UNIT - 1

Q. FEMA, origin&objectives.
Ans- FEMA is an act initiated to facilitate external trade and payments and to promote
orderly management of the forex market in the country. The older version had very strict
laws (for example, a person was assumed guilty unless proven otherwise.) All the
unnecessary restrictions were removed. The rules regarding foreign investments were
simplified to encourage more foreign investment in India and consequently ensure better
foreign cash flow. However, FERA was not in accordance with the pro-liberalization policies
of the Indian Government. Finally, in 1999 the FEMA was passed which replaced the FERA,
though certain provisions of FERA 1973 still exist under FEMA 1999.

Objectives-
● To facilitate external trade and payment
● • To promote orderly maintenance of the foreign exchange market In India.
● • Regulation of foreign capital in India.
● • To remove the imbalance of payment.
● • To make a strong and developed foreign exchange market.
● • Regulation of employment business and investment of non-residents.
● • To regulate foreign payments.

Q. Provisions of FEMA
Ans-
● It gives powers to the Central Government to regulate the flow of payments to and from a
person situated outside the country.
● All financial transactions concerning foreign securities or exchange cannot be carried out
without the approval of FEMA. All transactions must be carried out through “Authorised
Persons.”
● In the general interest of the public, the Government of India can restrict an authorized
individual from carrying out foreign exchange deals within the current account.
● Empowers RBI to place restrictions on transactions from capital Account even if it is
carried out via an authorized individual.
● As per this act, Indians residing in India, have the permission to conduct a foreign
exchange, foreign security transactions or the right to hold or own immovable property in
a foreign country in case security, property, or currency was acquired, or owned when the
individual was based outside of the country, or when they inherit the property from
individual staying outside the country.

Q. Foreign Exchange transactions- Foreign Exchange Transaction or “FX

Transaction” means a transaction providing for the purchase of an agreed amount in
one currency by one party such transaction in exchange for the sale by it of an
agreed amount in another currency to the other party to such transaction.
Q. Factors influencing the rate of foreign exchange.
Ans-

● Recession- During a recession, a country’s interest rates are likely to fall, thus decreasing its
chances to acquire foreign capital. This in turn weakens the currency of the country in question,
weakening the exchange rate.
● Speculation-Investors demand more of a country’s currency when its value is expected to
rise to make a profit in the near future. As a result, the value of the currency rises due to its
increased demand. Which in turn results in a rise in the exchange rate as well.
● Economic performance-One of the many factors that affect the economic performance
of a country is its political stability. A country, which has a stable political environment, attracts
more foreign investment and vice versa. An increase in foreign capital results in appreciation in the
value of its domestic currency.
● Terms of trade-Terms of trade are the ratio of the export prices of a country to its import
prices. When the export prices of a country rise at a greater rate than its import prices, its terms of
trade improves. This in turn results in higher revenue, higher demand for the country’s currency,
and an increase in the value of the currency.
● Government debt-This is the total national or public debt owed by the central government.
A country with a large amount of government debt is less likely to attract foreign investment and
acquire foreign capital, leading to inflation. This will result in an oversupply of the local currency,
thus diminishing its value.