Exchange exposure @ canara bank project report

“Foreign Exchange Exposure”

EXECUTIVE SUMMARY

“Techniques of Foreign Exchange Exposure used in Banks and
in Trading Firms”

In a floating exchange rate regime, the value of a currency changes frequently.
Such changes influence the value of those firms that are involved in international
transactions.

Foreign exchange exposure is into 2 classes. One is known as accounting or
translation exposure, while the other is known as economic exposure. The economic
exposure is further divided into transaction exposure and real operating exposure.

If such exposure results in loss to a firm, it needs to manage these exposures. For
this purpose they use some techniques like:

♦ Forward Market Hedges
♦ Hedging through currency futures
♦ Hedging through currency options.
♦ Money Market Hedge.
♦ Leads and Lags
♦ Cross Hedging
♦ Currency diversification
♦ Risk Sharing
♦ Pricing of transaction

If such exposure arises, then firms use some documents for reducing these
exposures through banks like:

♦ Letter of Credit
♦ Draft
♦ Bill of Exchange
♦ Pre-Shipment Credit
♦ Post-Shipment Credit
♦ Medium-term Credit
♦ Credit under duty draw-back scheme
♦ Factoring
♦ Forfeiting

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Sub Objectives:

1. What are the techniques available to reduce the exposure involved in foreign
market?
2. What are the procedures for forecasting the future currency rates?
3. What are the procedures, banks are following in foreign currency market?
4. What are the practical issues used in Banks and in firms i.e., who are actual
traders?
5. What traders are expecting from banks, other than their regular Forex trading?
6. What restrictions are involved in foreign currency market by government or
other concerns?

Data Collection for the Study:

Primary Data:
Questionnaire
Bank Officials in the Forex Department

Secondary Data:
Internet
Newspaper
Magazine

Significance of the Study

The objectives of the project is two-fold

A) To provide the guidelines/help lines to traders through the banks for avoiding
and minimizing the exposure.

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"The government is concerned over the rapid appreciation of the rupee against the US
dollar and the central bank may have to intervene if there is disorderly movement in the
exchange rate."3

- P Chidambaram, Finance Minister of India, in September, 2007

"The objective of the exchange rate management has been to ensure that the external
value of the rupee is realistic and credible as evidenced by a sustainable current account
deficit and manageable foreign exchange situation. Subject to this predominant
objective, the exchange rate policy is guided by the need to reduce excess volatility,
prevent the emergence of destabilizing speculation activities, help maintain adequate
level of reserves, and develop an orderly foreign exchange market."4

- RBI's Policy in the Foreign Exchange Market

"I expect the rupee to appreciate vis-a-vis the dollar through 2008. However, the
appreciation will be gradual and perhaps, not as rapid as it has been in the last few
months," ABN AMRO Bank's newly-appointed India chief Meera H Sanyal told media
here on Thursday.

IN 1975, about 80% of foreign exchange transactions (where one national currency is
exchanged for another) were to conduct business in the real economy. For instance,
currencies change hands to import oil, export cars, buy corporations, invest in portfolios,
or build factories. Real transactions actually produce or trade goods and services. The
remaining 20% of transactions in 1975 were speculative, which means that the sole
purpose was an expected profit from buying and selling currencies themselves, based on
their changing values. So, even in the days when the real economy was dominant, some
currency speculation was going on. There had always been that little bit of frosting on the
cake.

'Foreign exchange risk'

In considering the viewpoint of so-called real businesses (those that make cars, mine,
produce electronics, etc.), the 'foreign exchange risk' has by far become the largest risk in
international business today, often larger than political or market risk. For example, if a
German chemical company invests in a plant in India, it makes the investment in deutsch-
marks. The chemical products sold locally from that plant are paid in rupees, India's
currency. If the value of the rupee then drops in terms of the deutschmark, the return on
the original investment will drop as well. In short, the biggest risk of such investments is
not whether Indians will buy the chemicals (market risk) or whether the Indian
government will nationalise the plant (political risk), but the changes in the values of the
currencies involved (foreign exchange risk).

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COMPANY PROFILE

Late Sri. Ammembal Subba Rao Pai

Our beloved Founder

Founded as 'Canara Bank Hindu Permanent Fund' in
1906, by late Sri. Ammembal Subba Rao Pai, a
philanthropist, this small seed blossomed into a limited
company as 'Canara Bank Ltd.' in 1910 and became
Canara Bank in 1969 after nationalisation.

"A good bank is not only the financial heart of the community, but also one with
an obligation of helping in every possible manner to improve the economic
conditions of the common people" - A. Subba Rao Pai.

Founding Principles

1. To remove Superstition and ignorance.
2. To spread education among all to sub-serve the first principle.
3. To inculcate the habit of thrift and savings.
4. To transform the financial institution not only as the financial heart of the
community but the social heart as well.
5. To assist the needy.
6. To work with sense of service and dedication.
7. To develop a concern for fellow human being and sensitivity to the surroundings
with a view to make changes/remove hardships and sufferings.

Sound founding principles, enlightened leadership, unique work culture and remarkable
adaptability to changing banking environment have enabled Canara Bank to be a
frontline banking institution of global standards.

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Vision

To emerge as a ‘Best Practices Bank’ by pursuing global benchmarks in profitability,
operational efficiency, asset quality, risk management and expanding the global reach.

Mission

To provide quality-banking services with enhanced customer orientation, higher value
creation for stakeholders and to continue as a responsive corporate social citizen by
effectively blending commercial pursuits with social banking.

BRAND STORY

The new brand identity for Canara Bank is based on the idea of a bond and is a
representation of the close ties between the Bank and its many stakeholders – from
customers and employees to investors, institutions and society at large. With its rich
heritage of banking expertise, dedicated customer service and corporate social
responsibility, Canara Bank is a powerful enabler who helps its stakeholders
achieve their goals. The two seamlessly connected links capture the essence of this
partnership.

Canara Bank has more than 45,800 employees and serves over 31 million customers
through a network of over 2600 branches spread across the country. The simple,
memorable symbol can be easily recalled and decoded by all of the Bank’s diverse
audiences.

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The colour palette and typography have been carefully chosen. The rich blue
represents stability, scale and depth. This contrasts with accents of bright yellow
that evoke optimism, warmth and energy. The Canara Bank logotype has been
hand-crafted. Its classic, serif letterforms communicate heritage and stature.

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Significant Milestones

1st July Canara Hindu Permanent Fund Ltd. formally registered with a capital of 2000
1906 shares of Rs.50/- each, with 4 employees.
1910 Canara Hindu Permanent Fund renamed as Canara Bank Limited
1969 14 major banks in the country, including Canara Bank, nationalized on July 19
1976 1000th branch inaugurated
Overseas branch at London inaugurated
1983
Cancard (the Bank’s credit card) launched
1984 Merger with the Laksmi Commercial Bank Limited
1985 Commissioning of Indo Hong Kong International Finance Limited
1987 Canbank Mutual Fund & Canfin Homes, launched
1989 Canbank Venture Capital Fund started
1989-90 Canbank Factors Limited, the factoring subsidiary launched
Became the first Bank to articulate and adopt the directive principles of “Good
1992-93
Banking”.
Became the first Bank to be conferred with ISO 9002 certification for one of
1995-96
its branches in Bangalore
Opened a 'Mahila Banking Branch', first of its kind at Bangalore, for catering
2001-02
exclusively to the financial requirements of women clientele.
2002-03 Maiden IPO of the Bank
2003-04 Launched Internet & Mobile Banking Services
2004-05 100% Branch computerization
Entered 100th Year in Banking Service
2005-06 Launched Core Banking Solution in select branches
Number One Position in Aggregate Business among Nationalized Banks
Notched up the highest ever net profit since its inception
Retained Number One Position in Aggregate Business among Nationalized
2006-07 Banks
Singed MoUs for Commissioning Two JVs in Insurance and Asset
Management with international majors.

As at march 2007 the total business of the bank was over Rs.2,40,000 crores.

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AWARDS & ACHIEVEMENTS

• Canara Bank was awarded the "First National Award" instituted by the Ministry
of Micro, Small & Medium Enterprises, Govt. of India for excellence in "Micro &
Small Enterprises (MSE) Lending" for 2006-07.

• Adjudged the 'Best Public Sector Bank' in India under the 'Best Banks Survey'
conducted by 'Financial Express-Ernst and Young' for 2005-06.

• Conferred with 'Employer Branding Awards 2007' by Indiatimes Mindscape and
ITM Business School, for excellence in human resources. Canara Bank was the
first Public sector Bank to bag this award.

• Won the maiden award of 'Best Performing Bank' under solar water heater
finance for the year 2005-06, instituted by the Ministry of New and Renewable
Energy, Govt. of India.

• Received Niryat Bandhu Gold Trophy for outstanding performance under
export finance.

As a premier commercial bank in India, Canara Bank's track record in the service of the
CHAIRMAN'S MESSAGE

nation for over 100 years is both striking and impressive. Today, Canara Bank has a
strong pan India presence with over 2600 branches and 1500 ATMs, catering to all

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segments of an ever growing clientele base of exceeding 31 million. Canara Bank is
recognized as a leading financial conglomerate in India, with as many as nine
subsidiaries/sponsored institutions/joint ventures in India and abroad. As the Bank steps
into the second century, it aspires to emerge as a Global Bank with Best Practices in its
endeavour to become a 'Speciality Financial Supermarket'.

Introduction to Topic

The foreign exchange (also known as "forex" or "FX") market is the place where
currencies are traded. The overall forex market is the largest, most liquid market in the
world with an average traded value that exceeds $1.9 trillion per day and includes all of
the currencies in the world.

There is no central marketplace for currency exchange, rather, trade is conducted
over-the-counter. The forex market is open 24 hours a day, five days a week, with
currencies being traded worldwide among the major financial centers of London, New
York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - spanning
most time zones.

The forex is the largest market in the world in terms of the total cash value
traded, and any person, firm, or country may participate in this market.

Meaning of Foreign Exchange Market (Forex Market):

The foreign exchange market is the "place" where currencies are traded.
Currencies are important to most people around the world, whether they realize it or not,
because currencies need to be exchanged in order to conduct foreign trade and business

Foreign Exchange as a Financial Market
Currency exchange is very attractive for both the corporate and individual traders who
make money on the Forex - a special financial market assigned for the foreign exchange.
The following features make this market different in compare to all other sectors of the
world financial system:
Heightened sensibility to a large and continuously changing number of factors;
• Accessibility to all traders in the major currencies;
• Guaranteed quantity and liquidity of the major currencies;
• Increased consideration for several currencies, round-the clock business hours
which enable traders to deal after normal hours or during national holidays in
their country finding markets abroad open and
• Extremely high efficiency relative to other financial markets.

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This goal of this manual is to introduce beginning traders to all the essential aspects of
foreign exchange in a practical manner and to be a source of best answers on the typical
questions as why are currencies being traded, who are the traders, what currencies do
they trade, what makes rates move, what instruments are used for the trade, how a
currency behavior can be forecasted and where the pertinent information may be obtained
from. Mastering the content of an appropriate section the user will be able to make
his/her own decisions, test them, and ultimately use recommended tools and approaches
for his/her own benefit.

Foreign Exchange in a Historical Perspective
Currency trading has a long history and can be traced back to the ancient Middle East and
Middle Ages when foreign exchange started to take shape after the international merchant
bankers devised bills of exchange, which were transferable third-party payments that
allowed flexibility and growth in foreign exchange dealings.

The modern foreign exchange market characterized by the consequent periods of
increased volatility and relative stability formed itself in the twentieth century. By the
mid-1930s London became to be the leading center for foreign exchange and the British
pound served as the currency to trade and to keep as a reserve currency. Because in the
old times foreign exchange was traded on the telex machines, or cable, the pound has
generally the nickname “cable”. In 1930, the Bank for International Settlements was
established in Basel, Switzerland, to oversee the financial efforts of the newly
independent countries, emerged after the World War I, and to provide monetary relief to
countries experiencing temporary balance of payments difficulties.

After the World War II, where the British economy was destroyed and the United
States was the only country unscarred by war, U.S. dollar became the prominent currency
of the entire globe. Nowadays, currencies all over the world are generally quoted against
the U.S. dollar.

Reading a Quote

When a currency is quoted, it is done in relation to another currency, so that the value of
one is reflected through the value of another. Therefore, if you are trying to determine the
exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the quote
would look like this:

USD/JPY = 119.50

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This is referred to as a currency pair. The currency to the left of the slash is the base
currency, while the currency on the right is called the quote or counter currency. The base
currency (in this case, the U.S. dollar) is always equal to one unit (in this case, US$1),
and the quoted currency (in this case, the Japanese yen) is what that one base unit is
equivalent to in the other currency. The quote means that US$1 = 119.50 Japanese yen. In
other words, US$1 can buy 119.50 Japanese yen.

Direct Quote vs. Indirect Quote

There are two ways to quote a currency pair, either directly or indirectly. A direct quote is
simply a currency pair in which the domestic currency is the base currency; while an
indirect quote, is a currency pair where the domestic currency is the quoted currency. So
if you were looking at the Canadian dollar as the domestic currency and U.S. dollar as the
foreign currency, a direct quote would be CAD/USD, while an indirect quote would be
USD/CAD. The direct quote varies the foreign currency, and the quoted, or domestic
currency, remains fixed at one unit. In the indirect quote, on the other hand, the domestic
currency is variable and the foreign currency is fixed at one unit.

For example, if Canada is the domestic currency, a direct quote would be 0.85
CAD/USD, which means with C$1, you can purchase US$0.85. The indirect quote for
this would be the inverse (1/0.85), which is 1.18 USD/CAD and means that USD$1 will
purchase C$1.18.

In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S.
dollar is frequently the base currency in the currency pair. In these cases, it is called a
direct quote. This would apply to the above USD/JPY currency pair, which indicates that
US$1 is equal to 119.50 Japanese yen.

However, not all currencies have the U.S. dollar as the base. The Queen's currencies -
those currencies that historically have had a tie with Britain, such as the British pound,
Australian Dollar and New Zealand dollar - are all quoted as the base currency against
the U.S. dollar. The euro, which is relatively new, is quoted the same way as well. In
these cases, the U.S. dollar is the counter currency, and the exchange rate is referred to as
an indirect quote. This is why the EUR/USD quote is given as 1.25, for example, because
it means that one euro is the equivalent of 1.25 U.S. dollars.

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Most currency exchange rates are quoted out to four digits after the decimal place, with
the exception of the Japanese yen (JPY), which is quoted out to two decimal places.

Cross Currency

When a currency quote is given without the U.S. dollar as one of its components, this is
called a cross currency. The most common cross currency pairs are the EUR/GBP, EUR/
CHF and EUR/JPY. These currency pairs expand the trading possibilities in the forex
market, but it is important to note that they do not have as much of a following (for
example, not as actively traded) as pairs that include the U.S. dollar, which also are called
the majors.

Bid and Ask

As with most trading in the financial markets, when you are trading a currency pair there
is a bid price (buy) and an ask price (sell). Again, these are in relation to the base
currency. When buying a currency pair (going long), the ask price refers to the amount of
quoted currency that has to be paid in order to buy one unit of the base currency, or how
much the market will sell one unit of the base currency for in relation to the quoted
currency.

The bid price is used when selling a currency pair (going short) and reflects how much of
the quoted currency will be obtained when selling one unit of the base currency, or how
much the market will pay for the quoted currency in relation to the base currency.

The quote before the slash is the bid price, and the two digits after the slash represent the
ask price (only the last two digits of the full price are typically quoted). Note that the bid
price is always smaller than the ask price. Let's look at an example:

USD/CAD = 1.2000/05
Bid = 1.2000
Ask= 1.2005

If you want to buy this currency pair, this means that you intend to buy the base currency
and are therefore looking at the ask price to see how much (in Canadian dollars) the
market will charge for U.S. dollars. According to the ask price, you can buy one U.S.
dollar with 1.2005 Canadian dollars.

However, in order to sell this currency pair, or sell the base currency in exchange
for the quoted currency, you would look at the bid price. It tells you that the market will
buy US$1 base currency (you will be selling the market the base currency) for a price
equivalent to 1.2000 Canadian dollars, which is the quoted currency.

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Whichever currency is quoted first (the base currency) is always the one in which the
transaction is being conducted. You either buy or sell the base currency. Depending on
what currency you want to use to buy or sell the base with, you refer to the corresponding
currency pair spot exchange rate to determine the price.

Spreads and Pips

The difference between the bid price and the ask price is called a spread. If we were to
look at the following quote: EUR/USD = 1.2500/03, the spread would be 0.0003 or 3
pips, also known as points. Although these movements may seem insignificant, even the
smallest point change can result in thousands of dollars being made or lost due to
leverage. Again, this is one of the reasons that speculators are so attracted to the forex
market; even the tiniest price movement can result in huge profit.

The pip is the smallest amount a price can move in any currency quote. In the case of the
U.S. dollar, euro, British pound or Swiss franc, one pip would be 0.0001. With the
Japanese yen, one pip would be 0.01, because this currency is quoted to two decimal
places. So, in a forex quote of USD/CHF, the pip would be 0.0001 Swiss francs. Most
currencies trade within a range of 100 to 150 pips a day.

Currency Quote Overview
USD/CAD = 1.2232/37
Base Currency Currency to the left (USD)
Quote/Counter
Currency to the right (CAD)
Currency
Price for which the market maker
Bid Price 1.2232 will buy the base currency. Bid is
always smaller than ask.
Price for which the market maker
Ask Price 1.2237
will sell the base currency.
One point move, in USD/CAD it
The pip/point is the smallest
Pip is .0001 and 1 point change would
movement a price can make.
be from 1.2231 to 1.2232
Spread in this case is 5 pips/points;
Spread difference between bid and ask
price (1.2237-1.2232).

Spot Market and the Forwards and Futures Markets
There are actually three ways that institutions, corporations and individuals trade
forex: the spot market, the forwards market and the futures market. The spot market
always has been the largest market because it is the "underlying" real asset that the

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forwards and futures markets are based on. In the past, the futures market was the most
popular venue for traders because it was available to individual investors for a longer
period of time. However, with the advent of electronic trading, the spot market has
witnessed a huge surge in activity and now surpasses the futures market as the preferred
trading market for individual investors and speculators. When people refer to the forex
market, they usually are referring to the spot market. The forwards and futures markets
tend to be more popular with companies that need to hedge their foreign exchange risks
out to a specific date in the future.

Spot Market
More specifically, the spot market is where currencies are bought and sold according to
the current price. That price, determined by supply and demand, is a reflection of many
things, including current interest rates, economic performance, sentiment towards
ongoing political situations (both locally and internationally), as well as the perception of
the future performance of one currency against another. When a deal is finalized, this is
known as a "spot deal". It is a bilateral transaction by which one party delivers an agreed-
upon currency amount to the counter party and receives a specified amount of another
currency at the agreed-upon exchange rate value. After a position is closed, the settlement
is in cash. Although the spot market is commonly known as one that deals with
transactions in the present (rather than the future), these trades actually take two days for
settlement.

Forwards and Futures Markets
Unlike the spot market, the forwards and futures markets do not trade actual currencies.
Instead they deal in contracts that represent claims to a certain currency type, a specific
price per unit and a future date for settlement.

In the forwards market, contracts are bought and sold OTC between two parties, who
determine the terms of the agreement between themselves.

In the futures market, futures contracts are bought and sold based upon a standard size
and settlement date on public commodities markets, such as the Chicago Mercantile
Exchange. In the U.S., the National Futures Association regulates the futures market.
Futures contracts have specific details, including the number of units being traded,
delivery and settlement dates, and minimum price increments that cannot be customized.
The exchange acts as a counterpart to the trader, providing clearance and settlement.

Both types of contracts are binding and are typically settled for cash for the exchange in
question upon expiry, although contracts can also be bought and sold before they expire.
The forwards and futures markets can offer protection against risk when trading
currencies. Usually, big international corporations use these markets in order to hedge
against future exchange rate fluctuations, but speculators take part in these markets as
well.

Two types of analysis are used for the market movements forecasting:

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fundamental, and technical (the chart study of past behavior of commodity prices). The
fundamental one focuses on the theoretical models of exchange rate determination and on
the major economic factors and their likelihood of affecting the foreign exchange rates.

The main economic theories found in the foreign exchange deal with parity conditions. A
parity condition is an economic explanation of the price at which two currencies should
be exchanged, based on factors such as inflation and interest rates. The economic theories
suggest that when the parity condition does not hold, an arbitrage opportunity exists for
market participants. However, arbitrage opportunities, as in many other markets, are
quickly discovered and eliminated before even giving the individual investor an
opportunity to capitalize on them. Other theories are based on economic factors such as
trade, capital flows and the way a country runs its operations. We review each of them
briefly below.

Major Theories: Purchasing Power Parity
Purchasing Power Parity (PPP) is the economic theory that price levels between two
countries should be equivalent to one another after exchange-rate adjustment. The basis
of this theory is the law of one price, where the cost of an identical good should be the
same around the world. Based on the theory, if there is a large difference in price between
two countries for the same product after exchange rate adjustment, an arbitrage
opportunity is created, because the product can be obtained from the country that sells it
for the lowest price

Interest Rate Parity
The concept of Interest Rate Parity (IRP) is similar to PPP, in that it suggests that for
there to be no arbitrage opportunities, two assets in two different countries should have
similar interest rates, as long as the risk for each is the same. The basis for this parity is
also the law of one price, in that the purchase of one investment asset in one country
should yield the same return as the exact same asset in another country; otherwise
exchange rates would have to adjust to make up for the difference.

Balance of Payments Theory
A country's balance of payments is comprised of two segments - the current account and
the capital account - which measure the inflows and outflows of goods and capital for a
country. The balance of payments theory looks at the current account, which is the
account dealing with trade of tangible goods, to get an idea of exchange-rate directions.

If a country is running a large current account surplus or deficit, it is a sign that a
country's exchange rate is out of equilibrium. To bring the current account back into
equilibrium, the exchange rate will need to adjust over time. If a country is running a
large deficit (more imports than exports), the domestic currency will depreciate. On the
other hand, a surplus would lead to currency appreciation.

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Real Interest Rate Differentiation Model
The Real Interest Rate Differential Model simply suggests that countries with higher real
interest rates will see their currencies appreciate against countries with lower interest
rates. The reason for this is that investors around the world will move their money to
countries with higher real rates to earn higher returns, which bids up the price of the
higher real rate currency.

Asset Market Model
The Asset Market Model looks at the inflow of money into a country by foreign investors
for the purpose of purchasing assets such as stocks, bonds and other financial
instruments. If a country is seeing large inflows by foreign investors, the price of its
currency is expected to increase, as the domestic currency needs to be purchased by these
foreign investors. This theory considers the capital account of the balance of trade
compared to the current account in the prior theory. This model has gained more
acceptance as the capital accounts of countries are starting to greatly outpace the current
account as international money flow increases.

Monetary Model
The Monetary Model focuses on a country's monetary policy to help determine the
exchange rate. A country's monetary policy deals with the money supply of that country,
which is determined by both the interest rate set by central banks and the amount of
money printed by the treasury. Countries that adopt a monetary policy that rapidly grows
its monetary supply will see inflationary pressure due to the increased amount of money
in circulation. This leads to a devaluation of the currency.

These economic theories, which are based on assumptions and perfect situations, help to
illustrate the basic fundamentals of currencies and how they are impacted by economic
factors. However, the fact that there are so many conflicting theories indicates the
difficulty in any one of them being 100% accurate in predicting currency fluctuations.
Their importance will likely vary by the different market environment, but it is still
important to know the fundamental basis behind each of the theories.

Economic Data
Economic theories may move currencies in the long term, but on a shorter-term, day-to-
day or week-to-week basis, economic data has a more significant impact. It is often said
the biggest companies in the world are actually countries and that their currency is
essentially shares in that country. Economic data, such as the latest gross domestic
product (GDP) numbers, are often considered to be like a company's latest earnings data.
In the same way that financial news and current events can affect a company's stock
price, news and information about a country can have a major impact on the direction of
that country's currency. Changes in interest rates, inflation, unemployment, consumer
confidence, GDP, political stability etc. can all lead to extremely large gains/losses
depending on the nature of the announcement and the current state of the country.

The number of economic announcements made each day from around the world can be
intimidating, but as one spends more time learning about the forex market it becomes

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clear which announcements have the greatest influence. Listed below are a number of
economic indicators that are generally considered to have the greatest influence -
regardless of which country the announcement comes from.

Employment Data
Most countries release data about the number of people that currently are employed
within that economy. In the U.S., this data is known as non-farm payrolls and is released
the first Friday of the month by the Bureau of Labor Statistics. In most cases, strong
increases in employment signal that a country enjoys a prosperous economy, while
decreases are a sign of potential contraction. If a country has gone recently through
economic troubles, strong employment data could send the currency higher because it is a
sign of economic health and recovery. On the other hand, high employment can also lead
to inflation, so this data could send the currency downward. In other words, economic
data and the movement of currency will often depend on the circumstances that exist
when the data is released.

Interest Rates
As was seen with some of the economic theories, interest rates are a major focus in the
forex market. The most focus by market participants, in terms of interest rates, is placed
on the country's central bank changes of its bank rate, which is used to adjust monetary
supply and institute the country's monetary policy. In the U.S., the Federal Open Market
Committee (FOMC) determines the bank rate, or the rate at which commercial banks can
borrow and lend to the U.S. Treasury. The FOMC meets eight times a year to make
decisions on whether to raise, lower or leave the bank rate the same; and each meeting,
along with the minutes, is a point of focus.

Inflation
Inflation data measures the increases and decreases of price levels over a period of time.
Due to the sheer amount of goods and services within an economy, a basket of goods and
services is used to measure changes in prices. Price increases are a sign of inflation,
which suggests that the country will see its currency depreciate. In the U.S., inflation data
is shown in the Consumer Price Index, which is released on a monthly basis by the
Bureau of Labor Statistics.

Gross Domestic Product
The gross domestic product of a country is a measure of all of the finished goods and
services that a country generated during a given period. The GDP calculation is split into
four categories: private consumption, government spending, business spending and total
net exports. GDP is considered the best overall measure of the health of a country's
economy, with GDP increases signaling economic growth. The healthier a country's
economy is, the more attractive it is to foreign investors, which in turn can often lead to
increases in the value of its currency, as money moves into the country. In the U.S., this
data is released by the Bureau of Economic Analysis once a month in the third or fourth
quarter of the month.

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Retail Sales
Retail sales data measures the amount of sales that retailers make during the period,
reflecting consumer spending. The measure itself doesn't look at all stores, but, similar to
GDP, uses a group of stores of varying types to get an idea of consumer spending. This
measure also gives market participants an idea of the strength of the economy, where
increased spending signals a strong economy. In the U.S., the Department of Commerce
releases data on retail sales around the middle of the month.

Technical analysis

A method of evaluating securities by analyzing statistics generated by market activity,
such as past prices and volume. Technical analyst does not attempt to measure a
security’s intrinsic value, but instead use charts to identify patterns that can suggest future
activity. Technical analysts believe that the historical performance of stocks and markets
are indications of future performance.

Technical analysis has become increasingly popular over the past several years, as more
and more people believe that the historical performance of a stock is a strong indication
of future performance. People using fundamental analysis have always looked at the past
performance of companies by comparing fiscal data from previous quarters and years to
determine future growth. The deference lies in the technical analyst’s beliefs that
securities move according to very predictable trends and patterns. These trends continue
until something happens to change the trend, and until this change occurs, price levels are
predictable.

TECHNICAL ANALYSIS

• Identification of the current trend i.e. the direction of price movement and
spotting any trend reversal as early as possible.
• Historical price and volume data analyzed with the help of charts.
• For currencies, shares and commodities traded on exchanges, such data is usually
available but in the case of interbank currency market, volume data is not
available and the analyst makes use of different indicators, which are derived
from the price data. Many of these indicators have become so popular that they
are used extensively even for financial assets and instruments traded on
exchanges.
• Applicable only when prices fluctuate freely in response to market forces of
demand and supply for the underlying assets. Obviously not applicable for say a
pegged exchange rate like USD/HKD. Our focus hereafter will be on floating
exchange rates though the principles of technical analysis apply to other assets
such as commodities, stock market indices, certain heavily traded stocks, etc.
• More reliable in case of broad and very liquid markets than thin and shallow
markets.

BABASAB PATIL 19

• Helps to judge the emotional state of the market. The market has its own
collective consciousness distinct from the individual consciousness of the
participants.

Technical Analysis in Contrast with Fundamental Analysis

• Fundamental analysis is concerned with all the fundamental factors. In the case of
an exchange rate, the concerned factors are the present and expected interest rates,
inflation rates, GDP growth rates, international trade and current account balance,
exchange rate policies of the two countries in question, state of capital markets,
etc. After analysis of all these factors, the fundamental analyst attempts to
ascertain whether a currency is undervalued or overvalued and consequently
whether it is likely to appreciate or depreciate.

• Technical analysis, on the other hand, assumes that the price at any given time is
the result of not only the fundamental factors but also the market’s collective
response to all the factors. At the extreme, technical analysts don’t even want to
read newspapers lest the popular news bias their chart analysis! For the same
reasons. some even don’t want to know the identity of the underlying asset!!
• Often, economists focus on certain fundamentals and ‘prescribe’ how the market
ought to behave when the market behaviour is linked to some other factors. A
classic example is the euro’s persistent decline since its launch. The market is
labelled as crazy when it doesn’t behave in the prescribed manner. However,
those who are exposed to risk can’t afford to go against the market even if they
think it is crazy. Hence, the importance of technical analysis or proper
understanding of market psychology.

Assumptions in technical analysis

• The market discounts everything – All known information about a
market is reflected in the price. In other words, all the present political,
economic, psychological and any other type of information pertinent to the
market price, is already discounted or priced in. In electronic age,
information travels at the speed of light and any new information gets
disseminated and discounted quickly whereafter it ceases to be of further
relevance to the process of forecasting.
• Prices move in trends - When a price moves in a particular direction, be
it up or down, it will continue to trend in that direction till some news
changes market perception of future direction and reverses the trend itself.
To sum up the markets move in the path of least resistance.
• History repeats itself - This assumption arises from the fact that mass
psychology does not change. Markets overextend because of the herd
instinct leading to panic and euphoria time and again.

BABASAB PATIL 20


Some of the Important terms used in the Technical Analysis

Support and resistance are price levels at which movement should stop and reverse
direction. Think of support/resistance as levels that act as a floor or a ceiling to future
price movements.

Supports- A price level below the current market price, at which buying interest
should be able to overcome selling pressure and thus keep the price from going any
lower.

Resistance - A price level above the current market price, at which selling pressure
should be strong enough to overcome buying pressure and thus keep the price from going
any higher.

Concepts of trend

Trend is nothing but the direction of movement of price. Logically the share price can
ether be rising or falling or moving narrowly (flat). Thus there are three directions in
which the price can move these three directions give rise to the three types of trend when
prices are moving upwards, the trend is said to be rising. When prices are moving
downwards it is called a falling trend. And when prices are moving in a narrow range,
the trend can be said to be flat or choppy. Thus, the trend itself has three directions.

Upward Trend

If the market makes a high and then comes down and after that cuts the previous high
makes a new high, it means that the market is in an uptrend and it is making a higher
bottom higher top.

Downward Trend

If the market is falling and making a lower bottom lower top it is said to be a downtrend

Sideways Trend (flat)

If the market is just drifting and has no clear move it is laid to be a sideways trend.

Trend line

BABASAB PATIL 21

Trend lines are straight lines drawn by connecting either the tops or bottoms. To draw a
straight line, one requires two points. Similarly to draw trend lines, one requires at least
tow tops or bottoms. This however, does not mean that there cannot be more than tow
tops or bottoms that can be connected to draw a trend line, infect the more the number of
tops or bottoms that are touched or connected by the trend line, the better or more
powerful the trend line.

Trend lines are the simplest, yet the most effective way of riding the trend. Just as trend
has three directions rising, falling and flat, there are three types of trend lines to represent
each of the directions of trend
Up ward trend line

An uptrend line has a positive slope and is formed by connecting two or more low points.
The second low must be higher than the first for the line to have a positive slope. Uptrend
line act as support and indicate that net-demand (demand less supply) is increasing even
as the price rises. A rising price combined with increasing demand is bullish.

Down trend lines
A downtrend line has a negative slope and is formed by connecting two or more high
points. The second high must be lower than the first for the line to have a negative slope.
Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is
increasing even as the price declines. A declining price combined with increasing supply
is very bearish, and shows the strong resolve of the sellers. As long as prices remain
below the downtrend line, the downtrend is solid and intact. A break above the
downtrend line indicates that net-supply is decreasing and that a change of trend could be
imminent.

Moving Averages

Moving averages are one of the most popular and easy to use tools available to the
technical analyst. They smooth a data series and make it easier to spot trends, something
that is especially helpful in volatile markets. They also form the building blocks for many
other technical indicators and overlays.

There are three types of moving averages, namely simple moving average, exponential
moving average and weighted moving average. But the most popular types of moving
averages are the Simple Moving Average (SMA) and the Exponential Moving
Average (EMA). They are described in more detail below.

Simple Moving Average

BABASAB PATIL 22

A simple moving average is formed by computing the average (mean) price of a security
over a specified number of periods. While it is possible to create moving averages from
the Open, the High, and the Low data points, most moving averages are created using the
closing price. For example: a 5-day simple moving average is calculated by adding the
closing prices for the last 5 days and dividing the total by 5.

Ex: if the closing prices are as follows: 10, 11, 12, 13, 14, 17, 12……………

10+11+12+13+14=60

(60/5)=12

Here 12 is a first moving average obtained from the given closing prices, next moving
average can be calculated by deducting first cl price i.e 10 and adding next cl. Price i.e 17
and again dividing it by 5.

Exponential Moving Average (EMA)

In order to reduce the lag in SMA, technicians often use EMA. EMA's reduce the lag by
applying more weight to recent prices relative to older prices. The weighting applied to
the most recent price depends on the specified period of the moving average. The shorter
the EMA's period, the more weight that will be applied to the most recent price. For
example: a 10-period EMA weighs the most recent price 18.18% while a 20-period EMA
weighs the most recent price 9.52%. As such, it will react quicker to recent price changes
than a SMA. Here's the calculation formula

EMA (current) = ((price (current)-EMA (prev)) x multiplier+
EMA(prev)

Where, Multiplier – 2/n+1

n- Number of days for which EMA is calculated

If we take the same example of SMA 5 day EMA is calculated as follows.

EMA= (12-11) X 0.666 + 11 = 11.66

Where multiplier = 2/ (5 +1) = 0.666

For next EMA 11.66 acts as previous EMA and so on

A comparison of a 50-day EMA and a 50-day SMA for a script shows that the
EMA picks up on the trend quicker than the SMA. The blue arrows mark points when the
stock started a strong trend. By giving more weight to recent prices, the EMA reacted
quicker than the SMA and remained closer to the actual price.

BABASAB PATIL 23


Uses of moving averages

There are many uses for moving averages, but three basic uses stand out:
1. Trend identification/confirmation
2. Support and Resistance level identification/confirmation
3. Trading Systems

Moving Average Convergence and Divergence

In this system analyst uses a combination of two moving averages one is a short
term averages and other is long term averages. Also combination of SMA and EMA of
same period is frequently used for identification of selling and buying points in the graph.

Elliot wave theory
R. N. Elliott believed markets had well-define wave that could be used to predict market
direction. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock prices
are governed by cycles founded upon the Fibonacci series (1-2-3-5-8-13-21...).

According to the Elliott Wave Theory, stock prices tend to move in a predetermined
number of waves consistent with the Fibonacci series. Specifically, Elliott believed the
market moved in five distinct wave on the upside and three distinct on the downside. The
basic shape of the wave is shown below.

BABASAB PATIL 24


waves one, three and five represent the 'impulse', or minor up-wave in a major bull move.
Waves two and four represent the 'corrective,' or minor down-waves in the major bull
move. The waves lettered A and C represents the minor down-wave in a major bear
move, while B represents the one up-wave in a minor bear wave Elliott proposed that the
waves existed at many levels, meaning there could be waves within waves. To clarify,
this means that the chart above not only represents the primary wave pattern, but it could
also represent what occurs just between points 2 and 4.

Elliott wave theory ascribes names to the waves in order of descending size:

1. Grand Supercycle
2. Supercycle
3. Cycle
4. Primary
5. Intermediate
6. Minor
7. Minute
8. Minuette
9. Sub-Minuette

BABASAB PATIL 25

The major waves determine the major trend of the market, and minor waves determine
minor trends. This is similar to the Dow theory postulates primary and secondary trends.
Elliott provided numerous variations on the main wave, and placed particular importance
on the golden mean, 0.618, as a significant percentage for retracement.

Trading using Elliott wave patterns is quite simple. The trader identifies the main wave
or Supercycle, enters long, and then sells or shorts, as the reversal is determined. This
continues in progressively shorter cycles until the cycle completes and the main wave
resurfaces. The caution to this is that much of the wave identification is taken in hindsight
and disagreements arise between Elliott wave technicians as to which cycle the market is
in.

Chart Patterns
The vast majority of chart patterns fall into two main groups: reversal and continuation.
Reversal patterns indicate a change of trend and can be broken down into top and bottom
formations. Continuation patterns indicate a pause in trend and indicate that the previous
direction will resume after a period of time. Just because a pattern forms after a
significant advance or decline does not mean it is a reversal pattern. Many patterns, such
as a rectangle, can be classified as either reversal or continuation. Much depends on the
previous price action, volume and other indicators as the pattern evolves. This is where
the science of technical analysis becomes the art of technical analysis.

Below is a list of common chart patterns that can be useful in Technical Analysis.
 Double Top (Reversal)
 Double Bottom (Reversal)
 Head and Shoulders Top (Reversal)
 Head and Shoulders Bottom (Reversal)
 Falling Wedge (Reversal)
 Rising Wedge (Reversal)
 Rounding Bottom (Reversal)
 Triple Top (Reversal)
 Triple Bottom (Reversal)
 Bump and Run Reversal (Reversal)
 Flag, Pennant (Continuation)
 Symmetrical Triangle (Continuation)

BABASAB PATIL 26


 Ascending Triangle (Continuation)
 Descending Triangle (Continuation)
 Rectangle (Continuation)
 Price Channel (Continuation)
 Measured Move - Bullish (Continuation)
 Measured Move - Bearish (Continuation)
 Cup with Handle (Continuation)

We shall discus some of these patterns

Double top (reversal)

The double top is a major reversal pattern that forms after an extended uptrend. As its
name implies, the pattern is made up of two consecutive peaks that are roughly equal,
with a moderate trough in-between. The double top looks like the letter "M". The twice
touched high is considered a resistance level.

Althoug
h there can be variations, the classic double top marks at least an intermediate change, if
not long-term change, in trend from bullish to bearish. Many potential double tops can
form along the way up, but until key support is broken, a reversal cannot be confirmed.

Double bottom (reversal)

The double bottom is a major reversal pattern that forms after an extended downtrend. As
its name implies, the pattern is made up of two consecutive troughs that are roughly
equal, with a moderate peak in-between. The double bottom looks like the letter "W". The
twice touched low is considered a support level.

Most technical analysts believe that the advance off of the first bottom should be 10-20%.
The second bottom should form within 3-4% of the previous low, and volume on the
ensuing advance should increase.

Although there can be variations, the classic double bottom usually marks an
intermediate or long-term change in trend. Many potential double bottoms can form
along the way down, but until key resistance is broken, a reversal cannot be confirmed.

Head and sholder top (reversal)

BABASAB PATIL 27

A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a
trend reversal. The pattern contains three successive peaks with the middle peak (head)
being the highest and the two outside peaks (shoulders) being low and roughly equal. The
reaction lows of each peak can be connected to form support, or a neckline.

As its name implies, the Head and Shoulders reversal pattern is made up of a left
shoulder, a head, a right shoulder, and a neckline. Other parts playing a role in the pattern
are volume, the breakout, price target and support turned resistance.

Important words used in Technical Market:

The Bulls:
A bull market is when everything in the economy is great, people are finding jobs, GDP
is growing, and stocks are rising. Pecking stocks during the bull market is easier because
everything is going up. Bull market cannot last forever, sometime they can lead to
dangerous situations if stocks become overvalued. If a person is optimistic, believing that
stocks will go up, he or she is called a “bull” and said to have a “bullish outlook.”

The Bears:
A bear market I when the economy is bad, recession is looming, and stock prices are
falling. Bear market make it though for investors to pick profitable stocks. One solution
to this is to make money when stocks are falling using a technique called short selling.
Another strategy is to wait on until you feel that the bear market is over, and to buy again
in anticipation of a bull market. If a person is pessimistic, believing that stocks are going
to drop, he or she is called a “bear” and said to have a “bearish outlook.”

Other animal on the farm- chickens and pigs
Chickens are afraid to lose anything. Their fear overrides their need to make profits and
so they turn only to money market securities or get out of the markets altogether.

Pigs are high-risk investors looking for the one big score in a short period of time. Pigs
buy on hot tips and invest in hot companies without doing their due diligence. They get
impatient, greedy, and emotional about their investments, and they are drawn to high risk
securities without putting in the proper time or money to learn about these investment
vehicles. Professional traders love the pigs. As it’s often from their losses that the bulls
and bears reap their profits.

Short Selling
The selling of a security that the seller does not own, Short sellers assume that
they will be able to buy the stock at a lower amount than the price at which they sold
short.

BABASAB PATIL 28


Bear
An investor who believes that a particular security or market is headed
downward. Bears attempt to profit from a decline in prices. Bears are
generally pessimistic about the state of a given market.

Intraday
Another way of saying "within the day". Intraday price movements are
particularly important to short-term traders looking to make many trades over the course
of a single trading session. The term intraday is occasionally used to describe
securities that trade on the markets during regular business hours, such as stocks and
ETFs, as opposed to mutual funds, which must be bought from a dealer.

Day Trader
A stock trader who holds positions for a very short time (from minutes to hours)
and makes numerous trades each day. Most trades are entered and closed out within the
same day

Speculator
A person who trades with a higher-than-average risk, in return for a higher-than-
average profit potential. Speculators take large risks, especially with respect
to anticipating future price movements, or gambling, in the hopes of making quick, large
gains.

Going Long
Holding the security for an extended period of time. Depending on the type of
security, a long-term asset can be held for as little as one year or more.

Going short
Selling the existing security immediately to protect the profit made or to
minimizing the lose.

Short Covering
The act of purchasing securities in order to close an open short position. This is
done by buying the same type and number of securities that were sold short. Most often,
traders cover their shorts whenever they speculate that the securities will rise. In order to
make a profit, a short seller must cover the shorts by purchasing the security below the
original selling price.

Squaring off
It’s an intra day trading where in the trader first sells or buys the shares and then
reverse the process (buying/selling) within the closing of market on the same day and
pays off difference amount if he has lost or gains profit. So by doing so at the end of the
day he owns no shares in his account.

BABASAB PATIL 29


ANALYSIS PART

Structure of Forex Market Transaction in India

RBI

NOSTRO
Authorized
Dealer “A” Category
(AD) VOSTRO

Designated
Branch “B” Category
(D-Branch)

Money
Change “C” Category
(MC)

AD’s are fully pledge AD’s, means these AD’s are having Accounts in their own
name. Vostro in the sense Foreign Bank opens its Account in Indian Bank. Whereas
Nostro means our Indian Bank opens Account in any Foreign Banks. So Canara Bank is
having both types of accounts. Details about Canara Bank we will see in further pages.

Designated Branches are those branches, where these branches will not trade in
the name of their own account, but in the name of AD’s. They can act individually, even
though they don’t have accounts in their own name.

Money Change (MC)s, are comes under “C” category. This category people are
neither having accounts in their own name nor fully authorized to act individually. So
these are comes reports to D-Branches or otherwise they directly related to AD’s. We
can see in Mangalore or in Goa or in Mumbai small export agencies all these agencies are
comes under “C” category.

BABASAB PATIL 30


Foreign Exchange Operations of Station Road Branch of Canara Bank:

First we will see the Hierarchy of Foreign Exchange Operations in Canara Bank.
First it starts with International Foreign Exchange. Under this International Foreign
Exchange, Forex Department (FD) has existing. FD is having its own Account in their
name. So they do not dependent on any other.

In India around 13 departments are situated. In Karnataka there are only 2 FD’s
one is situated in Bangalore and another one is in Mangalore.

Under this FD, Foreign Exchange Cell comes. There are 22 Foreign Exchange
Cells situated in India. These Foreign Exchange Cells should report the daily report of
foreign exchange operations to Foreign Department.

Under this FD another branch also existed called it as Designated Branch (D-
Branch). This D-Branch is not like a Foreign Exchange Cell. This branch is not
dependent on any other Foreign Exchange Cells, but they have their own Account. For
instance, for foreign exchange transaction purpose a customer approaches Avenue
Branch of Bangalore. Avenue Branch is a D-Branch, so will not send this transaction to
any other Foreign Exchange Cells but it operates in their own account under the name of
Foreign Department.

In Karnataka especially in Bangalore these D-Branches are situated viz., in
Avenue Road Branch, Malleshwaram Branch etc.,

Apart from all these, still another branch is there, it is called Overseas Branch.
These Overseas Branches are Operate as branches or subsidiaries of the parent Bank.
These branches are to seek deposits and grant loans in currencies other than the currency
of the host government.

Diagrammatic way of Hierarchy of Foreign Exchange Operations in
Canara Bank

INTERNATIONAL FOREIGN EXCHANGE

Designated Branch Foreign Department

Foreign Exchange Cell

BABASAB PATIL 31


Now Let us see particularly of Hubli Branch:

For entire North Karnataka there is only one Foreign Exchange Transaction Cell,
is situated in Hubli. Hubli Foreign Exchange Transaction is a Foreign Exchange Cell.
This is comes under Foreign Department from previous diagram we can clarify it.

This Hubli Foreign Exchange Cell has been operating since from 1991. Till 2005
Hubli Foreign Exchange Cell was under Mangaloe Foreign Department. But now it is
shifted to Mumbai Foreign Department.

This Hubli Foreign Exchange Cell reports daily foreign exchange operations to
Mumbai Foreign Department. So for this reporting purpose it is having a new computer
technology, by this they only press a key to submit or to send the report at the end of the
day. So for this technology they have separate computer.

Hubli Foreign Exchange Cell covers especially almost all Districts of North
Karnataka (expect Hyderabad Karnataka). Viz., Districts of Dharwad, Belgaum, Bijapur,
Baglkot, Gadag, Koppal, Haveri etc.,

Services has been Providing by Hubli Forex Cell

IMPORT SERVICES EXPORT

REMITTANCE

BABASAB PATIL 32


EXPORT
Collection of
Bills
Purchase
Finance
Discount
Pre & Post
Shipment
Negotiation
Cash in
Advance

Hubli Forex Cell gives service to Exporter in the name of Export Service. Here
they have made 3 types of categories, as in the above figure.

Collection of Bills: Every document should be send through banks only. It is
compulsion made by RBI and also FEMA. Here exporter must submit some documents
are as follows:

Invoice, Packing List, Bill of Lading (in case of Sea) / Airway Bill (in case of
Air), Certificate of Origin, Test Certificate etc., Statutory Declaration Form (SDF) and
Shipping Bill are very important documents where bank will check these documents very
thoroughly. And combining these important documents, and they call it as GR Form.

Exporter or consignor prepares SDF. It is a document where exporter declares the
Type of goods he is exporting, Quantity (Kg & No.’s), Name of Importer, Name of
Shipping Agency etc., This is made in 3 copies. One is sent to RBI, another one is to
any commercial Forex traded Bank and remaining is for them. Superidentant of Exercise
Custom certifies all these copies.

Finance: (Pre & Post Shipment loan): At Sight they purchase the document and make
the payment within 15 to 20 days. Bank may discount it as per the instruction by party
like Bill of Exchange. This may maturated at 90 days after or 90 or 120 days as per
agreement between both parties. Negotiation also made by bank to get profits.

Who takes the pre shipment loan they should compulsorily take post shipment
loan also. Because, if any one have taken pre shipment, when goods are ready to
shipment, then bank convert this pre shipment into post shipment. For this purpose Bank
should require Purchase Order (PO), if New Importer / High value goods then opening of
L/c and Bank should take Inventory as a Hypothesis, Guarantee from Director/partner,
some times Mortgage and some times pledge the finished goods. These loan sanctions
stage by stage.

IMPORT
BABASAB PATIL 33 Letter of
Credit
Finance
Advise,
Conformance
FLC


Here Bank gives service to importers also as an Import Service. Here importer
can open Letter of credit, for this purpose Bank acts as a mediator between exporter and
importer. So bank will take some risks relating to export and import of goods.

Bank also acts as advisor to importer. Incase new exporter or incase of high value
materials or incase first time importing the materials, in all these cases banks will give
advise to the importer that whether to go or not. If any RBI’s prior permission is required
or not if so require then what are the procedure all things may advise to importer.

Some times for importer also it gives a loan called Foreign Letter of Credit (FLC).
According to this if exporter fails to supply goods then Bank will take the responsibility.
But some major responsibility will be on importer only.

Outward
REMITTANCE Inward
Money
Change
Remittance is nothing but receiving and paying of foreign currency in India.
Outward is nothing but paying abroad. Inward means incoming payment from abroad.
Money change means if a person wants to convert the one foreign currency into domestic
currency.

Here TT, DD, Bills, Travelers Cheques, Notes, Now recently Yatri Card etc., are
the major modes of transactions held in this type of service. For this purpose of service,
any receiving / paying person should be a customer i.e., he should be an Account holder
in that particular Bank. But this condition is not applicable to Tourist. For Tourist Bank
only looks out the Passport and Visa (According to FEMA).

BABASAB PATIL 34


NRI DEPOSITS

NON RESIDENT EXTERNAL RUPEE ACCOUNT (NRE)

• Types of account you can open are: Savings, Current or Term Deposit in Indian
Rupees.
• You can open a NRE account by:
o Remittance from abroad (through DD/SWIFT TRANSFER)
o Transfer of funds from existing NRE/FCNR accounts with other banks in
India or from other branches of our bank.
o Foreign currency notes/travellers cheques brought in during temporary
visit to India.
o Personal cheques drawn on your account abroad
• Unique features of NRE deposits:
o The entire credit balance inclusive of interest earned can be repatriated
outside India without reference to RBI.
o NRE accounts can be operated by Resident Indians on the basis of the
Power of Attorney Or letter of Authority issued by the NRI account
holder. However PA/LA holder can repatriate the funds abroad to the non
resident depositor only.
o Joint accounts can be opened along with other Non Resident Indians.
o Local disbursements, purchase of units of UTI, Central and State
Government securities and National Savings Certificates can be made
from these accounts.
o Sale/Maturity Proceeds/ repurchase proceeds of units of UTI, Securities or
certificates originally purchased out of funds in these accounts can be
credited without reference to RBI.

BABASAB PATIL 35

o Under term deposits accounts can be opened for a minimum period of 1
year and a maximum period of 3 years.
o Loans/overdrafts in India to deposit holders are available against security
of deposits.
o Cheque book facility is available for NRE Savings Bank account.

NON-RESIDENT (External) RUPEE ACCOUNT SCHEME (NRE Account)

NRIs (Individuals of Bangladesh/Pakistan
Who can open an account
nationality require prior approval of RBI)
In the names of two or more non-resident
Joint account
individuals Subject to a maximum of 4 persons
Nomination Permitted
Currency in which account is
Indian Rupees
denominated
Repatriability Repatriable
Type of Account Savings, Current, Recurring, Fixed Deposit
Period for fixed deposits Minimum one year and maximum 3 years.
Subject to RBI guidelines. The interest rates
Rate of Interest
are displayed on our web site
Loans
a) In India Permitted
(i) to the Account holder Permitted
(ii) to third parties Permitted
b) Abroad >
(i) to the Account holder Permitted
(ii) to third parties Permitted
c) Foreign Currency Loans In India

BABASAB PATIL 36


(i) to the account holder Not permitted
(ii) to third parties Not permitted

BABASAB PATIL 37


Purpose of Loan
a) In India
i)Personal purposes or for carrying on business
activities *
ii) Direct investment in India on non-
(i) to the Account holder repatriation basis by way of contribution to the
capital of Indian firms/ companies
iii) Acquisition of flat/ house in India for his
own residential use
Fund based and/or non-fund based facilities
(ii) to third party for personal purposes or for carrying on
business activities.
b) Abroad
Fund based and/or non-fund based facilities
To the account holder and third party
for bonafide purposes.

* The loans cannot be utilized for the purpose of relending, or carrying on agriculture or
plantation activities or for investment in real estate business.

Note:

a) When a person resident in India leaves India for Nepal and Bhutan for taking up
employment or for carrying on business or vocation or for any other purposes indicating
his intention to stay in Nepal and Bhutan for an uncertain period, his existing account will
continue as a resident account. Such account will not be designated as Non-resident
(Ordinary) Rupee Account (NRO).

b) We open and maintain NRE/FCNR(B) accounts of persons resident in Nepal and
Bhutan who are citizens of India or of Indian origin, provided the funds for opening these
accounts are remitted in free foreign exchange. Interest earned in NRE/FCNR (B)
accounts can be remitted only in Indian rupees to NRIs and PIO resident in Nepal and
Bhutan.

c) We extend all types of rupee loans under the “Retail lending scheme” to NRI’s.

BABASAB PATIL 38


RESIDENT FOREIGN CURRENCY [DOMESTIC] ACCOUNT [RFCD]

• Types of account you can open: Non interest bearing Current Account in Foreign
currency.
• A person resident in India can open an RFCD account out of foreign exchange
acquired in the form of currency notes, bank notes and travelers cheques from the
following sources:
o Acquired while on a visit to any place outside India by way of payment for
services not arising from any business in or anything done in India; or
o Acquired from any person not resident in India and who is on a visit to India, as
honorarium or gift or for services rendered or in settlement of any lawful
obligation; or
o Acquired by way of honorarium or gift while on a visit to any place outside India;
or
o Unspent amount of foreign exchange acquired by him from an authorised person
for travel abroad; or
o Unspent amount of foreign exchange received as allowance by Pilots/Crew
Members/Mariners etc., of Indian Airline/Shipping companies
o Foreign exchange earnings through export of goods and/or services,
royalty/honorarium etc. by resident individuals; or
o Insurance claims/maturity value settled in foreign currency.
o Gifts received from close relatives viz.,
 Husband and Wife
 Father/Mother (including step-mother)
 Fathers’ father/Father’s mother/Mother’s mother/ Mother’s father
 Son (including step-son)/Daughters (including step-daughter)
 Son’s wife/Son’s son/Son’s son’s wife/Son’s daughter/Son’s daughter’s husband
 Daughter’s husband/Daughter’s son/Daughter’s son’s wife/Daughter’s
daughter/Daughter’s daughter’s husband
 Brother (including step-brother)/Brother’s wife
 Sister (including step-sister)/Sister’s husband.

RESIDENT FOREIGN CURRENCY [DOMESTIC] ACCOUNT [RFCD]

BABASAB PATIL 39


Who can open an account
Persons Resident in India.

Joint account
In the names of two or more
resident individuals with a
maximum of 4 persons.

Nomination
Permitted

Permissible currencies
USD, GBP & EUR

Type of Account
Non interest bearing Current
Account

BABASAB PATIL 40


Facilities available to NRIs, PIO for investment in India

I. Bank Accounts and Deposits

a) Non-Resident (External) Rupee (NRE) Accounts (Principal / Interest
Repatriable)

• Savings - The interest rates on NRE Savings deposits shall be at the rate
applicable to domestic savings deposits. Currently the interest rate is 3.5%.

• Term deposits – For 1 year to 3 years, the interest rates on fresh repatriable Non-
Resident (External) Rupee (NRE) Term deposits should not exceed the
LIBOR/SWAP rates, as on the last working day of the previous month, for US
dollar of corresponding maturity plus 50 basis points.

The interest rates as determined above for three year deposits should also be applicable in
case the maturity period exceeds three years.

The changes in interest rates will also apply to NRE deposits renewed after their present
maturity period.

b) FCNR (B) (Principal/Interest Repatriable)

Deposits of funds in the account may be accepted in such permissible currencies as may
be designated by the Reserve Bank from time to time.

• Presently the term deposit can be placed with ADs in India in 6 specific foreign
currencies (US Dollar, Pound Sterling, EURO, Japanese Yen, Australian Dollar
and Canadian Dollar).
• Rate of Interest - Fixed or floating within the ceiling rate of LIBOR/SWAP rates
for the respective currency/corresponding term minus 25 basis points.
• Maturity of deposits: 1-5 years.

c) NRO Accounts (Current earnings repatriable)

• Savings - Normally operated for crediting rupee earnings / income such as
dividends, interest. Currently the interest rate is 3.5 per cent.
• Term Deposits - Banks are free to determine interest rates.

d) Repatriation from NRO balances

Authorised Dealers can allow remittance/s upto USD 1 million per financial year (April-
March) for bonafide purposes, from balances in NRO accounts subject to payment of
applicable taxes. The limit of USD 1 million per financial year includes sale proceeds of
immovable properties held by NRIs/PIO.

BABASAB PATIL 41


II. Other Investments on repatriation basis

• Government dated securities/treasury bills.

• Units of domestic mutual funds.

• Bonds issued by a public sector undertaking (PSU) in India.

• Non-convertible debentures of a company incorporated in India.

• Shares in Public Sector Enterprises being dis-invested by the Government of
India, provided the purchase is in accordance with the terms and conditions
stipulated in the notice inviting bids.

• Shares and convertible debentures of Indian companies under FDI scheme
(including automatic route & FIPB).

• Shares and convertible debentures of Indian companies through stock exchange
under Portfolio Investment Scheme.

• Perpetual debt instruments and debt capital instruments issued by banks in India.

III. Other Investments on non-repatriation basis

• Government dated securities (other than bearer securities)/treasury bills.

• Units of domestic mutual funds.

• Units of Money Market Mutual Funds in India.

• Non-convertible debentures of a company incorporated in India.

• The capital of a firm or proprietary concern in India, not engaged in any
agricultural or plantation activity or real estate business.

• Deposits with a company registered under the Companies Act, 1956 including
NBFC registered with RBI, or a body corporate created under an Act of
Parliament or State Legislature, a proprietorship concern or a firm out of rupee
funds which do not represent inward remittances or transfer from NRE/FCNR(B)
Accounts into the NRO Account.

• Commercial Paper issued by an Indian company.

• Shares and convertible debentures of Indian companies other than under Portfolio
Investment Scheme.

BABASAB PATIL 42


IV. Investment in immovable Property

• May acquire immovable property in India other than agricultural land/ plantation
property or a farmhouse out of repatriable and non-repatriable funds.

In respect of such investments NRIs are eligible to repatriate

• Sale proceeds of immovable property acquired in India to the extent of repatriable
funds used for acquiring the property, up to two residential properties. The
balance will be repatriable through NRO Account subject to conditions mentioned
at item (I) (d).

• Refund of (a) application / earnest money / purchase consideration made by
house-building agencies/seller on account of non-allotment of flats / plots and (b)
cancellation of booking/deals for purchase of residential/commercial properties,
together with interest, net of taxes, provided original payment is made out of
NRE/FCNR(B) account/inward remittances.

• Housing Loan in rupees availed of by NRIs from ADs / Housing Financial
Institutions can be repaid by the close relatives in India of the borrower.

V. Facilities to returning NRIs/PIO

Returning NRIs/ PIO

• May continue to hold, own, transfer or invest in foreign currency, foreign security
or any immovable property situated outside India, if such currency, security or
property was acquired, held or owned when resident outside India.

May open, hold and maintain with an authorised dealer in India a Resident Foreign
Currency (RFC) Account to transfer balances held in NRE/FCNR(B) accounts. Proceeds
of assets held outside India at the time of return, can be credited to RFC account. The
funds in RFC accounts are free from all restrictions regarding utilisation of foreign
currency balances including any restriction on investment in any form outside India.

BABASAB PATIL 43


NRI REMITTANCE FACILITIES

SAFE CUSTODY SERVICES

This subsidiary service is rendered by the Bank to most valued customers. Bank
undertakes the responsibility of safe custody of articles entrusted by the customer under a
contract and return the same according to terms agreed upon.

SAFE DEPOSIT LOCKERS
Keep your valuables in our lockers and have peace of mind.

Lockers available at select branches where Safe Deposit Vaults are installed. Bank lets on
hire safe deposit lockers to individuals (Singly or jointly), Firms, Companies, Association
or Clubs, Trustees on nominal rent.

NOMINATIONS

This facility has been devised with an aim of minimising the hardships caused to the
family members on the death of the depositor/s. Nominations can be made in respect of
all types of deposit accounts by the individual account holders in their own capacity
singly or jointly.

CANBANK ELECTRONIC FUNDS TRANSFER SCHEME

We have a high tech remittance product called “Canbank EFT” which at present is
extended to the following exchange houses and banks

1. M/s Al Razouki International Exchange Co LLC, Dubai
2. M/s Eastern Exchange Est., Doha, Qatar
3. M/s Al Fardan Exchange Co., UAE
4. M/s Bahrain India International Exchange Co., Bahrain
5. M/s UAE Exchange Centre, Abu Dhabi, UAE
6. M/s Zenj Exchange Co., Bahrain
7. Laxmidas Tharia Ved Exchange
8. Musandam Exchange Oman
9. Arab National Bank Riyadh Saudi Arabia
10. Canara Bank London

Residents of Dubai, Bahrain and Saudi Arabia can make use of the above product for
making remittances which enables the beneficiaries of the remittance in India to receive
the funds in their accounts with designated Canara Bank branches within 24 hours from
the date of remittance. This facility is highly cost-effective and secured way of
remittance. At present the funds by way of EFT can be remitted to 1022 designated
branches across the Country

BABASAB PATIL 44


Acquisition and Transfer of Immovable Property in India by a person
resident outside India

I) Regulations/Directions issued by Reserve Bank of India

1. Regulations regarding acquisition and transfer of immovable property in India
by a person resident outside India have been notified vide RBI Notification
No. FEMA 21/2000-RB dated May 3, 2000 as amended by Notification
No.FEMA 64/2002-RB dated June 29, 2002, Notification No.FEMA 65/2002-
RB dated June 29, 2002, Notification No.FEMA 93/2003-RB dated June 6,
2003 and Notification No. 146/2006-RB dated 10/02/06 and relevant
directions issued in the form of A.P. (DIR Series) Circulars.

II) Acquisition of immovable property in India by way of purchase by a
person resident outside India.

2. General Permission is available to purchase only a residential/commercial
property in India to a person resident outside India who is a citizen of India
(NRI) or who is a Person of Indian Origin (PIO).

3. For the purpose of acquisition and transfer of immovable property in India, a
PIO means an individual (not being a citizen of Pakistan or Bangladesh or Sri
Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who (i) at any
time, held Indian passport; or (ii) who or either of whose father or
grandfather was a citizen of India by virtue of the Constitution of India or the
Citizenship Act, 1955 (57 of 1955).

4. NRI/PIO who has purchased residential/commercial property under general
permission is not required to file any documents with the Reserve Bank.

5. There is no restriction on number of residential/commercial property that NRI/
PIO can purchase under the general permission available

6. No foreign national of non-Indian origin be added as a second holder to a
residential/commercial property purchased by NRI/PIO

7. A foreign national of non-Indian origin resident outside India cannot acquire
any immovable property in India by way of purchase. Sec 2 (ze)

BABASAB PATIL 45


8. Yes. A Foreign National of non-Indian origin including a citizen of Pakistan
or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or
Bhutan may acquire only residential accommodation on lease, not exceeding
five years for which he/she does not require prior permission of Reserve Bank
of India.

9. A person resident outside India cannot acquire by way of purchase
agricultural land/plantation property/farm house in India.

III) Acquisition of immovable property in India by way of gift by a person

10. Yes. Under general permission available NRI/PIO may acquire
residential/commercial property by way of gift from a person resident in India
or a NRI or a PIO.

11. No. Under section 2 (ze) of the Foreign Exchange Management Act, 1999
‘transfer’ includes among others, ‘gift’. Therefore, a foreign national of non-
Indian origin resident outside India cannot acquire
residential/commercial property in India by way of gift.

12. No. A person resident outside India cannot acquire agricultural land/plantation
property/farm house in India by way of gift.

IV) Acquisition of immovable property in India by way of inheritance by a
person resident outside India

13. Yes. A person resident outside India can hold immovable property acquired
by way of inheritance from a person resident in India as per the provisions of
Section 6(5) of the Foreign Exchange Management Act, 1999.

14. With the specific approval of Reserve Bank a person resident outside India
may hold any immovable property in India acquired by way of inheritance
from a person resident outside India, provided the bequeathor had acquired
such property in accordance with the provisions of foreign exchange law in
force at the time of acquisition or under FEMA regulations.

BABASAB PATIL 46


V) Transfer of immovable property in India by way of sale by a person

15. NRI can transfer by way of sale residential/commercial property in India to a
person resident in India or to a NRI or a PIO.

16. PIO can transfer by way of sale residential/commercial property in India only
to a person resident in India.

17. No. PIO would need to seek Reserve Bank prior approval for transfer by way
of sale residential/commercial property in India to a NRI or a PIO.

18. No. A foreign national of non-Indian origin whether resident in India or
outside India would need to seek prior approval of Reserve Bank for transfer
by way of sale residential/property in India acquired with the specific
permission of Reserve Bank to a person resident in India or outside India.

19. Under the general permission available NRI/PIO may transfer by way of sale
his agricultural land/plantation property/farm house in India to a person
resident in India who is a citizen of India.

20. A foreign national of non-Indian origin resident outside India would need to
seek prior approval of Reserve Bank for transfer, by way of sale, agricultural
land/plantation property/farm house acquired in India.

VI) Transfer of immovable property in India by way of gift by a person

21. Yes. NRI/PIO may transfer by way of gift residential/commercial property in
India to a person resident in India or to a NRI or a PIO.

BABASAB PATIL 47

22. Under the general permission available NRI/PIO may transfer by way of gift
agricultural land/plantation property/farm house in India to a person resident
in India who is a citizen of India.

23. No. A foreign national of non-Indian origin resident outside India would need
to seek prior approval of Reserve Bank for transfer by way of gift agricultural
land/plantation property/farm house acquired by him in India.

VII) Transfer of residential/commercial property in India by way of mortgage
by a person resident outside India

24. NRI/PIO, transfer by way of mortgage his residential/commercial property in
India to a party abroad. He should seek prior approval of RBI.

25. No. He should seek prior approval of RBI. However, immovable property
purchased by a person resident outside India who has established a Branch
Office or other place of business for carrying on in India any activity in
accordance with FERA/FEMA regulations, may under general permission
available, mortgage such a property with an authorized dealer as a security for
any borrowing.

VIII) Mode of payment for purchase of residential/commercial property in
India by NRI/PIO

26. Under the general permission available, NRI / PIO may purchase residential /
commercial property in India out of funds remitted to India through normal
banking channel or funds held in his NRE / FCNR (B) / NRO account. No
consideration shall be paid outside India. However, payment for acquisition of
immovable property in India by NRI/PIO cannot be made either by Travellers
cheques or by foreign currency notes.

27. Provided original payment was made by way of inward remittance or by debit
to NRE/FCNR (B) account. For this purpose no permission of Reserve Bank
is required and they may approach the Authorised Dealer directly in the
matter. (Please refer to A. P. (DIR Series Circular No. 46 dated November 12,
2002).

BABASAB PATIL 48

28. Subject to certain terms and conditions (Please refer to Schedule 1 and
Schedules 2 to Notification No. FEMA 5/2000-RB dated 3rd May 2000).

29. Loans can be repaid by the borrower by way of inward remittance through
normal banking channel or by debit to his NRE/FCNR (B)/NRO account or
out of rental income derived from renting out such property. Such loan can
also be repaid by the borrower's close relatives through their account in India
by crediting the borrower's loan account. (Please refer to Regulation 8 to
Notification No. FEMA 4/2000-RB dated 3rd May 2000 and A.P. (DIR
Series) Circular No.95 dated April 20, 2003 and A.P. (DIR Series) Circular
No.94 dated May 25, 2003).

30. NRI avail of housing loan in rupees from his employer in India subject to
certain terms and conditions (Please refer to Regulation 8A to Notification
No. FEMA 4/2000-RB dated 3rd May 2000 and A.P. (DIR Series Circular
No.27 dated October 10, 2003).

IX) Repatriation of sale proceeds of residential/commercial property
purchased by NRI/PIO

31. NRI / PIO may repatriate the sale proceeds of residential / commercial
property in India acquired by way of inward remittance through normal
banking channel or by debit to NRE /FCNR (B) account. The amount to be
repatriated should not exceed the amount paid for acquisition of residential /
commercial property (a) in foreign exchange received through normal banking
channel or by debit to FCNR (B) account or (b) the foreign currency
equivalent, as on the date of payment, of the amount paid by debit to NRE
account.

From out of balances in NRO account, he may remit upto USD one million
per financial year for any bonafide purposes, eligible balances including the
sale proceeds of immovable property.

32. Yes. Repayment of loan in foreign exchange is treated as equivalent to the
foreign exchange received for purchase of residential accommodation.

33. No lock in period is applicable for sale of such property.

34. Yes. Repatriation of sale proceeds is restricted to not more than two
residential properties.

BABASAB PATIL 49


X) Remittance of sale proceeds of residential/commercial property received
by way of gift by NRI/PIO

35. The sale proceeds of residential/commercial property received by way of gift
by NRI/PIO should be credited to NRO account only.

XI) Remittance of sale proceeds of immovable property inherited by a
person resident outside India

36. Yes. Amount not exceeding USD one million, per calendar year subject to
production of documentary evidence in support of inheritance and Tax
clearance certificate/no objection certificate from Income Tax authority to
authorized dealer for remittances. However, if a PIO is a citizen of Pakistan or
Bangladesh or Sri Lanka or Afghanistan or China or Iran he should seek prior
approval of Reserve Bank with documentary evidence in support of
inheritance and tax clearance/no objection certificate from Income Tax
authority. This remittance facility is not available to a citizen of Nepal or
Bhutan. (Please refer to Regulation 4 (3) to Notification No. FEMA
13/RB-2000 dated 3rd May 2000)

37. Yes. Amount not exceeding USD one million, per calendar year subject to
production of documentary evidence in support of inheritance and Tax
clearance certificate/no objection certificate from Income Tax authority to
authorized dealer for remittances. However, a citizen of Pakistan or
Bangladesh or Sri Lanka or Afghanistan or China or Iran shall seek prior
approval of Reserve Bank with documentary evidence in support of
inheritance and tax clearance/no objection certificate from Income Tax
authority. This remittance facility is not available to a citizen of Nepal or
Bhutan. (Please refer to Regulation 4 (2) (ii) to Notification No. FEMA
13/RB-2000 dated 3rd May 2000)

38. No. He needs to seek prior approval of Reserve Bank with documentary
evidence in support of inheritance and tax clearance/no objection certificate
from Income Tax authority.

BABASAB PATIL 50

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