The Foreign Exchange Market

The planetary put back MarketThe impertinent rally commercialise is the securities industry where wholeness funds is artd for an another(prenominal). This market is somewhat similar to the over the sound reflection market in securities. The barter in currencies is usually accomplished over the teleph angiotensin converting enzyme or with the telex. With direct dialing teleph unitary service anywhere in the word, orthogonal interchange markets draw be surface really global in the sense that currentness legal proceeding now require only a case-by-case telephone call and take place twenty four hours per day. The divers(prenominal) monetary centers ar connected by a telephone network and video screens and argon in constant hitting with one another, and so stooling a single world-wide distant switch market. However, the currencies and the extent of the participation of each silver in this market dep cease on local regulations, which vary form untaught to co untry.Chapter 1 deals with the door and conceptual framework of conflicting shell break market in India. It as well deals with the structure of Indian Forex Market.Chapter 2 deals with the literature re charm of organization and regulation of forex market as well as management of supervene upon risk, commutation rate mechanism.Chapter 3 deals with the methodology adopted in the research process come onlining the objectives of the study, methods of data assembling and limitations faced while contracting the study.Chapter 4 deals with the data analysis of the conflicting supplant market in India. It covers the wide term and short term factors which account to the problems.Chapter 5 deals with the conclusion, recommendations and future prospects of forex market in India.Chapter1Conceptual role model of forex MarketTheory of Foreign re-sentencingThe term opposed replace is normally apply to touch impertinent bullion surrendered or asked for in any of its current fo rms, i.e. a bullion note or a negotiable instrument or transfer of funds through cable or send off transfer or a letter of credit execution requiring sale and purchase of external commutation or conversion of one silver into another, all at the local center or an overseas center. The banks, dealings in for transfer and providing facilities for conversion of one bullion into another or vice versa atomic number 18 kn stimulate as Authorized Dealers or Dealers in Foreign replace. A bank is said to secure or sell foreign sub when it cargo decks the claims drawn in foreign bullion or the unquestionable legal tender money, i.e., foreign currentness notes and coins of other countries.The theory of Foreign supersede covers diametric nub and methods by which the claims expressed in terms of one currency are converted into another currency and specifically deal with the range at which such(prenominal) conversion takes place.With partial or complete permutation fancy, as exercised by countries since World state of war II exchange markets are no longer free. replace rates today are not entirely determined by market lines alone are officially fixed and maintained by Central Monetary Authorities. Fluctuations in exchange rates are permitted by authorities only within narrow limits,. And official rates often very different to what they would be if natural forces were allowed to operate.Forex MarketsThe foreign exchange market, like the market for any other commodity, comprises of buyers and sellers of foreign currencies. The trading operations in the foreign exchange market originate in the requirements of customers for making remittances to and receiving them from other countries. But the sight of proceeding take place among banks dealing in foreign exchange for their own requirements as they do cover operations. trusts undertake large and frequent deals with other banks through the agency of supersede Brokers, and it is these deals which g ive the market its signifi supportce. In addition, there are other legal proceeding which take place in the foreign exchange market. only legal proceeding of the exchange market may be divided into five categories Transactions in the midst of banks and their customers.Transactions mingled with different banks in the same centre.Dealings among banks in a country and their correspondents, and overseas branches.The purchase and sale of currencies between the central bank of a country and the commercial banks.The transactions of the central banks of one country, with central banks of other countries.There is not much difference between one market and another as far as the international transaction between markets at different centres is concerned. But local dealings, among members of the same market are organized in two different forms. star of them is the pattern adopted in Great Britain, U.S. A. and some other countries, where foreign exchange dealers never collaborate each o ther but transact line of descent through a network of telephone lines linking the banks, with exchange brokers who act as intermediaries. In India also the foreign exchange market is organized on these lines. The other type is the markets in countries of Western Europe, where the dealers in Foreign exchange agree on every on the job(p) day at a meeting place for trade proposals-They fix the exchange rates for sure kind of business particularly with-customers. The foreign exchange markets in these countries are like commodity exchange or stock exchange. However, the global spellant of these markets, is comparatively small.Indian Foreign transposition MarketThe Indian foreign exchange market, broadly concentrated in big cities, is a three-tier market. The first-class honours degree tier covers the transactions between the appropriate cashbox and Authorized Dealers (Ads). As per the Foreign Regulation sour, the responsibility and authority of foreign exchange administration is vested with the RBI. It is the apex body in this area and for its own convenience, has delegated its responsibility of foreign exchange transaction functions to Ads, primarily the historyd commercial banks. They stupefy formed the Foreign flip Dealers Association of India which framers rules regarding the conduct of business, coordinates with the RBI in the proper administration of foreign exchange control and acts as a change house for information among Ads. Besides the commercial banks, there are money- changers operating on the periphery. They are well-established firms and hotels doing this business under license from the RBI. In the first tier of the market, the RBI buys and sells foreign currency from and to Ads according to the exchange control regulations in force from time to time. Prior to the introduction of the Liberalized Exchange Management System, Ads had to sell foreign currency acquired by them from the primary market at rates administered by the RBI. The la tter too exchange pounds sterling or US dollars, note as well as transport, to Ads to cover the latters primary market requirements. But with the unified exchange rate clay, the RBI now intervenes in the market to stabilize the order of the rupee.The second of the market is the inter-bank market where Ads transaction business among themselves. They normally do their business within the country, but they nates transact business also with overseas bank in order to cover their own carriage. Through they can do it independently, they do it normally through a recognized broker. The brokers are not allowed to execute any deals on their own account or for the purpose of jobbing. Within the country, the inter-bank transactions can be both sport and forwards. These may be swap transactions. Any permitted currency can be sued. But while dealing with the overseas Ads, because the Indian market lacks depth in other currencies the Indian banks can deal mainly in two currencies, viz, the U S branches must cover only unquestionable transactions relating to a customer in India or for the purpose of adjusting or squaring the banks own sic. previous trading with overseas banks is also allowed if it is done for the above two purpose, that is for covering genuine transactions or for squaring the currency position, and does not exceed a period of six months. In case the implication is made on deferred payment terms and the period exceeds six months, permission has to be obtained from the RBI.Cancellation of forward contracts is allowed in India, although it has to be referred to the RBI. Previously, the banks used to get the forward transactions covered with the RBI, but since 1994-95 the RBI has stopped giving this cover and has permitted the banks to trade freely in the forward market. Cancellation of a forward contract involves entering into a reverse transaction at the going rate. Suppose US $1,000 was bough forward on 1 February for three months at Rs. 40/US $. On 1 March, it is cancelled involving selling the US dollar at the rate customary on this day. If the exchange rate on 1 March is Rs. 39.50/US $ there volition be a loss of Rs. 500 (the dollar sold for Rs. 39.5 minus dollar bought at Rs. 40.00). The loss is borne by the customer. If the value of the US dollar is greater on the cancellation day, the customer shall reap the profit.The third tier of the foreign exchange market is represented by the primary market where Ads transact in foreign currency with the customers. The very existence of this tier is the outcome of the legal provision that all foreign exchange transactions of the Indian residents must take place through Ads. The tourists exchange currency, exporters and importers exchange currency, and all these transactions come under the primary market Chapter 2LITERATURE REVIEW Organization And Regulation of Forex MarketThe Foreign Exchange division, which is also being called as the International Banking Division, is one of th e valuable departments of the banks operating in international market. In India also all scheduled commercial banks, both in the nationalized or non-nationalized sectors, do have Foreign Exchange departments, both at their principal offices as well as offices, in metropolitan centers. This department functions independently under the overall change of some ripened executive or a senior ships officer well-versed in foreign exchange operations as well as in the rules and regulations in force from time to time pertaining to foreign exchange transactions advised by dissimilar government agencies.The principal function of a Foreign exchange department is to handle foreign self-whispered remittances as well as outbound-bound remittances buying and selling of foreign currencies, handling and forwarding of import and export documents and giving the consultancy services to the exporters and importers. Besides this, the department also gives the financial assistance in carnal knowledge to the foreign trade, i.e., it gives assistance to the exporters by way of financing the exports and imports by giving them the financial assistance to unmortgaged the consignments or open a letter of credit. The department issues garner of credit for their importer clients and handles earn of credit genuine from overseas correspondents in favour of exporters from India. Issuance of Performance and the Bid Bond guarantees and tender document is also one of the important functions of the banks that are dealing I foreign exchange.In India, the banks doing foreign exchange business are issued a license to this effect by the Reserve Bank of India under Foreign Exchange Regulation Act, 1973. No bank, not having such license to deal in foreign exchange, can handle foreign exchange operations. Besides Authorized Dealers, licenses are also issued to the Dealers with limited powers to change foreign currency notes, coins and travellers cheques. Such licensees are known as Authorized Mon ey Changers.2.1 Organisation of A Foreign Exchange DepartmentThe foreign exchange department of a medium or large sized-bank can be divided into busted department and sections such department are locked after by a senior person not lower than the category of a branch manager having both administrative and functional know-how as well as discretionary powers for advances ask from time to time by the clients. The in even of the department functions independently within the overall framework laid bug out by the Management of the bank. The in charge is assisted in hid day-to-day work by a team of officers, and workmen. One of the important functions of the Foreign exchange department, beside banking operations, is to maintain liaison and correspondence relations with overseas banks who may be their correspondents. prick OF THE FOREIGN EXCHANGE DEPARTMENTThe Foreign exchange department is divided into number of sections, each one equally important and looked after by one officer or a department head. A particular section can be sub-divided into sub-section with specific duties allotted. The sections in Foreign exchange department can be broadly stated as under1. Dealers SectionThis section is the nerve of the foreign exchange department as the exchange rates are computed and advised by this section. The exchange rates are the on a foreign exchange and so any incorrect fixation of rates (price) go out turn the profits of the bank into losses and instead of earning from the foreign exchange transactions, the bank may deem on losing. This section is headed by an officer who is called a Dealer. In the morning, before the banking hours begin, the exchange rates of various currencies are computed. The rates are computed on the basis of certain fixed principles which may by either market quotations or any such approved channel. In India, the Dealer works out the exchange rates on cross rate method based on the sterling rate schedule fixed and advised by FEDAI vis-- vis the previous days closing rates in London market. This department calculates and advised both the ready rates as well as forward rates as and when requested. Besides rate computation, it also looks after the foreign currency accounts of the bank and supervises the balancing position in foreign currency accounts maintained abroad. It also controls the exchange position of the department and reconciles the various entries put onward by other sections both for buying as well as selling of foreign exchange. In addition, the section also calculates and tabulates the statistical data required by the principal office of the bank concerned, as well as the Exchange chair Department of the Reserve Bank of India. Such statistics prepared by the bank are to be reported to the authorities on the positive forms at the prescribed intervals. This data is very essential and of prime important as the Balance of Trade and Balance of Payments position is arrived at only from the statistics provi ded by the banks. From the data available from the banks even the import policy is formed and other monetary measure adopted by the monetary authorities from time to time depend.This section can be further sub-divided into following subsections treasure calculation and advisingForward Exchange contractsForeign currency AccountsExchange position and control, andReconciliation of Foreign Currency Accounts.2. Foreign Remittances SectionThis section deals with the in and outward remittances begetd in the country and sent outside, both on behalf of the transactions taken up by residents and non-residents. Foreign remittances are carried out in the form of cable transfers, mail transfers, demand drafts, travelers cheques and payment instructions by letters. All these forms are widely used both for inward remittances as well as outward remittances. The officer of this particular department has to be quite well-versed with various regulations in force from time to time and the amendment s to that as strict exchange control regulations are prevailing specially in case of outward remittances in developing and under substantial countries, due to the inauspicious balance of payments position, depleting foreign exchange reserves, and available resources required to meet with development programmes and national exigencies. This department also economises Test Key arrangements used for transmitting the instructions by cable, as in cable transfers no signature of the remitting bank is possible. So messages are computed with a particular number known as code or cipher. This code or cipher is recomputed at the other centre on the basis of the test arrangements exchanged between the two banks.In foreign exchange, whatever the reason may be irrespective of the amount, the entire gamut is focused around the inward and outward remittances and so this section is of prime importance. The remittances are converted into local currency in case of inward remittances and in foreign c urrency in case of outward remittances at the prevailing rate of exchange on the date of each transaction or a forward exchange rate if exchange rate if exchange is already booked earlier. So, the remittance department has to keep a close contact with Dealers section, both for getting the rates and also advising them the funds position which changes from time to time due to the remittances menstruation in either direction.3. issue Section Import section can be sub-divided into import letters of credit both opening and payment thereof, issue of Bid guarantees, performance guarantees and guarantees to Government agencies for release of import consignment, import documents received on collection basis and imports on consignment basis. Import section has to keep in touch with latest developments in international markets as well as the rules and regulations in force in various centres to take up the import business at right earnest without violating the rules and regulations. both(pre nominal) in developing and developed countries, there are Import and Export Trade Control Regulations and such regulations are enforced through a licensing procedure. Hence the Import section has to take care of the Import Trade Control Regulations as well as Exchange Control Regulations before allowing import transactions to be put through.4. Export Section The section deals with various exchange operations arising out of export trade. The principal functions of this sub-section areAdvising and confirming letters of credit received from abroadExtending financial assistance to exporters as and when required.Acting as an agent for collection on behalf of the clientsNegotiation of export tones drawn under letters of Credit whereby the dealer acts as an agent of overseas bank and facilitates smooth function/operation of international trade and Acting as an let channel appointed by Central Banking Authority to receive the export proceeds.5. Statistics SectionThis section collects the sales and purchase figures from various departments along with necessary exchange control forms, tabulates then and submits a periodical report by way of statements and returns to the Exchange Control Department of the Reserve Bank of India under whose authority it operates. This reports is also being submitted from time to time in one form or the other to the head office of the concerned bank to enable it to compile the overall position of the foreign exchange preferably of the bank as a whole.2.2 Exchange Regulation in India Exchange Control Regulations were first introduced in our country on 3rd September, 1939 at the outbreak of World War II. The control was introduced under the guidelines of Bank of England and also as a measure under the Defence of India rules to keep up and augment the foreign exchange resources of India to meet the defence requirements for Britishers. It primary objective was to conserve the foreign exchange resources, which needed to be diversified due to changed circumstances.It was initially introduced as a temporary device to meet the destiny situation arisen due to Second World War. In May, 1944 the Defence of India Rules were get uped and all emergency alimentation promulgated during the Defence of India Rules were ineffective. But the Government of India was not in a position to lift the Exchange Control Regulations due to the strain on the sterling balances The Exchange Control Regulations were kept active under a new law named as Emergency Provisions Continuance Act of 1994. The Exchange Control was put on a permanent Statute and the First Foreign Exchange Regulations Act came into existence on 25th March, 1947 as a full fledged foreign Exchange Regulations Act.The scheme of control adopted in 1947 was structurally identical to provisions laid down in 1939 at the inception of the control, but important changes in detail were introduced in FERA 1947 to meet the specific requirements of the situation and to nurse the inter ests of independent India.The Foreign Exchange Regulations Act (FERA) of 1947 has now been replaced by the FERA, 1973. Basic structure of the Exchange Control Regulations is till not very much divergent that the earlier ones, but keeping in view the economic conditions and balance of payments positions, certain new provisions have been included and the control has been made more than(prenominal) than comprehensive. Under the Act of 1973, the Authorized Dealers have been prone wider powers for releasing foreign exchange to the residents in India and a strict view has been taken of the non-resident interests.I) BROAD FEATURES OF EXCHANGE CONTROL There is an elaborate machinery to enforce Exchange Control Regulations in our country. The machinery comprises of the controller of the Exchange Control department of the Reserve Bank of India at the guide of affairs, which in turn has empowered the Banks dealing in foreign exchange to deal with general universe for their foreign exchan ge requirements. This authority enforces the provisions of the Foreign Exchange Regulations Act and has the powers to deal with any infraction or violation of the provisions of the Act.II) THE FERA AND THE EXCHANGE CONTROL MANUAL All the provisions of the FERA have been tinned in the banking terminology by the Reserve Bank of India to facilitate the day to day transactions between Reserve Bank, between the various dealers and the general public.Exchange control in India is administered by the Reserve Bank of India in accordance with the general policy laid down by the Union Government in consultation with the Reserve Bank. The Bank has an Exchange Control Department which is entrusted with this functions. Under the system, the Reserve Bank is true to license export of luxurious, silver, currency notes, securities, and a variety of other transactions involving the sue of foreign exchange.For foreign exchange transactions, which the general public conducts with the authorized deal ers in foreign exchange, the Reserve Bank of India has laid down general instructions for the guidance of the latter. The directions cover all transactions relating to imports and exports, foreign travel payments, family maintenance remittances by foreign nationals, transfers of investment income, capital transfers by foreign and Indian Nationals and other invisible items. several(prenominal) of these transactions particularly those pertaining to capital transfers, have to be referred by the authorized dealers to the Reserve Bank for its prior approval. Some remittances may, however, be made by the authorized dealers without prior approval of the Reserve Bank, such as those for foreign Nationals seeking to remit a part of their, earnings for the maintenance of their families abroad, provided the amounts are within limits specified by the Reserve Bank.The institutional framework of the exchange control system also compromised of a special machinery for enforcement and for dealing wi th any infringements of the provisions of the Act. The function is entrusted to the Directorate of Enforcement attached to the Union Ministry of Finance. The directorate deals with offenders who violate the control provisions and is authorized to take punitive action. It is also empowered to adjudicate in certain cases of infringement.III) Purchases and gross revenue by Authorized Dealers Authorized dealers purchase and sell foreign currencies in accordance with the regulations.Purchase They purchase T.Ts., M.Ts., drafts, bill etc., freely from banks and the general public. The receipt of remittances from any country is free and banks are, therefore allowed to purchase freely.Purchase of foreign currencies is also done from their overseas branches and correspondents for the purpose of making rupee payments into non-resident accounts in India and also for making payments to residents.The authorized dealers and authorized moneychangers purchase foreign currency notes, coins, and trave llers, cheques from travellers coming from abroad. The amounts purchased are endorsed on the reverse of the customs stamped currency declaration forms of the travellers. Foreign currency notes and coins are also purchased from other authorized dealers and money changers.Sales Sales of foreign currency are made by authorized dealers subject to control regulations. No remittances may be made to countries advised from time to time and no transactions may be carried out with persons, firms or banks residents in those countries.For the purpose of sales persons, firms, and banks residents in Nepal are treated as non- residents. 2.3 Exchange Rate Mechanism in India India is a founder member of the IMF. It followed the fixed parity system till the former(a) 1970s as a result which the value of the rupee in terms of gold was in the beginning fixed as the equivalent of 0.268601 gram of fine gold. In view of Indias long economic and governmental relations with England and membership of the s terling area from September 1939 to June 1972, the rupee was pegged to the pound sterling. The exchange rate was thus remained unchanged but the gold content of the rupee fell to 0.186621 gram. Again, with the devaluation of the Indian rupee in June 1996 the gold content fell further to 0.118489 gram. The following year, the pound was also devalued. This devaluation did have an impact on the rupee pound link, but the rupee was kept stable in terms of the pound. The latter continued as an intervention currency.In August 1971 when the system of fixed parity was under a cloud, the rupee was in brief pegged to the US dollar at Rs. 7.50/US $ and this continued till celestial latitude 1971. The peg to the dollar was not very effective as the pound sterling remained to continue as the intervention currency. In December 1971, the rupee returned to the sterling peg at a parity of Rs. 18.9677/ with of course , a margin of 2.2 S percent.After the Smithsonian arrangement had failed and the pou nd had began to float, the rupee tended to depreciate. The reserve Bank then had to delink it from the pound sterling in September 1975 and link it with a basket of five currencies but the pound sterling was retained as the intervention currency for fixing the external value of the rupee. The weight of different currencies forming the basket remained confidential and the exchange rate continued to be administered. The administered rate did not keep pace with the growing rate of ostentation and this resulted in a widening gap between the real and the nominal exchange rates that was more evident during the late 1980s and early 1990s. Thus, when economic reforms were initiated in the country, the rupee was depreciated by around 20 percent in two successive instalments in the first weeks of July 1991. In absolute terms, depreciation occurred from Rs. 21.201/US $ to Rs. 25.80 /US $From March 1992 a dual exchange rate system was introduced, in terms of which 40 percent of export earnings were to be converted at the official exchange rate prescribed by the Reserve Bank and the remaining 60 percent were to be converted at market determined rates. The US dollar was he intervention currency. From March 1993 the receipts on merchandise trade account and some of the items of invisible trade account came to be convertible entirely at the market determined rates on all items of current account.The ad election of the unified exchange rate system form March 1993 means adoption of a floating-rate regime, but it is a managed floating and the reserve Bank of India intervenes in the foreign exchange market in order to influence the value of the rupee. In the first two years, the value of the rupee remained stable but the onward, it has been depreciating despite RBIs intervention.2.4 Management of Exchange assay Risk Hedging tools in Forex MarketIn recent years financial markets have developed many new products whose popularity has become phenomenal. Measured in terms of trading volume, the growth of these products principally futures and options has confused traditional investors. Although active markets in futures and options contracts for physicals commodities have only recently attracted Internet.Multinational Companies normally use the spot and forward markets for international transactions. They also use currency futures, currency options, and currency futures options for various corporate functions. patch speculators trade currencies in these three markets for profit, multilingual companies use them to cover open positions in foreign currencies.2.4 (a) Forward contract Forward Exchange Forward exchange is a device to protect traders against risk arising out of fluctuations in exchange rates. A trader, who has to make or receive payment in foreign currency at the end of a given period, may convalesce at the time of payment or receipt that the foreign currency has appreciated or depreciated. Ifthe currency moves down or gets depreciated the trader w ill be att a loss as he will get lesser units of home currency for a given amount of foreign currency, which he was holding.Similarly, an importer, who was contracted to make payment of a given amount in pound sterling at the end of a given period, may find that at the time of payment, the rupee sterling rate is higher. He would then have to pay more in rupees than what it would have been at the time when the contract was made.To protect traders against such risks of appreciation and getting lesser amount of home currency, there is a device in exchange market of booking forward exchange contracts. The emergence of forward exchange contracts has been due to the rate fluctuations and possible losses that the traders might have to suffer in their foreign exchange business. The forward exchange transaction is an umbrella which gives protection to the dealers against the contrary movement of exchange rates. The forward exchange market in fact came into existence when the exchange rates were highly unstable following the abandonment of the gold standard by most of the countries at the end of first and Second World Wars. There are other means of taking care of the risks of the adverse effects of the exchange rate fluctuations such as including the Escalation Clause in the sale and purchase contracts entered between the buyers and sellers or fixing a parity rate between the home currency and foreign currency and any variation in the fixed parity entered into between the importers and exporters, the exchange risks will be passed on as per the terms of the contract. Escalation clause is more adaptable in contracts amounting to a very large volume,. particularly in contracts entered into on deferred payment terms.Forward Exchange Contracts Under option forward exchange contracts, the customers has an option to receive or deliver the contract