Chapter-5: Exchange control in India

Summary:
There are various forms of controls imposed by a government on the purchase/sale of
foreign currencies by residents or on the purchase/sale of local currency by non-residents.Common
foreign exchange controls includes Banning the use of foreign currency within the country, Banning
locals from possessing foreign currency, Restricting currency exchange to government-approved
exchangers, fixed exchange rates, Restrictions on the amount of currency that may be imported or
exported. Exchange control means official interference in the foreign exchange dealing of the country.
One of the important objectives of exchange control is protection of balance of payments.
Control of Exchange Rates is system of managedflexibility came up to take the merits of fixed and
flexible exchange rates. This system is based on the par value concept under IMF guidelines. In managed
flexibility of exchange rate system. To minimise the disadvantages of flexible exchange rate, most of the
developing countries including India have adopted the concept of managed Flexible Exchange Rate
(MFER).Under MFER, the Central bank intervenes to bring stability in exchange rate. RBIs intervention
involves purchase of foreign currency from market or release (sale) of foreign currency in the market, to
bring stability in exchange rates.
The transactions having International Financial implications are regulated by the Foreign Exchange
Department of Reserve Bank of India, which includesPurchase and sale of Foreign Exchange, Export and
import of currency , cheque, drafts, travelers cheque and other international elements, Export of
securities, Procedure for realisation of export proceeds, Foreign travel exchange, Acquisition and holding
of foreign securities , portfolio investment, Acquisition, holding and disposal of immovable property
beyond certain prescribed limit from time to time.
Freely convertible currencies or permitted currencies are those that anyone can convert in to another
foreign currency without any restrictions or intervention by government of the original country.Every
receipt in foreign exchange by an authorised dealer, whether by way of remittance from a foreign country
(other than Nepal and Bhutan) or by way of reimbursement from his branch or correspondent outside
India against payment for export from India, or against any other payment should be as described under
FEMA. Similarly payment in foreign exchange by an authorised dealer, whether by way of remittance
from India or by way of reimbursement to his branch or correspondent outside India (other than Nepal
and Bhutan) against payment for import into India, or against any other payment also should be as per
FEMA regulations.A convertible currency is a currency which can be converted in to gold or any other
currency freely i.e. without having obtained the prior permission of monetary authorities of the country
concerned.
While there are no restrictions form the exchange control viewpoint on any foreign currency being chosen
in international transactions comprising import / export trade, consultancy services etc.
Authorised dealer means a person authorised as an authorised dealer under subsection (1) of section 10
of the foreign Exchange Management Act.In addition, AD Category II Money Changers FFMCs, FFMCs
and established firms such as hotels, shops, etc., have been authorised by the Reserve Bank of India for
restricted money changer business, to deal in foreign currency notes, coins and travellers cheques.
Reserve Bank will buy/sell only U.S. dollar. It will not ordinarily buy/sell any other currency from/to
authorised dealers.

Foreign Exchange Dealers Association of India (FEDAI) is authorised for 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.
A correspondent is an overseas bank with which a bank in the home country maintains an account and
through which it routes its business in connection with the foreign exchange transaction undertaken by it.
For the purpose of foreign exchange transactions a bank authorised to deal in foreign exchange in India
requires to maintain accounts in foreign currencies with its overseas branches or correspondents in
different countries these accounts are called as Nostro accounts. Similarly, Vostro accounts are also
permitted to open by AD banks for their overseas correspondent banks.
Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods
or services, rather than with money. The countertrade includes Barter, Switch trading, counter purchase,,
offsets etc. AD Category I banks were permitted to open Escrow account and Special account on behalf
of non-resident corporate for acquisition/transfer of shares/ convertible debentures of an Indian company
through open offers/ delisting/ exit offers, subject to compliance with the relevant SEBI.
Barter is a system of exchange by which goods or services are directly exchanged for other goods or
services without using a medium of exchange, such as money. It is distinguishable from gift economies
in that the reciprocal exchange is immediate and not delayed in time.
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