Foreign Exchange Markets in India

Historically the value of goods was expressed through some other goods, for example -
abarter economy where individuals exchange goods. The obvious disadvantages of
such asystem encouraged establishment of more generally accepted and understand
means of goodsexchange long time ago in history - to set a common scale of value. In
different placeseverything from teeth to jewelry has served this purpose but later metals,
and especially goldand 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 systemsintroduced a paper form of IOUs (I owe you) which
gained wide acceptance during themiddle Ages. Such paper IOUs became the basis of
our modern currencies.Before First World War most central banks supported currencies
with gold. Even thoughbanknotes 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 hencepolitical instability. To protect national interests foreign exchange controls
were introduced todemand more responsibility from market players.Closer to the end of
World War II, the Bretton Woods agreement was signed as the initiativeof the USA in
July 1944. The Bretton Woods Conference rejected John Maynard Keynessuggestion
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
(GeneralAgreement 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. TheBretton Woods agreement resulted in a system of fixed
exchange rates that partly reinstatedthe gold standard, fixing the US dollar at USD35/oz
and fixing the other main currencies tothe dollar - and was intended to be
permanent.The Bretton Woods system came under increasing pressure as national
economies moved indifferent directions during the sixties. A number of realignments
kept the system alive for along time, but eventually Bretton Woods collapsed in the early
seventies following presidentNixon's suspension of the gold convertibility in August
1971. The dollar was no longersuitable as the sole international currency at a time when
it was under severe pressure fromincreasing US budget and trade deficits.The following
decades have seen foreign exchange trading develop into the largest globalmarket by
far. Restrictions on capital flows have been removed in most countries, leaving
themarket 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
EconomicCommunity) introduced a new system of fixed exchange rates in 1979, the
EuropeanMonetary 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
Europeancurrencies. Nevertheless, the quest for currency stability has continued in
Europe with therenewed attempt to not only fix currencies but actually replace many of
them with the Euro in2001.The lack of sustainability in fixed foreign exchange rates
gained new relevance with theevents in South East Asia in the latter part of 1997, where
currency after currency wasdevalued against the US dollar, leaving other fixed
exchange rates, in particular in SouthAmerica, looking very vulnerable.But while
commercial companies have had to face a much more volatile currencyenvironment in
recent years, investors and financial institutions have found a newplayground. The size
of foreign exchange markets now dwarfs any other investment marketby a large factor.
It is estimated that more than USD 3,000 billion is traded every day, farmore than the
world's stock and bond markets combined.Forex (Foreign Exchange) is the international
financial market used for trade of worldcurrencies. It has been working since 70s of the
20th century - from the moment when thebiggest world nations decided to switch from
fixed exchange rates to floating ones. Dailyvolume of Forex trade exceeds 4 trillion
United States dollars, and this number is alwaysgrowing .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 areperformed by world banks
any time during the day or night (some banks even work onSaturdays and Sundays).
Just like any other exchange, Forex market is driven by supply anddemand 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 timesper second - this market is very liquid.