Concepts of Export- Import & Forex Mechanism

Prof S P GargJaipuria Institute of Management , Jaipur

National Workshop on Export-Import & Forex Mechanism- 19 Oct, 2010

“Globalization is about producing where it is most cost

effective ,sourcing capital from where it’s cheapest and selling it where it is

most profitable.”N R Narayana Murthy

Toward A Better Future


Trade across the borders involve Payments and Receipts in Foreign Exchange

Banking System as intermediaries between foreign exchange inflows and outflows

Transfer of money and process of transfer Process of transfer varies


Forex Market As per BIS Study : In April 2010, Global

Forex Market Daily Turnover : $ 4 trillion (20% higher than in April 2007)

Significant Contributors: Mutual Funds, Pension Funds, Hedge Funds,Insurance Funds

Top Currencies : US$, Euro , Japanese YenEuro & Yen recorded highest rise and GBP

Recorded highest declineUSD –EURO : HIGHEST SHARE among all

currency Pairs (28%)National Workshop on Export-Import &

Forex Mechanism- 19 Oct, 2010

65% cross border transactions 35 % local transactions Indian Rupee share in global forex market

increased to 0.9% Share $ 27.4 billon per day USD-INR Pair Currency turn over more than

23%


IMPORT MECHANISM Good received in India and Forex remitted

out of India Importer is Purchaser of Forex and Bank is

SELLER Obligations on both


Banks deal in documents ,not in goods Buyer and Seller rarely meet each other Deal on the basis of documents and papers Possibilities of documents

misunderstood/misconstrued


Important publications of International Chamber of Commerce (ICC)):

UCPDC 600 : for Documentary Credit URC 522: for Collection Documents ISBP 681: SUPPORT PUBLICATION INCOTERMS 2000(13 Trade Terms) Now

2010

Role of FEDAI (Foreign Exchange Dealers’ Association of India) is a non-profit making body formed in 1958 with the approval of RBI


Export Credit Export finance is governed by various Acts and

guidelines issued by various departments /organisations:

EXIM Policy• Foreign Trade policy• FEMA (TO BE STUDIED IN CONJUCTION WITH

OTHER ACTS/GUIDELINES FEDAI Rules Reserve Bank of India Export Credit Guarantee Corporation (ECGC) rules• International Chamber of Commerce (ICC),

Paris(165 countries Members) KYC POLICY


Import Finance facilities are subject to the prevalent rules of the Banks/

RBI guidelines. The various facilities provided are:

Collection of import bill. Opening of Import L/Cs (Sight/ DA) Financing of import by way of Foreign Currency Loans Issuing Guarantees etc. on behalf of importers. COLLECTION OF IMPORT BILLS: LETTER OF CREDIT: granted to the importers after assessing their

requirement/ credit worthiness/ financial strength and other parameters.

BANK GUARANTEES: (Performance /Financial) on behalf of importers/ other customers issuance of

guarantees in favour of beneficiaries abroad.


Characteristics of foreign exchange market

An Over The Counter market: - No physical presence in the same

sense as a stock exchange or commodity market

- The participants deal among themselves and settle their transactions directly

- There is no exchange or clearing house


No single location – no barriers - FX market is not located in a single

building- No specific market place exists- FX market has few restrictions in this

modern world- FX market is global in nature / character- While the market does not exist at each

and every center in the world, it is accessible from any part of the world


foreign exchange:An expression to denote foreign currency

Also covers the method by which a currency of one country is exchanged for that of another.

Guidelines relating to foreign exchange management

All foreign exchange transactions are to be routed through Authorised Dealers for whom guidelines are issued by RBI under the provisions of Foreign Exchange Management Act .FEDAI governs operational aspects


Exchange rates fluctuate very frequently

Settlement of transactions normally

does not take place simultaneously

Highly liquid market


Authorised Dealers (AD) licences : AD I :banks, all India financial institutions

and a few co-operative banks to undertake foreign exchange transactions in India(87)

AD II: Money Changers licences alongwith other activities :Full Fledged/Restricted

ADIII: Institutional licences to a large number of established firms, companies, hotels, shops, etc


Maxims: Cause & Effect Relationship No one can receive money unless some one

pays Payment must always precede receipt. Credit is a natural corollary Location of Account The currency of the country never leaves

its borders where it is a legal tender. Transaction flow would take place for that

currency in that Country only.National Workshop on Export-Import &

Forex Mechanism- 19 Oct, 2010

Purchase and Sale : With reference to what a bank does All sales mean sale of foreign currency to

others All purchase mean purchase of foreign

currency from others Cover Operations: Squaring off the position


Transaction Date: The date on which a trade occurs

Ready or cash – To be settled on the same day

Tom – To be settled on the next working day to the date of transaction(1 day for Dollar/Canada )

Spot – To be settled on the second working day from the date of contract

Forward – To be settled at a date farther than the spot date


No of Days : 360/365 Days as Base In International Banking generally 360 days

for calculation purposes Calendar of Holidays Information to calculate maturity dates,

Value dates, follow up deliveries International Style of Amount : hundreds,

thousands, millions,billions


NOSTRO Account: Nostro is derived from the latin term "ours." our account with you A foreign currency account maintained by a

bank in India with a bank abroad BOI’s US$ ACCOUNT WITH CITI BANK


VOSTRO account: Vostro is latin for yours

Your account with us

A rupee account of a foreign bank (abroad) with a bank in India

CITI BANK RUPEE ACCOUNT WITH BANK OF INDIA


Role of Society for Worldwide Interbank Financial Telecommunication(S.W.I.F.T )

To provide communications platform, products and services that allow institutions to connect and exchange financial information securely and reliably.

To enable institutions to automate and standardize financial transactions, thereby lowering costs, reducing operational risk and eliminating inefficiencies from their operations.


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Concepts of Export- Import & Forex Mechanism

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