REGULATORY FRAMEWORK OF INTERNATIONAL FINANCE: ROLE OF FEMA

REGULATORY FRAMEWORK OF INTERNATIONAL FINANCE: ROLE OF FEMA

INTRODUCTION

International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, global financial system, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes the study of futures, options and currency swaps. International finance is a branch of international economics.Important theories in international finance include the Mundell-Fleming model, the optimum currency area (OCA) theory, as well as the purchasing power parity (PPP) theory. Whereas international trade theory makes use of mostly microeconomic methods and theories, international finance theory makes use of predominantly macroeconomic methods and concepts.Inetrnational finance is the branch of economics that studies.International macroeconomics (or international finance) as a subject covers many topical issues. As with international trade, international macro is the result of the fact that economic activity is affected by the existence of nations. If there were no national economies then we would not have this field. If there was no international trade we would not need international macro either. But countries do trade with each other, and because countries (not all, but many) use their own currencies we have to wonder about how these goods are paid for and what determines the prices that currencies trade at. More subtly, however, we have to also consider the fact that countries borrow and lend from each other: in other words, they trade inter-temporally consumption today for consumption in the future. Because of international borrowing and lending economic opportunities are expanded and households have better options to smooth their incomes. These are good things. But just as the existence of banks make bank panics possible, the existence of an international financial system makes international financial crises possible. This is where all the interesting action of the course comes from. In order to understand such crises we need to understand the nature of the international financial system.

DEFINITION:

The economic andmonetary systemthat transcends national borders. Thefieldof internationalfinanceconcernsitself with studyingglobalcapital marketsand might involvemonitoringmovements inforeign exchange rates. globalinvestmentflowsandcross border tradepractices.

NEED & IMORTANCE

Knowledge of international finance can help a financial manager decide how international events will affect a firm and what steps can be taken to exploit positive developments and insulate the firm from harmful ones.

Among the events that affect the firm and that must be managed are changes in exchange rates as well as interest rates, inflation rates, and asset values. These different changes are themselves related. For example, declining exchange rates tend to be associated with relatively high interest rates and inflation. Furthermore, some asset prices are positively affected by a declining currency, such as stock prices of export-oriented companies that are more profitable after devaluation.

Other asset prices are negatively affected, such as stock prices of companies with foreign-currency denominated debt that lose when the companys home currency declines: the companys debt is increased in terms of domestic currency. These connections between exchange rates, asset and liability values, and so on mean that foreign exchange is not simply a risk that is added to other business risks.

Only by studying international finance can a manager understand matters such as these. International finance is not just finance with an extra cause of uncertainty. It is a legitimate subject of its own, with its own risks and ways of managing them.

There are other reasons to study international finance beyond learning about how exchange rates affect asset prices, profits, and other types of effects described earlier. Because of the integration of financial markets, events in distant lands, whether they involve changes in the prices of oil and gold, election results, the outbreak of war, or the establishment of peace, have effects that instantly reverberate around the Earth.

The consequences of events in the stock markets and interest rates of one country immediately show up around the globe, which has become an increasingly integrated and interdependent financial environment.

The links between money and capital markets have become so close as to make it futile to concentrate on any individual part. In this concerned with the problems faced by any firm whose performance is affected by the international environment.

Analysis is relevant to more than the giant multinational corporations (MNCs) that have received so much attention in the media. It is just as valid for a company with a domestic focus that happens to export a little of its output or to buy inputs from abroad.

Indeed, even companies that operate only domestically but compete with firms producing abroad and selling in their local market are affected by international developments. For example, US clothing or appliance manufacturers with no overseas sales will find US sales and profit margins affected by exchange rates which influence the dollar prices of imported clothing and appliances

Specifically, if governments increase interest rates to defend their currencies when their currencies fall in value on the foreign exchange markets, holders of domestic bonds will find their assets falling in value along with their currencies: bond prices fall when interest rates increase.

It is difficult to think of any firm or individual that is not affected in some way or other by the international financial environment. Jobs, bond and stock prices, food prices, government revenues, and other important financial variables are all tied to exchange rates and other developments in the increasingly global financial environment.

THE GROWING IMPORTANCE OF INTERNATIONAL FINANCE

The managerial issues of international finance, it is important to emphasize that the international flows of goods and capital that are the source of supply of and demand for currencies, and hence essential to the subject of international finance, are fundamental to our well-being.

A strong currency, for example, ceteris paribus, improves a countrys standard of living the currency buys more in world markets. Not only does a strong currency allow citizens to buy more imports, they can also buy more domestically produced products that are internationally traded

The gain in standard of living from a rising currency is also evident when living standards are compared between nations. International rankings of living standards require conversions of local currency incomes into a common measure, usually the US dollar.

Citizens also gain from the efficient global allocation of capital when capital is allocated to its best uses on a global scale, overall returns are higher and these extra returns can be shared among the global investors. Therefore pause to consider the evidence of the international movement of goods and capital.

OBJECTIVES OF THE STUDY

1. To study an international perspective, necessary in order to become an effective professional working in todays global markets.2. To study of level of understanding and working with financial models required to become a financial professional.3. To study of acquire the ability to compile financial data and the ability to analyze such data to a professional level.4. To study about an intuitive understanding of financial theory, necessary to understand the workings of the modern financial market.5. Essentialfinance and accounting knowledge and skills.Objective of International Finance:1. Overall objective: to enable the Board to discharge those functions in the international field which fall to it as the Monetary Authority of the United States, especially by virtue of the unique international position of the United States as the economic and political leader of the free world.2. As adviser to the Board:-The Division should be ablea. To advise the Board of foreign developments affecting, or likely to affect, the level and direction of domestic economic activity, and, conversely, of the effects of changes in the level of domestic economic activity (including the effects of domestic monetary policy) upon economic developments abroad.b. To advise the Board of the significance of actions by foreign central banks, and of foreign problems (including foreign methods of dealing with them) which parallel the domestic problems faced by the board.c. To advise the Board on economic aspects of international operations and foreign relations of the Federal Reserve Banks which, in accordance with Section l4(g) of the Federal Reserve Act, are subject to special supervision by the Board.d. To maintain contact, and within the limits permitted by security requirements to exchange information, with personnel of foreign central banks. This should include continuing contacts with foreign central bank personnel temporarily assigned to the International Monetary Fund, the International Bank for Reconstruction and Development; and foreign embassies, as well as reception of foreign visitors, and so far as the budget permits visits by staff members abroad.e. To arrange, on request of foreign central banks or other agencies of the U. S. Government, for procurement of personnel for foreign missions to advise on problems affecting central banks or monetary policy.3. Subsidiary objectives as a unit of the Board's staff.The Division should be ablea. To maintain close working relationships with other Divisions of the Board's staff, especially with the Division of Research and Statistics and with the Legal Division and the Division of Examinations.b. To participate in staff work related to System economic research and the needs of the Federal Open Market Committee.c. To maintain close contacts with the officers and staff of the Federal Reserve Banks.d. To maintain informal contacts with professional economic research personnel in other Government agencies concerned with related fields of study, in order to help maintain a high level of technical competence and a broad understanding of problems on the part of members of the Board's staff.e. To maintain within the Division a lively spirit of inquiry; to be on the look-out for useful techniques of research and analysis; in general, to foster, in the international field standards of professional performance consistent with the high reputation of the Board's staff in the field of economic analysis.

REASERCH METHODOLOGYResearch is an art of scientific investigation. In other words research is a scientific and systematic search for pertinent information on a specific topic. The logic behind taking research methodology into consideration is that one can have knowledge regarding the method and procedure adopted for achievements of objective of the project. With the adoption of this others can also evaluate the results too.The methodology adopted for studying the objective of the project was surveying the bank account holders of the Cachar district. So keeping in view the nature of requirement of the study to collect all the relevant information regarding the comparison of public sector banks and the private sector banks direct personal interview method with the help of structured questionnaire was adopted for collection of primary data.Secondary data has been collected through the various magazines and newspaper and by surfing on internet and also by visiting the websites of Indian Banking Association.

DATA COLLECTIONData was collected by using two main methods i.e. primary data and secondary data.PRIMARY DATA primary data is the data which is used or collected for the first time and it is not used by anyone in the past. There are number of sources of primary data from which the information can be collected. We took the following resources for our research.

a) QUESTIONNAIRE This method of data collection is quite popular, particularly in case of big enquiries. Here in our research we set 10 simple questions and requested the respondents to answer these questions with correct information.SECONDARY DATA Secondary data is the data which is available in readymade form and which has already been used by other people for various purposes. The sources of secondary data are newspaper, internet, websites of IBA, journals and other published documents.

This project is based on secondary Data.

OVERVIEW

The global financial crisis that began in 2007 and deepened in 2008 exposed major weaknesses in financial and macroeconomic policy coordination, and profound flaws in financial risk management and regulation in a number of advanced countries. The severity of the crisis led global leaders to recognize that they must find a way to reform the global regulatory architecture to ensure that the financial system can absorb shocks while continuing to function efficiently.In response to the crisis, the Group of Twenty (G20) met in November 2008, for the first time at the leaders level, to agree on a comprehensive strategy to restore trust in the financial system and to limit the fallout from the crisis on global output and employment. Currently, there is a complicated governance structure for the program to reform the global architecture of financial regulation that consists of three entities one ad hoc and self-selected (G20), one treaty-based and systemic (International Monetary Fund [IMF]) and one a creation of the G20 (Financial Stability Board [FSB]). This paper undertakes an analysis of how cooperation takes place among these actors to implement the fundamental reforms needed to ensure that the global financial system is better able to withstand shocks than it was in 2007-2008.The analysis suggests a number of actions that the IMF and FSB should take to strengthen their cooperation and effectiveness, and highlights some of the problems created when no single agency has overall responsibility for the regulatory oversight of the international financial system. More broadly, it concludes that an appropriate framework for the governance of macroeconomic and financial policy cooperation in an interconnected world is abimodalstructure which includes both a restricted executive group of leaders who can implement major changes in the strategic policy direction to meet unforeseen developments and a universal, treaty-based official international financial institution that provides regular, consistent policy advice to its members.A more effective structure of governance over international economic policy cooperation would be possible if the countries and jurisdictions whose leaders made up the restricted executive group were to be selected by a more systematic and widely accepted process than at present. This raises the question, addressed at the conclusion of this paper, of what the appropriate relationship should be between the IMFs key governing body the International Monetary and Financial Committee and an executive group such as the G20.Finance is one of the world's biggest industries. The bulk of global finan cial services production takes place in a few international financial centres: New York, London, Singapore, Hong Kong and Tokyo. Finance production in these cities creates high wage jobs and wealth. In addition, high quality financial services supports high GDP growth in the hinterland. As an example, the presence of Hong Kong as an international financial centre assists Chinese companies. India is a large user of financial services, by virtue of a large and growing GDP and a high rate of investment and savings. At present, India is consuming financial services produced onshore as well as offshore. India requires sophisticated financial services to fuel growth in the future. The financial system determines the allocative efficiency of the use of capital; a sophisticated financial system improves the GDP growth obtained out of a given flow of investment.TRANSFORMING GLOBAL SCENARIOSince the World Bank and the International Monetary Fund (IMF) were launched at Bretton Woods more than 55 years ago, and the regional development banks in subsequent decades, the global economy has undergone transformation in several important respects1. Two fundamental transformations have taken place in the role of the international financial institutions (IFIs); both of which are of high significance for the global financial architecture. These changes are: First, globalisation has progressed a great deal over the preceding quarter century. This implies that foreign trade and private capital now play a far greater role in economic development than ever before. Second, the poor performance of statist models of development so popular in the past led to a re-examination of the role of the state, which in turn motivated a strong shift towards private, market-based approaches. As a result of these transformations, the private sector and private international finance have become prime agents of economic development.The IFIs can pursue their mandates by creating the conditions for the right kind of market-oriented growth and by forming partnerships with the private sector. We argue that partnership with the private sector calls for significant adjustments in the modus operandi of the IFIs as well as for clear principles of engagement. IFIs must complement and catalyse private finance, they must not displace it. A clearly defined approach to supporting private sector development will carry the IFIs well into the 21st century.

The role of IFIs in the changing market placeIn general terms the objectives of IFIs have always been poverty alleviation, economic growth and protection of the environment.12 Traditionally, IFIs have promoted these objectives by working with governments and government agencies. This reflects the ideas and the capital structures which prevailed at the time of their creation. Broadly speaking, the IFIs have pursued these objectives with loans for public sector projects or programmes, technical assistance, and policy-based lending. IFI loans have generally been made to, or guaranteed by, the borrowing states.The EBRD is different from the other IFIs. Its later foundation and the special circumstances of this foundation pointed to a rather specific objective, namely to foster the transition of its countries of operations to open market economies. The founders took it that the transition would indeed raise living standards over time as well as expanding basic choices and rights of the population. In the new economic environment, the importance of IFIs and bilateral aid as sources of funds has decreased. While private flows are rising, official flows are constrained by tight budgets following fiscal laxity in the 1970s and 1980s. As budgets get squeezed, official aid, both bilateral and multilateral, has been a vulnerable target. Furthermore, the collapse of centrally planned economies and the poor performance of heavily distorted economies in Africa, Latin America and the Middle East have led to a re-examination of the role of the state in economic development. As a result, there is a growing understanding among developing countries that to achieve market-oriented economic growth, they must create the conditions in which a strong private sector can flourish.Since the importance of IFIs as a source of funds has decreased while the potential role of the private sector has increased, a central challenge for IFIs is to find ways of fostering development through expanding opportunities for the private sector. They should view the private sector as a prime vehicle for the achievement of development goals. In so doing they must seek to ensure that the poor participate in the growth process and that growth is environmentally sustainable. There are two complementary ways in which the IFIs can pursue these objectives:i) they can help governments create the conditions for the right kind of market-oriented growth.ii) they can become participant investors, working with the private sector to expand and improve private capital flows.

THE DILEMMAS OF INTERNATIONAL FINANCIAL REGULATION

International finance has changed dramatically over the past two decades as governments eliminated barriers to cross-border capital flows and opened their domestic markets to foreign financial institutions. These changes produced an increasingly integrated world of international finance. A number of policymakers, who point to recent financial woes in Asia, Latin America, and Russia, worry that this integration requires increased international regulation of financial institutions. As a 1999 International Monetary Fund study lamented, these crises leave open the question of whether the official safety nets and monitoring systems have adapted sufficiently to this new financial environment and whether they are still ensuring that incentive structures encourage an appropriate amount of market discipline. Do we need international financial regulation? The consequences of one regulatory effort, the 1988 Basle Accord that instituted international standards for bank capital, suggests such regulation may be more harmful than helpful.

WHY NATIONS REGULATE BANKSGovernments regulate banks because of the need for a financial safety net to protect depositors and bank shareholders. This safety net in the form of explicit deposit insurance and implicit guarantees to shareholders is important because a banking crisis and widespread financial insolvency would have a devastating impact on real economic activity and could have serious political and social repercussions. Conscious of such experiences as the Great Depression and the 1997 Indonesian economic collapse, governments choose to bail out the banks rather than accept widespread insolvency and social crisis. Ironically, this safety net provides incentive for banks to take on additional risk. Because of the insurance and guarantees, banks are inclined to extend high-interest loans to risky borrowers because such lending will yield a high return if the loans are repaid, but society will shoulder the burden if the borrower defaults.

Because of the potential for economic and political crisis, governments cannot counter this risk-taking by eliminating the safety net. But governments can regulate banks to limit the banks exposure to risk. For instance, regulators can impose capital requirements intended to ensure that banks have sufficient capital on hand to cover unexpected losses in their lending portfolios. To accomplish this, regulators can enact a standard requirement that forces banks to hold capital equal to a specific percentage of their assets. Regulators can also implement a risk-weighted requirement that requires banks to hold capital in proportion to the risk of their various loans. By matching capital requirements to the overall riskiness of banks assets, regulators hope to discourage risky portfolios and ensure that banks have resources sufficient to cover losses resulting from high-risk loans. This will minimize the costs to society if and when banking crises do occur. Hence, regulating banks capital standards is a solution to the problems generated by the prior decision to extend a safety net to the banking system.

THE REASON FOR INTERNATIONAL REGULATION

Given that governments must regulate banks, is international financial regulation necessary to manage international financial integration? That is, have dramatic recent changes in financial activity eroded governments ability to rely on domestic regulation to maintain the stability of banks incorporated in their countries, thereby necessitating a move to international regulation? The short answer is no; international financial integration creates no new market failures that require governments to shift regulation away from independent national authorities. There may be a need for international coordination of regulatory responsibility (for instance, the determining of what country would oversee and insure a multinational bank), but countries can arrange this coordination through agreement and not by internationally harmonizing prudential regulation.If national regulation and international agreements can handle risk and insurance problems, then why does international financial regulation exist? Countries forged this regulation primarily as a political response to banks concerns about international competition. In a world in which national regulators set rules independently, some banks in some countries operate under more stringent regulatory standards than other banks in other countries. Disparate national regulations create cost differentials that hurt and help different banks bottom lines. Banks operating under lax regulation face lower costs than banks under more stringent controls. Hence, the banks in less regulated countries can offer banking services to customers at a lower price. International regulation, by requiring all governments to adopt a set of common standards, eliminates these disparities, creating a level playing field in international finance.The Basle Accord The political dynamic that produced the 1988 Basle Accord nicely illustrates this pursuit of a level playing field. In the 1980s, many of the largest U.S. commercial banks became imperiled by the Latin American debt crisis. The nine largest U.S. commercial banks lent 140 percent of their capital to three countries, Mexico, Argentina, and Brazil, all of which subsequently became unable to service their loans. The dozen largest American banks lent between 83 percent and 263 percent of their capital to five heavily indebted Latin American countries that later announced they were incapable of servicing their debts. Put simply, U.S. commercial banks were in trouble. American policymakers tried to address this crisis through the International Monetary Fund (IMF). The IMF was to provide Latin American debtor governments with new credits that could then be used to service their loans. This way, commercial banks transferred ownership of a portion of developing countries debt to the public sector. As part of this arrangement, commercial banks were to restructure their existing commitments and extend additional loans. To meet this obligation, the imf needed to boost its resources by 47 percent. Part of that revenue was to come from an $8.4 billion outlay from the United States. Congress agreed to the expenditure, but demanded a tightening of domestic banking regulations and an increase in commercial banks capital requirements. This met predictable opposition from American commercial banks who were facing tough competition from foreign, particularly Japanese, commercial banks. American bankers argued that existing cross-national differences in bank capital regulations directly contributed to their competitive difficulties; further regulation would only increase that disparity. In response to this opposition, Congress linked higher capital requirements in the United States to the successful completion of an international agreement on capital standards. This led to the Basle Accord, signed by the leaders of the Group of Ten nations in late 1987. Subsequently, more than 100 nations have adopted the standards.The political dynamics underlying the emergence of the Basle Accord suggest a more general political process lies at the center of international financial regulation. Governments, wanting to avoid domestic squabbles with their own banks, shift regulation out of the domestic arena and into the international arena. International financial regulation, therefore, has little to do with correcting market failures that arise from international financial integration. Instead, governments adopt international regulations to minimize the distributional consequences of regulatory reform in an increasingly integrated international financial system.

THE DANGER OF INTERNATIONAL REGULATION

It would seem that requiring all governments to regulate their banks in accordance with a common set of standards would not harm banks safety and would create a level playing field. But there is a potential for harm that arises from the interaction between the unintended consequences of financial regulation and the glacial nature of international decision-making. This interaction could indeed create a less safe banking system.The Basle Accords Unintended Consequences Regulation always has unintended consequences, and these consequences often push regulators further away from, rather than closer to, their goals. This has certainly been the case with the Basle Accord. The accord imposed an eight-per-cent minimum capital requirement on internationally active banks, but it required additional capital for loans that are considered more risky. The accord established four risk categories, assigning a zero risk weight to governments of nations in the Organization for Economic Cooperation and Development (oecd), a 20 percent risk weight to oecd banks and non-oecd governments, a 50 percent risk for mortgage lending, and a 100 percent risk to all other loans.

Faced with this simple risk classification scheme, banks altered their lending behavior in ways that regulators did not expect. For example, the risk classification provides incentive for banks to hold riskier loan portfolios than they would have held otherwise. Because the regulations assign the same risk weighting and capital costs to all loans within a given category, banks have incentive to shift toward higher-risk, higher-interest assets within each category. For example, a loan to a triple-A rated corporation receives the same risk weighting as a loan to a heavily indebted start-up firm, even though the loan to the start-up has a much higher probability of default. Because the banks charge higher interest to the start-up, they are more inclined to make that loan than to lend money at a lower interest rate to the secure corporation.The risk classification scheme also offers incentive for banks to engage in regulatory capital arbitrage. When capital requirements are not based on a standard like the probability of insolvency, banks can often restructure their portfolios in order to reduce their regulatory capital requirements without reducing their risk. By securitizing assets, banks can unbundle and repackage risks to transform on-balance sheet assets into off-balance sheet assets that fall into lower risk weight categories. While reliable information on the scale of regulatory capital arbitrage is not available, the Federal Reserve has estimated that securities used to engage in regulatory capital arbitrage account for more than 25 percent of total assets of the United States ten largest banks. In several individual cases, those securities account for close to 50 percent of total assets.The problems created by regulatory capital arbitrage pertain less to the off-balance sheet assets and more to the onbalance sheet assets. Banks can only securitize high quality assets at acceptable cost; thus, regulatory capital arbitrage moves higher quality assets off banks balance sheets in operations referred to as cherry picking. This causes the average credit quality of banks on-balance sheet assets to deteriorate as high quality assets disappear and low quality assets remain. Against this lower-quality balance sheet, the Basle Accords eight percent capital requirement may be insufficient and banks capital ratios may provide a misleading measure of banks true financial condition. Because market participants use capital ratios to determine the health of lending institutions, the weakened quality of this information may harm market discipline.

Revising International Regulations Given these unintended consequences, the Basle Accord may have made banks less, rather than more, secure. These problems have prompted regulators to call for refinement of the accord. Unfortunately, their efforts reveal the difficulty of amending internationally negotiated regulations. The Basle Committee has proposed two alternatives for assigning risk weights to different borrowers. The first option is to rely explicitly on external ratings agencies, such as Moodys and Standard and Poors, who link their assessments to explicit risk categories. While this approach would retain the same number of risk categories introduced in the initial accord, it would add greater nuance to the categories. The second option is to rely explicitly on banks internal rating systems. Large banks rely increasingly upon sophisticated methods of evaluating the risk of individual credit exposures. This option would allow banks to rely upon these techniques to determine the risk attached to particular exposures, subject to supervisory review.While these proposals address many of the major weaknesses in the initial accords risk classification scheme, distributive conflicts are frustrating efforts to negotiate their adoption. German authorities delayed publication of the proposed revisions in order to protect advantages the original accord gave to German banks over other countries banks. The United States and European governments are battling over whether to use banks internal rating systems to weight risk, with the Europeans claiming that American banks would be unfairly advantaged because European banks do not commonly use such rating systems. Small banks and large banks worldwide are tussling over the same issue. Finally, banks worldwide are arguing that, since the proposed accord does not place similar regulations on other institutions in the financial services industry, the proposals would affect cross-sectoral competitiveness.The current negotiations over reforming the Basle Accord are producing several layers of gridlock. Better domestic banking regulation is being held hostage until the conclusion of a better international banking agreement. A better international agreement on banking regulation isbeing held hostage by distributive struggles between banks incorporated in distinct jurisdictions, between banks of different sizes, and between banks and other financial services providers. These efforts to use international regulation to create a level playing field have created harmful delays in the introduction of necessary regulatory reforms.As long as government-devised regulations are imperfect, they will require continual refinement and adjustment. The speed at which regulators must make these adjustments depends upon the speed at which innovation and unexpected negative effects render the regulations obsolete. In banking, where regulation obsolesces quickly, governments must retain the ability to regularly adjust the regulatory framework. International negotiations are not well suited to the task.As international financial integration deepens, governments will continue to confront a difficult regulatory dilemma. Domestic financial regulation is likely to produce a safer financial system than international financial regulation, but it can also cause financial institutions to shift their business to countries with less demanding regulations. International financial regulation can eliminate the unwanted competitive consequences of unilateral domestic regulation, but it may produce a weaker financial system. Thus, a domestic approach to regulation produces safer financial institutions but less domestic financial business, while an international approach protects domestic financial business at the price of potentially weaker financial institutions.Instead of opting for either domestic or international regulation, the better solution may lie in domestic regulation supported by an international agreement on broad principles. Governments could move away from one-size-fits-all international regulations in favor of establishing broad regulatory objectives that each nation could then pursue through domestic regulation. To ensure that each country adopts regulations consistent with international goals, the international community could implement a review process. Such an approach would reduce the competitive consequences of purely domestic regulation while maintaining the flexibility of domestic regulation.

REGULATORY FRAMEWORK OF INTERNATIONALFINANCEForeign Trade PolicyEarlier this policy known as Export Import (Exim) Policy. Now this Policy statement is referred to as Foreign Trade Policy. The Policy is a set of guidelines and instructions related to the import and export of goods. The Government of India notifies the Policy for a period of five years. The current policy covers the period 2009-14. The Foreign TradePolicy is updated every year on the 31st of March and the modifications, improvements and new schemes becomes effective from 1st April of every year. All types of changes or modifications related to the Policy is normally announced through an annual supplement to the policy by the Union Minister of Commerce and Industry who coordinates with the Ministry of Finance, the Directorate General of Foreign Trade and its network of regional offices.The Current policy was announced when the entire world was facing unprecedent economic slowdown post war. WTO estimates that grim forecast that Global trade is likely to decline by over 11 %. India was not affected to the same extent. yet India exports had suffered decline due to contraction in demand in traditional markets. Protectionist measures adopted by some countries have also aggravated the situation. Therefore the strategies and policy measures have been oriented towards catalyzing the growth of Exports. This would also involve providing additional support to those sectors which have been badly hit by recission in the developed world.To meet these objectives Government is set to follow a mix of policy measures, including: Fiscal incentives institutional changes Procedural Rationalization Enhanced Marketing Access across the world Diversification of Exporters marketImprovement of Infrastructure related to Exports Reducing transaction costs Full refund of all indirect taxes and Levies.

The policy is directed towards: Support to exporters especially, in times of stress, to such sectors such as Textiles, Leather & Handicrafts. To encourage Value addition in Manufactured Exports. To this end the govt. has stipulated a minimum 15 % Value add on Imported inputs under the Advance Authorized Scheme. Diversify Export Markets of Africa , Latin America and CIS countries where the disadvantages of higher Credit risks and Trade Costs are sought to be offset by appropriate policy Instruments. Addittional resources have been made available under Market Development Assistance Scheme & Market Access Initiative Scheme. Incentives have been rationalized to identify leading products that would catalyze the next phase of export growth. To Promote Brand India. To enter into mutually beneficial trade agreements. To promote Technological upgradation of Exporters by allowing import of Capital Goods under the EPCG at Zero Percent Duty. Government recognition of exporters based on Export performance called Status Holdeers who will be permitted to import capital Goods free ( Through Duty Credits scrips equivalent to 1 Percent of the FOB value of exports in the previous year, of specified product group. Towns of export Excellence and units located therein would be granted added focussed support & incentives. Growth of Project Export facilitated by the formation of Coordination committees involving the EXIM Bank, RBI, & the Department of Economic Affairs.

Role of RBI with reference to International Finance

Exchange Manager and Controller -RBI manages exchange control, and represents India as a member of the international Monetary Fund [IMF]. Exchange control was first imposed on India in September 1939 when World War II started and continues till date. Exchange control was imposed on both receipts and payments of foreign exchange. According to foreign exchange regulations, all foreign exchange receipts, whether on account of export earnings, investment earnings, or capital receipts, whether of private or government accounts, must be sold to RBI either directly or through authorized dealers. The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investments in India and transactions.Publisher of Monetary Data and Other Data -RBI maintains and provides all essential banking and other economic data, formulating and critically evaluating the economic policies in India. In order to perform this function, RBI collects, collates and publishes data regularly. International Users can avail this data in the weekly statements, the RBI monthly bulletin, annual report on currency and finance, and other periodic publications.Controller of Money Supply and Credit -The International community needs to be assured that the Country they are dealing with has a stable Monetary system In a planned economy, the central bank plays an important role in controlling the paper currency system and inflationary tendency. RBI needs to ensure promotion of maximum output, and maintain price stability and a high rate of economic growth. To perform these functions effectively, RBI uses several control instruments such as -Open Market OperationsChanges in statutory reserve requirements for banksLending policies towards banksControl over interest rate structureStatutory liquidity ration of banksMonitoring of overseas branches of Indian banks -The RBI Supervision department of the Head Office is in charge of the reporting/monitoring system covering overseas operations of Indian banks.Promotional Role of RBI -Promotion of export financePromotion of credit guaranteesExchange Control Regulations -The exchange control regulations have been liberalized over the years to facilitate the remittance of funds both into and out of India. The changes have been introduced on a continuous basis in line with the government policy of economic liberalization. Still, in few cases, specific approvals are required from the regulatory authorities for foreign exchange transactions/remittances.

Role of Foreign Exchange Dealers Association of India (FEDAI):FEDAI was set up in 1958 as an Association of banks dealing in foreign exchange in India (typically called Authorised Dealers ADs) as a self regulatory body and is incorporated under Section 25 of The Companies Act, 1956. Its major activities include framing of rules governing the conduct of inter-bank foreign exchange business among banks vis--vis public and liaison with RBI for reforms and development of forex market. Due to continuing integration of the global financial markets and increased pace of de-regulation, the role of self-regulatory organizations like FEDAI has also transformed. In such an environment, FEDAI plays a catalytic role for smooth functioning of the markets through closer co-ordination with the RBI, other organizations like FIMMDA, the Forex Association of India and various market participants. FEDAI also maximizes the benefits derived from synergies of member banks through innovation in areas like new customized products, bench marking against international standards on accounting, market practices, risk management systems, etc.

Rupee ConvertibilityConvertibility of Rupee:The most important measure for integrating the economy of any country is to make its currency fully convertible i.e., allow it to determine its own exchange rate in the international market without any official intervention.As a first step towards full convertibility of rupee, rupee was devalued against major currencies in 1991. This was followed by introduction of dual exchange rate system in 1992-93 and full convertibility of the rupee on trade account in 1993-94. India achieved full convertibility on current account in August, 1994.Current account convertibilitymeans freedom to buy or sell foreign-exchange for the following transactions:(i) All payments due in connection with foreign trade, other current account business, including services and normal short term banking and credit facilities,(ii) Payment due as interest on loans and as net income from other investments(iii) Payments of moderate amount of amortization of loans or for depreciation of direct investment and(iv) Moderate remittances for family living expenses.Certain steps towards fullconvertibility on capital accounthave also been taken like authorized dealers have been allowed to invest abroad their unimpaired Tier1 capital, they have been delegated powers to release exchange for opening of offices abroad, banks fulfilling certain criteria have been permitted to import gold for resale in India.Non Resident Individuals and listed companies have been permitted to invest in overseas companies listed on a recognized stock exchange (subject to certain conditions), limit on banks investment from/in overseas markets has been raised; Indian companies are allowed to access ADR/GDR markets through an automatic route, Indian companies with a proven track record are allowed to invest up to 100% of their net worth in a foreign entity, Ads (Authorized Dealers) are allowed to issue international credit cards, NRIs are allowed to remit up to U.S. $1 million per calendar year out of their Non-resident ordinary accounts / sale proceeds of assets and so on. Committee on fuller capital account convertibility. (TaraporeCommittee II) has chalked out a road map for capital account convertibility. Strong macroeconomicframework, strong financial systems and prudent regulatory framework are the preconditions forcapital convertibility.A Five year time framework (2007-2011) has been given for full convertibilityon capital account.

Finance SEZs in the context of India's economic policy strategyKandla EPZ in 1965 and SEEPZ in 1973 were novel projects. They represented controlled experimentation with free trade while the Indian mainland was not ready for such ideas. The success of those ideas shaped and enabled the trade liberalisation which took place on an all-India scale in the following years. Today, free trade in goods has largely been achieved and the importance of the special dispensation that was given for Kandla or SEEPZ is low.In similar fashion, Finance SEZs would be India's first experiment with the Indian Financial Code. In some years, the Ministry of Finance will get this Code enacted and implemented. Doing this immediately at Finance SEZs, however, will be a test case where knowledge can be obtained about how this works. In the long run, once the Indian Financial Code is implemented on an all-India scale, there will be no need for this special treatment of Finance SEZs.In the future, China and India will have full capital account convertibility. In the short run, the debate about steps towards capital account liberalization for India is taking place. However there can, however, have no objections to removing restrictions for one physical location, as was done with trade account restrictions in Kandla in 1965 and SEEPZ in 1973. Until India achieves full convertibility, there is value in having an enclave like Hong Kong or GIFT, where high value jobs are created and the domestic economy obtains a better connection with financial globalisation. In the future, when free capital mobility has been achieved, the importance of the special dispensation that is given for Finance SEZs will be low. Thus, in the future, Finance SEZs like GIFT will thrive or fail on their own merits, competing with New York, London and Singapore. In the short term, special efforts are required for embarking on this journey. India cannot afford to wait for a long time before stepping into the ring in this global competition.

Foreign Exchange Management Act, 1999IntroductionTheforeign exchangeManagement Act, 1999 (FEMA) replaces theforeign exchangeRegulation Act (FERA). FERA was introduced in 1974 to consolidate and amend the then existing law relating to foreign exchange. FERA was amended in 1993 to bring about certain changes, as a result of introduction of economic reforms and liberalization of Indian Economy. But it was soon realized that FERA had by and large outlived its utility in the changed economic scenario and therefore replaced by FEMA in 1999.MeaningFEMA was introduced by thefinanceMinister in Lok Sabha on August 4, 1998. The Bill aims to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market India. It was adopted by the parliament in 1999 and is known as the Foreign Exchange Management Act, 1999. This Act extends to the whole of India and shall also apply to all branches, offices and agencies outside India owned or by a person resident in India.Objectives and Reasons for enactment of FEMAFEMA was enacted to consolidate and amend the law relating to foreign exchangewith the objective of facilitating external trade and payments and for promoting the orderly development and maintenance offoreign exchangemarket in India (Preamble). The statement of objects and reasons set the tone of the enactment of new legislation:i.The foreign exchangeRegulation Act, 1973, was reviewed in 1993 and several amendments were enacted as part of the ongoing process of economic liberalization relating to foreign investments and foreign trade for closer interaction with the world economy. At that stage, the central government decided that the further exchange of theforeign exchange Regulation Act would be undertaken in the light of subsequent developments and experience in relation to foreign trade and investment. It was subsequently felt that a better course would be to repeal the existing foreign exchange Regulation Act and enact a new legislation. A task force constituted for the purpose submitted its report in 1994 recommending substantial changes in the existing Act.ii.Significant developments have been taking place since 1993 such as substantial increase in foreign exchange reserves, growth in foreign trade, rationalization of tariffs, current account convertibility, liberalization of Indian investments abroad, increased access to external borrowings by Indian corporate and participation of Foreign investors inthe stock markets.Accordingly, a bill to repeal and replace Foreign Exchange Regulation Act, 1973 was introduced Lok Sabha on 04.08.1998. On reference to the standing committee modifications and suggestions were submitted by the standing committee in its report. After incorporating modifications and suggestions of the standing committee, the central government decided to introduce the new law, the Foreign Exchange Management Bill and repeal the Foreign Exchange Regulation Act, 1973Salient Features of FEMAFEMA extends to whole ofIndia. It shall also apply to all branches, offices and agencies outsideIndia, owned or controlled by a person resident inIndiaand also to any contravention there under committed outsideIndiaby any person to whom the Act applies. Therefore joint ventures or wholly owned subsidiaries, though outsideIndia, but controlled fromIndiaare intended to be covered by the Act. The new Act is meant to be user friendly with the object to facilitate external trade and payments for promoting the orderly development of foreign exchange inIndia.Under the new law, the emphasis for determining the residential status is on the actual period of stay inIndia, whereas under FEMA, the emphasis was on the intention of the person. Under the new law, it is not necessary that the person should be continuously and physically present inIndia. It will be sufficient the total of stay inIndiais 182 days or more during the year.The central government may from time to time give general or special directions to the Reserve Bank and Reserve Bank shall comply with such directions. The central government may by notification make rules to carry out the provisions of the Act. The Reserve Bank may by notification make regulation to carry out the provisions of the Act and rules there under. Every rule and regulation made under the Act shall as soon as after it is made, be laid before each house of parliament. If any difficulty arises in giving effect ti the provisions of the Act, the central government may by order, do anything not inconsistent with the provisions if the Act for the purpose of removing the difficulty.Applicability of the ActThe act extends to the whole of India. Also, it applies to all the branches, offices and agencies outside agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by person to whom this act appeals. The act has come into force with effect from June 1, 2000.Role of FEMA :The exchange control regulations in India are governed by the Foreign Exchange Management Act (FEMA). The apex exchange control authority in India is the Reserve Bank of India (RBI) which regulates the law and is responsible for all key approvals. FEMA is not only applicable to all parts of India but is also applicable to all branches, offices and agencies outside India which are owned or controlled by a person resident in India. FEMA regulates all aspects of foreign exchange and has direct implications on external trade and payments. FEMA is an important legislation which impacts foreign nationals who are working in India and also Indians who have gone outside India. It is important to be compliant with the exchange control regulations.

INTERNATIONALFINANCIAL SERVICES CENTRE (IFSC)An International Financial Services Centre (IFSC) is set up at Gandhinagar, Gujarat as a part of a Special Economic Zone (SEZ). To operationalise the IFSC, Notification under theforeign exchange management act, FEMA shall be issued by Reserve Bank of India (RBI) in March 2015, making regulations relating to financial institutions set up in the IFSC. The key features of these regulations will be that any financial institution (or its branch) set up in the IFSC,-a)shall be treated as a non-resident Indian located outside India,b)shall conduct business in such foreigncurrencyand with such entities, whether resident or non-resident, as the Regulatory Authority may determine, andc)subject to certain provisions, nothing contained in any other regulations shall apply to a unit located in IFSC.Pursuant to the Regulations issued under FEMA, the respective regulators would frame regulatory framework for provisions of financial services. IRDA of India would be permitting insurers including foreign insurer or reinsurers to set up branch in IFSC. Similarly RBI would permit thesetting up of IFSC Banking Units (IBUs) by banks. Government would be permitting IRDA of India to allow such life and non-life insurance services, health insurance services and reinsurance services, as may be specified. The Securities and Exchange Board of India (SEBI) would allow setting up of exchanges and allow other activities forfundraising, merchant banking, brokerage, fund management, private equity, etc. Activities like currency derivatives, NIFTY futures, Depository Receipts, etc. would take place on the exchanges like any other IFSC.

RBI has also formulated aDraft Scheme for the setting up of IFSC Banking Units (IBUs)by banks, whose broad contours may be summarised as follows:Setting up of IBUs:Eligible banks intending to set up IBUs (which would be regulated and supervised by RBI) would be required to apply to the Department of Banking Regulation (DBR) of RBI under Section 23 of the Banking Regulation Act, 1949. To begin with, only Indian banks (public and private, authorised to deal inforex and foreign banks having a presence in India would be eligible to set up IBUs. Banks already having offshore presence would be preferred and each bank would be permitted to set up only one IBU in one IFSC.IBUs vis--vis foreign branches of banks: For most purposes, the IBU will be treated on par with a foreign branch of an Indian bank, like the application of prudential norms, the 90 days Income Recognition Asset Classification and Provisioning norms, adoption of liquidity and interest rate risk management policies.Role of the Parent Banks Board:The banks Board would set comprehensive overnight limits for each currency for IBUs, may set out appropriate credit risk management policy and exposure limits, and monitor overall risk management and ALM framework of the IBU.Capital Requirements:The parent bank would be required to provide a minimum ofused20 million upfront as capital, and the IBU shall have to maintain minimum capital on an on-going basis as may be prescribed.Liabilities and Advances:The IBUs liabilities will be exempt both CRR and SLR. But liabilities only with original maturity period greater than one year are permissible, although short-term liabilities may be raised from banks subject to RBI prescribed limits. Deposits will not be covered by deposit insurance and RBI shall not provide liquidity or Lender of Last Resort support. Funds may be raised only from entities not resident in India, though the deployment may also be with entities resident in India, subject to FEMA, 1999. Advances by IBUs shall not be a part of the Net Bank Credit of parent banks.Permissibility of activities:Opening of current or savings accounts and issuance of bearer instruments is not allowed. Payment transactions can only be undertaken via bank transfers. IBUs can undertake transactions with non-resident entities other than retail customers/HNIs, and can deal with WOS/JVs of Indian companies abroad. They may undertake Factoring/Forfaiting of export receivables, but are prohibited from cash transactions.Ring Fencing:All transactions of IBUs shall be in currency other than INR, and IBUs would operate and maintain balance sheet only in foreign currency, except a Special Rupee Account to defray administrative and statutory expenses. Separate Nostro accounts will have to be maintained by IBUs with correspondent banks. IBUs will not be permitted to participate in domestic call, notice, term,forex, money and other onshore markets and domestic payment systems.

CONCLUSION

As we have learnt, finance and macroeconomics are inextricably linked. And what is true domestically is also true internationally. In the current historical phase, both real and financial markets are highly integrated globally, just as they were almost uninterruptedly for many decades until the Great Depression. The need to develop new analytical frameworks to think about the interaction between finance and macroeconomics in a domestic context inevitably extends to the global stage. This calls for a reversal in the prevailing perspective. One should not ask what the real side of the equation means for its financial counterpart, but what the financial side means for its real counterpart. The starting point should be what happens in financial asset markets rather than in the goods markets, domestically and internationally. Otherwise, there is a risk that the financial side will be neglected. This is precisely what has happened for far too long. There is a need to redress the balance. In both cases, financial surges and collapses within and across national borders were at the root of the historic financial crises. Current account positions did not provide a useful pointer: surges occurred in both surplus and deficit countries. And in both cases, understanding the build-up of vulnerabilities requires looking beyond the capital account to what decision-making units operating in multiple jurisdictions were doing banks and non-financial corporates in the interwar years, and, above all, the nexus between European banks and US money market funds in the US sub-prime crisis. This analysis has major implications for central banks. Given their primary responsibility for monetary and financial stability, central banks inevitably end up under the spotlight once the focus shifts to asset prices, balance sheets and financial crises. As long as the focus is on current accounts, central banks role is necessarily more peripheral. There is little doubt, however, that policy frameworks should be strengthened to incorporate more systematically financial surges and collapses. And in a highly globalised world, ways should also be found to take proper account of policy spillovers, both on other countries and on aggregate conditions.Despite an abundance of cross-section, panel, and studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade.Openness and growth, though if anything, they are more severe in the context offinance. There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries have moved over time in the direction of further financial openness. A plausible explanation is that financial development is a concomitant of economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross-border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial. The reforms developing countries need to institute to make their economies safe for international asset trade are the same ones they need so as to curtail the power of entrenched economic interests and liberate the economy's productive potential.

BIBLIOGRAPHY

Ericsmore.wordpress.comwww.managementjournals.com www.bis.orgwww.armeconomist.comwillembuiter.compib.nic.inwww.oecd.orgwww.bis.orgwww.isu.eduobject.cato.org

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