FOREIGN EXCHANGE MARKET OF INDIA

INTRODUCTIONS

Every country has a foreign exchange market. These markets differ from
country to country. Free operations in exchanges markets are not possible.
Therefore, exchange controls of varying intensity become a necessity in
developing countries because the markets operate under a variety of
constraints. The exchange markets in developing countries are accepted to
provide more of services to the import and export trade.
Foreign Exchange Markets in India is regulated through the exchange controls
systems instituted under Foreign Exchange Regulations Act, 1973. It empowers
the governments to assume monopoly of all exchange transactions. The foreign
exchange rates are important parts of financial analysis. Although, the exchange
rates is determined by the supply of and demand for foreign exchange the
complex forces of exports and imports are behind the whole process of
exchange rates determinations.
The Indian foreign exchange markets consist of the buyer, sellers, markets
intermediaries and the monetary authority of India. The main centre of foreign
exchange transactions in India is Mumbai, the commercial capitals of the
country.
There are several other centers for foreign exchange transactions in the country
including Kolkata, New Delhi, Chennai, Bangalore, Pondicherry, and Cochin.
In past, due to lack of communications facilities all these markets were not
linked. But with the developments of technologies, all the foreign exchange
markets of India are working collectively.
The foreign exchange markets India is regulated by the reserve banks of India
through the Exchange Control Departments. At the same time, Foreign
Exchange Dealers Associations (voluntary associations) also provide some help
in regulating the markets.
The Authorized Dealers (Authorized by the RBI) and accredited brokers are
eligible to participate in the foreign exchange markets in India. When the
foreign exchange trade is going on between Authorized Dealers and RBI or
between the Authorized Dealers and the overseas banks, the brokers have no
role to play.
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FOREIGN EXCHANGE MARKET OF INDIA

Parts from the Authorized Dealers and brokers, there are some others who are
provided with the restricted rights to accept the foreign currency or travelers
cheque. Among these, there are the authorized money changers, travels agents,
certain hotels and governments shops. The IDBI and EXIM Banks are also
permitted conditionally to hold foreign currency.
Indias Forex markets is a multi- tiered markets where the commercial banks
that quotes the domestic units against the US. Dollars are at the centre of
activity. The rupees are not quoted against any other currency in these rates
discovering markets. Businesses that need to transact in foreign currency, do so
with an authorized dealers (generally a commercial banks) as they are not
permitted to deals directly with each other.

FOREIGN EXCHANGE MARKET OF INDIA

1.1 MEANING:
Foreign Exchange markets are markets for the purchase and sale of foreign
currencies. The need for a foreign exchange markets arises because of the
presence of the multiple currencies such as US Dollar, UK Pound and Sterling,
Euro, Franc, Yen.etc. The purchase of foreign exchange markets is to facilities
internationals trade and investments.
The foreign exchange is converted at a price called the exchange rates. Free
operations in the exchange markets are not possible. The exchange rate is
determined by the supply and the demand for foreign exchange. Foreign
exchange markets differ from country to country
The day to day business of buying and selling foreign exchanges is handled by
the foreign exchange departments of RBI and authorized branches of
commercial banks in India.
Thus, a market for the purchase and sale of foreign currencies is foreign
exchange market. The objectives of these markets are to facilitate international
trade and investments. The need for a foreign exchange markets arises because
of the presences of the multiple international currencies such as US Dollars,
UK Pound< Euro, Franc, Yen and the need for trading in these currencies.
Foreign Exchange Markets does not have a physical place. It is a markets
where trading in foreign currencies takes place through the electronically linked
network of banks, brokers and dealers whose functions is to bring together
buyers and sellers of foreign exchange. The markets is vastly dispersed
throughout the leading financial centre of the world such as London, New York,
Paris, Zurich, Amsterdam, Tokyo, Hong Kong.

1.2 DEFINATIONS:
Foreign Exchange Markets aims at permitting the transfer of purchasing power
denominated in one currency to another whereby trading takes place. It
facilities a settlements between countries in their respective currency units.
Around 95 percent and sales of assets. Only five percents relate to the exportimport activities.

FOREIGN EXCHANGE MARKET OF INDIA

The foreign exchange markets provides credit through specialized instruments

such as bankers acceptances and letters of credit. The markets helps the
importer and exporter in the foreign trade to minimize their risks of trade. This
provides hedging facilities to the traders.
This also enables the traders to transact business in the international markets
with a view to earning a normal profit without exposures to an expected change
in anticipated profits .

FOREIGN EXCHANGE MARKET OF INDIA

1.3 HISTORY:
The whole foreign exchange markets in India is regulated by the Foreign
Exchange Managements Act, 1999 or FEMA. Before this act was introduced,
the market was regulated by the FERA or Foreign Exchange Regulations Act,
1947. After independence, FERA was introduced as a temporary measure to
regulate the inflow of the foreign capital. But with the economic and industrial
developments, the need for conversions of foreign currency was left and on the
recommendations of the Public Accounts Committee, the Indian governments
passed the Foreign Exchange Regulations Act, 1973 and gradually, this act
became famous as FEMA.
Until 1993, India maintained an administrative exchange rate. From its
independence from the British to 1971, India had a fixed exchange rate against
the currency of its former rulers. This was however done in consultations with
the International Monetary Fund. After the collapse of the fixed exchange rate
system in 1971, the currency was linked to the British pound, but not for long.
As other economics gained prominence in Indias economic relations, there was
a need to maintain stability vis--vis with other currencies too 1975 onwards,
the Indian rupees was linked to a basket of currencies and was devalued from
time to time in order to maintain stability
Following Indias economics Liberalizations in 1991, the currency was
devalued by 18% and administered exchange rate lived side by side the market
too. Also, the Indian currency began being quoted against the US Dollars a
change from its pound based quote. It was only in 1993, that the rupees were
made to float. The Indian was now tradable in the market.

FOREIGN EXCHANGE MARKET OF INDIA

1.4 FUNCTIONS OF FOREIGN EXCHANGE MARKETS:

TRANSFER OF PURCHASING POWER:International trade involves different currencies. India require purchasing
power in the form of UK pounds ($) to purchase good & services from that
country. Similarly residents of other countries require Indian currency or any
other acceptable currency for purchasing or investing in India. Foreign
Exchange Market helps transfer purchasing power between the people.
PROVISIONS OF CREDIT INTRUSMENTS AND CREDIT :
For the purpose of transferring credit, credit instruments are used. These are in
form of telegraphic transfer, foreign exchange bill, draft, etc. instruments with
time period i.e. a bill of foreign exchange of 90 days can be discounted before
the due date. Such a provisions enables to obtain credit from the commercial
bank or authorized agents.
COVERAGE OF RISK :
Exporters and importers may cover the possible risk due to a future change in
exchange rate through forward exchange market. The forward exchange
market is where buyers and seller agree to exchange currencies at some
specified day in the future. To understand the functioning of forward exchange
market we must know the participants in this market. The economic agents
involved in the forward markets can be divided into three groups. They are as
follows.
(a) HEDGERS:

FOREIGN EXCHANGE MARKET OF INDIA

These are the agents (usually firms) who enter the forward exchange market to
protect themselves agents the risk arising out of exchange rate fluctuations. To
understand the risk, let us assumes an Indian Importer who imports goods from
USA worth $ 50,000/-, has to make the payments in three months time. The
sports rate at the movements is Rs.45=$1 which requires 22, 50,000/-. Due to
uncertainty of the market, if the importer fears a depreciations of rupees, in that
event he will have to pay more than Rs.45=$1 three months hence. Therefore
he may enter into buying dollars forward today through an agreements with
commercial banks or authorized agents. If he enters into an agreements to
purchase at the rate of Rs.46.00, he does so as he fears the depreciations of
rupees. After three months he requires to pay additional Rs.50,000/- more. If
the spot rate is more than Rs. 46.00 after 3 months then the hedgers stand to
gain. If it turns out to be only Rs. 45.00 or less than that, hedgers are the losers.
The advantages of forward market which provide this facility makes the
importers sure of the money that he has to pay for obtaining $ 50,000.
(b) ARBITRAGEURS:
These are the agents (usually banks) who intend to make a risk less profit out of
discrepancies between interest rate differentials and the forward discount and
forward premium. Arbitrageurs enter into arbitrage. This refers to purchase of
an asset in a low price market and its risk fewer sales in a higher price market.
This process leads to equalizations of price of an asset in all the segment of the
market. Difference in prices if at all, is not more than transport or transaction
cost.
(c) SPECULATORS:
These are agents who intend making a profit by taking the advantage of change
in exchange in exchange rates. They participate in the forward exchange market
entering into forward exchange deal. They do so on the basis of their own
calculation of the difference between the forward rate and the spot rate that may
prevail on a future date. For example: If a speculator enters to sell a dollar at
Rs. 50.00 after three months with expectations of the dollar becoming cheap
and the spot rate after three months is Rs.49 = 1$, the speculator purchases the
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FOREIGN EXCHANGE MARKET OF INDIA

dollar for spot rate (Rs.49) and sales for the agreed forward rate (Rs. 50), thus
making a profit of Rs. 1 per dollar. He may incur loss if the spot rate crosses
Rs. 50. The forward exchange rate is determined by the interaction of hedgers,
arbitrageurs and speculators.

1.5 NATURE OF FOREIGN EXCHANGE MARKET IN

INDIA:
Every country has its foreign exchange market. These markets differ from
country to country. In a developing country like India free operations in
exchange markets are not possible because exchange controls are necessary.
This market in have to operate under a variety of constraints. Exchange market
in developing countries are expected to provided more of services to the
import and export trade, rather than opportunities for pure exchange trading.
Financial transactions not directly related to trade flows have steadily increased
in all the countries. It was estimated that trading turnover in foreign exchange
markets in the world averaged around US $ 150 million per day while the
world export were only about US $ 7 billion per day during the mid 1980s. In
other words, barely 5 percent of foreign exchange transactions reflected
international trade, while the balance of 95 percent of the exchange transactions
was accounted for by the capital transfer, arbitrage and speculations. In India,
the foreign exchange dealings have been expanded since 1980s.
The RBI has an authority to enter into foreign exchange transactions both on its
own accounts on behalf of the governments. It does not deal in foreign
exchange directly with the public. It has appointed authorized dealers. It
determined the foreign exchange markets with a view to create an active
exchange market an important trading centre in India. With wide participations
by authorized dealers, exporter, importer so the various currencies are actively
traded, facilitating customers to obtain fine quotations and the rate variations
are minimum.

FOREIGN EXCHANGE MARKET OF INDIA

The day to day business of buying and selling of foreign exchange has been
handled by the foreign exchange departments and scheduled commercials
banks. The public have to conduct all their foreign exchange transactions
through the authorized dealers. The dealers have to obtain prior approvals of
the RBI while entering into the foreign exchange transactions except those who
are exempted from such prior approval. Besides the authorized dealer, the RBI
has granted two types of money changers licenses to certain established firms,
hotels, shops and other organizations to deal in currency notes, coins and
travelers cheques to a limited extent.
The foreign exchange market in India is free to operate within prescribed bands
of the RBI rate. The authorized banks are free to deal among themselves in any
currency in both spot and forward maturities against either the rupee or any
other foreign currency. The authorized dealer is expected to buy and sell
currencies to the RBI only after exhausting all avenues for meeting their need
and unloading currencies on the domestic market. The RBI has taken a number
of steps in recent year to develop an orderly, competitive and act as inter-bank
market in foreign currencies so that they are enabled to quote competitive rates
of exchange.
The foreign exchange markets in Mumbai, Kolkata, Chennai and New Delhi
are very active. The objectives of RBI in respect of forward market are that it
should become a useful tool for covering all exchange risk by the importers and
exporters in respect of their firm commitments in the foreign exchange.
The existences of the exchange control system has enabled the RBI to
implements its polices with necessary power. The Government assumes a
monopoly of exchange transactions. The Government dictates the price at
which it will buy and sell foreign exchange, as well as the amounts of and the
purpose for which foreign exchange are made available. It may set a single for
foreign exchange or may set a selling rate substantially higher than the buying
rate.

FOREIGN EXCHANGE MARKET OF INDIA

The exchange control act was imposed under the foreign exchange Regulations
Act, 1973 which came into force on 1st January, 1974. The FERA is
administered by the RBI in accordance with the general policy laid down by the
Government of India in consultations with the bank. The exchange control is
closely related to and supplemented by the trade control imposed by the chief
controller of import and export in terms of imports and exports (control) Act,
1947.
The main objectives of the exchange are to regulate the demand for foreign
exchange for various purposes within the limit set by the available limited
supply. Some of the important features of the foreign exchange in India are as
follows..
I.

GEOGRAPHICAL DISPERSAL:

The foreign exchange market in India is widely dispersed throughout the

leading financial centers. U is not to be found to be one place.
II.

ELECTRONIC MARKET:

Foreign exchange market in India is connected electronically. Trading in

foreign currencies takes place through the electronically linked network of
banks, foreign exchange brokers and dealers. They bring together various
buyers and seller in the foreign exchange.
TRANSFER OF PURCHASING POWER:
Foreign exchange market aims at permitting the transfer of purchasing power
denominated in one currency to another. Firms of respective countries would
like to have their payments settled in their currencies.
INTERMEDIARY:
Foreign exchange market act as an intermediary between buyers and seller
of foreign exchange. It provides a convenient way of converting the currencies
earned into currencies wanted to their respective countries.
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FOREIGN EXCHANGE MARKET OF INDIA

PROVISION OF CREDIT:
The foreign exchange market provides credit through specialized instruments
like bakers acceptances and letter of credit. This credit is much helpful of the
trader in the international market.
MINIMIZING RISKS:
Foreign exchange market help the importers and exporters in the foreign trade
and minimizes their risks in international trade. This is done through the
provisions of Hedging facilities. earn a normal profit without exposure to an
expected change in anticipated profit.

1.6 ORGANISATIONS OF FOREIGN EXCHANGE MARKET

The day-to-day business of buying and selling foreign exchange is handled by
the foreign exchange department of scheduled commercial banks who are the
authorized dealers in foreign exchange in India. Reserve Bank of India plays an
important role in this market. RBI established the days buying and selling rate
of the rupees in terms of pound sterling at the beginning of the day. In order to
maintain the ruling exchange value of the rupee, the Bank is obliged to buy and
sell foreign against rupees on demand without limit at fixed rates.
The activities of the exchange market are carried out predominantly through the
World Wide inter-bank market. The Trading is done on telephone, telex or the
SWIFT system. There are large numbers of players who assist in trading of
foreign currencies. Inter-bank market is an important segment of foreign
exchange market. It is the wholesale market which currency transactions are
completed. It is used mostly by the bankers. About 95percent of foreign
exchange transactions are carried out in this market. 20 major banks domestic
this market
There are three constituents of inter-bank market. They are spot market forward
market and swap market. In the spot market the currencies are traded for
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FOREIGN EXCHANGE MARKET OF INDIA

immediate deliveries extended for a period of not exceeding two business days.
Spot transactions account for about 60 percent of the foreign exchange market.
In the forward market, delivery of currencies takes place at a future date and
the contract for buying and selling takes place at the current date. This account
for about 10 percent of the foreign exchange market. Swap market comprises
around 30 percent of transactions the parties exchange a series of cash flows at
specified intervals. The simultaneous purchase and sale of a given amount of
foreign exchange for different value dates are earned out in the swaps.
The Society for World Wide Inter-bank Financial Telecommunications
(SWIFT) is an important mode of trading in a foreign exchange market. It is an
international bank communications network that links electronically all brokers
and traders in foreign exchange market.

1.7 PARTICIPATIONS IN THE FOREIGN EXCHANGE

MARKET
Different categories of participants take part in the foreign exchange
market. They are as follows:
DEALERS:
Banks and non-banks agencies are as known as dealer in foreign exchange
market. They take part in the market. They are the market makers. They
actively deal in foreign exchange for their own accounts. They buy and sell
major foreign currencies on a continuous basis. They trade with other banks
and other centers in the world. They get profit from buying and selling foreign
exchange at a bid price. There are competitions among these dealers worldwide
which has made this market efficient and vibrant.
INDIVIDUALS AND FIRMS:
Exporter and Importers, International and portfolio Investors, MNCs,. Tourists
and other individuals use foreign exchange market to facilitate the execution of
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FOREIGN EXCHANGE MARKET OF INDIA

commercial or investment transactions. The firms which operate internationally

have to pay their suppliers, workers and other related parties in foreign
currencies. They convert their currency into foreign currency for these
payments. They also convert their foreign currency earning into home currency
trading. Some of these participants use the foreign exchange market for
hedging foreign exchange risks.
BROKERS:
These are the agents who bring together the suppliers and buyers of Foreign
currency. They are specialized in certain currency such as American Dollar,
British Pound Sterling and Deutsche Mark. They Provide information on the
prevailing and future rate of exchange, maintain confidential data participation,
help banks to keep at minimum contracts with other traders.

CENTRAL BANK AND TREASURIES:

Central Bank and treasuries also participate in the foreign exchange market for
the purpose of buying and selling countrys foreign exchange reserve. They
also aim at influencing the value of their own currencies in accordance with the
priorities of the national economic planning. They also trade in currencies for
the purpose of affecting exchange rates. Government deliberately attempts to
alter the exchange rate between two currencies by buying one and selling the
other currency. This is called intervention. The amount of currency intervention
varies country to country.
SPECULATORS AND ARBITRAGERS:
Speculators and Arbitragers trade in the foreign exchange market in their Own
way and making profit through normal and speculative transactions. A large
portion of speculation and arbitrage takes place on behalf of Major Banks.
Speculations buy and sell currencies solely to earn profit From anticipated
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FOREIGN EXCHANGE MARKET OF INDIA

changes in exchange rates. Currency speculation is also Combined with

speculation in short-term financial instruments. Its is Possible to buy foreign
currency in one market at a lower rate and sell it in another market at a higher
rate. This is done by the arbitragers.

1.8 EXCHANGE RATES:

There are different types of exchange rates used in the Indian Foreign
Exchange Market. These are given below.
1. MERCHANT RATE:
The rate at which the foreign exchange dealing takes place between a Bank and
the merchant business in known as the Merchant Rate. Cash Transaction or
spot transaction is the contract for buying or selling foreign exchange, which
is agreed and executed on the same day.
2. INTER BANK RATE:
The rate quoted between the banks is knows as inter bank rate or base rate.
Two types of rates are quoted in India. One is T.T Buying Rate and the other is
Bill Buying Rate. Telegraphic transfer (TT) simply implies that a bank without
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FOREIGN EXCHANGE MARKET OF INDIA

any delay receives the foreign exchange proceeds. It is between 0.0025 percent
and 0.08 percent. The rate applied on the purchase of foreign bills is knows as
bill buying rate. The rate quoted has to take the transit period, which would be
the inter-bank rate for one month forward since there is no rate for 15 days
forward. In the case of usance bills, the usance period plus the tansit period has
to be reckoned. The bills buying rate is loaded with forward margin that is
available for period in multiple of a month.
3. NOMINAL EXCHANGE RATE:
The price if one country in terms of other currency is called nominal Exchange
rate. It is the rate prevails at a given time. For example, the Rate between
Indian Rupee and U.S dollar is say Rs, 45. It means one U.S dollar is equal to
Rs.45. The nominal rate is presented in an index from. A rise or fall in nominal
rate not necessarily imply that the country has become more competitive or less
competitive in the inter-national markets.

4. REAL EXCHANGE RATE:

The rate that measure the purchasing power of the currency and gives an idea
whether the exchange rate is competitive in international markets is called as
Real Exchange Rate. It is obtained by adjusting the nominal exchange rate for
relative prices between the two countries.
5. EFFECTIVE EXCHAGE RATE:
Effective Exchange rate is a measure of appreciation or depreciation of a
currency against the weighted basket of currencies with whom the country
trades. Real Effective Rate changes without any changes in exchange rate. It
can appreciate due to the reduction of non-tariff barriers that makes import
cheaper. On the other hand, this rate can depreciate due to import liberalization
which has the effect of removing the difficulties in the availability of imported
inputs.
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FOREIGN EXCHANGE MARKET OF INDIA

1.9 MANAGEMENT OF EXCHANGE RATE:

The exchange rate management depends upon the management of the Domestic
economy of a country. There are two types of exchange rate Management
system that can be used by a Government. These are as follows:
1. FIXED RATE SYSTEM:
A country may follows a fixed rate system or a floating rate system. Under the
fixed rate system, Gold standard, Bretton woods, pegged rate and currency
board can be used by a country under the gold standard system of exchange rate
management, a countrys money supply is linked directly to the gold reserve
owned by its central bank. Notes and Coins can be exchanged for gold at any
time. Under the Bretton woods system, the countries are allowed to devalue
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FOREIGN EXCHANGE MARKET OF INDIA

their currencies under certain conditions with persistent balance of payments

deficits.
The International Monetary Fund was created to lend the members the gold or
foreign currencies to help the countries to overcome their balance of payment
crisis and thereby avert devaluation. Under the pegged rate system a country
decides to hold the value of its currency, usually with the trading partner. A
currency board is a particular type of peg rate system of exchange rate
management. The board takes the place central banks, issues currencies only
to the extent that each unit of currency is backed by an equivalent amount of
foreign currency reserve.
2. SEMI-FIXED RATE SYSTEM:
The exchange rate system takes the form of managed float. Under this System,
Bands, Target Zones, Pegs and Baskets and the crawling peg are Used by a
country. The Central Bank is responsible for adjusting the Interest rates to keep
the exchange rate within the band. The exchange Rate is allowed to stay and
float within a certain band. Target Zones are Similar to bands excepting that
the Governments commitment is non- Binding. The Government may interfere
and trade within a certain range against another currency.
The exchange rate of a countrys currency is pegged to basket of currencies
rather than to just a single currency. Setting the peg as the average exchange
rate against several currencies helps the country from the problem of variation
in the value of domestic currency on account of variation in the value of
particular currency. Under the crawling peg, the Central bank may allow the
depreciation of the currencys exchange rate.
3. FLOATING RATE SYSTEM:
Under this system, the exchange rates allowed to move with the market force .
Several Countries have been following floating rates. The exchange rates are
not the target of monetary policy. The Government and central bank use their
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FOREIGN EXCHANGE MARKET OF INDIA

policies to achieve other goal such as stable domestic prices and economic
growth.

1.10 GLOBAL FOREIGN EXCHANGE MARKET:

The Global Exchange Market is the oldest, biggest, most active and most
Liquid market in the world. It is the fastest growing market, which has
Geographical spread. The global financial market is an informal, electronically
Linked network of big banks, brokers and dealers. It has been dispread
throughout The world in big as well as small financial centers. The leading
financial markets are London, New York, Paris, Zurich, Tokyo, Milan and
Frankfurt. Trading take place 24 hours a day by telephones, telex, fax, display
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FOREIGN EXCHANGE MARKET OF INDIA

monitors and satellite communication network which is known as society for

World Wide International Financial Tele-communications (SWIFT). It is a
computer-based communication System. Each participating banks has a
separate Foreign Exchange Trading room and most transaction is based on
oral communication followed by written documents.
There is an informal code of moral conduct which has given a status of a Bond
to the word given by exchange dealers. The foreign exchange market At global
level operates on very narrow spreads between buying and selling Prices. The
spread can be smaller than a 10th of a percent of the value of currency Traded.
The spreads are about onefiftieth or less of the spread faced in banks Notes
by international travelers. However, the volumes of transaction involved are
Huge and therefore, the traders in the global financial market can make huge
Profits or losses

1.17 FOREIGN EXCHANGE RISKS:

Foreign exchange business has become very important these days not Only for
companies and banks but also from the, countrys view point The large portion
of a banks bottom line comes from its treasury operation The risks related to
foreign exchange are many and are mainly on account of the Fluctuations in
foreign currency.

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CAUSES FLUCTUATION IN FOREIGN CUREENCY:

1) Foreign exchange rates are influenced by domestic as well as

International factors and

happening.
2) Foreign exchange dealing cross national boundaries and rates move On the basis of
governmental regulations, fiscal policies, political instabilities and a variety of other causes.
3) Foreign exchange rate movements, like the stock market, are influenced by settlements that
may not always be logical.
4) Foreign exchange is traded 24 hours a day at different markets and dealers cannot be in control
at all times.
5) The rating of credit agencies can affect the exchange rate. For instance, when Indias foreign
exchange rating was downgraded by Moodys in the mid-1990, the value of the rupee fell.
Rate move instantaneously and very fast. A hesitation of a few seconds or minutes can change
profi to a loss and vise-versa.

TYPES OF FOREIGN EXCHANGE RISKS:

Risks associated with foreign exchange may be broadly classified as:

Transaction Risk
Position Risk
Settlement or Credit Risk
Operational risky , Sovereign Risk
Cross-country Risk
TRANSACTION RISK:
Let us assume that an Indian company invoices an export consignment of US$
1 Million and then for the period between the contract date and the date Of
receivable, the exporter has an exporter has an exposure of US$ 5 Million. If
the US dollar was to appreciate by 10% against the Indian rupee during this
Period then there is a realized gain of 10% on the exposure. Thus a change in
the Value of the US dollar may lead to cash gain/loss to the company. In short,
Transaction exposure or risk is the possibility of incurring exchange gains or
losses Upon settlement at a future date on transaction already entered into and
Denominated in a foreign currency.

POSITION RISK:
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Bank dealing with customer continuously, both on spot and forward basis,
result in position being created in the currencies in which these transaction are
denominated . A position risk occurs when a dealer in a bank has an
overbought (long) or an oversold (short) position. Dealers enter into these
position in Anticipation of a favorable movement.
SETTLEMENT OR CREDIT RISKS:
It is important to differentiate between pre-settlement risks and Settlement
risks.
PRE-SETTLEMENT RISK:
Pre-settlement risk means that a customer, with whom the bank has a contract,
may default on a contractual obligations before settlement of the contract. This
risk exist on foreign exchange contract. For instance, in the case of a forward
sale contract with counterparty, the bank may cover its exposure by way of a
forward purchase with a second counterparty. As a result of the default of the
first counterparty, the bank will have an exposure due to the forward purchase
of foreign currency. This exposure will, in turn be covered by a replacement
contract whose Price may be unfavorable. In short, this risk is the economic
cost of replacing the defaulted contract With another one plus the possibility
that the replacement cost may increase due to future volatility.
SETTLTMENT RISKS:
Settlement risk is the risk of a counterparty failing to meet its obligations In a
financial transaction after the bank has fulfilled its obligations on the Date of
settlement of the contract. Settlement risk exposure potentially Exist in foreign
exchange or local currency money market business.
MISMATCH OR LIQUIDITY RISK:
In the foreign exchange business it is not always possible to be in an ideal
Position where sales and purchases are matched according to maturity And
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FOREIGN EXCHANGE MARKET OF INDIA

there are no mismatched situations. Some mismatching of maturities is in

general unavoidable.
For example, a customer may want a forward contract to mature on an Odd
date like 8 January. In the Interbank market counterparty may not be Available
for the precise date in question. It may, therefore become. Necessary to cover
the forward sale to the customer, delivery 8 January, By making purchase of the
currency in the market for the nearest possible Date for which counterparty
may be available
OPERATIONAL RISKS:
Operational risks are related to the manner in which transactions are Settled or
handled operationally. Some of these risks are discussed below:
a) DEALING AND SETTLEMENT:
These functions must be properly separated, as otherwise there would be
inadequate segregation of duties.
b) CONFIRMATION:
Dealing is usually done by telephone/telex/Reuters or some other Electronic
system. It is essential that these deals are confirmed by written confirmation.
There is a risk of mistake being made related to amount, rate, value, date and
the likes.
c) PIPLINE TRANSACTION:
There are, at times faults in communication and often cover is not available for
pipline transactions entered into by branches. There can be delays in conveying
details of transactions to the dealer for a cover resulting in the actual position
of the bank beings different from what is shown by the dealers position
statement. The cumulative effect may be large (as they may not always match)
exposing the bank to the risks associated with open positions.

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d) OVERDUE BILLS AND FORWARD CONTRACTS:

The trade finance department of banks normally monitor the maturity of export
bills and forward contracts. A risks exists in that the monitoring may not be
done properly.
SOVEREOGN RISK:
Another risk which banks and other agencies that deal in foreign Exchange
have to be aware of is sovereign riskthe risk on the Government of a
country.
CROSS-COUNTRY RISK:
It is often not prudent to have large exposures on any country as that Country
may go through troubled times. In such a situation, the bank/entity that has an
exposure could suffer large losses. This happened in Japan when several
Japanese banks suffered immense losses when the Indonesian rupiah collapsed
in 1997 as did institutions in Hong Kong and the United States.

1.18. FOREIGN EXCHANGE MANAGEMENT RISK:

The foreign exchange risk management policy of a country generally Defines
instruments in which the bank is authorized to trade, risk Limits commensurate
with the banks activities, regularity of reports To management, and who is
responsible for producing such reports.
The main points that are considered in a risk management policy are:
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FOREIGN EXCHANGE MARKET OF INDIA

Open position limits commensurate with customer driven turnover, and the banks appetite for
market risk.
Separate limits to be allocated for each currency, together with an overall cap limit.
Where a bank trades with counterparty other than members of Their own group located in
select countries, settlement and country Limits should be addressed and clearly defined.
Forward foreign exchange mismatch limits.
List of approved instruments. Use of foreign exchange derivatives.
Monitoring and reporting system. Recording and follows up of limit
Excesses.
Impact on P&L of an adverse 10% movement is exchange rates on
Maximum permitted exposure.
Imposition of a Stop Loss limit to restrict or prevent any future
Trading other than client deals and hedging.

OBJECTIVE

1) To study the History, Function and Nature of Foreign Exchange Market.

2) To study the Organization, Participants and RBI intervention in Foreign Exchange
Market.
3) To study the Foreign Exchange Rate, Concept, and Policy of Foreign Exchange Rate in
India.
4) To study the Foreign Exchange Rate Policy till 1991 and since 1991.

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RESEARCH DESIGN

Primary

Secondary

Interview

Books

Telephonic Interview

Working Paper

Mail survey

Web Sites

2.1 METHOD OF DATA COLLECTIONS

Primary Method:
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FOREIGN EXCHANGE MARKET OF INDIA

Primary data are those which are collected a fresh and for the first time and
thus happen to be original in character.
Methods of Primary research:

Interview Method
Telephone Interview
Mail Survey
Questionnaire

Personal Interview:
Personal interview method requires a person known as the interview asking
questions generally in a face-to-face contract to the other persons to persons.

The personal interview of the concerned employee of the banks was conducted
which help to get a clear idea about the products, Pricing, Placing, Promotion
of different banks. The interview was conducted with help of structure
questionnaires containing open and close end questions give more scope for
quantitative and qualitative information for better conclusions.
Secondary Method:
Secondary data means data that are already available i.e. they refer to the data
which have already been collected and analyzed by some else.
Published secondary data was used to get an overall idea about the growth of
services marketing in banking sector after globalizations with the help of
source like:

Books
News Paper
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FOREIGN EXCHANGE MARKET OF INDIA

Website

Secondary research or desk research is so called because it is usually concerned

with the use if secondary data or information that is already available. This
means such data have already been collected and analyzed by someone else.
Such information has not been gathered afresh specially for any research
project. This information is inclusive of a wide range of material- Books,
Magazines, and Web Sites, Company report, Government statistics. Newspaper
and Journal articles to report worked out by commercial market research
agencies.
Books were used to get more information to known about the concept of
foreign exchange market. Magazines were refereed to take the on current
scenario of FOREIGN EXCHANGE MARKET.

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FOREIGN EXCHANGE MARKET OF INDIA

SUMMARY
Foreign Exchange Market in India is regulated through the exchange control
system instituted under Foreign Exchange Regulation Act 1973. Foreign
Exchange Market is a matter for the purchase and sale of foreign Currencies.
The need for a foreign exchange arises due to the presence of The multiple
currencies. RBI has an authority to enter into foreign exchange transaction both
on its own accounts and on behalf of the Government. It has authorized dealer
to carry out foreign exchange transaction. The participation in the foreign
exchange market are dealers, brokers, Individuals and Firms, Central Bank and
Treasuries and Speculators and Arbitragers. RBI determine the foreign
exchange regime, and surprises, monitors and control the foreign exchange
market with a view to create an active exchange market at important trading
centres with wide participants. For this purpose, the RBI is required to
intervene in this market from time to time.
The exchange rates used in Indian foreign exchange market are Merchant Rate
and Interbank Rate. Indian Rupees was devalued in 1948, 1966 and 1991. The
value of Indian Rupees per US dollar declined from Rs.3.3082 In 1948 to Rs.
25.98 in 1991. Indian Rupees was devalued

with a view to Promote

competitiveness of our exporters, to reduce unnecessary importer Minimize

incentives for capital flight, stabilizing the capital account and restoring
viability of our balance of payment position.
The freedom to convert one currency into other internationally Accepted
currencies is known as currency convertibility. Current Account Convertibility

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FOREIGN EXCHANGE MARKET OF INDIA

is the convertibility for current of capital Movements internationally. Tarapore

committee has recommended Capital Account Convertibility in 1991.
The Foreign Exchange Market different kind of risk like
a)
b)
c)
d)
e)
f)

Transaction Risk
Position Risk
Settlement Risk
Mismatch Risk
Optional Risk
Cross Country Risk etc.

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CONCLUSION
According to my conclusion that Foreign Exchange Market in India is Growing
rapidly. The Foreign Exchange in India is regulated by RBI Through the
exchange control department. There is various activities in Foreign Exchange
Market like hedging, Arbitrage and speculation etc. which play very important
role to maintain The trading activity and also to regulate the risk which arises
due to Foreign Exchange.
There are various policy measure which adopted by RBI in accordance With
the general policy laid down by government of India in consultation With the
bank. The RBI has authority to inter in to the Foreign Exchange Market to
Regulate the demand, supply, exchange rate in the market. There are various
type of change in exchange rate carried out by RBI to Regulate Foreign
exchange market like managed flexible exchange rate, LERMS, convertibility
of rupees etc. There are different kind of risk is face by trader in Foreign
Exchange Market. To minimize the risk RBI has taken various initiatives to
Minimize the risk in Foreign Exchange Market

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BIBLIOGRAPHY

BOOK:
A.D Mascarenhas, Dr. P.A. Johson, Business Economics- II Eight Revised
Edition, Publish by Manan Prakashan 2005, Pg. No. 230 to 231, 235 to 239.
A.D Mascarenhas, Dr. P.A. Johson, Dr. Lina R. Thatte, Sonali Chatterjee,
Policies and Prospectus of Indian Economy Fourth Revised Edition Publish by
for Manan Prakashan 2006, Pg. No.250 to 253.
Dr. P.K.Bandgar, Financial Market Second Revised Edition Publish by N.V.
Maroo for Vipul Prakashan Pg. No. 231 to 250.

WEBSITE:
www.foreignexchangemarketinindia.com

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