FOREIGN EXCHANGE MANAGEMENT ACT

NO PERSON SHALL DEAL IN OR TRANSFER FOREIGN EXCHANGE OR

FOREIGN SECURITY TO ANY PERSON NOT BEING AN AUTHORISED
PERSON.

NO PERSON (RESIDENT IN INDIA) SHALL ACQUIRE, HOLD, OWN, POSSESS
OR TRANSFER ANY FOREIGN EXCHANGE, FOREIGN SECURITY OR ANY
IMMOVABLE PROPERTY SITUATED OUTSIDE INDIA, SAVE AS OTHERWISE
PROVIDED IN THIS ACT.

ANY PERSON MAY SELL OR DRAW FOREIGN EXCHANGE TO OR FROM AN
AUTHORISEDPERSON IF SUCH SALE OR WITHDRAWAL IS A CURRENT
ACCOUNT TRANSACTION PROVIDED THAT THE CENTRAL GOVT. MAY IN
PUBLIC INTEREST AND IN CONSULTATION WITH RBI, IMPOSE SUCH
REASONABLE RESTRICTIONS.
ENTER INTO ANY FINANCIAL TRANSACTION IN INDIA AS CONSIDERATION
FOR ON IN ASSOCIATION WITH ACQUISITION OR CREATION OR TRANSFER
OF A RIGHT TO ACQUIRE, ANY ASSET OUTSIDE INDIA BY ANY PERSON

MANAGEMENT OF FOREIGN EXCHANGE
RESERVES (FOREX)
MAINTAINING BALANCE IN MONETARY AND EXCHANGE RATE
POLICIES.

ENHANCING THE CAPACITY TO INTERVENE IN FOREX
MARKETS.

LIMITING EXTERNAL VULNERABILITY SO AS TO ABSORB
SHOCKS DURING TIMES OF CRISIS.

PROVIDING CONFIDENDE TO THE MARKETS THAT EXTERNAL
OBLIGATIONS CAN ALWAYS BE CONSIDERED.

ADDING TO THE COMFORT OF THE MARKET PARTICIPANTS
BY DEMONSTRATING THE BACKING OF DOMESTIC
CURRENCY BY EXTERNAL ASSETS

INSTRUMENTS OF FOREIGN EXCHANGE
SPOT RATE IS THE EXCHANGE RATE QUOTED FOR TRANSACTIONS THAT
REQUIRE EITHER IMMEDIATE DELIVERY OR WITHIN TWO DAYS. THE RATE AT
WHICH THE TRANSACTIONS IS SETTLED IS THE SPOT RATE.

OUTRIGHT FORWARD THIS INVOLVES THE EXCHANGE OF CURRENCY
THREE OR MORE DAYS AFTER THE DATE. THE RATE AT WHICH THE
TRANSACTION IS SETTLED IS THE FORWARD RATE.
FX SWAP THIS IS A SIMULTANEOUS SPOT AND FORWARD TRANSACTION

CURRENCY SWAP DEALS MORE WITH INTEREST BEARING FINANCIAL
INSTRUMENTS (SUCH AS BOND) AND THEY INVOLVE THE EXCHANGE OF
PRINCIPAL AND INTEREST PAYMENTS.
OPTIONS IS THE RIGHT BUT NOT THE OBLIGATION TO TRADE A FOREIGN
CURRENCY AT A SPECIFIC EXCHANGE RATE
FUTURE CONTRACT THIS IS AN AGREEMENT BETWEEN TWO PARTIES TO
BUY OR SELL A PARTICULAR CURRENCY AT A PRICE ON A PARTICULAR
FUTURE DATE, AS SPECIFIED IN A STANDARD CONTRACT TO ALL
PARTICIPANTS IN THAT CURRENCY FUTURE EXCHANGE.


INTERNATIONAL EXCHANGE RATES
NOMINAL EXCHANGE
RATE

THE RATE AT WHICH A
PERSON CAN

TRADE THE CURRENCY OF
ONE

COUNTRY FOR THE
CURRENCY OF

ANOTHER.
REAL EXCHANGE RATE

THE RATE AT WHICH A
PERSON CAN

TRADE THE GOODS AND
SERVICES

OF ONE COUNTRY FOR THE
GOODS

AND SERVICES OF ANOTHER.
Real Exchange Rate

Real exchange rate = Nominal exchange rate x Domestic price
Foreign Price
APPRECIATION
AN INCREASE IN THE VALUE
OF A CURRENCY AS
MEASURED BY THE
AMOUNT OF FOREIGN
CURRENCY IT CAN BUY
DEPRECIATION
A DECREASE IN THE VALUE
OF A
CURRENCY AS MEASURED
BY THE
AMOUNT OF FOREIGN
CURRENCY IT CAN BUY.
Determination of Exchange
Rate
PPP- Purchasing Power Parity.
ER = Er x Pd/Pf,

Where, ER= equilibrium exchange rate
Er= exchange rate in the reference period.
Pd= domestic price index
Pf= foreign countrys price index.


Determination of exchange rate
International Fisher effect (IFE)
The country with higher nominal interest rate should
have higher inflation and hence that countrys
currency will weaken in future.

Nominal interest rate= real interest rate + inflation
Need for Exchange control

To save foreign exchange by importing the essential commodities
only and check the import of items considered wasteful.
To maintain stability of exchange rates and to prevent violent
fluctuations there in.
To control and conserve the supply of foreign exchange which is
scarce.
To protect home industries from unfair competition by exporting
countries.
To restrict the outflow of capital.
To prevent export of essential goods and to encourage export of
surplus goods.
To favour trade with particular countries and to discourage trade
with other countries
To secure bargaining power in foreign trade and to assist in central
planning for economic development
Objectives of exchange control

To strengthen the government.
To conserve foreign exchange.
To check speculation .
To check capital flight.
To improve balance of payments.
To protect domestic industries.
To check recession- induced exports into the country.
To maintain exchange rate stability.
To enable government to repay foreign loans.


Methods of Exchange control

1. Unilateral

2. Bilateral/ Multilateral
UNILATERAL

REGULATION OF BANK RATE
REGULATION OF FOREIGN TRADE
RATIONING OF FOREIGN EXCHANGE
EXCHANGE PEGGING
EXCHANGE EQUALISATION FUNDS
BLOCKED FUNDS


BILATERAL/MULTILATERAL

PRIVATE COMPENSATION AGREEMENT

CLEARING AGREEMENT

STANDSTILL AGREEMENT

PAYMENTS AGREEMENT