FOREX IN INDIA

PRESENTED TO:
Prof. Shruti Kelkar

PRESENTED BY:
Sonal Ingawale 9182
Sujay Jadhav 9185
Priyanka Mhatre 9196
Kirti Multani 9198
Sadhana Ranjane 9204
 Foreign Exchange Market

Organisational setting within which individuals,

governments and banks buy and sell foreign
currencies
Only a small fraction of daily transactions in foreign
exchange involve trading of currency
Most foreign exchange transactions involve transfer
of bank deposits
 Definition of foreign exchange

Deposits, credits and balances payable in foreign

currency
Drafts, travellers’ cheques, letter of credit or bill of
exchange expressed or drawn in Indian currency but
payable in foreign currency
Drafts, travellers’ cheques, L/Cs, etc. drawn by
banks, institutions or persons outside India but
payable in Indian currency
The above definition is as per FEMA (1999)
 Exchange rate

Denotes the price or the ratio or the value at which

one currency is exchanged for another
Exchange rate is very dynamic
The foreign exchange market is round-the-clock
market due to different time zones
Major participants- central banks, commercial
banks, forex brokers, corporations, individuals
 Types of exchange rate

Ready/cash- Settlement of funds on the same day

(date of the deal).
Tom- Settlement of funds takes place on the next
working day of the date of the deal
Spot- Settlement of funds takes place on the second
working day following the date of the deal
 Types of exchange rate (contd…)

Forward- Delivery takes place on any day after the

date of the deal
In the forex market all rates that are quoted are
generally spot rates
When delivery takes place beyond the spot date then
it is a forward transaction and the forward rate is
applicable.
 SPECIAL ABOUT THE FOREX MARKET

It is by far the world’s largest financial market in terms of

transaction volume.
The daily transaction volume in all currencies is estimated to
amount to $3.98 trillion a day.
This is gigantic even in comparison to a very active equity
market like the New York Stock Exchange, which reaches an
average daily volume of approximately US$ 296 billion a day.
The forex market is also a market with extraordinarily low
transaction costs.
The quoted spreads in the forex inter-bank market can
become as low as 0.5 to 1.5 basis points
 WHERE DOES INDIA STAND IN GLOBAL FOREX MARKET

The foreign exchange market in India has grown into

the 16th largest market in the world in terms of total
daily turnover.
The daily turnover was US$34 billion in 2007.
The OTC derivatives segment register a daily average
turnover of USD 24 billion, which is 17th largest
among all countries.
The daily turnover has increased to US$48 billion in
2007-08.
 FOREX IN INDIA

Foreign Exchange Market in India works under the

central government in India and executes wide powers
to control transactions in foreign exchange.
The Foreign Exchange Management Act, 1999 or
FEMA regulates the whole foreign exchange market in
India.
Before this act was introduced, the foreign exchange
market in India was regulated by the Reserve Bank of
India through the Exchange Control Department, by
the FERA or Foreign Exchange Regulation Act, 1947.
FOREX IN INDIA CONTD……

Until 1992 all foreign investments in India required

previous approval of the government.
 The Foreign-Exchange Regulation Act rarely
allowed foreign majority holdings for foreign
exchange in India.
However, a new foreign investment policy
announced in July 1991, declared automatic approval
for foreign exchange in India for thirty-four
industries.
 RBI GUIDELINES

RBI has issued Authorised Dealers (AD) licenses to

banks, all India financial institutions and a few co-
operative banks to undertake foreign exchange
transactions in India
It has also issued Money Changer licenses to a large
number of established firms, companies, hotels,
shops, etc
RBI GUIDELINES (contd…)

Money changers help facilitate encashment of

foreign currencies of foreign tourists
Entities authorised to buy and sell foreign currency
notes, coins and travelers' cheques are called full
fledged money changers
Those authorised only to buy are called restricted
money changers
 FOREIGN EXCHANGE DEALER’S
ASSOCIATION OF INDIA

Foreign Exchange Dealer's Association of

India (FEDAI) was set up in 1958 as an
Association of banks dealing in foreign exchange in
India
Its a self regulatory body and is incorporated under
Section 25 of The Companies Act, 1956.
It's major activities include framing of rules
governing the conduct of inter-bank foreign
exchange business among banks in India.
 Presently some of the functions are as follows:
 Guidelines and Rules for Forex Business.
 Training of Bank Personnel in the areas of Foreign
Exchange Business.
 Accreditation of Forex Brokers
 Advising/Assisting member banks in settling
issues/matters in their dealings.
 Represent member banks on Government/Reserve Bank of
India/Other Bodies.
 Announcement of daily and periodical rates to member
banks.
 FEMA ACT 1999

Provides guidelines for the free flow of foreign

exchange regulation act.
Prohibits foreign exchange dealings undertaken
other authorized person.
Gives full freedom to ROI
To hold or own or transfer any foreign security or
immovable property situated outside India.
Similar freedom to NROI.
ROI is permitted to hold shares securities and
property.
 DETERMINANTS OF EXCHANGE RATE IN
INDIA

 The Bank Rate:

An increase in the bank rate indicates a tight monetary
policy, and is counter-reacted with an expectation that the
bank rate will decline in future.
This results in a depreciation of the domestic currency.
 Interest Yield Differentials:
An increase in the interest differential between domestic
securities and foreign securities indicates a rise in the gain
from capital inflows into the economy.
This is expected to result in a depreciation of the domestic
currency
 DETERMINANTS OF EXCHANGE RATE IN
INDIA contd…

Liquidity:
The growth rates of broad money and foreign
exchange reserves indicate increased liquidity in the
economy.
Such an increase in the liquidity is expected to cause
depreciation in the exchange rate
External Shocks
 INTEGRATION BETWEEN FOREIGN EXCHANGE
AND CAPITAL MARKETS IN INDIA

Some of the specific developments that have taken place during

the reforms process and might have impacted on the extent of
financial markets integration are:
 Indian equity market has continued to grow and has seen the relaxation of
foreign investment restrictions primarily through country deregulation.
 The issuance of American Depository Receipts (ADR ‟s) or General
Depository Receipts (GDR‟s) has facilitated the trade of foreign securities
on the NYSE, NASDAQ or on non-American exchanges.
 Allowing Indian Rupee to be determined by market forces (though at times
market intervention by Reserve Bank of India, the concerned authority, took
place).
 Gradual move towards full convertibility of Indian Rupee has had an impact
in the Indian capital market as international investors have invested
substantial amount (about US $15 billion) in Indian capital market.
RELATIONSHIP BETWEEN EXCHANGE RATE AND
STOCK PRICES IN INDIA:

Rupee and stock market are directly correlated with

each another.
If the sensitive index is moving up we will see
upward moment in rupee as because of improvement
in the companies value and goodwill in the market.
More and more people start investing in the
companies stocks and there will also be a huge
amount of capital inflow from the global investors.
which will rise the demand of rupee in the county’s
local exchange market.
 RELATIONSHIP BETWEEN INR and US Dollar

Indian rupee is quoted in dollar terms this relation of

rupee and dollar makes it more dependent on each
other.
There is a relationship seen in dollar and major
currencies of world, if dollar is falling against Euro or
against Euro or Yen then it will fall against another
major currencies.
The relation is dollar and rupee is inversely
proportionate to each another
 RELATIONSHIP BETWEEN INR and EURO

Euro is one of the major currencies in the global

Forex market and it is quoted in the terms of dollar.
On the other hand rupee is not directly related to
euro but is somehow because of being quoted against
common currency euro moment effect rupee also.
 FOREX DERIVATIVES IN INDIA

In respect of forex derivatives involving rupee,

residents have access to foreign exchange in both
both cross currency as well as foreign currency-rupee
 forward contracts
 foreign currency-rupee swap instruments
 currency options
Many corporate using currency derivatives for
hedging their foreign currency exposure
 VALUE AT RISK IN FOREX MARKET

Value at Risk (VaR) models plays a core role in the

risk management of today’s financial institutions.
A VaR model measures market risk by determining
how much the value of a portfolio could decline over
a given period of time with a given probability due to
the change in the market price of an asset.
There are four major categories of financial risk, viz.,
credit risk, operational risk, liquidity risk and market
risk.
 THE WAY AHEAD

Euro to become a key ingredient in setting the target

value of INR.
Trading in currency and its derivatives is likely to
increase and the involvement of foreign banks is
expected to go up.
From a foreign exchange-starved, control-ridden
economy, India has moved on to a position of $250
billion plus in international reserves with a firm
rupee and with far less forex control.
THANK YOU