The Foreign Exchange Market

• Presented by Dr. S.N.L Das

University Professor and Dean, Faculty of Commerce & Business

Management Ranchi University, Ranchi

Foreign Exchange

• Foreign Exchange is a methods and instruments used to adjust the payment of debts between two nations that employ different currency systems. A nation’s balance of payments has an important effect on the exchange rate of its currency.

• Bills of Exchange, Drafts, Checks and Telegraphic orders are the principal means of payment in International transactions.

Foreign Exchange

• The rate of exchange is the price in local currency of one unit of foreign currency and it is determined by the relative supply and demand of the currencies in the foreign exchange market.

• Arbitrage : Buying or selling foreign currency in order to profit from sudden changes in the rate of exchange is known as Arbitrages.

Foreign Exchange

• The chief demand for foreign exchange within a country comes from importers from foreign goods, purchasers of foreign securities, government, agencies purchasing goods and services abroad and travelers.

Definition of Foreign Exchange market

• A market for converting the currency of one country into that of another country.

• An over the country market where buyers and sellers conduct foreign exchange business by telephone, internet and other means of communications. Also referred to as a “Forex Market”.

• A computerized communications network embracing all the major financial centres in the globe, where sellers and buyers of any national money can quickly and efficiently carry out any desired currency exchange.

Structure of Foreign Exchange market

Structure of Foreign Exchange market

• The world wide Forex Market is a 24-hours market, it is open virtually all the 24-hours of a day in at least one of the financial markets of the world.

• London, Zurich, Frankfurt, Bahrain, New York, Los Angles, Singapore, Hongkong, Tokyo, Sidney, etc.

The Foreign Exchange market in Indian Context

The Foreign Exchange market in Indian Context

• The Indian Rupee has been convertible on the trade account since August, 1994.

• Capital inflow on one side and the RBI on the other side have kept it sandwiched at 31.37 INR to the US$ since around August, 1992.

• But now the scenario has been changed. Now it is fairly easy to buy US$ 100 millions or so during the day.

The Foreign Exchange Transactions

•The foreign exchange market in India is growing in both volume and depth. Various kinds of transactions are facilitated by the Banks, both on a spot and on a forward tasks.

The Foreign Exchange Management Act, 1999 (FEMA)

* The Parliament has enacted the Foreign Exchange Management Act (FEMA), 1999 to replace the foreign exchange regulation act (FERA), 1973. This Act come into force on 1st day of June, 2000.

* To investigate provisions of the Act, the Centre Govt. has established the Directorate of enforcement with Directors and other officers as officers of the enforcement.

The Foreign Exchange Management Act, 1999 (FEMA),

Regulation & ManagementDealing in Foreign Exchange, etc.• Save as otherwise provided in this Act, Rules or

regulations made there under or with the general or special permission of the RBI, no person shall

• Deal in or transfer any foreign exchange, or foreign securities to any person not being an authorized person.

• Make any payment to or for the credit of any person resident outside India in any manner.

The Foreign Exchange Management Act, 1999 (FEMA),

Regulation & Management• Holding of foreign exchange, etc.

• Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

The Foreign Exchange Management Act, 1999 (FEMA),

Regulation & Management Current Account Transaction and Capital Account

Transaction• Any person may shall or draw foreign exchange to

or from an authorized person if such sale or drawl in a current or capital account transaction.

• Provided that the Central Govt. may, in public interest and in consultation with RBI impose such reasonable restriction.

Enforcement Directorate

• Pertains to the establishment of Directorate of Enforcement and the powers to investigate the violation of any provisions of Act, rule, regulation, notifications, directions or order issued in exercise of the powers under this Act. The Director have been empowered to take up investigations.

Enforcement Directorate• The Directorate of Enforcement is mainly concerned

with the enforcement of the provisions of the FEMA to prevent leakage of foreign exchange which generally occurs through the following malpractices.

1. Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments.

2. Acquisition of foreign currency illegally by person in India.

3. Unauthorized maintenance of accounts in foreign countries.

4. Illegal acquisition of foreign exchange through Hawala.5. Secreting of commission abroad.

Organizational Set-Up

* The Enforcement directorate, with its HQs at New Delhi has seven zonal offices at Bombay, Calcutta, Delhi, Jalandhar, Madras, Ahmedabad and Bangalore. The zonal offices are headed by the Dy. Directors

* The Directorate has 9 sub zonal offices at Agra, Srinagar, Jaipur, Varanasi, Trivendrum, Calicut, Hyderabad, Guwahati and Goa, which are headed by the Asstt. Directors.

Presented by

Dr. S.N.L Das University Professor and Dean

Department of Commerce & Business Management Ranchi

University, Ranchi