FOREX

MANAGEME
NT
 • Foreign Exchange can be the exchange of money or credit
in one country for money or credit of another country.
• A Foreign exchange market is a market in which
currencies are bought and sold. (Distinguished from a
financial market where currencies are borrowed and lent)
•  As per the Foreign Exchange Regulation Act of India,
Foreign foreign exchange means foreign currency and includes

Exchange  All deposits, credits and cheques, letters or credit and bills
of exchange, expressed or drawn in Indian currency but
payable in any foreign currency
 Any instrument payable, at the option of the drawee or
holder thereof or any other party thereto, either in Indian
currency or in foreign currency or partly in one and partly
in the other.
 Functions of Foreign Exchange Market

Transfer purchasing power  Provision of credit Provision of Heding Facilities

Transfer of purchasing power from
one country to another and from
one currency to another and
facilitating international trade and
capital movement.
Exporters and importers may get
pre shipment and post shipment
credit.
Covering of foreign trade risks, and
it provides a mechanism to
exporters and importers to guard
themselves against losses from
fluctuations in exchange rates.
 Exchange Control
• Refers to the control by the government or a centralized agency, of transactions involving
foreign exchange. 
• origin of 1930’s. 
• Introduced in India on September 3, 1939, on a temporary basis during the second world war.
• To control over foreign exchange transactions - on a statutory basis and the Foreign Exchange
Regulations Act of 1947 was enacted.
• Scope of exchange control in India has steadily widened and the regulations have become
progressed. Appraisals and reviews of policies and procedures have been undertaken and
modifications in the national policies.
• Fluctuations in forex reserves resulted in changes and developments in statutory bodies.
  Exchange Control

Foreign Exchange Regulations Act, 1973 was passed to replace the Act of 1947. 

The Foreign Exchange Regulations Act, 1973 (FERA) was reviewed in 1993 and several
amendments were enacted as part of the on-going process of economic liberalisation

Any transaction in foreign Exchange is governed by Foreign Exchange Management

ACT 1999.​

report in 1994 recommending substantial changes in the existing Act. The Foreign
Exchange Management Act, 1999 was introduced to provide the necessary change.

Reserve Bank of India principally controls the movement of the Foreign Exchange.

 Purpose of this is to consolidate and amend
the law regulating:

• certain payments
• dealings in foreign exchange and securities
•  import and export of currency, for the conservation of the
foreign exchange resources of the country. 
• proper utilization thereof in the interest of the economic
development of the country.
Objectives of foreign exchange control

For treating the For treating the

For stability of
overvaluation undervaluation
exchange rate
of currency of currency

For
For treating the For economic
encouraging
bop deficit planning
local industries
 Passed in 1973. Came into force on 1st
Jan 1974

FOREIGN OBJECTIVES
EXCHANGE
REGULATORY • To regulate payments and dealings in forex in
India.
ACT (FERA 1973) • To regulate import and export of currency and
(statutory) bullion
• To regulate holding of immovable properties
outside India
• To regulate employment of foreign nationals
• To regulate foreign companies
• To conserve forex resources.
 FOREIGN EXCHANGE REGULATORY ACT (FERA
1973) (statutory)

Residential
81 sections Rigid approach status Based on
citizenship.

Violation is Act authorizes

Punishment:
treated as only RBI to deal
imprisonment
criminal offence. with forex
 • On the recommendations of the Tarapore Committee.
FOREIGN • FEMA head office is also known as Enforcement
Directorate : Delhi
EXCHANGE
MANAGEME
Objectives
NT ACT 1. To facilitate external trade and payments in India
(FEMA 1999) 2. To help orderly management of forex market.

Applicability
1. Import and export of goods and services
2. Foreign currency and securities
3. Banking and financial services.
 • 7 chapters; 49 Sections
• Residential status based on the
condition: Stay in India for
FOREIGN 6months or more.
EXCHANGE
MANAGEMEN • Violation is considered as a civil
offense.
T ACT (FEMA
1999) • Punishment: Fine
• Imprisonment if not paid in 90days
 Authorized Dealers in Foreign Exchange -
Foreign Exchange Dealers Association of
India (FEDAI).

To protect the interest of the exporters,

importers, general public and also the
authorized

Foreign Exchange Was set up in 1958 as an Association of

Dealers Association banks dealing in foreign exchange in India.
of India (FEDAI)
Self regulatory body and is incorporated
under Section 25 of the Companies Act, 1956
Administrative set up of Forex in India
FUNCTIONS OF FOREIGN EXCHANGE DEPARTMENT
• Financing
Exports

• Furnishing
• Financing
Credit
Imports
Information

• Dealings In
• Remittance
Foreign
Facilities
Exchange
 • Exchange rate is determined by the monetary
authority.
Fixed exchange • Government (Central Bank) may fix the
rate exchange rate .
system/pegged  • To maintain the stability in the currency rate,
Exchange rate there is purchasing of foreign exchange by
system the central bank or government when the rate
of foreign currency increases and selling
foreign currency when the rates fall.
 Advantage
• Stability in foreign exchange that encourages foreign
trade.
• Stability in the value of currency - protects from
market fluctuations.
Fixed • Promotes foreign investment for the country.
exchange • Maintaining stable inflation rates in an economy.
rate system Disadvantage
• Constant need for maintaining foreign reserves in
order to stabilise the economy.
• Lack the flexibility that is required to bounce back in
case an economic shock engulfs the economy.
Flexible exchange rate system / floating exchange rate system

No intervention of the
Exchange rate
central banks or the
dependent on the
government in the
market forces of
floating exchange rate
supply and demand.
system.
 Advantages 
• No need to maintain foreign reserves in this
exchange system.
• Deficiencies or surplus in Balance of Payment
is automatically corrected in this system.
Floating Exchange Disadvantages 
Rate System • Encourages speculation that may lead to
fluctuations in the exchange rate .
• Fluctuations in exchange rates are too much it
can cause issues with movement of capital
between countries and also impact foreign
trade.
Managed floating
exchange rate system
• Combination of the fixed and floating
exchange rate systems. 
• Central banks intervene or participate in
the purchase or selling of the foreign
currencies.