basics,structure, forex reserve

1. Presented By-
HEENALI M. SAWAI
PG16 MBA1624

2. FOREIGN EXCHANGE MARKET
⃘The market where the commodity traded is Currencies.
⃘Price of each currency is determined in term of other currencies.
What is an Exchange Rate ?
Exchange Rate is the price of the one country’s currency
expressed in another country’s currency. In other words, the rate at
which one Currency can be exchanged for another.
e.g.Rs.67.954 per one USD
Major currencies of the World
 USD
 EURO
 YEN
 POUND STERLING

3. General Features
⃘It is largest Financial Market on the “Earth”
⃘It is a 24-Hour Market
⃘Market has no physical presence
⃘Changing wealth
⃘No centralised Market

4. FUNCTIONS OF FOREIGN EXCHANGE

5. MARKET PARTICIPANTS
Corporates
Central bank
Individuals
Commercial
companies
Investment firms
Corporation

6. Foreign Exchange Market-World View
⃘ Globally, operations in the foreign exchange market
started in major way after the breakdown of the Bretton Wood
system in 1971, which also marked the beginning of floating
exchange rate regimes in several countries.
⃘ Over the years, the foreign exchange market has
emerged as the largest market in the world.
⃘ The decade of the 1990s witnessed a perceptible policy
shift in many emerging market towards reorientation of
their financial markets in terms of new products and
instruments, development of institutional and
market infrastructure and realignment of regulatory
structure consistent with the liberalised operational
framework.

7. Foreign Exchange Market In India
⃘ The changing contours were mirrored in a rapid
expansion of foreign exchange market in terms of
participants, transaction volumes, decline in
transaction costs and more efficient mechanisms of
risk transfer.
⃘ The of the foreign exchange market in India could
be traced to the year 1978 when banks in India were
permitted to undertake intra-day trade in foreign
exchange.
⃘ However, it was in the 1990s that the Indian foreign
exchange market witnessed far reaching changes along
with the shifts in the currency regime in India.

8. TYPES OF EXCHANGE RATES
⃘Fixed exchange rates
⃘Floating exchange rates
⃘Direct exchange rates
⃘Indirect exchange rates
⃘Spot and forward
Fixed and Floating Exchange Rate
⃘Fixed exchange rate is the official rate set by the
Monetary authorities of the Governance for one or more
currency
⃘Under floating exchange rate ,the value of the currency is
decided by supply and demand factors

9. Direct And Indirect Exchange Rate
⃘ Direct method - Under this , a given number of units
of local currency per unit of foreign currency is
quoted. They are designated as direct / certain rates
because the rupee cost of single foreign currency
unit can be obtained directly . Direct quotation is
also called home currency quotation .
⃘ Indirect method – Under this , a given number of
units of foreign currency per unit of local currency
quoted. Indirect quotation is also called foreign
currency quotation .

10. ⃘ SPOT-The term spot exchange refers to the class of foreign
exchange transaction which requires the immediate delivery or
exchange of currencies on the spot. In practice the settlement takes
place within two days in most markets. The rate of exchange
effective for the spot transaction is known as the spot rate and the
market for such transactions is known as the spot market.
⃘ FORWARD -The forward transactions is an agreement between
two parties, requiring the delivery at some specified future date of a
specified amount of foreign currency by one of the parties, against
payment in domestic currency be the other party, at the price agreed
upon in the contract. The rate of exchange applicable to the forward
contract is called the forward exchange rate and the market for
forward transactions is known as the forward market.

12. FOREIGN EXCHANGE MANAGEMENT ACT-
1999
⃘Replaced FERA- Foreign Exchange Regulation Act 1974
⃘This was done in order to relax the controls on foreign exchange in
India, as a result of economic libralization.
⃘FEMA served to make transactions for external trade easier and for
promoting the orderly development and maintainance of foreign
exchange market in India.

13. Points of comparison FEMA-1999 FERA- 1973
NATURE Basically it is a civil law It was considered as a criminal law.
APPLICABILITY The act applies to all branches,
offices and branches outside India
owned or controlled by a person
resident in India.
The act applies to all citizens of India
and to branches and agencies outside
India.
NEW TERMS Capital account transactions, current
account transaction.
These terms were not defined.
PENELTY Limited to three times the sum
involved if it is quantifiable.
Five times at the sum
involved+imprisonment in most of
the cases.
OBJECT The object is to encourage external
trade.
The object was to control, regulate
and prohibits foreign exchange
transactions.
LEGAL HELP The complainant has a full right to
take legal help from a lawyer or a
chartered accountant.
There was no provision for legal
assistance.
CONTENT There are 49 sections out of which 12
section relate to operational part and
rest with penal provision.
There were 81 sections out of which
32 sections related to operational part
and rest deals with penalty, appeals
etc.
AUTHORISED PERSON It has been extended to include banks,
money changes etc.
It was limited in case of FERA
DIFFERENCE BETWEEN FEMAAND FERA

14. FOREIGN CURRENCY ACCOUNT
1) Nostro- Account maintained by the Indian bank in abroad.
2) Vostro- A foreign bank may open a rupee account with an
Indian bank.
FOREIGN EXCHANGE RISK
⃘ Also known as exchange rate risk or currency risk.
⃘ Financial risk posed by an exposure to unanticipated changes in
the exchange rate between two currencies.
⃘ Investors and multinational business exporting or importing
goods and services or making foreign investments throughout
the globe economy are faced with an exchange rate risk which
can have severe financil consequences if not managed properly.

15.  Transaction exposure
Change in the value of financial position created by foreign
currency changes between establishment and settlement of
contract.
 Translation exposure
Potential change in value of a company’s financial position due
to exposure created during consolidation process.
 Economic exposure
Potential for value of future cash flows to be affected by
unanticipated exchange rate movements.
TYPES OF FOREIGN EXCHANGE RISK

16. FOREIGN EXCHANGE RESERVE
⃘Foreign exchange reserve Strict definition is the total of a country’s
foreign currency deposits and bond held by the central bank and
monetory authorities
⃘Foreign exchange reserve (Forex reserves) are generally defined as
assets held by RBI which is denominated in other foreign currencies.
Forex reserves include
Foreign currency assets
Gold
Special drawing rights (SDR)
Reserve tranche position

17. ⃘Foreign currency assets are investments in foreign bonds, Tbills,
deposits with foreign central banks etc.
It is maintained in major currencies like US dollar, Euro, Pound
sterling, Japanese Yen etc valued in terms of US dollar.
⃘Gold reserves are passively managed by RBI and accounts for
around 9% of total reserves.
⃘SDR is international reserve created by IMF. It was created to
supplement a shortfall of preferred foreign exchange reserve assets,
namely gold and US doller.
⃘Reserve tranche position in IMF is a reserve where India can draw
upon to purchase other foreign currencies from the fund.

18. IMPORTANCE OF FOREX RESERVE
⃘Foreign exchange reserves are important indicators of ability to
repay foreign debt.
⃘It is used to determine credit ratings of nations.
⃘Can be applied to libilities in times of crices include stabilization
funds, otherwise known as sovereign wealth funds.

19. RANKING OF COUNTRIES ACCORDING
TO THEIR FOREX RESERVE
Rank Country or Region Foreign-exchange
reserve
(Millions of US$)
Figures as of
1 China 3,108,500 September 2017
2 Japan 1,266,300 September 2017
3 Switzerland 795,100 September 2017
4 Saudi Arabia 485,200 September 2017
5 Taiwan 450,469 November 2017
6 Russia 430,200 November 2017
7 Hong Kong 419,300 September 2017
8 India 401,942 December 2017
9 South Korea 384,700 September 2017
10 Brazil 381,200 September 2017

20. 0
100000
200000
300000
400000
500000
600000
700000
800000
900000 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
Foreign Currency
Assets
SDR
RTP
Gold
TOTAL FOREIGN EXCHANGE RESERVE OF INDIA

21. Statistics
⃘In 1980, India had foreign exchange reserve of over U$7 billion,
more than double the level (U$2.55 billion) of what china had at that
time.
⃘India was forced to sell Dollars to the extent of close to u$35 billion
in spot market in Financial year 2009 due to 22%depreciation in
rupee (against the dollar) in the same fiscal year 2009.
⃘Foreign exchange reserved of India reached milestone of $100 billon
mark only in 2004.
⃘In 2009, India purchased 200 tonnes of gold from the IMF, worth
US$6.7bn

22. Sept-402246
330000
340000
350000
360000
370000
380000
390000
400000
410000
Nov-4/2016
Nov-18/2016
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
$ in million
FOREIGN EXCHANGE RESERVE AFTER DEMONITISATION

23. CONCLUSION
⃘We can observe from the above study that India’s forex
reserve has changed over the years.
⃘The level of forex reserves has steadily increased from 42281
US dollar in 2001 to 400741 US dollar in 2017.
⃘The mix ratio of gold and SDR’s are also increasing over the
years.
⃘Two factor responsible for significant addition to forex
reserves over the years can be attributed to lower level of
current deficit and high capital inflows.