Exchange control in India

Globalization has made the world economies to witness an immense surge

of financial flow across nations. There are various institutions and regulators at
international level who regulate the entire global financial environment. The
major players in this are International Monetary Fund, Bank for international
settlement, etc. They act as a watchdog of financial risks and uncertainties. To
improve the functioning of international financial system, financial supervision
and regulation is essential among the policy officials. The paralyses of global
economy after the World-War II, demanded a policy framework to restabilise
our global economy. World Bank and IMF thereafter were formed as a measure
to revive the devastated economies from the destruction caused due to the world
war.
Foreign Exchange Control is a technique wherein the state intervenes in the
buying and selling of exchanges, imports and exports activities of a country, to
correct adverse balance of payment. Here the government restricts free play of
inflow and outflow of capital and the exchange rate of currencies. The Reserve
Bank of India implements exchange control on a statutory basis. Initially
Foreign Exchange Regulation (FERA) Act, 1973 empowered the bank to
regulate investments as well as trading, commercial and other industrial
activities in India (other than banking) by foreign nationals and non-resident
individuals. At present India's foreign exchange control regime is governed by
the Foreign Exchange Management (FEMA) Act 2000, enacted with the
objective of facilitating external trade and payments, promoting the orderly
development and maintenance of the foreign exchange market in India and the
liberalization of economic policies. Under the present exchange control system,
The Reserve Bank of India has authorised foreign exchange departments of
commercial banks to handle the day-to-day transactions of buying and selling
foreign exchange. The RBI sets India’s exchange-control policy and administers
foreign exchange regulations in consultation with the Government of India.
Why countries peg their currencies with US$?
Countries have different reasons for pegging their currencies to dollar. Most
of the Caribbean islands (Aruba, Bahamas, Barbados, and Bermuda, to name a
few) pegged their currencies to the U.S. dollar because; their main source of
income is derived from tourism paid in dollars. Fixing currencies to the U.S.
dollar stabilizes the economy and makes them less volatile. It makes sense for
many small nations to fix their currencies, especially if the primary source of
revenues comes in the form of the dollar. This pegged strategy helps stabilize
and secure small economies which may otherwise be unable to
withstand volatility.
Major Fixed Currencies
 Bahrain
 Cuba
 Djibouti
 Oman
 Lebanon
 Panama
 Qatar
 Saudi Arabia
 UAE
These countries have no legal tender of their own. They consider US $ as
their legal tender
 Caribbean Netherlands
 Marshall Islands
 Ecuador
 Palau
 Zimbabwe
OBJECTIVES OF EXCHANGE CONTROL
Exchange control is a technique to achieve certain national objectives.
Although the exchange control is administered by the central authority like the
central bank, the exchange departments of the commercial banks etc; but the
day-to-day business of buying and selling foreign exchange is ordinarily
handled by private exchange dealers. For example, in India there are authorised
dealers and money changers, entitled to conduct foreign exchange business.
Correcting and improving BOP
Exchange control in executed to restore balance of payment disequilibrium.
This can be done by limiting import requirements. Only those commodities
which are necessary can be imported and unnecessary imports can be restricted
to limit the outflow of currency and foreign exchange. In this way by putting a
curb on imports a country can correct deficit in its BOP. Methods of exchange
control are classified into two groups: Direct method and indirect method. The
important objective of exchange control is to secure stability of fixed exchange
rate and to ensure balance of payments equilibrium.
Conservation of foreign exchange
 Exchange control is a measure to conserve foreign exchange reserves such
as gold, bullion foreign currencies etc. The main objective of foreign exchange
regulation in India, as laid down in the Foreign Exchange Regulation Act
(FERA), 1973, is the conservation of the foreign exchange resources of the
country and the proper utilisation thereof in the interest .of the national
development. Later FERA was replaced with FEMA Foreign Exchange
Management Act 2000 to liberalise and simplify foreign trade and payment
making it more flexible to promote orderly development and maintenance of
foreign exchange market. This is one of the important objectives .of foreign
exchange regulations of many other countries too.
Protection to Home Industries
Exchange control can also be employed as a measure to protect domestic
industries from foreign competition. The government resort to exchange control
technique in order to protect domestic trade and industries from foreign
competition. It induces the domestic industries to produce and export more with
a view to restrict import of goods.
To stabilise exchange rate
In a free exchange market, exchange rate is a fluctuating phenomenon. The
government may adopt exchange control to check fluctuations in the rate of
exchange. Fluctuation in exchange rate is a normal feature of free exchange
market and may cause disequilibrium in the economic life of a country.  Thus,
exchange control may be adopted to maintain exchange rates.
Check on Flight of Capital
Under the free exchange system there is the danger of huge outflow of
capital which may weaken the country’s economy. Especially erratic shifting of
capital tends to accentuate the disequilibrium in the balance of payment and it
also adversely affects future growth of a country. Exchange control, however,
offers a prompt and effective means to prevent such capital outflow.