… The of RBI on Exchange Rate Management – Raghuram Rajan Effect…

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*** Flow of Presentation ***

Introduction

Types of Exchange Rates

RBI, ECD, FERA, LERMS, MFER & FEMA

Factors Affecting Exchange Rate

Role of RBI- Exchange Rate Control

Measures

Conclusion

Video: : Raghuram Rajan’s Bold plan on Rupee Rescue

Plan : https://

www.youtube.com/watch?v=J6zNJedZWOs

Presentation By:

Sanjay Kumbhar : Roll No 107

… The of RBI on Exchange Rate Management – Raghuram Rajan Effect…

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*** Introduction & Types of Exchange Rate System ***

Introduction:The earliest exchange rate system was popularly known as Gold standard, this system existed during 1879-1934. In this exchange rate system the value of currencies of different countries was fixed in terms of gold. Hence under gold standard exchange rate system there could be only fixed exchange rates.

After the end of World War II to 1971, another Fixed Exchange Rate System known as Bretton Woods System prevailed.

After 1971, the exchange rate system was not purely flexible, hence it was called Managed Float System.

Types of Exchange Rate SystemFixed Exchange Rates:-

IMF was established with the object of stabilising the rates of exchange between the member countries.    

Flexible Exchange Rate:-

Flexible exchange rates are determined by forces of demand and supply in the foreign exchange market without the interference of Government.   The free floating rate is allowed to seek its own level as no par of exchange is fixed. Since 1980s as many countries were in favour of the flexible exchange rates IMF was forced to adopt flexible exchange rates.

Managed Exchange Rate System  IManaged Flexibility :-

A system of managed flexibility came up to take the merits of fixed and flexible exchange rate and to overcome their demerits. This system is based on the par value concept under IMF guidelines.

… The of RBI on Exchange Rate Management – Raghuram Rajan Effect…

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*** RBI & Exchange Control Dept. ***

RBI, FERA, LERMS & MEFR & FEMA:In 1939, the Exchange Control Department of RBI was set up. In order to conserve the scarce foreign exchange reserves, the Foreign Exchange Regulation Act (FERA) was passed in 1947.

Up to 1971 India adopted fixed exchange rate of IMF, whereby the Indian Rupee external par value was fixed. In 1973, FERA was amended and it came in force on January 1st, 1974. It gave wide powers to RBI to administer exchange control mechanism properly.

In 1992, RBI introduced LERMS (Liberalized Exchange Rate Management System) Under LERMS a dual exchange rate was fixed. The 1993-94 Budget made Indian Rupee fully convertible on trade account. LERMS was withdrawn.

To minimise the disadvantages of flexible exchange rate, most of the developing countries including India have adopted the concept of managed Flexible Exchange Rate (MFER).

Under MFER, the Central bank intervenes to bring stability in exchange rate. RBI’s intervention involves purchase of foreign currency from market or release (sale) of foreign currency in the market, to bring stability in exchange rates.

FOREIGN EXCHANGE MANAGEMENT ACT (FEMA)

The relaxation of FERA encouraged the inflow of foreign capital and the growth of Multi National Corporations (MNC's) in India. FERA was replaced by FEMA in 1999.

 Under FERA RBI's permission was necessary. Under FEMA, except for Section 3 (relates to foreign exchange) no other permission is required from RBI. The purpose of FEMA is to facilitate external trade and payments and promote orderly development and maintenance of foreign exchange market in India. FEMA simplified to facilitate the relaxation of foreign exchange controls and move towards capital account convertibility. If any person contravenes any provisions of FEMA, he shall be liable to a penalty up to twice the sum involved in such contravention. There would be no punishment by way of imprisonment.

… The of RBI on Exchange Rate Management – Raghuram Rajan Effect…

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*** Factors Affecting the Exchange Rates. ***

Factors Affecting the Exchange Rate:1. Differentials in Inflation

Lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies. Oil process, Onion are factors affects inflation.   

2. Differentials in Interest Rates

Interest rates, inflation and exchange rates are all highly correlated. Higher interest rates attract foreign capital and cause the exchange rate to rise.

3. Current-Account Deficits

A deficit in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit. The excess demand for foreign currency lowers the country's exchange rate until domestic goods and services are cheap 

4. Public Debt

A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.

5. Terms of Trade

A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments. Results in rising revenues from exports, which provides increased demand for the country's currency

6. Political Stability and Economic Performance

A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries. 

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*** Role of Reserve Bank of India ***

Role of RBI (FERA 1973) :-Empowered to issue licenses to those who are involved in foreign exchange transactions & dealers

Issue Of Directions -The 'Exchange Control Manual'

Fixation Of Exchange Rates :-Responsibility of fixing the exchange value of home currency in terms of other currencies. This rate is known as official rate of exchange. All authorised dealers and money lenders are required to follow this rate strictly in all their foreign exchange transactions.

Foreign Investments :-Non-residents can make investments in India only after obtaining the necessary permission from Central Government or RBI. Great investment opportunities are provided to non-resident Indians.

Foreign Travel :- Indian residents can get foreign exchange released from RBI up to a specified amount for travelling abroad through proper application.

Import Trade:- The RBI regulates import trade. Imports are permitted only against proper licenses. The items of imports that can be imported freely are specified under Open General Licence.

Export Trade:- The RBI controls export trade. Export of gold and jewellery are allowed only with special permission from RBI.

Gold, Silver, Currency Notes Etc.:- In recent years, the limits fixed for bringing gold, silver, currency notes etc. has been relaxed considerably.

 Submission Of Returns:- All foreign exchange transactions made by authorised dealers must be reported to RBI. This enables the RBI to have a close watch on foreign exchange dealings in India.

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*** Conclusion ***

Conclusion:Thus, RBI is the apex bank that intervenes, supervises, controls the foreign exchange markets in order to create an stable and active exchange market.

References:-http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12252

http://www.iitk.ac.in/ime/MBA_IITK

http://www.forex-ratings.com/

http://www.slideshare.net/anujzeal4u/rbi-intervention-in-foreign-exchange-market

http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12252#EXC

http://www.investopedia.com/articles/basics/04/050704.asp

http://en.wikipedia.org/wiki/Reserve_Bank_of_India

http://www.moneycontrol.com/mccode/currencies/

… The of RBI on Exchange Rate Management – Raghuram Rajan Effect…

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https://www.youtube.com/watch?v=J6zNJedZWOs

*** Video: : Raghuram Rajan’s Bold plan on Rupee Rescue Plan ***