INTRODUCTION TO THE FOREIGN EXCHANGE MARKET

Personally, like many others I was also mistaken that it is a

business only for banks. I was surprised when a friend of
mine told me that this business is not only for banks and
companies. He was into this business and told me that is
earning good money. Later when logged on to my computer
and searched for forex I was nearly shocked to see that 30%
of forex industry was held by the individuals. 30% of $7
million industry means a big amount. Apparently, forex
market does not have any common points with what we
study in school but to a closer look I can say that in forex
market we can find informational, economic, marketing,
mathematical, psychological, and even geographical
elements. Thereafter, the foreign exchange market quickly
established itself as the financial market. Before the year
1998, the foreign exchange market was only available to
larger entities trading currencies.

ADMINISTRATION OF FOREIGN EXCHANGE

The legal framework for administration of exchange control

in India is provided by the Foreign Exchange Management
Act, 1999. Under the Act, freedom has been granted for
buying and selling of foreign exchange for undertaking
current account transactions. However, the Central
Government has been vested with powers in consultation
with Reserve Bank to impose reasonable restrictions on
current account transactions. The Foreign Exchange
Management Act,1999 (FEMA), has come into force with
effect from June 1, 2000.

The participation of central banks in the foreign exchange

markets for stabilising exchange rates is very important
because this infuses’ confidence in the functioning of forex
markets. Apart from RBI, the Foreign Exchange Dealers’
Association of India (FEDAI) plays an important role in the
development of foreign exchange markets in India.

The Reserve Bank of India:

The RBI is entrusted with monetary stability, the
management of currency and the supervision of the banking
as well as the payments system.

RBI manages the foreign exchange operations through two

departments, namely:
1. Department of External Investments and Operations,
2. Foreign Exchange Department.

Department of External Investments and

Operations:
The main activities of the department are management of
exchange rate of the Indian rupee, and management and
investment of foreign exchange reserves of RBI.
This primarily involves the following:
Exchange rate management:
The day-to-day movements in exchange rates are market-
determined. The primary objective of RBI is to maintain
stability in the foreign exchange market, meeting temporary
supply-demand gaps that may arise for various reasons, and
curbing destabilising and self-fulfilling speculative activities.
Reserves management:
The essential framework for reserves management as
regards currency, market and instruments for investment are
provided in the Reserve Bank of India Act, 1934. The overall
stance of RBI’s reserve management policy continues to be
risk-averse aiming at stable returns. The principal objectives
behind its approach continue to be safety and liquidity.
Within these parameters, return optimization dictates
operational strategies.

Foreign exchange department:

With the introduction of the Foreign Exchange Management
Act, 1999 (FEMA) with effect from June, 2000, the objective
of the Foreign Exchange Department has shifted from
conservation of foreign exchange to “facilitating external
trade and payment and promoting the orderly development
and maintenance of foreign exchange market in India.”
Foreign Exchange Dealers Association of India:
A self-regulatory body, FEDAI was set up in 1958 as an
association of banks dealing in foreign exchange in India. Its
major activities include framing of rules governing the
conduct of interbank foreign exchange business among banks
in relation to the public, and liaising with RBI for reforms and
development of the forex market.
Presently, some of the functions are as follows:
1. Setting guidelines and rules for forex business
2. Training of bank personnel in the areas of foreign
exchange business
3. Accreditation of forex brokers
4. Advising/assisting member banks in settling issues/matters
in their dealings
5. Represent member banks on government/RBI/other
bodies
6. Announcement of daily and periodical rates to member
banks.

Regulatory Framework for Foreign Exchange in India:

The following section briefly lists down regulatory
guidelines for:
1. Residents other than ADs,
2. Foreign Institutional Investors,
3. Non-resident Indians and Overseas Corporate Bodies,
4. Foreign Direct Investment and 
5. Interbank foreign exchange dealings.

TYPES OF FOREIGN EXCHANGE TRANSACTIONS

Forex transactions include all conversions of currencies that
may be done by a traveller on an airport kiosk or billion-
dollar payments made by financial institutions and
governments. The growth in globalization has led to a
massive increase in the number of foreign exchange
transactions in recent years.

The following are the types of forex transactions:

 Spot Transactions
This method of transaction is the fastest way to exchange
currencies. Spot transaction refers to the exchange or
settlement of the currencies by the buyer and seller within
two days of the deal without a signed contract. The Spot
Exchange Rate is the prevailing exchange rate in the
market.
 Forward Transactions
Forward transactions are future transactions when the
buyer and seller enter into an agreement of purchase and
sale of currency after 90 days. The agreement is framed
based on a fixed exchange rate for a definite date in the
future. The rate at which the deal is fixed is termed
as Forward Exchange Rate.

 Future Transaction
Future transactions also deal with contracts in the same
manner as forward transactions. However, in the case of
future transactions, standardized contracts in terms of
features, date, and size should be followed. At the same
time, regular forward transactions have flexibility and can
be customized. In future transactions, an initial margin is
fixed and kept as collateral in order to establish a future
position.
 Swap Transactions
Simultaneous lending and borrowing of two different
currencies between two investors are called swap
transactions. One investor borrows a currency and repays
it in the form of a second currency to the second investor.
Swap transactions are done to pay off obligations without
suffering a foreign exchange risk.
 Option Transactions
The exchange of currency from one denomination to
another at an agreed rate on a specific date is an option
for an investor. Every investor owns the right to convert
the currency but is not obligated to do so.

FOREIGN CURRENCY ACCOUNTS

Resident foreign currency (domestic) account

A Resident foreign currency domestic account can be
opened in the form of a non-interest-bearing account. The
RBI defines a resident as someone who is living in the
country for over 182 days. This can include foreigners who
are working or running a business in India.

Foreign currency non-resident account

A non-resident who is an OCI or NRI can open a foreign
currency non-resident account in India. The Foreign
Currency Non-Resident account is only allowed to be a
term deposit, versus a savings or current account for
residents. The term deposit is required to be a minimum of
1 year and have a maximum time of 5 years.

Exchange earners foreign currency account

An exchange-earners foreign currency account is a
specialized account for those earning in foreign currencies
especially through exports. It is a vehicle that allows
companies and individuals to save on fees by not having to
exchange their earnings into rupees.

MULTINANTIONAL BANKING
Multinational banking system is the system that a bank can
operate its banking system in any countries to follow the
rules and regulations of The Central Bank of those
countries. It is the bank physically operate in more than
one country.
In 1990, most countries undertook financial incorporation
by reducing impediments to cross border financial
transactions and an increased participation of foreign
banks in the local banking system. This inclination was
particularly prominent for Eastern Europe and the New
Member States where the foreign multinational banks
have become the dominant players in the local banking
system in this market.

Multinational banking encompasses a variety of activities

all over the banking system in the world. It includes trading
currencies, borrowing, and lending and financial
international trade. All these activities are delivered by the
variety of organizational forms. On the other hand,
multinational banks are different from other banks
because they have the internal capital market.

Theories of Multinational Banking

There are many reasons for that a domestic bank can
choose to become Multinational Banking System. We
know that the multinational bank always tries to fulfil the
client’s mind satisfaction. The drivers justifying entry may
differ depending upon the specific foreign market under
consideration or the external and internal rules and
regulations at point of time. There are some important
theories of multinational banking system.
The theories of multinational banking are –
Theories relating to growth and profit opportunities.
Theories concerning leveraging of strengths.
Theories pertaining to client activities.
Theories relating to risk management.
Miscellaneous theories of multinational banking.
All these theories are most important for a multinational
bank. It always follows all these theories.

Factors of Multi-nationalization of Banking

Multinational banks are that those banks are physically operates
in more than one country all over the world. If we see Citibank,
then we can understand. Citibank already operates their offices in
more than ninety countries all over the world. On the other hand,
international banks involve cross-border operations and they do
not set up their operations in other countries. So, I can say that
multinational banking system is different from international
banking system.

Multinational Bank and Globalization

There have been two distinct waves of growth of modern
multinational banking. The first wave occurred before the First
World War and the second wave occurred in the 1960s. Today the
activities of the multinational bank include,
Deal in foreign currencies, derivative securities, gold, and precious
metals
Participate in the Euro market
Borrowing and lending in the foreign currencies
Provision of trade finance
Trade in foreign securities markets
Provision of corporate finance across borders
All these services of activities include that are also performed by
the non-multinational banks.