INTRODUCTION The foreign exchange market or Currency market is a global, worldwide decentralized over-the-counter financial market for trading

currencies. Financial centres around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the worlds major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

Objective of the study

Primary Objective:

To Study Impact of Currency market in Indian economy.

Secondary Objective:

To study the on board aspects of corporate. To Study the various services provided by Broker house to their clients. To know investors experience in Forex market, To study what other services investors expect from their broker house.

Limitations of the study Theoretical data are taken from internet; possibilities of wrong data can take in the report. Respondent could provide wrong data. Shortage of time. May small sample size doesnt cover the all population characteristics.

HISTORY OF THE ORGANIZATION:

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment. HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build sound customer franchises across distinct businesses so as to be the preferred provider of banking services for target retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with the bank's risk appetite. The bank is committed to maintain the highest level of ethical standards, professional integrity, corporate governance and regulatory compliance. HDFC Bank's business philosophy is based on four core values - Operational Excellence, Customer Focus, Product Leadership and People. As on 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore. The paidup capital as on the said date is Rs. 469,33,76,540 (234,66,88,270 equity shares of Rs. 2/each). The HDFC Group holds 23.15% of the Bank's equity and about 17.29 % of the equity is held by the ADS / GDR Depositories (in respect of the bank's American Depository Shares
3

(ADS) and Global Depository Receipts (GDR) Issues). 30.68 % of the equity is held by Foreign Institutional Investors (FIIs) and the Bank has 4,47,924 shareholders. The shares are listed on the Bombay Stock Exchange Limited and The National Stock Exchange of India Limited. The Bank's American Depository Shares (ADS) are listed on the New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN No US40415F2002. DISTRIBUTION NETWORK: HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of 2,620 branches spread in 1,454 cities across India.All branches are linked on an online real-time basis. Customers in over 500 locations are also serviced through Telephone Banking. The Bank's expansion plans take into account the need to have a presence in all major industrial and commercial centres where its corporate customers are located as well as the need to build a strong retail customer base for both deposits and loan products. Being a clearing/settlement bank to various leading stock exchanges, the Bank has branches in the centres where the NSE/BSE have a strong and active member base. The Bank also has 10,316 networked ATMs across these cities. Moreover, HDFC Bank's ATM network can be accessed by all domestic and international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express Credit/Charge cardholders.

MANAGEMENT: Mr. C.M. Vasudev has been appointed as the Chairman of the Bank with effect from 6th July 2010. Mr. Vasudev has been a Director of the Bank since October 2006. A retired IAS officer, Mr. Vasudev has had an illustrious career in the civil services and has held several key positions in India and overseas, including Finance Secretary, Government of India, Executive Director, World Bank and Government nominee.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years, and before joining HDFC Bank in 1994 was heading Citibank's operations in Malaysia. The Bank's Board of Directors is composed of eminent individuals with a wealth of experience in public policy, administration, industry and commercial banking. Senior executives representing HDFC are also on the Board. Senior banking professionals with substantial experience in India and abroad head various businesses and functions and report to the Managing Director. Given the professional expertise of the management team and the overall focus on recruiting and retaining the best talent in the industry, the bank believes that its people are a significant competitive strength.

TECHNOLOGY: HDFC Bank operates in a highly automated environment in terms of information technology and communication systems. All the bank's branches have online connectivity, which enables the bank to offer speedy funds transfer facilities to its customers. Multi-branch access is also provided to retail customers through the branch network and Automated Teller Machines (ATMs). The Bank has made substantial efforts and investments in acquiring the best technology available internationally, to build the infrastructure for a world class bank. The Bank's business is supported by scalable and robust systems which ensure that our clients always get the finest services we offer. The Bank has prioritised its engagement in technology and the internet as one of its key goals and has already made significant progress in web-enabling its core businesses. In each of its businesses, the Bank has succeeded in leveraging its market position, expertise and technology to create a competitive advantage and build market share.

BUSINESSES: HDFC Bank offers a wide range of commercial and transactional banking services and treasury products to wholesale and retail customers. The bank has three key business segments: Wholesale Banking Services The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian corporate to small & mid-sized corporates and agri-based businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers. Based on its superior product delivery / service levels and strong customer orientation, the Bank has made significant inroads into the banking consortia of a number of leading Indian corporates including multinationals, companies from the domestic business houses and prime public sector companies. It is recognised as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks. Retail Banking Services The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by world-class service and delivered to customers through the growing branch network, as well as through
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alternative delivery channels like ATMs, Phone Banking, NetBanking and Mobile Banking. The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading provider of Depository Participant (DP) services for retail customers, providing customers the facility to hold their investments in electronic form. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched its credit card business in late 2001. By March 2010, the bank had a total card base (debit and credit cards) of over 14 million. The Bank is also one of the leading players in the merchant acquiring business with over 90,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.

TREASURY Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the liberalisation of the financial markets in India, corporates need more sophisticated risk management information, advice and product structures. These and fine pricing on various treasury products are provided through the bank's Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.

RATINGS: CREDIT RATING: The Bank has its deposit programs rated by two rating agencies - Credit Analysis & Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which represents instruments considered to be "of the best quality, carrying negligible investment risk". CARE has also rated the bank's Certificate of Deposit (CD) programme "PR 1+" which represents "superior capacity for repayment of short term promissory obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the "AAA ( ind )" rating to the Bank's deposit programme, with the
6

outlook on the rating as "stable". This rating indicates "highest credit quality" where "protection factors are very high" The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by CARE and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper Tier II Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of "CARE AAA" for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also assigned "CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt programme and Upper Tier II Bond issue. In each of the cases referred to above, the ratings awarded were the highest assigned by the rating agency for those instruments. CORPORATE GOVERNANCE RATING: The bank was one of the first four companies, which subjected itself to a Corporate Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating Information Services of India Limited (CRISIL). The rating provides an independent assessment of an entity's current performance and an expectation on its "balanced value creation and corporate governance practices" in future. The bank was assigned a 'CRISIL GVC Level 1' rating in January 2007 which indicates that the bank's capability with respect to wealth creation for all its stakeholders while adopting sound corporate governance practices is the highest.

AWARDS & ACHIEVEMENTS: 2012

Forbes Asia IBA Banking Technology Awards 2011

Fab 50 Companies - Winning for the 6th year - Best Online Bank - Best use of Business Intelligence - Best Customer Relationship Initiative - Best Risk Management & Security Initiative - Best use of Mobility Technology in Banking - Overall Best Bank - Best Private Sector Bank - Asset Quality - Private Sector - Retail Banking -Private Sector Best Bank in 'IT for Operational Effectiveness' category

Dun & Bradstreet Banking Awards 2012 IDRBT Banking Technology Excellence Awards 2011-12 Asia Money 2012

Best Domestic Bank in India

India's Top 500 Best Bank in India Companies -Dun & Bradstreet Corporate Awards Finance Asia UTI Mutual Fund CNBC TV 18 Financial Advisor Awards 2011 - Best Managed Company - Best CEO - Mr. Aditya Puri - Best Performing Bank - Private

Asian Banker - Best Retail Bank in India International - Best Bancassurance Excellence in Retail - Best Risk Management Financial Services Awards 2012 5th Loyalty Summit Customer and Brand Loyalty award Skoch foundation 2012 ICAI Awards 2011 SHG/JLG linkage programme Excellence in Financial Reporting

2011

Outlook Money Best Bank Award 2011 Best Commercial Vehicle Financier

- Best Bank - Runner Up

- Driving Positive Change

Businessworld Best - Best Bank Bank award BCI Continuity & Resilience Award Financial Express Best Bank Survey 2010-11 - Most Effective Recovery of the Year - Best in Strength and Soundness - 2nd Best in the Private Sector

CNBC TV18's Best - Best Bank Bank & Financial - Mr. Aditya Puri, Outstanding Finance Professional Institution Awards Dun & Bradstreet Banking Awards 2011 Best Private Sector Bank - SME Financing

ISACA 2011 award Best practices in IT Governance and IT Security for IT Governance IBA Productivity Excellence Awards 2011 New Channel Adopter (Private Sector)

DSCI (Data Security in Bank Security Council of India) Excellence Awards 2011 Euromoney Awards Best Bank in India for Excellence 2011 FINANCE ASIA Country Awards 2011: India Asian Banker BloombergUTV's Financial Leadership Awards 2011 IBA Banking - BEST BANK - BEST CASH MANAGEMENT BANK - BEST TRADE FINANCE BANK Strongest Bank in Asia Pacific Best Bank

Winner 9

Technology Awards 2010

1) Technology Bank of the Year 2) Best Online Bank 3) Best Customer Initiative 4) Best Use of Business Intelligence 5) Best Risk Management System Runners Up Best Financial Inclusion Excellence in Customer Experience

IDC FIIA Awards 2011

2010

Outlook Money 2010 Awards

Best Bank

Businessworld Best Best Bank (Large) Bank Awards 2010 Teacher's Achievement Awards 2010 (Business) The Banker and PWM 2010 Global Private Banking Awards Economic Times Awards for Corporate Excellence 2010 Forbes Asia NDTV Business Leadership Awards 2010 The Banker Magazine MIS Asia IT Excellence Award 2010 Dun & Bradstreet Banking Awards Mr. Aditya Puri

Best Private Bank in India

Business Leader of the Year - Mr. Aditya Puri

Fab 50 Companies - 5th year in a row Best Private Sector Bank

World's Top 1000 Banks BEST BOTTOM-LINE I.T. Category

Bank
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2010 Best Private Sector Bank in SME Financing Institutional Investor Magazine Poll HDFC Bank MD, Mr. Aditya Puri among "Asian Captains of Finance 2010"

IDRBT Technology Winner - 1) IT Infrastructure 2) Use of IT within the Bank 2009 Awards Runners-up - IT Governance (Large Banks) ACI Excellence Awards 2010 FE-EVI Green Business Leadership Award Highly Commended - Asia Pacific HDFC Bank Best performer in the Banking category

Celent's 2010 Model Bank Award Banking Innovation Award Avaya Global Connect 2010 Forbes Top 2000 Companies Financial Express Ernst & Young Survey 2009-10 Best in strength Asian Banker Excellence Awards 2010 Technology Implementation The Asset Triple A Awards Euromoney Private Banking and Wealth Management Poll 2010 Financial Insights Innovation Awards 2010 Global Finance Award 2 Banking Best Cash Management Bank in India 1) Best Local Bank in India (second year in a row) 2) Best Private Banking Services overall (moved up from No. 2 last year) Customer Responsiveness Award - Banking & Financial Services category Our Bank at 632nd position and among 130 Global High Performers

Innovation in Branch Operations - Server Consolidation Project

Best Trade Finance Provider in India for 2010 1) Best Risk Management Initiative and 2) Best Use of Business
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Technology Awards 2009 SPJIMR Marketing Impact Awards (SMIA) 2010 Business Today Best Employer Survey

Intelligence. 2nd Prize

Listed in top 10 Best Employers in the country

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Foreign Exchange Markets in India: Historically the value of goods was expressed through some other goods, for example a barter economy where individuals exchange goods. The obvious disadvantages of such a system encouraged establishment of more generally accepted and understand means of goods exchange long time ago in history - to set a common scale of value. In different places everything from teeth to jewelry has served this purpose but later metals, and especially gold and silver, were introduced as an accepted means of payment, and also a reliable form of value storage. Originally, coins were basically minted from the metal, but stable political systems introduced a paper form of IOUs (I owe you) which gained wide acceptance during the middle Ages. Such paper IOUs became the basis of our modern currencies. Before First World War most central banks supported currencies with gold. Even though banknotes always could be exchanged for gold, in reality this did not happen that often, developing an understanding that full reserves are not really needed. Sometimes huge supply of banknotes without gold support led to giant inflation and hence political instability. To protect national interests foreign exchange controls were introduced to demand more responsibility from market players. Closer to the end of World War II, the Bretton Woods agreement was signed as the initiative of the USA in July 1944. The Bretton Woods Conference rejected John Maynard Keynes suggestion for a new world reserve currency in favor of a system built on the US dollar. Other international institutions such as the IMF, the World Bank and GATT (General Agreement on Tariffs and Trade) were created in the same period as the emerging victors of WW2 searched for a way to avoid the destabilizing monetary crises which led to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that partly reinstated the gold standard, fixing the US dollar at USD35/oz and fixing the other main currencies to the dollar - and was intended to be permanent. The Bretton Woods system came under increasing pressure as national economies moved in different directions during the sixties. A number of realignments kept the system alive for a long time, but eventually Bretton Woods collapsed in the early seventies following president Nixon's suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits. The following decades have seen foreign exchange trading develop into the largest global market by far. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values. But the idea of fixed exchange rates has by no means died. The EEC (European Economic Community) introduced a new system of fixed exchange rates in 1979, the European Monetary System. This attempt to fix exchange rates met with near extinction in 1992-93, when pent-up economic pressures forced devaluations of a number of weak European
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currencies. Nevertheless, the quest for currency stability has continued in Europe with the renewed attempt to not only fix currencies but actually replace many of them with the Euro in 2001. The lack of sustainability in fixed foreign exchange rates gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates, in particular in South America, looking very vulnerable. But while commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have found a new playground. The size of foreign exchange markets now dwarfs any other investment market by a large factor. It is estimated that more than USD 3,000 billion is traded every day, far more than the world's stock and bond markets combined. Forex (Foreign Exchange) is the international financial market used for trade of world currencies. It has been working since 70s of the 20th century - from the moment when the biggest world nations decided to switch from fixed exchange rates to floating ones. Daily volume of Forex trade exceeds 4 trillion United States dollars, and this number is always growing .Main currency for Forex operations is the United States dollar (USD). Unlike stock exchanges, Forex market doesn't have any fixed schedule or operating hours it's open 24 hours per day, 5 days per week from Monday to Friday, since buy/sell orders are performed by world banks any time during the day or night (some banks even work on Saturdays and Sundays). Just like any other exchange, Forex market is driven by supply and demand of a particular tool. For instance, there are buyers and sellers for "Euro vs US dollar". Exchange rates at Forex are changing constantly, and fluctuations may happen many times per second - this market is very liquid.

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MARKET SIZE & LIQIDITY: The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998). Of this $3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and other currency derivatives. Trading in the UK accounted for 36.7% of the total, making UK by far the most important global center for foreign exchange trading. In second and third places, respectively, trading in the USA accounted for 17.9%, and Japan accounted for 6.2%. Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in 2010 (double the turnover recorded in April 2007). Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Most developed countries permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. A number of emerging countries do not permit FX derivative products on their exchanges in view of controls on the capital accounts. The use of foreign exchange derivatives is growing in many emerging economies. Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some controls on the capital account. Foreign exchange trading increased by 20% between 2007 and 2010 and has more than doubled since 2004. The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high frequency traders, and the emergence of retail investors as an important market segment. The growth of electronic execution methods and the diverse selection of execution venues have lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot FX turnover, or $150 billion per day

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Top 10 currency traders % of overall volume, May 2011 Rank 1 2 3 4 5 6 7 8 9 10 Name Deutsche Bank Barclays Capital UBS AG Citi JPMorgan HSBC Royal Bank of Scotland Credit Suisse Goldman Sachs Morgan Stanley Market share 15.64% 10.75% 10.59% 8.88% 6.43% 6.26% 6.20% 4.80% 4.13% 3.64%

Market participants Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. From there, smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX market makers. According to Galati and Melvin, Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s. (2004) In addition, he notes, Hedge funds have grown markedly over the 20012004 period in terms of both number and overall size. Central banks also participate in the foreign exchange market to align currencies to their economic needs.
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a. Banks The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which are trading desks for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago. b. Commercial companies An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the longterm direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants. c. Central banks National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading. d. Forex Fixing Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks, dealers and online foreign exchange traders use fixing rates as a trend indicator. The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 199293 ERM collapse, and in more recent times in Southeast Asia.
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e. Hedge funds as speculators About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor. f. Investment management firms Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of Assets Under Management (AUM), and hence can generate large trades. g. Retail foreign exchange traders Individual Retail speculative traders constitute a growing segment of this market with the advent of retail forex platforms, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams. To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirement particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller and perhaps questionable brokers are now gone or have moved to countries outside the US. A number of the forex brokers operate from the UK under FSA regulations where forex trading using margin is part of the wider over-the-counter derivatives trading industry that includes CFDs and financial spread betting. There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at. h. Non-bank foreign exchange companies Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but
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are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account). It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services. i. Money transfer/remittance companies and bureau de changes Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange.

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Currency United States dollar Euro Japanese yen Pound sterling Australian dollar Swiss franc Canadian dollar Hong Kong dollar Swedish krona New Zealand

ISO 4217 code (Symbol) USD ($) EUR () JPY () GBP () AUD ($) CHF (Fr) CAD ($) HKD ($) SEK (kr)

% daily share 84.9% 39.1% 19.0% 12.9% 7.6% 6.4% 5.3% 2.4% 2.2% 1.6% 1.5% 1.4% 1.3% 1.3% 0.9%
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NZD ($) South Korean won KRW Singapore dollar Norwegian krone Mexican peso Indian rupee SGD ($) NOK (kr) MXN ($) INR

16

Other Currencies

Total

12.2% 200%

Trading characteristics There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fx market space opened in 2007 and aspired but failed to the role of a central market clearing mechanism. The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends. Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates; so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow. Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates against the USD with the US dollar as the base currency (e.g. USDJPY, USDCAD, USDCHF). The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and the euro (EUR) where the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).

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The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ. On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral currency pairs were: EURUSD : 28% USDJPY : 14% GBPUSD : 9% and the US currency was involved in 84.9% of transactions, followed by the euro (39.1%), the yen (19.0%), and sterling (12.9%). Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies. Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centred is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased. Determinants of FX rates: The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government): I. International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world. II. Balance of payments model: This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit. III. Asset market model: views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by peoples willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.

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None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithms can be devised to predict prices. It is understood from the above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology. a. Economic factors These include: (a) economic policy, disseminated by government agencies and central banks, (b) economic conditions, generally revealed through economic reports, and other economic indicators. Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates). Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency. Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency. Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation. Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

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 Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector. b. Political conditions Internal, regional, and international political conditions and events can have a profound effect on currency markets. All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency. c. Market psychology Market psychology and trader perceptions influence the foreign exchange market in a variety of ways: Flights to quality: Unsettling international events can lead to a "flight to quality," a type of capital flight whereby investors move their assets to a perceived "safe haven." There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty. Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. "Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought". To buy the rumour or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices. Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

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Financial instruments: A. Spot A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a direct exchange between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. B. Forward One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties. C. Swap The most common type of forward transaction is the FX swap. In an FX swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.

D. Future Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts. E. Option A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world. Speculation: Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists such as Joseph Stieglitz this argument to be based more on politics and a free market philosophy than on economics
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consider this argument to be based more on politics and a free market philosophy than on economics. Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors. Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators. Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit. In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from them for having caused the unsustainable economic conditions. Foreign exchange reserves: Introduction Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions. History Official international reserves, the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar functioned as a reserve currency, so it too became part of a nation's official international reserve assets. From 1944-1968, the US dollar was convertible into gold through
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the Federal Reserve System, but after 1968 only central banks could convert dollars into gold from official gold reserves, and after 1973 no individual or institution could convert US dollars into gold from official gold reserves. Since 1973, no major currencies have been convertible into gold from official gold reserves. Individuals and institutions must now buy gold in private markets, just like other commodities. Even though US dollars and other currencies are no longer convertible into gold from official gold reserves, they still can function as official international reserves. Purpose In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money or fiat currency as IOUs). This action can stabilize the value of the domestic Currency. Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates. Changes in reserves The quantity of foreign exchange reserves can change as a central bank implements monetary policy. A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher and a decrease lowers). In a flexible exchange rate regime, these operations occur automatically, with the central bank clearing any excess demand or supply by purchasing or selling the foreign currency. Mixed exchange rate regimes ('dirty floats', target bands or similar variations) may require the use of foreign exchange operations (sterilized or unsterilized) to maintain the targeted exchange rate within the prescribed limits . Foreign exchange operations that are unsterilized will cause an expansion or contraction in the amount of domestic currency in circulation, and hence directly affect monetary policy and inflation: An exchange rate target cannot be independent of an inflation target. Countries that do not target a specific exchange rate are said to have a floating exchange rate, and allow the market to set the exchange rate; for countries with floating exchange rates, other instruments of monetary policy are generally preferred and they may limit the type and amount of foreign exchange interventions. Even those central banks that strictly limit foreign exchange interventions, however, often recognize that currency markets can be volatile and may intervene to counter disruptive short -term movements. To maintain the same exchange rate if there is increased demand, the central bank can issue more of the domestic currency and purchase the foreign currency, which will increase the sum of foreign reserves. In this case, the currency's value is being held down; since (if there is no sterilization) the domestic money supply is increasing (money is being 'printed'), this may provoke domestic inflation (the value of the domestic currency falls relative to the value of goods and services).
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Since the amount of foreign reserves available to defend a weak currency (a currency in low demand) is limited, a foreign exchange crisis or devaluation could be the end result. For a currency in very high and rising demand, foreign exchange reserves can theoretically be continuously accumulated, although eventually the increased domestic money supply will result in inflation and reduce the demand for the domestic currency (as its value relative to goods and services falls). In practice, some central banks, through open market operations aimed at preventing their currency from appreciating, can at the same time build substantial reserves. In practice, few central banks or currency regimes operate on such a simplistic level, and numerous other factors (domestic demand, production and productivity, imports and exports, relative prices of goods and services, etc) will affect the eventual outcome. As certain impacts (such as inflation) can take many months or even years to become evident, changes in foreign reserves and currency values in the short term may be quite large as different markets react to imperfect data. Costs, benefits, and criticisms: Large reserves of foreign currency allow a government to manipulate exchange rates usually to stabilize the foreign exchange rates to provide a more favourable economic environment. In theory the manipulation of foreign currency exchange rates can provide the stability that a gold standard provides, but in practice this has not been the case. Also, the greater a country's foreign reserves, the better position it is in to defend itself from speculative attacks on the domestic currency. There are costs in maintaining large currency reserves. Fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. Even in the absence of crisis, fluctuations can result in huge losses. For example, China holds huge U.S. dollardenominated assets, but if the U.S. dollar weakens on the exchange markets, the decline results in a relative loss of wealth for China. In addition to fluctuations in exchange rates, the purchasing power of fiat money decreases constantly due to devaluation through inflation. Therefore, a central bank must continually increase the amount of its reserves to maintain the same power to manipulate exchange rates. Reserves of foreign currency provide a small return in interest. However, this may be less than the reduction in purchasing power of that currency over the same period of time due to inflation, effectively resulting in a negative return known as the "quasi-fiscal cost". In addition, large currency reserves could have been invested in higher yielding assets. Excess reserves: Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defence, and are used to determine credit ratings of nations, however, other government funds that are counted as liquid assets that can be applied to liabilities in times of crisis include stabilization funds, otherwise known as sovereign wealth funds. If those were included, Norway, Singapore and Persian Gulf States would rank higher on these lists, and
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UAE's $1.3 trillion Abu Dhabi Investment Authority would be second after China. Apart from high foreign exchange reserves, Singapore also has significant government and sovereign wealth funds including Temasek Holdings, valued in excess of $145 billion and GIC, and valued in excess of $330 billion. India is also planning to create its own investment firm from its foreign exchange reserves. On May 2011, an estimated that Asia has $3.5 trillion of foreign reserves or is around two thirds of the world's reserves and a stark contrast to the indebtedness in many developed Western economies. The following is list of top 20 largest countries by Foreign Exchange Reserves:

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Country People's Republic of China Japan Russia Saudi Arabia Republic of China (Taiwan) Brazil India South Korea Switzerland Hong Kong Singapore Germany Thailand France Italy Algeria

Billion USD (end of month) $ 3045 (Mar 2011) $ 1140 (May 2011) $ 525 (Apr 2011) $ 466 (Mar 2011) $ 400 (Apr 2011) $ 333 (May 2011) $ 310 (Ma y 2011) $ 307 (Apr 2011) $ 280 (Mar 2011) $ 277 (Apr 2011) $ 243 (Apr 2011) $ 221 (Mar 2011) $ 190 (Apr 2011) $ 173 (Mar 2011) $ 164 (Mar 2011) $ 155 (Dec 2010)
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17 18 19 20

United States Mexico United Kingdom Malaysia

$ 143 (Apr 2011) $ 128 (Mar 2011) $ 119 (Apr 2011) $ 114 (Mar 2011)

The following is the list of inter-governmental free trade association and supranational organizations: Rank 1 2 3 Country European Economic Area European Union Eurozone Billion USD (end of month) $ 1 416 (Feb 2011) $ 1 356 (Feb 2011) $ 798 (Feb 2011)

These few holders account for more than 60% of total world foreign currency reserves. The adequacy of the foreign exchange reserves is more often expressed not as an absolute level, but as a percentage of short-term foreign debt, money supply, or average monthly imports.

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IMPACT OF CURRENCY MARKET IN INDIAN ECONOMY: FEMA RULES & POLICIES: The Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from June 1, 2000. With the introduction of the new Act in place of FERA, certain structural changes were brought in. The Act consolidates and amends the law relating to foreign exchange to facilitate external trade and payments, and to promote the orderly development and maintenance of foreign exchange in India. From the NRI perspective, FEMA broadly covers all matters related to foreign exchange, investment avenues for NRIs such as immovable property, bank deposits, government bonds, investment in shares, units and other securities, and foreign direct investment in India. FEMA vests with the Reserve Bank of India, the sole authority to grant general or special permission for all foreign exchange related activities mentioned above. Section 2 - The Act here provides clarity on several definitions and terms used in the context of foreign exchange. Starting with the identification of the Non-resident Indian and Persons of Indian origin, it defines "foreign exchange" and "foreign security" in sections 2(n) and 2(o) respectively of the Act. It describes at length the foreign exchange facilities and where one can buy foreign exchange in India. FEMA defines an authorized dealer, and addresses the permissible exchange allowed for a business trip, for studies and medical treatment abroad, forex for foreign travel, the use of an international credit card, and remittance facility Section 3 prohibits dealings in foreign exchange except through an authorized person. Similarly, without the prior approval of the RBI, no person can make any payment to any person resident outside India in any manner other than that prescribed by it. The Act restricts non-authorized persons from entering into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire any asset outside India. Section 4 restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act. Section 6 deals with capital account transactions. This section allows a person to draw or sell foreign exchange from or to an authorized person for a capital account transaction. RBI in consultation with the Central Government has issued various regulations on capital account transactions in terms of sub-sect ion (2) and (3) of section 6. Section 7 covers the export of goods and services. All exporters are required to furnish to the RBI or any other authority, a declaration regarding full export value. Section 8 puts the responsibility of repatriation on the people resident in India who has any amount of foreign exchange due or accrued in their favour to get the same realized and repatriated to India within the specific period and in the manner specified by the RBI. The duties and liabilities of the Authorized Dealers have been dealt with in Sections 10, 11 and 12, while Sections 13 to 15 cover penalties and enforcement of the orders of the Adjudicating Authority as well as the power to compound contraventions under the Act.
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GNP & GDP: The Gross Domestic Product (GDP) in India expanded 7.8 percent in the first quarter of 2011 over the same quarter, previous year. From 2004 until 2010, India's average quarterly GDP Growth was 8.40 percent reaching an historical high of 10.10 percent in September of 2006 and a record low of 5.50 percent in December of 2004. India's diverse economy encompasses traditional vi ll age farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. India's economy rose 7.8 percent in the three months ended March 31 from a year earlier, after a revised 8.3 percent gain in the previous quarter, the Central Statistical Office said in a statement in New Delhi on May 31. Thats the slowest pace in five quarters. Manufacturing rose 5.5 percent in the three months through March from a year earlier, compared with a 6 percent gain in the previous quarter. Finance and insurance services grew 9 percent after a 10.8 percent jump in the previous quarter. Farm output rose 7.5 percent while mining advanced 1.7 percent, according to the report. The sectors which registered significant growth rates are agriculture, forestry and fishing at 7.5 percent, electricity, gas and water supply at 7.8 percent, construction at 8.2 percent, trade, hotels, transport and communication at 9.3 percent, and financing, insurance, real estate and business services at 9.0 percent.
Particulars Gross Domestic Product (%) Gross National Product (GNP) (%) Net National Product (NNP) (%) Index of Industrial Production (IIP) (%) Wholesale Prices Index (WPI)(%) Consumer Price Index (CPI)(%) Balance Of Payment (BOP) Inflation 7.48 Nov -1.10 8.58 Oct Dec 2010 10.4 Sep 10.8 Oct 6.4 -0.9 11.3 July Dec 2010 4.4 Sep Dec 2010 Latest 7.8 Chg - last quarter Estimated / Last Last Update May 2011

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MONETARY POLICY RATES: INDIA

Particulars Cash Reserve Ratio (CRR) (%) Bank Rate (%) Statutory Liquidity Ratio (SLR) (%) Repo Rate (%) Reverse Repo Rate (%) Latest 6.0 6.0 24.0 6.5 5.5 Chg - last quarter 0.25 0.25 Last Qtr 6.0 6.0 24.0 6.25 5.25 Last Update Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011

LENDING & DEOSIT RATES:

Particulars Base Rate (%) Savings Bank Rate (%) Deposit Rate (%) Latest 7.60-8.50 3.5 7.0-8.0 Chg - last quarter 0.10-0.50 1.0-0.50 Last Qtr 7.50-8.00 3.5 6.00-7.50 Last Update Jan 2011 Jan 2011 Jan 2011

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EXPORTS & IMPORTS IN FY12: India's exports surged by 37.5 per cent for the financial year ended March 31, 2011 to touch $245.9 billion shooting well past the $200-billion target set for the year. Commerce and industry minister Anand Sharma while releasing the trade figures said, "Exports have indeed exceeded our expectations. This is the highest annual percentage growth ever. Imports for the same period stood at $350.3 billion and the good news is that the trade deficit figure has come down to $104.4 billion, While there has been an improvement in the demand for Indian goods in the US and in EU, my hunch is that export growth also came from new markets, particularly from Latin America. Since export growth had fallen in 2009-10, the export expansion looks high due to the comparison with these low base figures. However, even if this base effect was not there the export growth would have been around 30 per cent, Engineering goods, which comprise high-value added goods, formed the largest component of the country's exports surpassing the $60-billion mark to register a growth of 84.76 per cent over the previous year. Petroleum product exports were valued at $ 42.45 billion, registering a growth of 50.58 per cent, reflecting the increased refining capacity in the country. The gems & jewellery sector, which provides large-scale employment to people, recorded an export growth of 15.34 per cent to touch $33.54 billion. The UAE emerged as the largest export market for Indian gems and jewellery with 47 per cent of the shipments followed by Hong Kong with 22 per cent and the US in the third spot with 11 per cent. At present, India exports 95 per cent of the world's diamonds. The Indian drugs and pharmaceuticals sector, which is fast gaining a global footprint, saw total exports to the tune of $10.32 billion, 15.08 per cent higher than the previous year. Readymade garment exports crossed $11.1 billion showing a growth of 4.23 per cent. Cotton yarn fabrics saw exports of $5.66 billion registering a growth of 42.87 per cent. Exports of carpets, jute and leather goods which are labour intensive industries, also recorded high growth. Agricultural exports and allied sectors, including tea, coffee, tobacco, spices, cashew, oil meals, fruits and vegetables and marine products crossed $12.92 billion. However, iron exports went down by 25per cent to $4.5 billion as the government had clamped down on illegal mining. Based on the current performance, it will achieve the target of $450 billion for exports in 2013-14 set in the draft strategy paper." However, imports figures may be revised upwards leading to the trade gap increasing to $110-115 billion. The good show by exports has lessened worries on the current account deficit, is likely to be at $25-35 billion. Exports for March rose by a robust 43.9 per cent to $29.1 billion compared to the growth in the same month in the previous financial year. Imports in March totalled $34.7 billion, up 17.3 per cent year-on-year.
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RESEARCH METHODOLOGY:
1. Exploratory Design:In exploratory design first collect the information about research. Understand foreign exchange market About foreign exchange market in India Impact of currency market in Indian economy Collection of primary data from past research. Then collection secondary data from Books, Magazines, Internet etc.

Then start qualitative research in this the interview of branch manager & relationship manager of HDFC securities limited. SAMPLE SIZE- 100 SAMPLING METHOD: STRATIFIED SAMPLING (strata viz. investors in Currency Market.)

The six W 1. Who: Who are respondent? The account holders in HDFC Securities who are trading in Forex Market.

2. What: What information should be obtained from the respondent? A wide variety of information could be obtained, including: a. What are income criteria? b. In which financial instrument they invest in? c. Factors they determine before investing. 3. When: When should the information is obtained from the respondent? 11.00a.m. to 5.00p.m.

4. Where: Where should the respondent is contacted to obtain the required information? The information was collected from the HDFC Securities, Mumbai.

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5. Why: Why are we obtaining information from the respondent? It is the necessary step to determine the factors of currency market impact in Indian economy because of the research project assigned.

6. Way: In what way are we going to obtain information from the respondent? a. Personal interview with questionnaire.

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DATA ANALYSIS & DATA INTERPRETATION: a) Gender:

Sr. no 1 2

Gender MALE FEMALE

No. of respondents 76 24

No. of respondents in % 76 24

24%

MALE 76% FEMALE

INTERPRETATION: From the above chart we can interpret that male gender are more interested in currency market than females. The percentage of male gender is 76% which covers the majority of the market & only 24% of women are interested in currency market.

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b) Age:

Sr. no 1 2 3 4

Age (years): 20 30 30 40 40 50 50 & Above

No. of respondent
20 52 15 13

No. of respondent in % 20 52 15 13

13% 15%

20% 20-30 30-40 40-50 52% 50 & ABOVE

INTERPRETATION: 52% of people having between 30-40 years are more interested in currency market. The second large age group which invest in the currency market is between 20-30 age group which has 20% of the respondents.

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c) Qualification:

Sr. no 1 2 3 4

Qualification H.S.C Graduate Post-Graduate Other

No. of respondents 10 54 32 4

No. of respondents in % 10 54 32 4

4% 10% 32% H.S.C Graduate 54% Post-Graduate Other

INTERPRETATION: 54% of the respondents who are investing in currency market are graduate and 32% are post graduate and 10% are under-graduate.

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c) Occupation:

Sr. no 1 2 3 4 5 Q.6

Occupation Business Self-employed Service House-wife Student Other

No. of respondents 35 10 26 5 14 10

No. of respondents in % 35 10 26 5 14 10

10% 14% 5% 10% 35%

Business Self-employed Service House-wife Student Other

26%

INTERPRETATION: 35% of the people who invested in currency market are from business group & the second highest group which invest in the currency market is of service group i.e. 26%.

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1. What are the investment avenues which you are presently investing? Sr. no 1 2 3 4 5 Avenues Equity Currency IPO Bonds Commodity No. of respondents 78 65 71 63 58 No. of respondents in % 78 65 71 63 58

17%

23% Equity Currency 20% 21% IPO Bonds Commodity

19%

INTERPRETATION: 78% of the respondents are investing in equity & 71% are preferring IPO to invest while 65% of the respondents are investing in the currency market.

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2. In which currency would you prefer to invest? Sr. no 1 2 3 4 5 Currency USD EURO GBP YEN Other No. of respondents 40 30 22 6 2 No. of respondents in % 40 30 22 6 2

2% 6% 22% 40% USD EURO GBP YEN 30% Other

INTERPRETATION: 40% of the respondents invest in USD. There is more trading volume in USD. 30% of the respondents invest in EURO, while 22% of the respondents invest in GBP.

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3. What is the primary objective of your investment in currency?

Sr.no 1 2 3 4

Objective Hedging Volatility Speculation Arbitrage

No. of respondents 46 34 16 4

No. of respondents in % 46 34 16 4

4% 16% 46% Hedging Volatility 34% Speculation Arbitrage

INTERPRETATION: 46% of the respondents investing in currency market for their hedging purpose. The second most important objective is volatility. 34% of the respondents invest in currency market with the object of volatility.

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4. What is the time duration you invest in currency?

Sr. no 1 2 3 4 5

Time period Intraday Less than 1 month 1-2 months 2-3 months More than 3 months

No. of respondents 10 52 28 6 4

No. of respondents in % 10 52 28 6 4

6%

4% 10% Intraday

28% 52%

Less than 1 month 1-2 months 2-3 months More than 3 months

INTERPRETATION: 52% of the respondents hold their investment in currency market for less than 1 month. 28% of the respondents hold their investment for the period of 1-2 months.

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5. What factors do you determine at the time of investing in currency market?

Sr. no 1 2 3 4 5 6

Factors Economy Political Industrial Export-Import Infrastructure Other

No. of respondents 40 10 20 24 6 0

No. of respondents in % 40 10 20 24 6 0

0% 6% 24% 40% Economy Political Industrial 20% Export-Import 10% Infrastructure Other

INTERPRETATION: 40% of the employees determine economic factor while investing in currency market. 24% of the respondents consider the export-import factor of the country to invest in the currency market.

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6. How much percentage of money do you invest in currency from your income?

Sr. no 1 2 3 4

% of income 10 % 11-20% 21-30% >31%

No. of respondents 22 50 18 10

No. of respondents in % 22 50 18 10

10% 18%

22% 10 % 11-20% 21-30% 50% >31%

INTERPRETATION: 50% of the respondents invest 11-20% of their income in the currency market. 22% of the respondents invest less than 10% of the income in the currency market. 18% of the respondents invest 21-30% of their income in the currency market.

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7. Which currency do you mostly rely on?

Sr. no 1 2 3 4 5

Currency USD EURO GBP YEN Other

No. of respondents 36 32 22 10 0

No. of respondents in % 36 32 22 10 0

0% 10% 36% 22% USD EURO GBP YEN 32% Other

INTERPRETATION: 36% of the respondents rely on the USD & 32% of the respondents rely on the EURO. 22% of the respondents think that GBP will rise in future so 22% rely on the GBP.

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8. Type of return you expect in currency market?

Scale No. of respondents No. of respondents in %

1 4 4

2 12 12

3 32 32

4 44 44

5 8 8

4% 8% 12% 1 2 32% 3 4 44% 5

INTERPRETATION: 44% of the respondents expect high returns from the currency market. 32% of the respondents were neutral about the returns which they expect from the currency market.

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9. How much riskier the currency market is?

Scale No. of respondents No. of respondents in %

1 20 20

2 16 16

3 10 10

4 3 3

5 1 1

1% 3% 10% 20% v.low low neutral 16% high v.high

INTERPRETATION: 20% of the respondents think that investing in currency market is less risky. While 3% of the respondents think that investing in currency market is of high risk.

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10. Which service of broker you give high weightage?

Particulars 1 Research & Advisory Based Call Less Margin Low Brokerage Good Trading Software 40 14 36 6 2 36 20 40 8

Rank 3 16 40 20 24 4 8 26 4 62

70 60 50 40 30 20 10 0 1 2 3 4 Research & Advisory Based Call Less Margin Low Brokerage Good Trading Software

INTERPRETATION: 40 respondents ranked Research & Advisory Based Cell on first. On second rank respondents preferred low brokerage the fewer margin is on third place 40 respondents ranked it. On fourth good trading software is preferred.

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FINDINGS: Most of the people prefer investing in equity. Male gender is more interested in currency market. Mostly business people deal in currency market. USD currency is preferred by investors while investing in currency market. Hedging is the main objective which is preferred while investing in currency market. Economic factors are determined at the time of investment. Majority of respondents spends their 11-20% of income in currency market. Majority of respondents think that currency market is less in risk. Majority of respondents think that Research & Advisory Based Call is preferred while investing.

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CONCLUSION: The survey I have carried out on Impact of currency market in India. The conclusion of the survey is as follows. The awareness of the forex market in India is very low in compare to other financial instruments. Only fewer people know about the currency trading. As the gender wise male investors are more investing than women investors. But the education level is as well a positive sign of women also taking interest in forex market. The equity and commodity investors are as well investing in currency. In India USD, EURO, GBP, and JPY are the currencies been traded most. USD and EURO are the most preferred currency in response from the respondents. There is high volume in this two currency pair in India. USD is on first position to trade in India, as per the data of MCX-SX the volume of USD/INR of June contract 3588917 in lots as on 3rd. June 2011. The EURO is on second to be traded in India. The data of MCX-SX volume in EURO/INR is 156556 in lots, as on 3rd. June 2011. GBP and JPY are been traded in India on 3rd. and 4th position respectively The volume in GBP/INR was 58255 in lots and volume in JPY/INR was 23628 in lots as on 3rd. June 2011 respectively. In future 36% & 32% of respondent are relay on USD & EURO respectively. But in future as per the report of Bank Of Japan Change in the total quantity of domestic currency in circulation and current account deposits held at BOJ, It's positively correlated with interest rates-early in the economic cycle an increasing supply of money leads to additional spending and investment, and later in the cycle expanding money supply leads to inflation. This release would be affecting the JPY rate. The earning in currency market is low in comparison of Equity or Commodity market. The volatility in currency rates is very less. It doesnt volatile as equity or commodity market. The risk is also very less in the currency market. The main or primary object of investing in currency market by investor is hedging. More number of respondents is connected in the business of Import-Export. They use to hedge the currency market for future payment and earn the deference. The impact of currency market in Indian economy can be measure from the Gross Domestic Product and Gross National Product. The GDP of current year if 7.8%. It is a positive in compare to last financial year; the second factor is foreign reserve. As on May 2012 India is having $ 3010 billion of foreign reserve as per the IMF data. Export of the country is as well increased as exports surged by 37.5 per cent for the financial year ended March 31, 2012 to touch $245.9 billion shooting well past the $200-billion target set for the year. Currency market in India is having a wide scope for development in future.

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