(Last Updated on : 04/05/2013)
Foreign Exchange Market in India operates under the Central Government of India and executes wide powers to control transactions in foreign exchange. The Foreign Exchange Management Act, 1999 or FEMA regulates the whole Foreign Exchange Market in India. Before the introduction of this act, the foreign exchange market in India was regulated by the Reserve Bank of India through the Exchange Control Department, by the Foreign Exchange Regulation Act or FERA, 1947. After independence, FERA was introduced as a temporary measure to regulate the inflow of the foreign capital. But with the Economic and Industrial development, the need for conservation of foreign currency was urgently felt and on the recommendation of the Public Accounts Committee, the Indian government passed the Foreign Exchange Regulation Act, 1973 and gradually, this act became famous as FEMA.
Early Years of Foreign Exchange Market
Until 1992, all Foreign Investments in India and the repatriation of Foreign Capital required previous approval of the government. The Foreign Exchange Regulation Act rarely allowed foreign majority holdings for Foreign Exchange in India. However, a new Foreign Investment Policy announced in July 1991, declared automatic approval for Foreign Exchange in India for thirty-four industries. These industries were designated with high priority, up to an equivalent limit of 51 percent. The foreign exchange market in India is regulated by the Reserve Bank of India through the Exchange Control Department.
Initially, the Government required that a company's routine approval must rely on identical exports and dividend repatriation, but in May 1992, this requirement of Foreign Exchange in India was lifted, with an exception to low-priority sectors. In 1994, foreign nationals and non-resident Indian investors were permitted to repatriate not only their profits but also their capital for Foreign Exchange in India. Indian exporters enjoyed the freedom to use their export earnings as they found it suitable. However, transfer of capital abroad by Indian nationals is only allowed in particular circumstances, such as emigration. Foreign Exchange in India is automatically made accessible for imports for which import licenses are widely issued.
Foreign Exchange Rate Policy in India
Indian authorities are able to manage the Exchange Rate easily, only because Foreign Exchange Transactions in India are so securely controlled. From 1975 to 1992 the Rupee was coupled to a trade-weighted basket of currencies. In February 1992, the Indian Government started to make the Rupee convertible, and in March 1993 a single floating Exchange Rate in the market of Foreign Exchange in India was implemented. In July 1995, Rs 31.81 was worth US$1, as compared to Rs 7.86 in 1980, Rs 12.37 in 1985, Rs 17.50 in 1990, Rs 44.942 in 2000 and Rs 44.195 in the year 2011.
Since the onset of liberalisation, Foreign Exchange Markets in India have witnessed explosive growth in trading capacity. The importance of the Exchange Rate of Foreign Exchange in India for the Indian Economy has also been far greater than ever before. While the Indian Government has clearly adopted a flexible exchange rate regime, in practice the Rupee is one of most resourceful trackers of the US dollar.
Predictions of capital flow-driven currency crisis have held India back from Capital Account Convertibility, as stated by experts. The Rupee's deviations from Covered Interest Parity, as compared to the Dollar, display relatively long-lived swings. An inevitable side effect of the Foreign Exchange Rate Policy in India has been the ballooning of Foreign Exchange Reserves to over a hundred Billion Dollars. In an unparalleled move, the Government is considering to use part of these reserves to sponsor in
frastructure investments in the country.
Growth of Foreign Exchange Market in India
The Foreign Exchange Market in India is growing very rapidly, since the annual turnover of the market is more than $400 billion. This Foreign Exchange transaction in India does not include the Inter-Bank transactions. According to the record of Foreign Exchange in India, Reserve Bank of India released these transactions. The average monthly turnover in the merchant segment was $40.5 billion in 2003-04 and the Inter-Bank transaction was $134.2 for the same period. The average total monthly turnover in the sector of Foreign Exchange in India was about $174.7 billion for the same period. The transactions are made on spot and also on forward basis, which include currency swaps and interest rate swaps.
The Indian Foreign Exchange Market is made up of the buyers, sellers, market mediators and the Monetary Authority of India. The main centre of Foreign Exchange in India is Mumbai, the commercial capital of the country. There are several other centres for Foreign Exchange Transactions in India including the major cities of Kolkata
, New Delhi, Chennai
, Pondicherry and Cochin. With the development of technologies, all the Foreign Exchange Markets of India work collectively and in much easier process.
Foreign Exchange Dealers Association is a voluntary association that also provides some help in regulating the market. The Authorised Dealers and the attributed brokers are qualified to participate in the Foreign Exchange Markets of India. When the Foreign Exchange Trade is going on between Authorized Dealers and Reserve Bank of India or between the Authorised Dealers and the Overseas Banks, the brokers usually do not have any role to play. Besides the Authorised Dealers and Brokers, there are some others who are provided with the limited rights to accept the Foreign Currency or Travellers' Cheque; they are the Authorised Moneychangers, Travel Agents, certain Hotels and Government Shops. The IDBI and Exim Bank are also permitted at specific times to hold Foreign Currency.
The Foreign Exchange Market in India is a flourishing ground of profit and higher initiatives are taken by the Central Government in order to strengthen the foundation.