foreign-exchange-market-1230373682311454-2

Foreign Exchange MarketForeign Exchange Market

By By Rajeev Kumar JhaRajeev Kumar Jha

Treasury DepartmentTreasury Department

Chinatrust Commercial Bank Ltd., New Chinatrust Commercial Bank Ltd., New Delhi BranchDelhi Branch

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A CommentA Comment

““There is no sphere of human influence in There is no sphere of human influence in which it is easier to show superficial which it is easier to show superficial

cleverness and the appearance of superior cleverness and the appearance of superior wisdom as in matters of currency and wisdom as in matters of currency and

exchange”exchange”Winston ChurchillWinston Churchill

House of Commons 1946House of Commons 1946

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Structure of the PresentationStructure of the Presentation

Basic Concepts, Terminologies, Instruments & Basic Concepts, Terminologies, Instruments & Mechanism.Mechanism.

Exchange Rate RegimesExchange Rate RegimesHistorical perspectiveHistorical perspectiveForeign Exchange Trading & rate quotationsForeign Exchange Trading & rate quotationsRole of Reserve Bank of India (RBI) in the FX Role of Reserve Bank of India (RBI) in the FX

Market. Market.

As per Foreign Exchange Act, (Section 2), As per Foreign Exchange Act, (Section 2), 1947.1947.(c)(c) "Foreign Currency""Foreign Currency" means any currency other means any currency other than Indian currency;than Indian currency;

(d)(d) "Foreign Exchange""Foreign Exchange" means includes any means includes any instrument drawn, accepted, made or issued under instrument drawn, accepted, made or issued under clause (8) of section 17 of the Banking Regulation Act, clause (8) of section 17 of the Banking Regulation Act, 1956, all deposits, credits and balance payable in any 1956, all deposits, credits and balance payable in any foreign currency, and any drafts, traveler’s cheques, foreign currency, and any drafts, traveler’s cheques, letters of credit and bills of exchange, expressed or letters of credit and bills of exchange, expressed or drawn in Indian currency but payable in any foreign drawn in Indian currency but payable in any foreign currency;currency;

BASIC CONCEPTS/TERMINOLOGIESBASIC CONCEPTS/TERMINOLOGIESForeign Currency vs. Foreign ExchangeForeign Currency vs. Foreign Exchange

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Financial MarketsFinancial Markets

Financial market is a place where Financial market is a place where Resources/funds are transferred from Resources/funds are transferred from those having surplus/excess to those those having surplus/excess to those having a deficit/shortage.having a deficit/shortage.

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Foreign Exchange MarketsForeign Exchange Markets

The market where the commodity traded is The market where the commodity traded is Currencies.Currencies.

Price of each currency is determined in term Price of each currency is determined in term of other currencies.of other currencies.

Exchange Rate is the price of one country's Exchange Rate is the price of one country's currency expressed in another country's currency expressed in another country's currency. In other words, the rate at which one currency. In other words, the rate at which one currency can be exchanged for another. currency can be exchanged for another. e.g. Rs. 48.50 per one USDe.g. Rs. 48.50 per one USD

Major currencies of the WorldMajor currencies of the World

USDUSDEUROEUROYENYENPOUND STERLINGPOUND STERLING

What is an Exchange Rate ?

What is a Foreign Exchange What is a Foreign Exchange Transaction ?Transaction ?

– Any financial transaction that involves more than Any financial transaction that involves more than one currency is a foreign exchange transaction.one currency is a foreign exchange transaction.

– Most important characteristic of a foreign Most important characteristic of a foreign exchange transaction is that it involves exchange transaction is that it involves Foreign Foreign Exchange Risk.Exchange Risk.

PARTICIPANTS IN THE FOREIGN PARTICIPANTS IN THE FOREIGN EXCHANGE MARKETEXCHANGE MARKET

All Scheduled Commercial Banks All Scheduled Commercial Banks (Authorized Dealers only).(Authorized Dealers only).

Reserve Bank of India (RBI).Reserve Bank of India (RBI). Corporate Treasuries.Corporate Treasuries. Public Sector/Government.Public Sector/Government. Inter Bank Brokerage Houses.Inter Bank Brokerage Houses. Resident IndiansResident Indians Non ResidentsNon Residents Exchange CompaniesExchange Companies Money ChangersMoney Changers

FIXEDFIXED PEGGEDPEGGED COMPOSITECOMPOSITE MANAGED FLOATMANAGED FLOAT FREE FLOATINGFREE FLOATING

FOREIGN EXCHANGE REGIMESFOREIGN EXCHANGE REGIMES

Components of a Standard Components of a Standard FX TransactionFX Transaction

Base CurrencyBase Currency (USD/INR)(USD/INR) ‘‘Dealt’ or ‘Variable’ CurrencyDealt’ or ‘Variable’ Currency Exchange RateExchange Rate AmountAmount Deal Date Deal Date Value DateValue Date Settlement InstructionsSettlement Instructions

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ValueValue Date ConventionsDate ConventionsCurrencies are traded both inCurrencies are traded both in ReadyReady andand forward forward

value datesvalue dates..

1) Ready: 1) Ready: Settlement on the deal date. e.g. IndiaSettlement on the deal date. e.g. India

2) Value Tom : 2) Value Tom : Settlement on next day. e.g. CanadaSettlement on next day. e.g. Canada

3) Spot Transaction : 3) Spot Transaction : Settlement usually in two working days.Settlement usually in two working days. In International FX transactions, Spot is the Standard value In International FX transactions, Spot is the Standard value

date.date.

Why Spot Date ?Why Spot Date ?

Time Zone DifferenceTime Zone Difference Herstat RiskHerstat Risk

4) Forward Transaction: 4) Forward Transaction: Settlement at some future date Settlement at some future date ahead of the spot.ahead of the spot.

FX Rate Quotation:FX Rate Quotation:

In the forex market rates are always quoted ‘two way’.In the forex market rates are always quoted ‘two way’.Two way quote gives both ‘Bid’ and ‘Offer’.Two way quote gives both ‘Bid’ and ‘Offer’.

e.g.e.g.USD/INR= 48.50 / 60 USD/INR= 48.50 / 60

Bid / OfferBid / Offer

‘‘Big Figure’: Big Figure’: Term referring to the first digits of an exchange rate. These figures are rarely Term referring to the first digits of an exchange rate. These figures are rarely change in normal market fluctuations and are usually omitted in dealer quotes. change in normal market fluctuations and are usually omitted in dealer quotes.

‘‘Pips (or Point): Pips (or Point): The smallest incremental move an exchange rate can make. The smallest incremental move an exchange rate can make.

‘‘Base CurrencyBase Currency’ Vs. ‘’ Vs. ‘Dealt CurrencyDealt Currency’’

Number of variable or dealt currency unit in one unit of base currency.Number of variable or dealt currency unit in one unit of base currency.

In international quotes base currency comes first.In international quotes base currency comes first.e.g. e.g. BC/VCBC/VC USD/INR= 48.50/60USD/INR= 48.50/60

Price maker Vs. Price TakerPrice maker Vs. Price Taker

The bank quoting the price is The bank quoting the price is ‘price maker’‘price maker’ or or ‘market maker’.‘market maker’.

The bank asking for the price or ‘quote’ is The bank asking for the price or ‘quote’ is the the ‘price taker’‘price taker’ or ‘user’. or ‘user’.

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RATERATE QUOTATION CONVENTIONSQUOTATION CONVENTIONSIN-DIRECT QUOTATION:IN-DIRECT QUOTATION:

““Price of one Unit of Foreign Currency in terms Price of one Unit of Foreign Currency in terms of Domestic Currency”of Domestic Currency”

e.g. USD/INR = 48.50/60e.g. USD/INR = 48.50/60

Buy One USD at 48.50Buy One USD at 48.50Sell One USD at 48.60Sell One USD at 48.60Spread 00.10Spread 00.10

In the international market, almost all In the international market, almost all currencies are quoted indirectly.currencies are quoted indirectly.

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RATE QUOTATION CONVENTIONSRATE QUOTATION CONVENTIONSDIRECT QUOTATION:DIRECT QUOTATION:““Price of one Unit of Domestic Currency in terms of Foreign Price of one Unit of Domestic Currency in terms of Foreign

Currency”Currency”

e.g. EURO=e.g. EURO= 1.2805/121.2805/12

Buy One Euro at 1.2805Buy One Euro at 1.2805Sell One Euro at 1.2812Sell One Euro at 1.2812SpreadSpread 0.0007 0.0007

Five Currencies are quoted in Direct TermsFive Currencies are quoted in Direct Terms

1) Pound Sterling1) Pound Sterling2) Euro2) Euro3) Australian Dollar3) Australian Dollar4) New Zealand Dollar4) New Zealand Dollar5) Irish Punt5) Irish Punt

In the international market, almost all the In the international market, almost all the currencies are quoted in terms of USD.currencies are quoted in terms of USD.

e.g.e.g.JPY=JPY= 105.78/82105.78/82

A visit to REUTERS ‘EFX=’ Page.A visit to REUTERS ‘EFX=’ Page.

FORWARD TRANSACTIONSFORWARD TRANSACTIONS

1.1. Out right sale/purchase of a currency against the Out right sale/purchase of a currency against the other for settlement at a future date at the other for settlement at a future date at the predetermined exchange rate. predetermined exchange rate.

2.2. Forward rates are quoted as premium or discount Forward rates are quoted as premium or discount over spot rate.over spot rate.

3.3. Forward rates depend upon interest rate Forward rates depend upon interest rate differential between the two currencies.differential between the two currencies.

4.4. Currency with higher interest rates is at discount Currency with higher interest rates is at discount wrt currency having lower interest rate.wrt currency having lower interest rate.

5.5. Currency with lower interest rates is at premium Currency with lower interest rates is at premium wrt currency having higher interest rate.wrt currency having higher interest rate.

Calculating Forward RateCalculating Forward Rate

Interest rate of USD = 1.25%Interest rate of INR = 6.00%Spot Rate = 48.50DB for INR = Actual/365DB for USD = Actual/360

Six month Forward Rate =spot rate (48.50) x (1+ .06*181/365)/(1+.0125*181/360)=59.87

FX SWAP TransactionFX SWAP Transaction

““An FX swap is a contract to buy an amount An FX swap is a contract to buy an amount of currency for one value date at an agreed of currency for one value date at an agreed rate, and to simultaneously resell the same rate, and to simultaneously resell the same amount of currency for a later value date, also amount of currency for a later value date, also at an agreed rate, to the same counter party”.at an agreed rate, to the same counter party”.

FX swap is essentially a ‘funding’ or ‘Money FX swap is essentially a ‘funding’ or ‘Money Market’ transaction and does not involve Market’ transaction and does not involve exchange risk. exchange risk.

– Foreign exchange transactions are settled through Foreign exchange transactions are settled through NostroNostro and and VostroVostro accounts. accounts.

NostroNostro: our account with banks abroad. Reserve Bank : our account with banks abroad. Reserve Bank of India (RBI) maintains various Nostro accounts in a of India (RBI) maintains various Nostro accounts in a number of countries.number of countries.

VostroVostro: their account with us. Many multilateral : their account with us. Many multilateral agencies (e.g. IMF, World Bank) maintain their Nostro agencies (e.g. IMF, World Bank) maintain their Nostro accounts at Reserve Bank of India (RBI). accounts at Reserve Bank of India (RBI).

– SWIFT (Society for Worldwide Interbank Financial SWIFT (Society for Worldwide Interbank Financial Telecommunications)Telecommunications)

Deals are done over Telephone, Deals are done over Telephone, REUTERS dealing system etcREUTERS dealing system etc

R E U T E R SR E U T E R S Dealing TerminalDealing Terminal– Industry Standard for FX trading.Industry Standard for FX trading.– Security guaranteed by Reuters Int.Security guaranteed by Reuters Int.– Password Protected.Password Protected.– Maintains record of all transactions.Maintains record of all transactions.

News TerminalNews Terminal– Domestic Market Data/ news available on line. Domestic Market Data/ news available on line. – Real Time Exchange Rate quotes of all major Currencies.Real Time Exchange Rate quotes of all major Currencies.– Data about Interest Rates (e.g. LIBOR)Data about Interest Rates (e.g. LIBOR)– Various Reserve Bank of India (RBI) pages on Various Reserve Bank of India (RBI) pages on

REUTERS.REUTERS.

Pre-Reform era till early 90s ( The fixed Pre-Reform era till early 90s ( The fixed ERM & Exchange Control Regime)ERM & Exchange Control Regime)

– Fixed ERM, with occasional devaluations.Fixed ERM, with occasional devaluations.– Reserve Bank of India (RBI)Reserve Bank of India (RBI) to fix its buying & selling to fix its buying & selling

rates for Authorized Dealers and their rates for customers.rates for Authorized Dealers and their rates for customers.– Residents not allowed to hold foreign exchange.Residents not allowed to hold foreign exchange.– Only ADs (Banks), allowed to deal in Fx.Only ADs (Banks), allowed to deal in Fx.– Fx available only for current account transactions. (goods & Fx available only for current account transactions. (goods &

services) and some other personal transactions viz. travel, services) and some other personal transactions viz. travel, education, medical treatment etc.education, medical treatment etc.

Pre-Reform era till early 90s Pre-Reform era till early 90s (The fixed ERM & Exchange Control Regime)(The fixed ERM & Exchange Control Regime)

– Reserve Bank of India (RBI) to buy and sell forex from and Reserve Bank of India (RBI) to buy and sell forex from and to ADs, at its buying and selling rates for Authorized Dealers.to ADs, at its buying and selling rates for Authorized Dealers.

– Reserve Bank of India (RBI) to provide forward cover to ADs Reserve Bank of India (RBI) to provide forward cover to ADs for importers and exporters as well as foreign currency loans for importers and exporters as well as foreign currency loans mobilized by corporates from abroad.mobilized by corporates from abroad.

– Exporters of goods and services, were bound to sell forex to Exporters of goods and services, were bound to sell forex to an AD at rates prescribed by Reserve Bank of India (RBI).an AD at rates prescribed by Reserve Bank of India (RBI).

– Elaborate system of reporting by ADs to Reserve Bank of Elaborate system of reporting by ADs to Reserve Bank of India (RBI).India (RBI).

Market liberalization. The decade of 90sMarket liberalization. The decade of 90s

– Early nineties marked an era of liberalization of foreign Early nineties marked an era of liberalization of foreign exchange market.exchange market.

– FCAs Scheme was launched for Resident Pakistanis. FCAs Scheme was launched for Resident Pakistanis. Banks were required to surrender their FC deposits Banks were required to surrender their FC deposits against purchase of forward cover from against purchase of forward cover from Reserve Reserve Bank of India (RBI)Bank of India (RBI)..

– Money Changers were authorized to Deal in foreign Money Changers were authorized to Deal in foreign exchange (Notes and TCs only).exchange (Notes and TCs only).

– Forward cover for imports and exports shifted to banks.Forward cover for imports and exports shifted to banks.– Forward cover for FC loans also transferred to banks Forward cover for FC loans also transferred to banks

(under certain rules and regulations).(under certain rules and regulations).

Post detonation crisis (May ’98) and Post detonation crisis (May ’98) and move towards market based ERM.move towards market based ERM.

– In early 98, India was making gradual moves In early 98, India was making gradual moves towards market based ERM.towards market based ERM.Third currency rates to be quoted by banks.Third currency rates to be quoted by banks.Reserve Bank of India (RBI) also stopped Reserve Bank of India (RBI) also stopped

giving customer’s buying and selling rate and giving customer’s buying and selling rate and gave a 1% band to the market, quoting its gave a 1% band to the market, quoting its buying and selling rates for ADs.buying and selling rates for ADs.

– The target was to put the currency onThe target was to put the currency on free float. free float.

Post detonation crisis (May ’98) and Post detonation crisis (May ’98) and move towards market based ERM.move towards market based ERM.

Detonation of May 98 changed the way things were Detonation of May 98 changed the way things were moving.moving.

Despite low reserves, Reserve Bank of India (RBI) made Despite low reserves, Reserve Bank of India (RBI) made the decision of going ahead with fx market reforms.the decision of going ahead with fx market reforms.

Phased approach was adopted for transition to free float.Phased approach was adopted for transition to free float.As a first step Two-Tier ERM was introduced in July 21, As a first step Two-Tier ERM was introduced in July 21,

1998.1998.Except for essential items (e.g. wheat l/cs) , the rest of Except for essential items (e.g. wheat l/cs) , the rest of

the trade transactions were settled through interbank the trade transactions were settled through interbank market. market.

Initially 50/50 , 80/20, FINALLY 95/05Initially 50/50 , 80/20, FINALLY 95/05

Post detonation crisis (May ’98) and Post detonation crisis (May ’98) and move towards market based ERM.move towards market based ERM.Two-tier was finally abolished in May 1999.Two-tier was finally abolished in May 1999.Currency was freely floated.Currency was freely floated.Regulations pertaining to current account Regulations pertaining to current account

transactions remained more or less unchanged. transactions remained more or less unchanged. However all transactions were to be done at However all transactions were to be done at interbank rate and every bank was to offer its own interbank rate and every bank was to offer its own rate to customers.rate to customers.

However, an unofficial narrow band was imposed However, an unofficial narrow band was imposed on banks, which remained there till July 2000. when on banks, which remained there till July 2000. when it was finally done away with.it was finally done away with.

The Demand Side of inter-bank marketThe Demand Side of inter-bank market– importers – buying foreign exchange to importers – buying foreign exchange to

finance their imports.finance their imports.– A host of regulations governing imports into A host of regulations governing imports into

India.India.– Out ward remittances for debt servicing.Out ward remittances for debt servicing.– Out ward remittances for services.Out ward remittances for services.– PTEQ and BTQ, Medical treatment etc.PTEQ and BTQ, Medical treatment etc.

Forex TransactionsForex Transactions


The Demand Side of inter-bank marketThe Demand Side of inter-bank market– Remittances on account of education abroad.Remittances on account of education abroad.– Remittances on account medical treatment.Remittances on account medical treatment.– Repatriation of profit of foreign controlled Repatriation of profit of foreign controlled

companies and ‘freight collection’ etc.companies and ‘freight collection’ etc.– Disinvestment through SCRA.Disinvestment through SCRA.– A host of other invisible payments.A host of other invisible payments.

The Supply Side of inter-bank marketThe Supply Side of inter-bank market– Exports – regulations governing export Exports – regulations governing export

receipts.receipts.– Home remittances.Home remittances.– Foreign Direct Investment.Foreign Direct Investment.– Capital account receipts.Capital account receipts.– Investment through SCRA.Investment through SCRA.– A host of other invisible receipts.A host of other invisible receipts.


Foreign Exchange RiskForeign Exchange Risk

Exposure to exchange rate movement. Exposure to exchange rate movement. 1.1. Any sale or purchase of foreign currency Any sale or purchase of foreign currency

entails foreign exchange risk.entails foreign exchange risk.2.2. Foreign exchange transaction affects the Foreign exchange transaction affects the

net asset or net liability position of the net asset or net liability position of the buyer/seller.buyer/seller.

3.3. Carrying net assets or net liability position Carrying net assets or net liability position in any currency gives rise to exchange in any currency gives rise to exchange risk.risk.

NET OPEN POSITION- (NOP)NET OPEN POSITION- (NOP)A measure of foreign exchange riskA measure of foreign exchange risk

•NOP is the Net Asset/Net Liability position in all FCs together (Both B/S & Off B/S).

•Net Asset Position is also called “LONG” or “Overbought “ position.

•Net liability Position is also called “SHORT” or “Oversold “ position.

•NOP is a single statistic that provides a fairly good idea about exchange risk assumed by the bank.

•Its major flaw is that FX exposures in third currencies remain hidden.

EXAMPLE (NOP)EXAMPLE (NOP) (USD in Mio)

Opening Position $ 0.00

Ready Purchases from Exporter $ 1.00

Fwd Purchases from Corporate (1.00 Euro) \ $ 0.90

Ready Sell to importer ( 60 Mio Yen) - $ 0.50

Fwd Sell to Corporate - $ 0.40

NET OPEN POSITION $ 1.00

Foreign Exchange ExposureFX Exposure is the higher of the long and short positions in FCs.EXAMPLE

Currency-wise NOP in equivalent INRCURRENCY SHORT LONGDollar -10Yen 10Euro -10Pound 10Total -20 20Net Open Position is 0 while exposure is 20.

Introduction to Inter-bank FX activitiesIntroduction to Inter-bank FX activities

Foreign Exchange Markets

Role of Reserve Bank of Role of Reserve Bank of India (RBI) and linkages India (RBI) and linkages

with economywith economy

RBI’s Role in the Forex MarketRBI’s Role in the Forex Market

To manage the exchange rate mechanism.To manage the exchange rate mechanism.

Regulate inter-bank forex transactions and Regulate inter-bank forex transactions and monitor the foreign exchange risk of the banks.monitor the foreign exchange risk of the banks.

Keep the exchange rate stable.Keep the exchange rate stable. Manage and maintain country's foreign Manage and maintain country's foreign

exchange reserves.exchange reserves.

• RBI has imposed foreign exchange exposure limits on banks (FE 12 of 1999).

• The limits are tied with the Paid up capital of the bank.

• Previously banks had NOP limit, which was based on foreign exchange volume handled by the bank.

RBI’s RoleRBI’s Role in the Forex Market in the Forex Market

TREASURYTREASURY OPERATIONS AT RBIOPERATIONS AT RBI

1.1. All Central Banks have treasuries to implement All Central Banks have treasuries to implement policy objectives vis a vis EXCHANGE RATE & policy objectives vis a vis EXCHANGE RATE & INTEREST RATESINTEREST RATES

2.2. Dealing room catered to the FX market onlyDealing room catered to the FX market only3.3. Money market was being looked after by the Money market was being looked after by the

Securities departmentSecurities department4.4. It soon became apparent that the two cannot It soon became apparent that the two cannot

work in isolation with each other as the linkage work in isolation with each other as the linkage between the money market & exchange market between the money market & exchange market became pronounced became pronounced

5.5. Finally the dealing room and securities Finally the dealing room and securities department were merged to form EDMD to from department were merged to form EDMD to from first ever Treasury of RBI.first ever Treasury of RBI.

Functions of DMMDFunctions of DMMDMarket MonitoringMarket MonitoringPro active monitoring of interbank MM & Pro active monitoring of interbank MM &

FX market by Front Office.FX market by Front Office.Prepare demand/supply forecast.Prepare demand/supply forecast.Gather data from various Sources.Gather data from various Sources.Real time feedback to management.Real time feedback to management.Real time remedial measures to remove Real time remedial measures to remove

distortions in the market.distortions in the market.

A day in the Front OfficeA day in the Front Office NOP report.NOP report. FX inflow/outflow statements.FX inflow/outflow statements. Oil payments,Oil payments, Forward transactions.Forward transactions. Market monitoring – Market Flows and their Market monitoring – Market Flows and their

impact on exchange rate.impact on exchange rate. Money Market liquidityMoney Market liquidity Forward ratesForward rates Market activity – if requiredMarket activity – if required Rates Preparation – M2M, Wtd. Avg, FCA Rates Preparation – M2M, Wtd. Avg, FCA

Conversion.Conversion.

Front Office ChallengesFront Office Challenges– Small Market SizeSmall Market Size– Lumpy paymentsLumpy payments– ‘‘Leads’ and ‘Lags’.Leads’ and ‘Lags’.– Historical trend of keeping long positions.Historical trend of keeping long positions.– The issue of ‘entries in transit’.The issue of ‘entries in transit’.

INTERVENTIONINTERVENTION To keep exchange rate in line with To keep exchange rate in line with

macro objectives RBI has to intervene macro objectives RBI has to intervene from time to timefrom time to time

Intervention is a process where FX is Intervention is a process where FX is sold or purchased to keep the right sold or purchased to keep the right amount of liquidity available in the FX amount of liquidity available in the FX market so that demand / supply market so that demand / supply equilibrium is maintainedequilibrium is maintained

Intervention can be in READY or Intervention can be in READY or FORWARD FORWARD

OTHER FX RELATED FUNCTIONSOTHER FX RELATED FUNCTIONS

OFFSITE MONITORINGOFFSITE MONITORING DAILY RATES FOR MARKETDAILY RATES FOR MARKET THIRD CURRENCY ACTIVITY FOR GoP THIRD CURRENCY ACTIVITY FOR GoP

PAYMENTSPAYMENTS RESERVE MANAGEMENTRESERVE MANAGEMENT

Off Site monitoring of banks Off Site monitoring of banks by RBIby RBI

Inputs of Inputs of Computerized Computerized

Reporting SystemReporting System (CRS)(CRS)All individual foreign exchange transactions

reported by each bank on daily basis on a floppy diskette

Amount

Type of Deal

Counter Party

CurrencyRate

Posting date

Maturity DateDeal DateMode of Deal


Reports from Reports from CRSCRS

Exposure ReportFE - 25 balances & other depositsNostro BalancesUn-reconciled interbank deals


Reports from CRS Reports from CRS Cont’d

Reports for research & statistical purposes

Business volume - banks/customers/currencyTypes of transactions/customers/currency

Broker wise market volume reportHistory of exchange rates - trend analysis

How does RBI manages How does RBI manages exchange rate in the exchange rate in the interbank market?interbank market?

• Non-Quantitative Tools• Quantitative Tools

Non-Quantitative ToolsNon-Quantitative Tools

• Moral suasion• facilitating large commercial

outflows• Relaxation in FEEL

Quantitative MeasuresForeign Exchange Exposure Limit (FEEL) Basically restricts the banks to keep a net asset

(long) or net liability (short) position in foreign currencies.

Presently FEEL for each bank is set at 10 %10 % of it’s paid up capital.

In the presence of FEEL, banks’ net purchases or net sales in foreign exchange on a given day have to be within their FEEL.

How does RBI manages How does RBI manages exchange rate in the exchange rate in the interbank market?interbank market?

Physical interventionPhysical intervention

• Direct selling or buying of foreign exchange by State Bank in the interbank market.

• Such sale/purchase can be in spot or forward value

• It can have two objectivesTo provide support to the market

for lumpy paymentsTo manage the Rs/$ parity

• Intervention may be direct or indirect. Currently RBI only indirectly intervenes in the market.

• RESERVE BUILDING

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Thank YouThank You

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