly in the inter bank market.

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Foreign Exchange Market

Retail Wholesale

Inter Bank

Direct

Spot

Merchandise(Trade based)

Indirect

Forward

Non Merchandise(Hedge,

speculation)

Derivatives

Central Bank


Various types of risk in foreign exchange market:-

FEM players were to face various kinds of risk. Very common risk faced in foreign

exchange operation is: Exchange risk, Settlement risk, Liquidity risk, Country risk,

Sovering risk, Interest rate risk, Operational risk.

Exchange risk:-

Movement in exchange rate can adversely affect the values of our foreign

exchange dealers’ receivable & payments in foreign currencies if they are not

covered at the appropriate time. in case he dose not or by the time he covers the

transaction, the markets moves against him, then he is exposed to exchange risk

this is the most common and obvious risk in foreign exchange dealing operations.

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In the present context of major currencies of the world viciously floating against

each other, this risk assumes considerable significance. Apposition in a given

currencies arises when asset & outstanding contracts to purchase that currency

exceed the liabilities plus the outstanding contract to sell that currency. The bank

will have along position & would be exposed to a risk the currency depreciates in

value. The bank will have a short position & would stand to lose if the currency

appreciates value.

It may not be possible to cover each transaction individually; this risk can be

controlled & managed by prescribing suitable limits. It is a participate to

accumulate and keep position open taking a view on the movement of exchange

rate, like possible depreciation/appreciation of currencies etc.

The number of branches/offices reporting to dealing room, number & volume of

foreign exchange transaction undertaken at these branches, our foreign

exchange dealers may also desire & decide that branches/offices report such

transactions, beyond a certain value, then and there & obtain firm rates for the

transactions.

Settlement risk:-

FEM is at the center of international financial system. It is the largest, in terms of

turnover, most liquidity, innovative, and only 24 hours open financial market in the

world. The net daily turnover, in the market as per a survey conducted in April

1998 amounted to USD 1.5 trillion. The volume is transacted between market

participants world wide without the use of one single central clearing house –it is

truly an over the counter market.

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In the absence of such a single central clearing house, each EFM participate has to

make & receive payments on an individuals basis & each transactions is open to

counter party credit risk. A disruption in the market due to sudden doubts about the

solvency of one market participants could have survive repercussions for the global

trade and finance and for the international banking system. Credit risk in foreign

exchange operation is the risk of failure of a counter party weather a bank or a

customer to meet obligations at maturity of the contract resulting in the result open

position being covered in the market at the on going rate.

Liquidity risk:-

Liquidity risk is the risk that to a foreign exchange transaction not being able to

meet its funding requirement or execute a transaction at a reasonable price. It is

also the risk of the party not begin able to exit or offset position quickly at a

reasonable price.

For example:- In a USD sale – Rupee purchase deal if the party selling USD is

short of funds in the nostro account then it has to fund this account. If for any

reason, the dealing party is unable to practice have to be followed by the dealer.

Operational risk:-

It is a risk arising on account of human errors, technical faults, and infrastructure

break down, faulty system and procedure or lack of internal controls.

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Market Risk:-

It is a risk which arises due to be party to a foreign exchange transaction dealing

unable to exist or offset a position quickly at a reasonable price.

Systematic risk:-

This risk is the possibility of a majority bank failing & the resultant losses to

counter parties reverberating into banking crisis.

Country risk:-

It is the of the counter party situated a different country unable to perform its part

of the contractual obligation despite its willingness to do so due to local

government regulations or political or economical instability in that country.

Sovering Risk:-

It is a sub risk in the overall country risk in that certain state owned entities

themselves quoting their sovereign status claim immunity from any recovery

proceeding of fulfillment of any obligations they had original agreed to, as in these

countries, the sovereign status cannot be questioned even in a court of law. The

foreign exchange market (currency, forex, or FX) trades currencies. It lets banks

and other imitations easily buy & sell currencies.

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Chapter-4

Types of Instrument in FOREX Market

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Financial instruments

Spot:-

A spot transaction is a two day delivery transaction (except in the case of traders

between the US Dollar, Canadian Dollar, Turkish Lira & Russian Ruble, which

settle the next business day), as opposed to the futures contracts, which are usually

three months. This trade represents a “direct exchange” between two currencies,

has the shortest time frame, involve cash rather than a contract; and interest is not

included in the agreed upon transaction. The data for this study come from the spot

market. A spot transaction has the second largest turnover by volume after swap

transaction among all FX transaction in the Global FX market. NNM

Forward:-

One way to deal with the foreign exchange risk is to engage in a forward

transaction. In this transaction, money does not actually change hands until some

agreed upon future date. A buyer and seller agree on an exchange rate for any date

in the future, and the transaction occurs on that date, regardless of what the market

rates are then. The duration of the trade can be a one day, a few days, months or

years. Usually the date is decided by both parties.

Future:-

Foreign currency futures are exchange traded forward transaction with standard

contract sizes and maturity dates – for example, $1000 for next November at an

agreed rate. Futures are standardized and are usually traded on an exchange created

for this purpose. The average contract length is roughly 3 months. Futures

contracts are usually inclusive of any interest amounts.

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Swap:-

The most common type of forward transaction is the currency swap. In a swap,

two parties exchange currencies for a certain length of time and agree to reverse

the transaction at a later date. These are not standardized contracts and are not

traded through an exchange.

Option :-

A foreign exchange option (commonly shortened to just FX option) is a derivative

where the owner has the right but not the obligation to exchange money

denomination in one currency into another currency at a pre-agreed exchange rate

on a specified date. The FX option market is the deepest, largest & most liquid

market option of nay kind in the world…

Exchange-Traded Fund:-

Exchange-traded funds (or ETFs) are open ended investment companies that can

be traded at any time throughout the course of the day. Typically, ETFs try to

replicate a stock market index such as the S&P 500 (e.g., SPY), but recently they

are now replicating investments in the currency markets with the ETF increasing in

value the US Dollar weakens versus a specific currency, such as the Euro.

Certain of these funds track the price movement of world currencies versus the US

Dollar, and increase in the value directly counter to the US Dollar, allowing for

speculation in the US Dollar for UD and US Dollar denominated investors and

speculators.

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Speculation:-

Controversy about currency speculators and their effect on currency devaluations

and national economies recurs regularly. Nevertheless, economists including

Milton Friedman have argued that speculators ultimately are a stabilizing influence

on the market and perform the important function of providing a market for

hedgers and transferring risk from those people who don’t wish to bear it, to those

who do.

Other economist such as Joseph Stieglitz consider this argument to be based more

on politics and a free market philosophy that on economics.

Large hedge funds and other well capitalized “Position Traders” are the main

professional speculators. According to some economists, individual traders could

act as “Noise Traders” and have a more destabilizing role than larger and better

informed actors.

Currency speculations are considered a highly suspect activity in many countries.

While investments in traditional financial instruments like bonds or stock often is

considered to contribute positively to economic growth by providing capital,

currency speculation does not; according to this view, it is simply gambling that

often interferes with economic policy. For example, in 1992, currency speculation

forced the central bank of Sweden to raise interest for a few days to 500% per

annum, and later to devalue the krona.

Former Malaysian Prime Minister Mahatari Mohammad is one well known

proponent of this view. He blamed the devaluation of Malaysian ringgit in 1997 on

George Soros and other specula foreign exchange market.

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FOREX Market in India

Content:-

History Indian scenario Recent Development

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Indian Foreign Exchange Market

The structure of the foreign exchange market in India is a three tier one, with the

RBI, the central banking authorities in India at the apex, followed by commercial

bank who authorized to deal in foreign exchange known as authorized dealers &the

importers & exporters & other recipients & payers forming the third tier.

To this may be added a forth tier namely the overseas branches of Indian banks&

the head offices & branches of foreign banks handling foreign exchange business

in India & correspondent banks abroad who from the nucleus for international

settlements- payment/ receipts for import/export & interbank settlements.

Alongside the bank in the market are the foreign exchange brokers. Their function

is to provide information on current exchange rates & to bring buyers & sellers

together. They act as intermediaries in the interbank foreign exchange market.

Apart from the above in the Indian context we have what are known as restricted

moneychangers & full fledged moneychangers. While the restricted

moneychangers are authorized only to purchase foreign currency, full fledged

moneychangers are authorized to buy & sell foreign currency. They generally

extend their services to travelling public & are not direct participants in the

exchange market.

The volume in the Indian inter bank market varies & depend on the volatility in the

market. The turnover is around 2 to 3 billion dollar per day at the peak. RBI acts as

the catalyst as well as controller of foreign exchange operations of authorized

dealers while the latter handle customers export/import business & inward/outward

remittances & provide the required foreign exchange cover.

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Essentially it is the import & export trade & invisible like inward & outward

remittances, which form the major part of the foreign exchange market. As a

matter of conscious policy, RBI has been actively intervening in the FEM with a

view to ensuring that the nominal appreciation/depreciation in rupee does not

affect export or import trade.

FEDAI plays a special role in the FEM as it sets the ground rules & also involves

in the matter of mutual interest of FEM participants. It may be noted here that RBI

while granting authorization to deal in foreign exchange makes it a condition for

the authorized dealers to become member of FEDAI.

The Indian scenario:-

Prior to 1992, the forex market was totally regulated. The value of the Indian rupee

was fixed, first in the term of the pound & the later USD. This value was revised

once in a while when the regulator felt the need. All inward & outward remittance

was required to be converted at this rate of exchange. The liberalization of the

forex market started in1992.

In March 1992, a dual exchange rate system was put into place. This was known as

liberalized exchange rate Management system. Two exchange rates were

prevailing during this period, one determined by the RBI & the other determined

by the market. This was the beginning of moving toward a market oriented rate.

Under this system 40% of current account receipts were required to be converted at

official rates & the balance could be at market determined rates. This was later

modified to become the Unified Exchange Rate system which came into effect

from March 1, 1993. Under this system all fore transaction are required to be

routed through the Ads at market determined rates. The RBI also announces its

rates based on market rates. Any other person desiring to buy & sell foreign

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exchange can do so through these permitted person, & only for permissible

transactions.

In August 1994, the RBI announced relaxation on current account transactions &

delegated future powers to Ads. They can now allow remittance for various

purposes like travel, studies & services to the extent specified by the RBI under the

various provision of the Exchange Control Manual. From time to time the RBI

comes out with rules regarding the various players who are allowed to operate in

the forex market, the various permissible instrument (like forward contracts,

swaps), the conditions in which these instruments can be used etc. it thus regulates

the operation of the market. Some of the important regulations, & the relevant

FEDAI guidelines as on January 7, 1999.

Recent developments in FEM in India:-

The recent development of FEM in India in the recent past has been significantly

influenced by the review by & recommendations contained in

1. Report of the Expert Group on Foreign Exchange Market in India

(Sadhani committee report) 1995

2. The report of the committee on capital account convertibility

(Tarapore committee report) 1997

3. Report of the high level committee on balance of payments

(Ranagarajan committee report)

The year 1978 can be said to be the beginning of FEM in India because it is in

1978 that RBI allowed bank to undertake intra-day trading in foreign exchange

&stipulated that “square” or “Near square” position should be maintained at the

close of business hours each day.

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During 1975-1992 the RBI was obliged to buy & sell unlimited amounts of the

intervention currency arising from the bank’s merchant purchases & RBI quotes

for buying/selling became the fulcrum around which the market clearing role on

day-to-day basis.

Gold policy:-

The liberalization of the gold policy had a significant impact on Indian forex

market. This policy opened up additional channels of import of gold, which led to

reduction in the difference in the domestic & international price of gold. The

unofficial market in foreign exchange nearly disappeared. The operation of large

public sector enterprises also have had a significant impact especially on the spot

forex market, their procedure for purchase/sale of foreign currency also have

impact on market sentiments.

Reform in banking operations:-

The three major participants in Foreign Exchange Market are:-

Central bank

Commercial

Corporation

The large commercial banks make the market by trading with each other. By

managing, arbitraging & helping their own customer position within each,

currency & between currencies they provide foreign exchange market with

continuity & dept. the central banks control the market so as to “Maintaining an

orderly market” by trading with commercial banks or with other central banks.

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Chapter-6

Intervention of RBI in Forex Market

Content:-

Role of RBI RBI & FEDAI Guidelines Other Regulations

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Central bank intervention:-

The nature of the FEM in India needs to be further explained by the role of the

RBI, & the operation of the foreign exchange control (FEC), before & after the

introduction of the new economic policy in 1991. The bank did not fix buying &

selling rate for many years in any foreign currency than the pound sterling because

the latter was in an intervention currency.

The purchases were started by RBI from October 9, 1972 & dollar sales from

February 2, 1987. The RBI has taken a number of steps over the years to develop

an orderly, competitive, & active interbank market in foreign currencies so that

they are enabling to take recourse to international foreign exchange markets

besides London, for offering quotation to their customers on the basis of ongoing

rates.

The RBI has also been trying to bring about decentralization of foreign exchange

business & dealing, without which not much can be achieved in a vast country like

INDIA, in respect of better customer services to exporters & importers in different

regions.

The objective of RBI in respect of the forward market has been that it should

became a useful tool for covering all exchange risks by the importers & exporters

in respect of their firm commitment in foreign exchange. The RBI regulations are

meant to ensure that forward market facilities are based & are not used for

speculative purposes.

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The role of RBI:-

The RBI very often intervenes in the foreign exchange market to stabilize the value

of rupee against foreign currencies. Intervention is the sale & purchase of foreign

currencies in the foreign exchange market. The intervention by the RBI in the FEM

could be either passive or active.

The purchasing & selling of foreign exchange & maintaining the exchange rate at

its desirable level or any fixed level affects the independence of monetary policy

operation of the central bank.

For example:-

The RBI want to attract more global capital to India by keeping Indian interest

rates higher than the world interest rate, then the excess capital inflow would be

absorbed by the RBI if it leads to excess appreciation of rupee than what is

expected, which in turn, increase money supply & reduce the rate of interests. But

the RBI nullifies the effect through a process called sterilization.

Sterilization means absorption of liquidity from the market by selling Government

securities through the Open Market Operations (OMO). Sterilization might be

successful in the capital inflow is temporary & the demand for Government

securities is perfectly elastic. The bank rate, REPO rate & reverse REPO rate have

also been used by the monetary authorities it contain the excessive volatility in the

foreign exchange market.

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RBI & FEDAI Guidelines:-

The central bank of one country would like to ensure development of an orderly

FEM. Even though the central bank themselves will not dictate term to the market

their very presence in the market at time by way of intervention, & other market

operation like interest rate changes etc. will instill & enforce the much needed

discipline in the market place.

The RBI also guides & directs our FEM through direct & indirect method of

control. RBI prescribed guidelines on maintenance of open positions. RBI also

intervenes in the market when there are adverse movements in the rupee exchange

rates. RBI also utilizes other control mechanisms like interest rate participants etc.

RBI guidelines on foreign exchange operations are covered in detail in the

exchange control manual. RBI has also issued guidelines on internal control over

foreign exchange business.

FEDAI guidelines describe the rule & regulation of the game infect an undertaking

to RBI to abide by the exchange rates & other terms & conditions prescribed by

FEDAI for transacting foreign exchange business is must & a prerequisite for

obtaining an authorized dealer license by schedule commercial banks from RBI.

General guidelines on handling export, import transactions merchant trade, clean

instrument & guarantees, and FEDAI has very clear & exhaustive guidelines on

hours of business, exchange contracts, interbank transaction & exchange rate

quotations. FEDAI has prescribed dealing ethics & code of conduct for foreign

exchange dealers & exchange brokers.

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Guidelines with respect to forward exchange contracts:-

Can be booked only for genuine transaction & where there is exposed to

exchange risk, & not for speculative purposes.

Cannot be booked for anticipative transactions, but only for firm exposure.

Can be booked in the currency in which the importer is exposed to the

exchange rate or in any other permitted currency, i.e. any freely convertible

currency.

Value of the forward cover should not exceed the value of the goods

contracted for.

Forward cover can be taken by resident corporate clients in respect of the

dividend due to overseas investors who have made a direct foreign

investment in India. The cover can be provided only after the board of

directors has decided upon the rate of dividend.

Forward cover can also be taken for foreign currency loans to be raised, any

time after the final approval for the loan arrangements have been obtained

from the RBI.

The GDR issues forward cover can be obtained once the issue price has been

finalized.

Other regulations:-

Exporters & certain other recipients of forex, at their option, can retain a

portion of the proceeds in forex in a foreign currency accounts opened with

Ads in India. This account is known as exchange earners foreign currency

deposits.

Cross currency exposure can be covered in the overseas market through Ads,

without necessarily covering the rupee/dollar leg of the transaction.

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Chapter-7

EXIM Bank

Content:-

Objective Role

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The role of Exim bank

Exim bank is fully owned by the government of India and is managed by a board

of Directors with representation from government, financial institutions, banks,

and business commu7nity. It offers following services from promotion of India’s

international trade Advisory Services, it has undertaken following activities in

fulfillment of its objective of providing quality advice to promote international

trade from India.

Multilateral agencies funded projects overseas (MFPO)- it provides information

and support services to Indian companies to help improve their prospects of

securing business in multilateral agencies funded projects. Promoting consultancy

among Indian companies- for this purpose it has entered into tie-up with the

international finance corporation, Washington D.C., Eastern and Southern African

trade and development bank (PTA bank) and African management service

company (AMSCO).

Knowledge building- for achievement of this goal EXIM bank of India established

EXIMIUS Center for teach in Bangalore into organized seminars and workshops I

area related to international trade and commerce. Information service EXIM Bank

of India provide information to and on exporter and importers, industry and market

reports, trade regulations and laws, international quality standard and product

display.

Financial Services the Export-Import bank of India (EXIM bank) provides

financial assistance to promote Indian exports through direct financial assistance,

overseas investment finance, term finance for export production and export

development, pre-shipment credit, buyer’s credit, lines of credit, relending facility,

export bills re-discounting, re-finance to commercial banks. The EXIM bank

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extends non-funded facility to Indian exporters in the form of Guarantees and its

lending programmers cover various stages of exports. Its focus is on export of

manufactured goods, project export, exporters of technology services ad export of

computer software.

EXIM Banks financing programmers:-

1) Loans to Indian companies:-

Deferred payment exports: Term finance is provided to Indian Exporters of

eligible goods and services which enable them to offer deferred credit to

overseas buyers. Commercial bank participate in this programmed directly or

under risk syndication.

i) Pre-shipment credit:- Finance is available from EXIM bank for

companies executing export contracts involves cycle time exceeding 6

months. The facility also enables provisions of rupee mobilsation

expense for construction/ turnkey project.

ii) Term loan for export production:- EXIM bank provide term loans/

deferred payment guarantees to 100% export oriented units, units in free

trade zone and computer software exporters.

iii)Oversea investment finance: Indian Companies establishing joint venture

overseas are provided finance towards there equity contribution in the

joint venture.

iv) Finance for export marketing: This programmed help exporters

implement export market development plans.

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2) Loans to Foreign Governments, Companies and Financial institutions:

i) Overseas Buyers credit: Credit is directly offered to foreign entities for

import of eligible goods ad related service, on deferred payment basis.

ii) Lines of credit: Besides foreign governments, finance is available to

foreign financial institution and government agencies to on-lend in the

respective country for import of goods and services from India.

iii)Re-lending facility to banks overseas:- Re-lending facility is extended to

banks overseas to enable them to provide term finance to their worldwide

clients for import from India.

3) Loan to Commercial Banks in India:-

i) Export Bills Rediscounting: Commercial banks in India who are

authorized to deal in foreign exchange can rediscount their short term bill

with EXIM banks, for an unexpired usance of a period of not more than

90 days.

ii) Refinance of Export bill: Authorized dealers in foreign exchange obtain

from EXIM banks 100% refinance of deferred payment of loans extended

for export of eligible Indian goods

4) Guaranteeing of obligation:-

EXIM bank participates with commercial banks in India in the issue of

guarantees required by Indian Companies for the export contracts for the

execution of overseas.

The India forex market owes it origin to the important step that RBI took in

1978 to allow banks to undertake intra-day trading in foreign exchange. As a

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consequence, the stipulation of maintain “Square” or “Near square” position

was to be compiled with only at the close of business each day.

During the period 1975-1992, the exchange rate of rupees was official

determined by the RBI in terms of a weighted basket of currencies of Indians

major trading partners and there were significant restrictions on the current

account transactions.

The initiations of economic reforms of 1991 saw significant steps downward

adjustment in the exchange rate of the rupee on July 01st and 03rd, 1991 with a

view to placing it at an appropriate level in the line with the inflation

differential to maintain the competitiveness of exports.

Objective of EXIM Banks:

The main objective of this unit is to make you to understand various

functions and facilities extended by EXIM. The EXIM is a public sector

financial institution created by an Act of parliament, the Import-Export bank of

India Act, 1981. EXIM Bank is the principal financial institution for co-

coordinating the working of institutions engages in financing export and import

of India.

The business of EXIM Bank is to finance Indian exports that lead to

continuity of foreign exchange from March 01st,1982. To finance this

expanding EXIM bank was established as a specialized institution which could

provide a comprehensive terms as well as offer advisory service to Exporters

for new traditional exports.

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Chapter-8

Opinion of Expert

Content:-

Introduction of Forex Brief Background Invention of RBI Strong Market Trend

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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 of all cash, derivatives

and dept instrument 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 India foreign exchange sector. Indeed the

liberalization process itself was sparked by a server Balance of payment and

foreign exchange crisis. Since 1991, the rigid, four-decade old, fixed exchange

rate system replete with sever 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 reform than before), the

nature of intervention and range of independence tolerated have booth

undergone significant changes. With an overabundance of foreign exchange

reserves, imports are on longer viewed with fear and skepticism.

The Reserve Bank of India and its allies now intervene occasionally in the

foreign exchange market 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

46 | P a g e


horizon. The effect of these developments is palpable in the explosive growth in

the foreign exchange market in India.

Foreign Exchange Market in India –a brief background:-

The foreign exchange market in India started in earnest less then three decades

ago when in 1978 the government allowed banks to trade foreign exchange

continues to take place in the inter-bank market. The market consist of over 90

Authorized Dealers (mostly banks) who transact currency among themselves

and come out “square” or without exposure at the end of the trading day

Trading is regulated by the foreign exchange Dealers Association of India

(FEDAI), a self regulatory association of dealers. Since 2001, clearing and

Settlement functions in the foreign exchange market are largely carried out by

the clearing corporation of India Ltd. (CCIL) that handles transaction of

approximately 3.5billion US Dollar a day, about 80% of the total transaction.

The liberalization process boosted the foreign exchange market in the Country

by allowing both banks and corporations greater flexibility in holding ad trading

foreign currencies. The Sodhani committee set up in 1994 recommended greater

freedom to participating banks allowing them to fix their own trading limits,

interest rates on FCNR deposit and the use of derivative products.

The growth of foreign exchange market in the last few years being nothing less

than momentous. In the last five year, from 2000-01, to 2005-06, trading

volume in the foreign exchange market (including swap forward and forward

cancellation) has more than tripled, growing at a compounded annual rate

exceeding 25%.

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The inter-bank forex trading volume has continued to account for the dominant

share (over 77%) of total trading over this period, though there is an

unmistakable downward trend in that proportion. (Part of this dominance,

though results from double counting since purchases and sales is added

separately and a single inter bank transaction leads to purchases as well as sales

and entry)

This is in keeping with global partners. In March 2006, about half (48%) of the

transaction were spot trades, while swap transactions (essential re-purchase

agreement with a one way transaction- spot or forward- combined with a

longer-horizon forward transaction in the reverse transaction) accounted for

34% and forward and forward cancellation made up 11% ad 7% respectively.

About two-third of all transactions at the rupee on one side. In 2004,

accordingly to the triennial central bank survey of foreign exchange and

derivatives market conducted by the bank for international settlement (BIS

2005a) the Indian rupee featured in the 20th position among all the currencies in

terms of being on one side of all foreign transactions around the globe and its

shares had tripled since 1998.

As a host of foreign exchange trading activity, India ranked 23rd among all

countries covered by the BIS survey in 2004- accounting for 0.3% of the world

turnover. Trading is relatively moderately concentrated in India with 11 banks

accounting for over 75% of trades covered by BIS 2004 survey.

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Intervention in Foreign Exchange market:

The two main function of the foreign exchange market are to determine the

price of the different currencies in terms of one another and to transfer currency

risk from more risk adverse participants to those more willing to bear it. As in

any market essentially the demand and supply for a particular currency at any

specific point in the determine its price (exchange rate) at that point. However,

since the value of a country’s currency has significant bearing on its economy,

foreign exchange market frequently witness government intervention in one

form or another, to maintain the value of a currency at or near its “desired”

level.

Intervention can range from quantitative restriction on trade and cross-border

transfer of capital to periodic trades by the central bank of the country or its

allies and agents so as to move the exchange rate in the desired direction. In

recent years India has witnessed both kinds of intervention through

liberalization has implied a long term policy push to reduce and ultimately

remove the former kind. It is safe to any that over the years since liberalization,

India has allowed restricted capital mobility and followed a “managed float”

type exchange rate policy.

During the early of liberalization, the rangarajan committee recommended that

India’s exchange rate be flexible. Officially speaking, India moved from a fixed

exchange rate regime to “market determine” exchange rate system in 1993. The

overall objective of India exchange rate policy, according to various policy

announcements, has been to manage “volatility” in exchange rate without

integrating any specific levels.

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The Indian rupee has had a remarkable stable relation with the US dollar.

Meanwhile the dollar appreciated against major currencies in the late90’s and

then went into an extended decline particularly during 2003 and 2004. The lock

step pattern of the US dollar and the Rupee is best reflected in the movement in

the two currencies against a third currency like the Euro.

The correlation of the exchange rate of the two currencies against the Euro

during 1999-2004 was 0.94. Several studies have established the pegged nature

of the rupee in recent years (Chakrabati 2006) for a more detailed discussion).

Based on volatility, India had a de factor crawling peg to the US dollar between

1979 and 1991 which changed to a de factor peg from mid-1991 to mid-1995,

with a major devaluation in March 1993. From mid-1995 to end-2001, the

rupee reverted to a crawling peg arrangement in practice.

An analysis of the ratio of the variance of the exchange rate to the sum of the

variance of the interest rate and the foreign exchange reserve reveals a more

even closer to the fixed exchange rate system. A comparison of the sensitivity

(beta) of the Dollar rupee rate with the Euro-rupee rate for a three year period

(1999 through 2001), indicate that India had a dollar beta of 1.01 – tenth highest

among the 53 countries considered.

More importantly, the US dollar-Euro exchange rate explained about 97% of all

movement in the Indian rupee-Euro exchange rate – highest among all the 53

countries considered. Clearly the Indian rupee has been an excellent “tracker”

of the US dollar.

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It is instructive to consider the Rupee-Dollar exchange rates in the light of the

purchasing power parity (ppp) holding that the exchange rate between two

currencies should equal the ratio of price levels in two countries. In its dynamic

from ppp holds that the rate of depreciation of a currency should equal the

excess of its inflation rate to that in the other country. Over a reasonable long

period of time, the devaluation in the Indian Rupee, vis-à-vis the US dollar does

seem to have an association with the difference in the inflation rates in the two

countries. Between 1991 and 2003, the two variables have had visible co-

movements with a correlation of about 0.57 (chakarbarti 2006). This may be a

result of Indo-US trade flows do9minating exchange rate markets but it is

perhaps more likely that it reflect the exchange rate management principles of

the monetary authorities.

The Reserve Bank of India has used a varied mix of techniques in intervention

in the foreign exchange market – indirect measures such as press statements

(sometimes called “open mouth operations” in central bank speak) and, in more

extreme situation, monetary measures to affect the value of the rupee as well as

direct purchase and sale in the foreign exchange market using spot, forward and

swap transactions (Ghosh 2002). Till around 2002, the measures were mostly in

the nature of crises management of saving the rupee kind and sometimes the

direct deals would be repeated over several days till desired outcome was

accomplished.

Other public sector banks, particularly the SBI often aided or veiled the

intervention process. The exact details of the intervention are shrouded in

mystery, not unusual for central banks ever wary of disclosing too much of their

hand to the currency speculators.

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The tarapore committee report had urged more transparency in the intervention

process and recommended, in 1997, that a ‘Monitoring exchange rate band’ of

5% be used around an announced neutral real effective exchange rate (REER),

with weekly publication of relevant figures, something yet to be implemented.

In a recent survey on foreign exchange market intervention in emerging

markets, the bank for International settlements (BIS(2005b) found that out of 11

emerging market countries considered, INDIA gave out most complete

information on intervention strategy (along with three others); no information

on actual intervention (five others did the same) and did not cover foreign

exchange intervention in annul repots (like two other countries). On the whole it

ranked fourth most opaque in matters of foreign exchange intervention among

the eleven countries compared

STRONG MARKET TRENDS

Forex traders make money by getting accurate market data and than analyzing

the direction the market takes. To do this, forex traders rely heavily on trends

and trending in an attempt to predict the direction of the forex market. Most

traders use technical analysis to analyze past and present forex market data and

then search for trends.

Other financial markets use trends and trending but this characteristic so

much stronger in the forex market. Due to strong trending, forex markets are

much easier to analyze and indentify possible entry and exit position during

trading. Now you already know the characteristics that make the forex market

52 | P a g e


a sound, financially – stable and profitable investment earns handsome profits.

You can just take advantage of the forex market’s positive assets and make

money works for you. The foreign exchange market India is growing very

rapidly. The annual turnover of the market is more than $400billion.

This transaction does not include the inter-bank transaction. According to the

record of transaction released by RBI, the average monthly turnover in the

merchant segment was $40.5billionin 2003-04 and the inter –bank transaction

was $134.2for the same period. The average monthly turnover was about

$17407 billion for the same period. The transactions are made on spot and also

forward basis, which include currency swaps and interest rate swaps.

The Indian foreign exchange market consists of the buyers, sellers, markets

intermediaries and the monetary aut6hority of India. The main center of

foreign exchange transaction in India is Mumbai, the commercial capital of 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 markets 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.

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Apart from the authorized dealers and brokers, there are some other who are

provided with the restricted rights to accept the foreign currency or travelers

cheque. Among these, there are the authorized money charges, travel agencies,

certain hotels and government shops. The IDBI and Exim bank are permitted

conditionally to hold foreign currency.

The whole foreign 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 FEMA or Foreign Exchange Regulation Act,

1947. After independence, FERA was introducing as a temporary measure to

regulate the inflow of the foreign capital. But with the economic and industrial

development, the need for the conversation of foreign currency was felt and on

the recommendation of the public account committee, the Indian government

passed the foreign exchange regulation act, 1973 and gradually, this act

become famous as FEMA.,

Subsequently, following the recommendation of the high level committee on

balance of payment (chairman: Dr C. Rangarajan) the liberalized exchange rate

management system (LERMS) involving dual exchange rate mechanism was

instituted in march 1, 1993(christened modified LERMS).

The unification of the exchange rate of the rupee marks the beginning of the

era of market determined exchange rate regime of rupee, based on demand and

supply in the forex market .it is also an important step in the progress toward

current account convertibility. Which was finally achived in August 1994 by

accepting Article VIII of the Article of Agreement of the international

monetary fund? The appointment of an Expert Group on Foreign Exchanger

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(popularly known as Sodhani Committee) in November 1994 is a landmark in

the design of foreign exchange market in India.

The group studied the market in great detail and came up with far reaching

recommendation to develop, deepen and widen the forex market. In the process

of development of forex markets, banks have been accorded significant

initiative and freedom to operate in the market. To quote a few important

measures relating to market development and liberalization, banks were

allowed freedom to fix their trading limits, accorded freedom to determine

interest rates on FCNR deposits within ceiling and allowed to use derivative

products for asset-liability management purpose.

Similarly, corporate were given flexibility to book forward cover based on the

past turnover and allowed to use a variety of instrument like i\interest rates and

currency swaps, caps/collar and forward rate agreements in the international

forex market. Rupee-foreign currency swaps market for hedging longer term

exposure has developed substantially in the last few years.

The exchange rate of rupee is set by the interbank market. Since 2000, this has

been managed by the reserve bank of India and is classified as a managed float

regime. Documentation is required for offshore trading. NDFs and FX options

are available. It is widely speculated that the INR will be among the first of the

emerging market to become spot eligible without restriction or documentation.

There is a very liquid bond market with maturates of up to 25 years available.

Based on the government need to fund the persistent budget deficit. Interest

rates swaps are available onshore and are traded up to 10 years, with mixed

liquidity.

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The dynamics of the global forex market has undergone dramatic changes over

the years. With the evolution in the high technology that provides for round the

clock connectivity, the forex market have extended their continuous presence

in cross border capital movement through the Asia, European and American

time zones. International trade has been changing direction and the emerging

economic are becoming stronger by the day. The huge reserve accumulation by

the Asian countries is seen as one of the indication of the ongoing power shift

in the world.

To a large extent, the changing trend in the global forex market may be taken

as reflecting the changing scenario in international economic power balance.

India has also been accumulating large reserve and the amount in reserves

crossed the $200 billion mark recently. At this juncture, there was a call for

full capital account convertibility. Capital account convertibility has already

been there partially in India with ceiling in place. Recently, several policy

changed took place in this direction.

The rupee is also gained strength and on this account India has become a

trillion dollar economy of late. In the context of the tremendous growth of

global forex market and emergency of newer power balance in the world

economy, this book “the Icfai University Press on Dynamics of forex market

and management”, will make useful reading, capturing the concept and

practical aspect underlying the operation of forex markets. The book presents a

series of well-written articles that bring out the essence of the happening in the

global and Indian forex market.

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Chapter-9

ICICI BANK

Content:-

FOREX Rates

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ICICI Banks Forex Rates

ICICI banks brings to its customers forex services that take care of your

requirement for foreign exchange while travelling to a foreign land for

business, leisure, holiday or any other purpose . Organize the foreign currency,

traveler’s cheque, travel card and other fund transfer services in the most

convenient manner with ICICI bank foreign Exchange Services in the most

convenient manner with ICICI bank foreign exchange services.

If you are travelling abroad or moving out of India or you are returning to

India, the foreign currency exchange can be quite a petty task. Just visit any of

your nearest ICICI bank branches or login to icici.com to avail the best

services and most suitable foreign exchange rates at all times.

ICICI bank offers prompt Forex services with the foreign exchange delivered

at your doorstep that covers ICICI Bank travel card, traveler’s cheques by

American Express and Foreign.

For any other informat6ion regarding the ICICI bank NRI banking services or

ICICI bank online banking services, refer to our subsequent pages listed on

your left hand side. You can also directly browse through the ICICI bank

website for ICICI customer services.

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Chapter-10

CASE STUDY

CONTENT:-

Service FOREX & Treasury Service

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About the client: Axis bank forex is a leading FX Trading provider, providing

investors with a diverse range of financial & investment management services.

Prolog (Press Release)-April 01, 2010 –About the client: Axis forex is a

leading FX Trading provider, providing investors with a diverse range of

financial & investment management services.

Requirements : the principals of Axis forex are experienced FX investment

professionals and wish to expand their clients base further to include more

Asian investor, they are interested in promoting their services to Asian

investors in Australia and in Asia.

Our services:

During our discussion with the client, we have identified a number of

opportunities- Axis Forex provides FX investment/trading as well as foreign

exchange transfer service, a particular service in demand for many migrants

such as transferring fund to their children or transferring fund between the

businesses.

In addition, their trading platform is available in Chinese, and we view this as

an added on advantages for Asian investors.

A number of activates have been suggested and implemented:

First, we have created the Chinese version website for Axis Forex, these

websites are being updated regularly incorporated the new contents and

services offered by Axis Forex.

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Second, we have assisted the company to release press release onto Chinese

media. Online and on newspaper, as well as providing and works for their

advertising campaign.

Third, as a follow up, we have also helped them to participate in investment

seminars and meet with investors to educate and promote their services and

products to investors.

We have also found regular commentaries are very useful and effective

marketing tool by sending out regular financial commentaries in the form of

newsletters is a very cost-effective strategy to promote your company as the

subject expert for the area.

Additionally, regular monthly interviews which we provide the transactions as

well as the distribution are another effective way to promote the company as

the expert in the field.

Axis Bank Forex, Treasury Services

Axis bank forex facility is one of the most trusted ones in the industry. The

Axis bank treasury employs highly sophisticated technology thereby reducing

the processing costs and offering the cheapest foreign exchange rates to the

clients.

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The Axis bank forex product includes:

Spot contact:-

The foreign exchange take place on a pre committed fixed rate for delivery for

buy and sell of one currency against other. Here the risk involved due to

fluctuating Forex rates are ruled out. This is for up to two business days.

Forward contract:-

This Forex product of Axis bank is another form of spot contract with liquidity

of up to 1 year.

Currency swaps:-

Available as cross-currency swaps, coupon only swaps and principle only

swaps, this forex product by Axis bank allow currency exchange at fixed rates

for future for both principle and interest.

Interest Rate Swaps:-

The exchange rate takes place in a fixed interest rate and a floating rate

liability on behalf of a client. Only the cash flow differences are settled and the

principle amount is left untouched.

Currency option:-

Axis bank offer option of purchase or sell of a specified currency at a pre-

specified rate. It is an instrument that is usually dealt by corporate having

underlying knowledge and exposure of the currency rates.

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FRA- Forward Rate Agreement:-

This includes a contract that specifies exchange of interest payments for a

specified period in the future. The interest rate risk is thereby hedged and only

the cash flow difference is settled.

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Conclusion

From this project I concluded that Foreign Exchange market play a vital role in integrating the global economy. It is 24 hours & over the counter market made up of many different types of players each with its own set of rules, practices & disciplines. The market operates on professional basis & this professionalism is held together by the integrity of the players.

According to me foreign exchange defined as:-

Foreign currency Exchange of one currency into another &

Foreign Exchange Market is a market in which individuals, business firms & banks purchase & sell foreign currency.

The Indian Foreign Exchange Market is on exception to this international market requirement with the liberalization, privatization, globalization (LPG) initiated in India, Indian Foreign Exchange Market have been reasonably liberated play their role effectively. However, much more needs to be done to make our markets vibrant, deep & liquid.

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Bibliography

Introduction to foreign trade, foreign exchange & risk management (CAIIB Examination)

Financial Institution & Markets

-L.M.Bhole International Banking

-ICFAI International Finance

- Dipak Abhyankar

Webliography

www.google.com www.yahoo.com www.icici.com www.axisbank.com

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Documents

Foreign Exhange Final Project