174050571 final foreign exchange market of india 3

8/19/2019 174050571 Final Foreign Exchange Market of India 3

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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 ct, !"#$. It empo%ersthe governments to assume monopoly of all exchange transactions. The foreign

exchange rates are important parts of financial analysis. lthough, the exchange

rates is determined by the supply of and demand for foreign exchange the

complex forces of exports and imports are behind the %hole 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 &olkata, 'e% (elhi, )hennai, *angalore, +ondicherry, and )ochin.

In past, due to lack of communications facilities all these markets %ere not

linked. *ut %ith the developments of technologies, all the foreign exchange

markets of India are %orking collectively.

The foreign exchange markets India is regulated by the reserve banks of India

through the Exchange )ontrol (epartments. t the same time, Foreign

Exchange (ealers ssociations voluntary associations- also provide some help

in regulating the markets.

The uthoried (ealers uthoried by the R*I- and accredited brokers are

eligible to participate in the foreign exchange markets in India. /hen the

foreign exchange trade is going on bet%een uthoried (ealers and R*I or

bet%een the uthoried (ealers and the overseas banks, the brokers have no

role to play.

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+arts from the uthoried (ealers and brokers, there are some others %ho are

provided %ith the restricted rights to accept the foreign currency or traveler0s

che1ue. mong these, there are the authoried money changers, travels agents,

certain hotels and governments shops. The I(*I and E2IM *anks are also

permitted conditionally to hold foreign currency.

India0s Forex markets is a multi3 tiered markets %here the commercial banks

that 1uotes the domestic units against the 45. (ollars are at the centre of

activity. The rupees are not 1uoted against any other currency in these rates

discovering markets. *usinesses that need to transact in foreign currency, do so

%ith an authoried dealers generally a commercial banks- as they are not

permitted to deals directly %ith each other.

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1.1 MEANING:

Foreign Exchange markets are markets for the purchase and sale of foreigncurrencies. The need for a foreign exchange markets arises because of the

presence of the multiple currencies such as 45 (ollar, 4& +ound and 5terling,

Euro, Franc, 6en.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 R*I and authoried branches of

commercial banks in India.

Thus, a market for the purchase and sale of foreign currencies is foreign

exchange market. The ob7ectives 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 45 (ollars,

4& +ound8 Euro, Franc, 6en and the need for trading in these currencies.

Foreign Exchange Markets does not have a physical place. It is a markets%here trading in foreign currencies takes place through the electronically linked

net%ork of banks, brokers and dealers %hose functions is to bring together

buyers and sellers of foreign exchange. The markets is vastly dispersed

throughout the leading financial centre of the %orld such as 9ondon, 'e% 6ork,

+aris, :urich, msterdam, Tokyo, ;ong &ong.

1.2 DEFINATIONS:

Foreign Exchange Markets aims at permitting the transfer of purchasing po%er

denominated in one currency to another %hereby trading takes place. It

facilities a settlements bet%een countries in their respective currency units.

round "< percent and sales of assets. =nly five percents relate to the export3

import activities.

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The foreign exchange markets provides credit through specialied instruments

such as bankers0 acceptances and letters of credit. The markets helps the

importer and exporter in the foreign trade to minimie their risks of trade. This

provides hedging facilities to the traders.

This also enables the traders to transact business in the international markets%ith a vie% to earning a normal profit %ithout exposures to an expected change

in anticipated profits .

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1.3 HISTORY:

The %hole foreign exchange markets in India is regulated by the Foreign

Exchange Managements ct, !""" or FEM. *efore this act %as introduced,

the market %as regulated by the FER or Foreign Exchange Regulations ct,

!">#. fter independence, FER %as introduced as a temporary measure to

regulate the inflo% of the foreign capital. *ut %ith the economic and industrial

developments, the need for conversions of foreign currency %as left and on the

recommendations of the +ublic ccounts )ommittee, the Indian governments

passed the Foreign Exchange Regulations ct, !"#$ and gradually, this act

became famous as FEM.

4ntil !""$, India maintained an administrative exchange rate. From its

independence from the *ritish to !"#!, India had a fixed exchange rate against

the currency of its former rulers. This %as ho%ever done in consultations %ith

the International Monetary Fund. fter the collapse of the fixed exchange rate

system in !"#!, the currency %as linked to the *ritish pound, but not for long.

s other economics gained prominence in India0s economic relations, there %as

a need to maintain stability vis3?3vis %ith other currencies too !"#< on%ards,

the Indian rupees %as linked to a basket of currencies and %as devalued fromtime to time in order to maintain stability

Follo%ing India0s economics 9iberaliations in !""!, the currency %as

devalued by !@A and administered exchange rate lived side by side the market

too. lso, the Indian currency began being 1uoted against the 45 (ollars B a

change from its pound based 1uote. It %as only in !""$, that the rupees %ere

made to float. The Indian %as no% tradable in the market.

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1.4 FUNCTIONS OF FOREIGN EXCHANGE MARKETS:

TRANSFER OF PURCHASING POWER:-

International trade involves different currencies. India re1uire purchasing

po%er in the form of 4& pounds C- to purchase good D services from that

country. 5imilarly residents of other countries re1uire Indian currency or anyother acceptable currency for purchasing or investing in India. Foreign

Exchange Market helps transfer purchasing po%er bet%een 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 %ith

time period i.e. a bill of foreign exchange of " days can be discounted before

the due date. 5uch a provisions enables to obtain credit from the commercial

bank or authoried agents.

COVERAGE OF RISK :

Exporters and importers may cover the possible risk due to a future change in

exchange rate through for%ard exchange market. The for%ard exchange

market is %here buyers and seller agree to exchange currencies at some

specified day in the futureG. To understand the functioning of for%ard exchange

market %e must kno% the participants in this market. The economic agents

involved in the for%ard markets can be divided into three groups. They are as

follo%sHHHHH.(a HEDGERS:

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These are the agents usually firms- %ho enter the for%ard exchange market to

protect themselves agents the risk arising out of exchange rate fluctuations. To

understand the risk, let us assumes an Indian Importer %ho imports goods from

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dollar for spot rate Rs.>"- and sales for the agreed for%ard rate Rs.


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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 authoried dealers. The dealers have to obtain prior approvals of

the R*I %hile entering into the foreign exchange transactions except those %ho

are exempted from such prior approval. *esides the authoried dealer, the R*I

has granted t%o types of money changer0s licenses to certain established firms,

hotels, shops and other organiations to deal in currency notes, coins and

traveler0s che1ues to a limited extent.

The foreign exchange market in India is free to operate %ithin prescribed bands

of the R*I rate. The authoried banks are free to deal among themselves in any

currency in both spot and for%ard maturities against either the rupee or any

other foreign currency. The authoried dealer is expected to buy and sell

currencies to the R*I only after exhausting all avenues for meeting their need

and unloading currencies on the domestic market. The R*I has taken a number

of steps in recent year to develop an orderly, competitive and act as inter3bank

market in foreign currencies so that they are enabled to 1uote competitive rates

of exchange.

The foreign exchange markets in Mumbai, &olkata, )hennai and 'e% (elhi

are very active. The ob7ectives of R*I in respect of for%ard 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 R*I to

implements its polices %ith necessary po%er. The Novernment assumes a

monopoly of exchange transactions. The Novernment dictates the price at%hich it %ill buy and sell foreign exchange, as %ell as the amounts of and the

purpose for %hich 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.

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The exchange control act %as imposed under the foreign exchange Regulations

ct, !"#$ %hich came into force on !st Oanuary, !"#>. The FER is

administered by the R*I in accordance %ith the general policy laid do%n by the

Novernment of India in consultations %ith 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- ct,

!">#.

The main ob7ectives of the exchange are to regulate the demand for foreign

exchange for various purposes %ithin the limit set by the available limited

supply. 5ome of the important features of the foreign exchange in India are as

follo%sH..

I. GEOGRAPHICA$ DISPERSA$:

The foreign exchange market in India is %idely dispersed throughout the

leading financial centers. 4 is not to be found to be one place.

II. E$ECTRONIC MARKET:

Foreign exchange market in India is connected electronically. Trading in

foreign currencies takes place through the electronically linked net%ork 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 po%er

denominated in one currency to another. Firms of respective countries %ould

like to have their payments settled in their currencies.

INTERMEDIARY:

Foreign exchange market act as an intermediary bet%een buyers and seller

of foreign exchange. It provides a convenient %ay of converting the currencies

earned into currencies %anted to their respective countries.

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PROVISION OF CREDIT:

The foreign exchange market provides credit through specialied instruments

like baker0s acceptances and letter of credit. This credit is much helpful of the

trader in the international market.

MINIMI&ING RISKS:

Foreign exchange market help the importers and exporters in the foreign trade

and minimies their risks in international trade. This is done through the

provisions of P;edging0 facilities. earn a normal profit %ithout exposure to an

expected change in anticipated profit.

1.' ORGANISATIONS OF FOREIGN EXCHANGE MARKET

The day3to3day business of buying and selling foreign exchange is handled by

the foreign exchange department of scheduled commercial banks %ho are the

authoried dealers in foreign exchange in India. Reserve *ank of India plays an

important role in this market. R*I established the day0s 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 *ank is obliged to buy and

sell foreign against rupees on demand %ithout limit at fixed rates.

The activities of the exchange market are carried out predominantly through the

/orld /ide inter3bank market. The Trading is done on telephone, telex or the

5/IFT system. There are large numbers of players %ho assist in trading of

foreign currencies. Inter3bank market is an important segment of foreign

exchange market. It is the %holesale market %hich currency transactions are

completed. It is used mostly by the bankers. bout "


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immediate deliveries extended for a period of not exceeding t%o business days.

5pot transactions account for about L percent of the foreign exchange market.

In the for%ard 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 ! percent of the foreign exchange market. 5%ap market comprises

around $ percent of transactions the parties exchange a series of cash flo%s at

specified intervals. The simultaneous purchase and sale of a given amount of

foreign exchange for different value dates are earned out in the s%aps.

The 5ociety for /orld /ide Inter3bank Financial Telecommunications

5/IFT- is an important mode of trading in a foreign exchange market. It is an

international bank communications net%ork that links electronically all brokers

and traders in foreign exchange market.

1. PARTICIPATIONS IN THE FOREIGN EXCHANGE

MARKET

D)**+,+ #a+/0,)+ 0* a,)#)a a+ a, ) + *0,+)/ +5#a/+

6a,+. T+7 a,+ a *08809:

DEA$ERS:

*anks and non3banks agencies are as kno%n 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 o%n accounts. They buy and sell

ma7or foreign currencies on a continuous basis. They trade %ith other banks

and other centers in the %orld. They get profit from buying and selling foreign

exchange at a bid price. There are competitions among these dealers %orld%ide

%hich has made this market efficient and vibrant.

INDIVIDUA$S AND FIRMS:

Exporter and Importers, International and portfolio Investors, M')s,. Tourists

and other individuals use foreign exchange market to facilitate the execution of

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commercial or investment transactions. The firms %hich operate internationally

have to pay their suppliers, %orkers 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. 5ome of these participants use the foreign exchange market for

hedging foreign exchange risks.

"ROKERS:

These are the agents %ho bring together the suppliers and buyers of Foreign

currency. They are specialied in certain currency such as merican (ollar,

*ritish +ound 5terling and (eutsche Mark. They +rovide information on the

prevailing and future rate of exchange, maintain confidential data participation,

help banks to keep at minimum contracts %ith other traders.

CENTRA$ "ANK AND TREASURIES:

)entral *ank and treasuries also participate in the foreign exchange market for

the purpose of buying and selling country0s foreign exchange reserve. They

also aim at influencing the value of their o%n currencies in accordance %ith the

priorities of the national economic planning. They also trade in currencies for

the purpose of affecting exchange rates. Novernment deliberately attempts to

alter the exchange rate bet%een t%o currencies by buying one and selling the

other currency. This is called intervention. The amount of currency intervention

varies country to country.

SPECU$ATORS AND AR"ITRAGERS:

5peculators and rbitragers trade in the foreign exchange market in their =%n

%ay and making profit through normal and speculative transactions. large

portion of speculation and arbitrage takes place B on behalf of Ma7or *anks.

5peculations buy and sell currencies solely to earn profit From anticipated

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changes in exchange rates. )urrency speculation is also )ombined %ith

speculation in short3term financial instruments. Its is +ossible to buy foreign

currency in one market at a lo%er rate and sell it in another market at a higher

rate. This is done by the arbitragers.

1. EXCHANGE RATES:

There are different types of exchange rates used in the Indian Foreign

Exchange Market. These are given belo%.

1. MERCHANT RATE:

The rate at %hich the foreign exchange dealing takes place bet%een a *ank and

the merchant business in kno%n as the Merchant RateG. )ash Transaction or

spot transaction is the contract for buying or selling foreign exchange, %hich

is agreed and executed on the same day.

K. INTER "ANK RATE:

The rate 1uoted bet%een the banks is kno%s as inter bank rate or base rate.

T%o types of rates are 1uoted in India. =ne is T.T *uying Rate and the other is

*ill *uying Rate. Telegraphic transfer TT- simply implies that a bank %ithout

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any delay receives the foreign exchange proceeds. It is bet%een .K< percent

and .@ percent. The rate applied on the purchase of foreign bills is kno%s as

bill buying rate. The rate 1uoted has to take the transit period, %hich %ould be

the inter3bank rate for one month for%ard since there is no rate for !< days

for%ard. In the case of usance bills, the usance period plus the tansit period has

to be reckoned. The bills buying rate is loaded %ith for%ard margin that is

available for period in multiple of a month.

$. NOMINA$ 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 bet%een

Indian Rupee and 4.5 dollar is say Rs, >. REA$ EXCHANGE RATE:

The rate that measure the purchasing po%er of the currency and gives an idea

%hether the exchange rate is competitive in international markets is called as

Real Exchange Rate. It is obtained by ad7usting the nominal exchange rate for

relative prices bet%een the t%o countries.


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1.; MANAGEMENT OF EXCHANGE RATE:

The exchange rate management depends upon the management of the (omestic

economy of a country. There are t%o types of exchange rate Management

system that can be used by a Novernment. These are as follo%s

!. FIXED RATE SYSTEM:

country may follo%s a fixed rate system or a floating rate system. 4nder the

fixed rate system, Nold standard, *retton %oods, pegged rate and currency

board can be used by a country under the gold standard system of exchange rate

management, a country0s money supply is linked directly to the gold reserve

o%ned by its central bank. 'otes and )oins can be exchanged for gold at any

time. 4nder the *retton %oods system, the countries are allo%ed to devalue

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their currencies under certain conditions %ith persistent balance of payments

deficits.

The International Monetary Fund %as 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. 4nder the pegged rate system a country

decides to hold the value of its currency, usually %ith the trading partner.

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 e1uivalent amount of

foreign currency reserve.

2. SEMI-FIXED RATE SYSTEM:

The exchange rate system takes the form of managed float. 4nder this 5ystem,

*ands, Target :ones, +egs and *askets and the cra%ling peg are 4sed by a

country. The )entral *ank is responsible for ad7usting the Interest rates to keep

the exchange rate %ithin the band. The exchange Rate is allo%ed to stay and

float %ithin a certain band. Target :ones are 5imilar to bands excepting that

the Novernment0s commitment is non3 *inding. The Novernment may interfere

and trade %ithin a certain range against another currency.

The exchange rate of a country0s currency is pegged to basket of currencies

rather than to 7ust a single currency. 5etting 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. 4nder the cra%ling peg, the )entral bank may allo% the

depreciation of the currency0s exchange rate.

3. F$OATING RATE SYSTEM:

4nder this system, the exchange rates allo%ed to move %ith the market force .

5everal )ountries have been follo%ing floating rates. The exchange rates are

not the target of monetary policy. The Novernment and central bank use their

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

gro%th.

1.1< G$O"A$ FOREIGN EXCHANGE MARKET:

The Nlobal Exchange Market is the oldest, biggest, most active and most

9i1uid market in the %orld. It is the fastest gro%ing market, %hich hasNeographical spread. The global financial market is an informal, electronically

9inked net%ork of big banks, brokers and dealers. It has been dispread

throughout The %orld in big as %ell as small financial centers. The leading

financial markets are 9ondon, 'e% 6ork, +aris, :urich, Tokyo, Milan and

Frankfurt. Trading take place K> hours a day by telephones, telex, fax, display

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monitors and satellite communication net%ork %hich is kno%n as society for

/orld /ide International Financial Tele3communications0 5/IFT-. It is a

computer3based communication 5ystem. Each participating banks has a

separate PForeign Exchange Trading room0 and most transaction is based on

oral communication follo%ed by %ritten documents.

There is an informal code of moral conduct %hich has given a status of a *ond

to the %ord given by exchange dealers. The foreign exchange market t global

level operates on very narro% spreads bet%een buying and selling +rices. The

spread can be smaller than a ! th of a percent of the value of currency Traded.

The spreads are about oneQfiftieth or less of the spread faced in banks 'otes

by international travelers. ;o%ever, the volumes of transaction involved are

;uge and therefore, the traders in the global financial market can make huge

+rofits or losses

1.1 FOREIGN EXCHANGE RISKS:

Foreign exchange business has become very important these days not =nly for companies and banks but also from the, country0s vie% point The large portion

of a bank0s 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 F$UCTUATION IN FOREIGN CUREENCY:!- Foreign exchange rates are influenced by domestic as %ell as International factors and

happening.2 Foreign exchange dealing cross national boundaries and rates move =n 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 al%ays be logical.4 Foreign exchange is traded K> hours a day at different markets and dealers cannot be in control

at all times.% The rating of credit agencies can affect the exchange rate. For instance, %hen India0s foreign

exchange rating %as do%ngraded by Moody0s in the mid3!"", the value of the rupee fell.

Rate move instantaneously and very fast. hesitation of a fe% seconds or minutes can change

profi to a loss and vise3versa.

TYPES OF FOREIGN EXCHANGE RISKS:

Risks associated %ith foreign exchange may be broadly classified as

Transaction Risk

+osition Risk

5ettlement or )redit Risk

=perational risky , 5overeign Risk

)ross3country Risk TRANSACTION RISK:

9et us assume that an Indian company invoices an export consignment of 45C

! Million and then for the period bet%een the contract date and the date =f

receivable, the exporter has an exporter has an exposure of 45C < Million. If

the 45 dollar %as to appreciate by !A against the Indian rupee during this

+eriod then there is a realied gain of !A on the exposure. Thus a change in

the alue of the 45 dollar may lead to cash gainloss to the company. In short,Transaction exposure or risk is the possibility of incurring exchange gains or

losses 4pon settlement at a future date on transaction already entered into and

(enominated in a foreign currency.

POSITION RISK:

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*ank dealing %ith customer continuously, both on spot and for%ard basis,

result in position being created in the currencies in %hich these transaction are

denominated . position risk occurs %hen a dealer in a bank has an

overbought long- or an oversold short- position. (ealers enter into these

position in nticipation of a favorable movement.

SETT$EMENT OR CREDIT RISKS:

It is important to differentiate bet%een pre3settlement risks and 5ettlement

risks.

PRE-SETT$EMENT RISK:

+re3settlement risk means that a customer, %ith %hom 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 for%ard

sale contract %ith counterparty, the bank may cover its exposure by %ay of a

for%ard purchase %ith a second counterparty. s a result of the default of the

first counterparty, the bank %ill have an exposure due to the for%ard purchase

of foreign currency. This exposure %ill, in turn be covered by a replacement

contract %hose +rice may be unfavorable. In short, this risk is the economiccost of replacing the defaulted contract /ith another one plus the possibility

that the replacement cost may increase due to future volatility.

SETT$TMENT RISKS:

5ettlement 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 (ate of

settlement of the contract. 5ettlement risk exposure potentially Exist in foreign

exchange or local currency money market business.

MISMATCH OR $I=UIDITY RISK:

In the foreign exchange business it is not al%ays possible to be in an ideal

+osition %here sales and purchases are matched according to maturity nd

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there are no mismatched situations. 5ome mismatching of maturities is in

general unavoidable.

For example, a customer may %ant a for%ard contract to mature on an =dd

date like @ Oanuary. In the Interbank market counterparty may not be vailable

for the precise date in 1uestion. It may, therefore become. 'ecessary to cover

the for%ard sale to the customer, delivery @ Oanuary, *y making purchase of the

currency in the market for the nearest possible (ate for %hich counterparty

may be available

OPERATIONA$ RISKS:

=perational risks are related to the manner in %hich transactions are 5ettled or handled operationally. 5ome of these risks are discussed belo%

a DEA$ING AND SETT$EMENT:

These functions must be properly separated, as other%ise there %ould be

inade1uate segregation of duties.

! CONFIRMATION:

(ealing is usually done by telephonetelexReuters or some other Electronic

system. It is essential that these deals are confirmed by %ritten confirmation.

There is a risk of mistake being made related to amount, rate, value, date and

the likes.

# PIP$INE 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 conveyingdetails of transactions to the dealer for a cover resulting in the actual position

of the bank beings different from %hat is sho%n by the dealers0 position

statement. The cumulative effect may be large as they may not al%ays match-

exposing the bank to the risks associated %ith open positions.

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> OVERDUE "I$$S AND FORWARD CONTRACTS:

The trade finance department of banks normally monitor the maturity of export

bills and for%ard contracts. risks exists in that the monitoring may not be

done properly.

SOVEREOGN RISK:

nother risk %hich banks and other agencies that deal in foreign Exchange

have to be a%are of is sovereign riskQthe risk on the Novernment of a

country.

CROSS-COUNTRY RISK:

It is often not prudent to have large exposures on any country as that )ountrymay go through troubled times. In such a situation, the bankentity that has an

exposure could suffer large losses. This happened in Oapan %hen several

Oapanese banks suffered immense losses %hen the Indonesian rupiah collapsed

in !""# as did institutions in ;ong &ong and the 4nited 5tates.

1.1. FOREIGN EXCHANGE MANAGEMENT RISK:

The foreign exchange risk management policy of a country generally (efines

instruments in %hich the bank is authoried to trade, risk 9imits commensurate

%ith the bank0s activities, regularity of reports To management, and %ho is

responsible for producing such reports.

T+ 6a) 0) a a,+ #0)>+,+> ) a ,) 6aa/+6+ 08)#7 a,+:

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=pen position limits commensurate %ith customer driven turnover, and the banks0 appetite for

market risk. 5eparate limits to be allocated for each currency, together %ith an overall capG limit.

/here a bank trades %ith counterparty other than members of Their o%n group located in

select countries, settlement and country 9imits should be addressed and clearly defined. For%ard foreign exchange mismatch limits.

9ist of approved instruments. 4se of foreign exchange derivatives.

Monitoring and reporting system. Recording and follo%s up of limit

Excesses. Impact on +D9 of an adverse !A movement is exchange rates on

Maximum permitted exposure. Imposition of a 5top 9ossG limit to restrict or prevent any future

Trading other than client deals and hedging.

O"?ECTIVE

!- To study the ;istory, Function and 'ature of Foreign Exchange Market.

K- To study the =rganiation, +articipants and R*I intervention in Foreign Exchange

Market.

$- To study the Foreign Exchange Rate, )oncept, and +olicy of Foreign Exchange Rate in

India.

>- To study the Foreign Exchange Rate +olicy till !""! and since !""!.

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RESEARCH DESIGN

P,)6a,7 S+#0>a,7

I+,@)+9 "00

Telephonic Intervie% /orking +aper

Mail survey /eb 5ites

2.1 METHOD OF DATA CO$$ECTIONS

P,)6a,7 M+0>:

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+rimary data are those %hich are collected a fresh and for the first time and

thus happen to be original in characterH.

M+0> 0* P,)6a,7 ,++a,#:

Intervie% Method

Telephone Intervie%

Mail 5urvey

Suestionnaire

P+,0a8 I+,@)+9:

+ersonal intervie% method re1uires a person kno%n as the intervie% asking

1uestions generally in a face3to3face contract to the other persons to persons.

The personal intervie% of the concerned employee of the banks %as conducted

%hich help to get a clear idea about the products, +ricing, +lacing, +romotion

of different banks. The intervie% %as conducted %ith help of structure

1uestionnaires containing open and close end 1uestions give more scope for

1uantitative and 1ualitative information for better conclusions.

S+#0>a,7 M+0>:

5econdary data means data that are already available i.e. they refer to the data

%hich have already been collected and analyed by some else.

+ublished secondary data %as used to get an overall idea about the gro%th of

services marketing in banking sector after globaliations %ith the help of

source like

*ooks

'e%s +aper

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/ebsite

5econdary research or desk research is so called because it is usually concerned

%ith the use if secondary data or information that is already available. Thismeans such data have already been collected and analyed by someone else.

5uch information has not been gathered afresh specially for any research

pro7ect. This information is inclusive of a %ide range of material3 *ooks,

Magaines, and /eb 5ites, )ompany report, Novernment statistics. 'e%spaper

and Oournal articles to report %orked out by commercial market research

agencies.

*ooks %ere used to get more information to kno%n about the concept of foreign exchange market. Magaines %ere refereed to take the on current

scenario of F=REIN' E2);'NE MR&ET.

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SUMMARY

Foreign Exchange Market in India is regulated through the exchange control

system instituted under Foreign Exchange Regulation ct !"#$. Foreign

Exchange Market is a matter for the purchase and sale of foreign )urrencies.

The need for a foreign exchange arises due to the presence of The multiple

currencies. R*I has an authority to enter into foreign exchange transaction both

on its o%n accounts and on behalf of the Novernment. It has authoried dealer

to carry out foreign exchange transaction. The participation in the foreign

exchange market are dealers, brokers, Individuals and Firms, )entral *ank and

Treasuries and 5peculators and rbitragers. R*I determine the foreign

exchange regime, and surprises, monitors and control the foreign exchange

market %ith a vie% to create an active exchange market at important trading

centres %ith %ide participants. For this purpose, the R*I is re1uired 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 %as devalued in !">@, !"LL and !""!. The

value of Indian Rupees per 45 dollar declined from Rs.$.$@K In !">@ to Rs.

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is the convertibility for current of capital Movements internationally. Tarapore

committee has recommended )apital ccount )onvertibility in !""!.

The Foreign Exchange Market different kind of risk like

a- Transaction Risk b- +osition Risk c- 5ettlement Riskd- Mismatch Risk e- =ptional Risk f- )ross )ountry Risk etc.

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CONC$USION

ccording to my conclusion that Foreign Exchange Market in India is Nro%ing

rapidly. The Foreign Exchange in India is regulated by R*I Through the

exchange control department. There is various activities in Foreign Exchange

Market like hedging, rbitrage and speculation etc. %hich play very important

role to maintain The trading activity and also to regulate the risk %hich arises

due to Foreign Exchange.

There are various policy measure %hich adopted by R*I in accordance /ith

the general policy laid do%n by government of India in consultation /ith the

bank. The R*I 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 R*I to Regulate Foreign

exchange market like managed flexible exchange rate, 9ERM5, convertibility

of rupees etc. There are different kind of risk is face by trader in Foreign

Exchange Market. To minimie the risk R*I has taken various initiatives to

Minimie the risk in Foreign Exchange Market

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"I"$IOGRAPHY

"OOK:

.( Mascarenhas, (r. +.. Oohson, *usiness Economics3 II Eight Revised

Edition, +ublish by Manan +rakashan K

174050571 final foreign exchange market of india 3

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