Forex in India 1

8/8/2019 Forex in India 1

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FOREX IN INDIA

PRESENTED TO:

Prof. Shruti Kelkar

PRESENTED BY:

Sonal Ingawale 9182

Sujay Jadhav 9185

Priyanka Mhatre 9196Kirti Multani 9198

Sadhana Ranjane 9204


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Foreign Exchange Market

y Organisational setting within which individuals,governments and banks buy and sell foreigncurrencies

y Only a small fraction of daily transactions in foreignexchange involve trading of currency

y Most foreign exchange transactions involve transferof bank deposits


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Definition of foreign exchange

y Deposits, credits and balances payable in foreigncurrency

y Drafts, travellers cheques, letter of credit or bill of

exchange expressed or drawn in Indian currency butpayable in foreign currency

y Drafts, travellers cheques, L/Cs, etc. drawn by banks, institutions or persons outside India but

payable in Indian currencyy The above definition is as per FEMA (1999)


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Exchange rate

y Denotes the price or the ratio or the value at whichone currency is exchanged for another

y Exchange rate is very dynamic

y

The foreign exchange market is round-the-clockmarket due to different time zones

y Major participants- central banks, commercialbanks, forex brokers, corporations, individuals


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Types of exchange rate

y Ready/cash- Settlement of funds on the same day(date of the deal).

y Tom- Settlement of funds takes place on the next

working day of the date of the dealy Spot- Settlement of funds takes place on the second

working day following the date of the deal


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Types of exchange rate (contd)

y Forward- Delivery takes place on any day after thedate of the deal

y In the forex market all rates that are quoted are

generally spot ratesy When delivery takes place beyond the spot date then

it is a forward transaction and the forward rate isapplicable.


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SPECIAL ABOUTTHE FOREX MARKET

y It is by far the worlds largest financial market in terms oftransaction volume.

y The daily transaction volume in all currencies isestimated to amount to $3.98 trillion a day.

y This is gigantic even in comparison to a very active equitymarket like the New York Stock Exchange, which reachesan average daily volume of approximately US$ 296

billion a day.

y

The forex market is also a market with extraordinarilylow transaction costs.

y The quoted spreads in the forex inter-bank market canbecome as low as 0.5 to 1.5 basis points


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WHERE DOES INDIASTAND IN GLOBAL FOREXMARKET

y The foreign exchange market in India has grown intothe 16th largest market in the world in terms of totaldaily turnover.

y The daily turnover was US$34 billion in 2007.y The OTC derivatives segment register a daily average

turnover of USD 24 billion, which is 17th largestamong all countries.

y The daily turnover has increased to US$48 billion in2007-08.


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FOREX IN INDIA

y Foreign Exchange Market in India works under thecentral government in India and executes widepowers to control transactions in foreign exchange.

y

The Foreign Exchange Management Act, 1999 orFEMA regulates the whole foreign exchange marketin India.

y Before this act was introduced, the foreign exchangemarket in India was regulated by the Reserve Bank

of India through the Exchange Control Department,by the FERA or Foreign Exchange Regulation Act,1947.


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FOREX IN INDIA CONTD

y Until 1992 all foreign investments in India requiredprevious approval of the government.

y The Foreign-Exchange Regulation Act rarely

allowed foreign majority holdings for foreignexchange in India.

y However, a new foreign investment policyannounced in July 1991, declared automatic approval

for foreign exchange in India for thirty-fourindustries.


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RBI GUIDELINES

y RBI has issued Authorised Dealers (AD) licenses tobanks, all India financial institutions and a few co-operative banks to undertake foreign exchange

transactions in Indiay It has also issued Money Changer licenses to a large

number of established firms, companies, hotels,shops, etc


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RBI GUIDELINES (contd)

y Money changers help facilitate encashment offoreign currencies of foreign tourists

y Entities authorised to buy and sell foreign currency

notes, coins and travelers' cheques are called fullfledged money changers

y Those authorised only to buy are called restrictedmoney changers


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FOREIGN EXCHANGE DEALERSASSOCIATION OF INDIA

y Foreign Exchange Dealer's Association ofIndia (FEDAI) was set up in 1958 as an

Association of banks dealing in foreign exchange in

Indiay Its a self regulatory body and is incorporated under

Section 25 of The Companies Act, 1956.

y It's major activities include framing of rulesgoverning the conduct of inter-bank foreignexchange business among banks in India.


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Presently some of the functions are as follows:

Guidelines and Rules for Forex Business.

Training of Bank Personnel in the areas of ForeignExchange Business.

Accreditation of Forex Brokers

Advising/Assisting member banks in settlingissues/matters in their dealings.

Represent member banks on Government/Reserve Bank

of India/Other Bodies.Announcement of daily and periodical rates to member

banks.


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FEMA ACT 1999

y Provides guidelines for the free flow of foreignexchange regulation act.

y Prohibits foreign exchange dealings undertaken

other authorized person.y Gives full freedom to ROI

y To hold or own or transfer any foreign security orimmovable property situated outside India.

y

Similar freedom to NROI.y ROI is permitted to hold shares securities and

property.


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DETERMINANTSOF EXCHANGE RATE ININDIA

y The Bank Rate:

An increase in the bank rate indicates a tight monetarypolicy, and is counter-reacted with an expectation that the

bank rate will decline in future.

This results in a depreciation of the domestic currency.

y Interest Yield Differentials:

An increase in the interest differential between domesticsecurities and foreign securities indicates a rise in the gainfrom capital inflows into the economy.

This is expected to result in a depreciation of the domesticcurrency


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DETERMINANTSOF EXCHANGE RATE ININDIA contd

y Liquidity:

y The growth rates of broad money and foreignexchange reserves indicate increased liquidity in the

economy.y Such an increase in the liquidity is expected to cause

depreciation in the exchange rate

y External Shocks


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INTEGRATION BETWEEN FOREIGN EXCHANGEAND CAPITAL MARKETS IN INDIA

y Some of the specific developments that have taken placeduring the reforms process and might have impacted on theextent of financial markets integration are:

Indian equity market has continued to grow and has seen the relaxationof foreign investment restrictions primarily through country

deregulation. The issuance of American Depository Receipts (ADRs) or General

Depository Receipts (GDRs) has facilitated the trade of foreignsecurities on the NYSE, NASDAQ or on non-American exchanges.

Allowing Indian Rupee to be determined by market forces (though attimes market intervention by Reserve Bank of India, the concerned

authority, took place). Gradual move towards full convertibility of Indian Rupee has had animpact in the Indian capital market as international investors haveinvested substantial amount (about US $15 billion) in Indian capitalmarket.


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RELATIONSHIP BETWEEN EXCHANGE RATE ANDSTOCKPRICES IN INDIA:

y Rupee and stock market are directly correlated witheach another.

y If the sensitive index is moving up we will see

upward moment in rupee as because of improvementin the companies value and goodwill in the market.

y More and more people start investing in thecompanies stocks and there will also be a huge

amount of capital inflow from the global investors.y which will rise the demand of rupee in the countys

local exchange market.


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RELATIONSHIP BETWEEN INR and US Dollar

y Indian rupee is quoted in dollar terms this relation ofrupee and dollar makes it more dependent on eachother.

y There is a relationship seen in dollar and majorcurrencies of world, if dollar is falling against Euro oragainst Euro or Yen then it will fall against anothermajor currencies.

y The relation is dollar and rupee is inverselyproportionate to each another


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RELATIONSHIPBETWEEN INR and EURO

y Euro is one of the major currencies in the globalForex market and it is quoted in the terms of dollar.

y On the other hand rupee is not directly related to

euro but is somehow because of being quoted againstcommon currency euro moment effect rupee also.


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FOREX DERIVATIVES IN INDIA

y 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

y Many corporate using currency derivatives forhedging their foreign currency exposure


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VALUE AT RISK IN FOREX MARKET

y Value at Risk (VaR) models plays a core role in therisk management of todays financial institutions.

y AVaR model measures market risk by determining

how much the value of a portfolio could decline overa given period of time with a given probability due tothe change in the market price of an asset.

y There are four major categories of financial risk, viz.,

credit risk, operational risk, liquidity risk and marketrisk.


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THE WAY AHEAD

y Euro to become a key ingredient in setting the targetvalue of INR.

y Trading in currency and its derivatives is likely to

increase and the involvement of foreign banks isexpected to go up.

y From a foreign exchange-starved, control-riddeneconomy, India has moved on to a position of $250

billion plus in international reserves with a firmrupee and with far less forex control.


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THANK YOU

Forex in India 1

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