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INTRODUCTION

Introduction
Simultaneous purchase and sale of the currency or the exchange of one country's currency for the one of another country Market in India is traced in the year 1978 Exchange rate of the rupee is officially determined by RBI In 1994, unification of the exchange rate of rupee taken place based on demand and supply of foreign exchange Average daily turnover in global foreign exchange markets is

estimated at $3.98 trillion

Purpose of Foreign Exchange Market


To convert the money of one country into the money of another country To provide the security of the risk against the foreign exchange Banks trade on the foreign exchange market to make profits,

The depreciation of a country's currency refers to a decrease in the value of that country's currency. The appreciation of a country's currency refers to an increase in the value of that country's currency

PARTICIPANTS AND DERIVATIVES

Participants in Forex market in India

Extent of RBI Intervention in Foreign exchange Market


4 3.5 3 2.9 2.5 2 1.5 1 0.5 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 200809P 0.7 0.4 0.4 0.7 1.5 3.8

Foreign Exchange Derivative Instruments in India


Foreign Currency Rupee Swap

Foreign Exchange Forwards


Foreign Currency Rupee Options Cross-Currency Options Cross-Currency Swaps

EARLY STAGES

Early Stages
Par Value System (1947-1971) Bretton Woods System

Basket Peg (1971-1991)

Foreign Exchange Regulations Act


Enacted -1947 Placed on permanent basis 1957 Reserve Bank

POST LIBERALISATION

Post-Reform period - 1991 onwards


New economic policy of 1991 Two-step devaluation of exchange rate by 9% and 11% in 1991 by RBI Closing of Pegged-exchange rate Rangarajan committee report & Market determined exchange rate LERMS and dual-exchange rate system (92) Convergence of dual rates in 93 Current account convertibility in 94 Sodhani Committee report 95 Tarapore committee report 97 Internal Technical group on Forex Markets by RBI 2005

Measures initiated to develop Forex markets in India


Institutionl framework FERA (1973) was replaced by the more market friendly FEMA (1999) More power to Ads Setting up of CCIL in 2001 recommended by Sodhani Committee

Increase in instruments in Forex market More rupee-foreign currency swaps Additional hedging instruments such as foreign currency-rupee options, cross currency options, interest rate swaps, currency swaps, forward rate agreements (FRAs)

Liberalization measures ADs were allowed to trade in overseas markets Banks were allowed to:
Fix net overnight position limits and gap limits, determine interest rates and maturity period of FCNR(B), use derivative products for asset-liability management

Forex market participants and FIIs were allowed to transact without any limits

Foreign exchange earners were permitted to maintain foreign currency accounts

Global forex market turnover

Indian forex market growth


Item Total Annual Turnover Average Daily Turnover 1997-98 (bn USD) 1306 5 2005-06 (bn USD) 4413 18 2006-07 (bn USD) 5734 23

Average Daily Merchant Turnover


Average Daily interbank Turnover

13

18

PHASES OF FOREIGN EXCHANGE MARKET POSTLIBERALIZATION

First Phase of Stability


March 1993 to June 1995 Stable at 1 USD = Rs. 31.37 Policy aimed at:
boosting exports

building up reserves

Large FDI inflows & portfolio investments

RBI purchased major chunk

First Phase of Volatility


August 1995 to March 1996 Decrease in inflows and strengthening of USD Bid-Offer spread widened to 20 paise, 85 paise on some days Two approaches by RBI:
Sell in large lots Continuous sale of small amounts

Result: Stability at 1 USD = Rs. 34 to 35

Second Phase of Stability


April 1996 to Mid-August 1997 Rate stable at 1 USD = Rs. 35.50 to 36 Capital inflows increased again Forex reserve losses were recovered soon

Second Phase of Volatility


2 Significant periods:
Mid-August 1997 to January 1998

May 1998 to August 1998

South East Asian Crisis; depreciation of rupee by 9% Reversible Policy measures undertaken by the Reserve Bank

Reversible Measures from Nov 1997 to Jan 1998


CRR : Up from 9.5% to 10% to 10.5%

Reverse Repo Rate : 4.5% to 6.5% to 7% to 9%

Interest on Export Credit: Raised from 13% to 15% to

20%

Second Phase of Volatility


Exchange rate back to 1 USD = Rs. 39.50 Normalcy returned, policies rolled back 2nd Period: May 1998 to August 1998 Appreciation of USD; Reduction in FIIs and downgrading of Indias investment outlook Rupee falls to 42.50 = 1 USD by June 1998 Indirect intervention by RBI RIBs get $4.2 billion Result: Volatility controlled and forex reserve increased

Phase of Relative Stability


September 1998 to March 2003

Slight pressure during June to October 1999 due to Kargil War


RBI loosens its kitty for oil imports and government service debts IMDs raise Forex reserve to USD 5.5 billion by November 2000

Phase of Surge in Capital Flows


From 2003 to 2008 1 USD = Rs. 38.48 in October 2007 Large purchasing by RBI to absorb excess supply Market Stabilization Scheme (MSS) Forex reserves of USD 203.1 billion (April 2007) Forex reserves of USD 294.82 billion (March 2012)

CHALLENGES AND CURRENT TRENDS

Challenges
Improvement in Market Infrastructure Accounting Standards Relaxation of the criteria of underlying for transactions Interest Rate Parity Reserve Management Implications of Global Imbalances Managing Exchange Rate Volatility Customer Service Greater Inter-linkages of Foreign Exchange Market with other Segments

Current trend
One of the emerging economies of the world Global forex market is presently estimated at USD 3 trillion Indian forest market is 16th forex market in the world in terms of daily turnover as the bureau of Indian standards 34 billion in 2007 Reserve Bank of India, officially determined the exchange rate of rupee according to the weighed basket of currencies with the significant business partners of India.

Open market policy in the year 1991 and implementation of the new economic policy by the Govt. of India Introduced LERMS Articles of Agreement with the International Monetary Fund Introduction of future derivative segment in Forex trading The trade of derivative contract at the leading stock exchanges NSE and MCX for three new currency pairs