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Ch 11 Foreign Exchange Market.

Foreign Exchange Market: Every country has its own foreign exchange market. In a
developing country like India free operations are not
possible as exchange controls are necessary.
Financial transactions not directly related to trade flows
have steadily increased in all the countries.
FEM in the world averaged US $150 million per day while
only US $7 billion per day were exports i.e. only 5%
reflects foreign exchange transactions, balance 95% by
capital transfer, speculation etc.
RBI has authority to enter into FE transactions both in
its own account & on behalf of the government.
Foreign exchange market in India is connected through
electronically linked network of banks, FE brokers &
dealers.
FEM acts as an intermediary between buyer & seller of
foreign exchange.
FEM helps importer & exporter to minimize their risk,
which is done through the provisions of Hedging
facilities.

Organization Of Foreign Exchange Market:1

The day to day business of buying & selling in FE has been


handled by FE department & Scheduled Commercial
Banks.
Authorized Dealers has to get approval from RBI & can
trade in FEM only after meeting the needs of domestic
market.
The exchange control act was imposed under the FERA
1973 which came into force on 1st January 1974. It is
administrated by RBI in accordance to the general policy
laid by GOI in consultation with the bank.
Participants in Foreign Exchange Market:1. Dealers Banks & non-bank agencies are dealers in FEM.
2. Individuals & Firms Exporter, importer, International
portfolio investors, MNCs, tourist & other individuals
using FEM.
3. Brokers Are agents who bring together supplier &
buyer.
4. Central Bank & Treasuries They aim at influencing the
value of their own currencies.
5. Speculators & Arbitragers They trade in their own way
& make profit through normal & speculative transactions.

Exchange Rates:2

1.Merchant Rate:Rate at which foreign exchange dealing takes place


between bank & merchant business.
2.Inter Bank Rate: Rate quoted between the banks
Rates quoted has to be in transit period, for one month
forward.
3.Nominal Exchange Rate: Price of one currency in term of other currency.
The Nominal rate is presented in a index form.
4.Real Exchange Rate:Rate that measures the purchasing power of the
currency & gives an idea whether the exchange rate is
competitive in international markets.
5.Effective Exchange Rate:Measure of appreciation or depreciation of a currency
against the weighted basket of currencies with whom the
country trades.

Devaluation & Depreciation:1. Indian rupee was devalued about 30% in 1949.
2. India has the exchange rate system of managed
flexibility under IMF arrangements.
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3. During 1971 & 1991 value of rupee declined substantially


against major international currency.
4. The condition regarding export, import, balance of trade,
earnings, foreign exchange reserve capital had been
deteriorating over the past many years.
5. When a countrys official exchange rate relative to gold
to another currency is lowered in devaluation.
6. When the price of a given currency falls to a foreign
exchange currency it is depreciation of domestic
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currency.
Exchange rate adjustment comprises both devaluation &
depreciation.

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