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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 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.

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 export-import activities. The foreign exchange markets provides credit through specialized instruments such as bankers acceptances and letters of credit. The markets helps the importer and

FOREIGN EXCHANGE MARKET OF INDIA

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: 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

FOREIGN EXCHANGE MARKET OF INDIA

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 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.

FOREIGN EXCHANGE MARKET OF INDIA

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. 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

FOREIGN EXCHANGE MARKET OF INDIA

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. 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..

FOREIGN EXCHANGE MARKET OF INDIA

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. 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.

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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 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.

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1.7

PARTICIPATIONS MARKET

IN

THE

FOREIGN

EXCHANGE

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 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.

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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 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.

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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 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.

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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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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 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.

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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 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 policies to achieve other goal such as stable domestic prices and economic growth. Central bank may allow the depreciation of the

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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 monitors and satellite communication network which is known as society for World Wide International Financial Telecommunications (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

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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.

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 viseversa.

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

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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: 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

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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 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.

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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. 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.

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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 responsible for producing such reports. The main points that are considered in a risk management policy are: 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. To management, and who is

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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: 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:

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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 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

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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 is the convertibility for current of capital Movements internationally. committee has recommended Capital Account Convertibility in 1991. The Foreign Exchange Market different kind of risk like a) Transaction Risk b) Position Risk c) Settlement Risk Tarapore

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FOREIGN EXCHANGE MARKET OF INDIA

d) Mismatch Risk e) Optional Risk f) Cross Country Risk etc.

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FOREIGN EXCHANGE MARKET OF INDIA

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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FOREIGN EXCHANGE MARKET OF INDIA

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 Maroo for Vipul Prakashan Pg. No. 231 to 250. N.V.

WEBSITE: www.foreignexchangemarketinindia.com

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