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IMPACT OF CURRENCY MAR

In the partial fulfillment of the Degree of


Master of Business Administration
CENTER FOR
CENTER FOR MANAGEMENT STUDIES
A
Study on
OF CURRENCY MARKET IN INDIAN ECONOMY
Summer Project Report
Submitted
In the partial fulfillment of the Degree of
Master of Business Administration
Semester-II
By
NITISH PATEL 12.
Under the Guidance of:
Pro. NIKI SANGHVI
CENTER FOR MANAGEMENT STUDIES
Submitted To:
CENTER FOR MANAGEMENT STUDIES
Ganpat University,
Kherva.
(2010-2012)
IN INDIAN ECONOMY
i
CERTIFICATE BY THE GUIDE
This is to certify that the contents of this report entitled IMPACT OF CURRENCY
MARKET IN INDIAN ECONOMY by Nitish Patel, 12 submitted to Center for
Management Studies for the Award of Master of Business Administration (MBA Sem-II) is
original research work carried out by him under my supervision.
This report has not been submitted either partly or fully to any other University or Institute
for award of any degree or diploma.

Pro. Niki Sanghvi.
Centre for Management Studies,
Ganpat University,
Ahmadabad.
Date:
Place:

ii
CERTIFICATE BY THE MENTOR
This is to certify that the contents of this report entitled IMPACT OF CURRENCY
MARKET IN INDIAN ECONOMY by Nitish Patel, 12 submitted to Center for
Management Studies for the Award of Master of Business Administration (MBA Sem-II) is
original research work carried out by him under my mentoring. I, hereby certify the
authenticity of the data and facts mentioned in the report.
This report has not been submitted either partly or fully to any other University or Institute
for award of any degree or diploma.



Date :
Place :

iii
CANDIDATES STATEMENT
I hereby declare that the work incorporated in this report entitled IMPACT OF
CURRENCY MARKET IN INDIAN ECONOMY in partial fulfillment of the
requirements for the award of Master of Business Administration (Sem.- II) is the outcome of
original study undertaken by me and it has not been submitted earlier to any other University
or Institution for the award of any Degree or Diploma.
Nitish Patel
Date:
Place:

iv
Preface
As a Part of MBA Program, Student has to pursue a project duly approved by the Faculty of
Concerned area. I had the privilege of undertaking the project on Impact of Currency
Market in Indian Economy at Religare Securities Limited. Main aim of the Project is to
find out the factors which impact on Indian economy of currency market of glob & India.
The foreign exchange trading introduced in India since 2008. There are several products
traded in forex market. As far as the study is consent the report is mainly focusing on the
currency market in India. There are two exchanges MCX-SX and NSE for currency trading in
India. There are four main currency pairs been traded in India are USD, EURO, GBP and
JPY. There is major four ways to invest in or we can say financial instrument to invest in
currency are spot, forward, swap, future and option.
There are mainly three factors which impact the currency market are economic, political and
market physiology. Foreign exchange reserves in a strict sense are only the
foreign currency deposits and bonds held by central banks and monetary authorities. These
are assets of the central bank held in different reserve currencies, mostly the US dollar, and to
a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities,
the impact on any economy can be measured by analyzing the GDP, GNP, Import and export
growth of the country and additionally the foreign reserve of the country.
The report contains the market research of currency investors as in-depth interview with
questioner. This Project work is divided into following parts which are as under.
1. Objective of the Study
2. Limitations of the Study
3. Research Methodology.
4. To Understand Global Forex Market
5. To Understand Indian Forex Market
6. To Study Indian Economy
7. Data analysis & Interpretation
7. Conclusion
9. Annexure
10. Bibliography
v
Acknowledgement
I am thankful to Mr. Siddharth Doshi (Branch Manager) and the management of Religare
securities limited for permitting me to go through my summer training.
First and for most I would like to thank my company guide Mr. Nishank Patel ( Sales
Manager) for his constant encouragement, guidance and advice at every stage of my training.
I would like to thank Mr. Pratik Adhvayu (Relationship Manager), Mr. Sameer Pandya
(Relationship Manager), Mr. Ritesh Panchal (Dealer). This project would not have been
successfully completed without their great support.
I am very much thankful to Center for Management Studies, Ganpat University for their
excellent guidance, support and appreciation and also provided me with this great opportunity
to work in such a reputed organization.
I express my sincere thanks to Mr. M. Sharma (chancellor), CA. Ujal Mehta (central
coordinator), Dr. Vipul Patel (coordinator) and a sincere thanks to Prof. Niki Sanghvi, Center
for Management Studies, Ganpat University, Ahmadabad, who helped me in understanding
the project and the implementation of the same. Her suggestions really helped me think on a
broad perspective and give me motivation to do my best. I would again like to thank Center
for Management, Ganpat University, Ahmadabad for helping and supporting me for my
Summer Internship Program at RELIGARE SECURITIES LIMITED.
Date:
Place: - Nitish Patel

vi
Table of Content
Chapter Particulars Page no.
Certificate By the Guide I
Certificate by Mentor II
Candidates Statement III
Preface IV
Acknowledgments V
Table of content VI
List of Tables VIII
List of Figures & Graphs IX
Objective & limitations of the study X
Chapter 1 Introduction 1
Chapter 2 Company Profile 2
2.1. introduction of the company 2
2.2. Religare Securities Limited 4
2.3. Religare securities offering different services. 5
2.4. Group of companies 6
2.5. General information 7
Chapter 3 Research Methodology 8
3.1 Research Design 8
3.2. Define the target population 10
3.3. The six W 11
Chapter 4 Foreign Exchange Markets in India 12
4.1. Market Size and liquidity 14
4.2. Market participants 16
4.3. Trading characteristics 20
4.4. Determinants of FX rates 21
4.5. Financial instruments 24
4.6. Speculation 25
4.7. Foreign exchange reserves 26
Chapter 5 Economy of India 31
5.1. Post-liberalization period (since 1991) 32
vii
5.2. Sectors 33
5.3. External trade and investment 36
5.4. Indian currency exchange
39
5.5. Foreign Exchange Department of RBI 48
5.6. FEMA Rules & Policies 49
Chapter 6 Impact of currency market in Indian economy 50
6.1. GDP & GNP 50
6.2. Exports & Imports in FY'11 52
Chapter 7 Interpretation of questioner 53
7.1 Demographic Questions 53
7.2 Main Questions 58
Chapter 8 Conclusion 68
Chapter 9 Annexure 69
9.1 Questioner 69
Chapter 10 Bibliography 71

viii
List of Table
Table
No.
Particulars Page
no.
1 Major Players of Online Trading in India 4
2 Top 10 currency traders 15
3 Most traded currencies 19
4 Top 20 largest countries by foreign exchange reserves 29
5 inter-governmental free-trade associations and supranational organizations 30
6 Share of top five investing countries in FDI inflows 38
7 Shareholders of MCX-SX 42
8 Contract Specifications for USD INR 43
9 Contract Specifications for Euro INR 44
10 Contract Specifications for Pound Sterling-INR 45
11 Contract Specifications for Japanese Yen-INR 46
12 GDP & GNP of India 50
13 Monetary Policy Rates: India 51
14 Lending & Deposit Rates : India 51
15 Data interpretation of gender 53
16 Data interpretation of age 54
17 Data interpretation of education qualification 55
18 Data interpretation of occupation 56
19 Data interpretation of annual income 57
20 Data interpretation of currency preference 59
21 Data interpretation of primary object of investing 60
22 Data interpretation of time duration 61
23 Data interpretation of factors to determine 62
24 Data interpretation of percentage criteria of investment 63
25 Data interpretation of currency relay on 64
26 Data interpretation of risk in currency market 65
27 Data interpretation of return in currency market 66
28 Data interpretation of service provided by broker 67
ix
List of Graphs
No. Particulars Page no.
1 Pie chart of gender 53
2 Pie chart of age 54
3 Pie chart of education qualification 55
4 Pie chart of occupation 56
5 Pie chart of annual income 57
6 Pie chart of investment avenues 58
7 Pie chart of currency preference 59
8 Pie chart of primary object of investing 60
9 Pie chart of time duration 61
10 Pie chart of factors to determine 62
11 Pie chart of percentage criteria of investment 63
12 Pie chart of currency relay on 64
13 Pie chart of risk in currency market 65
14 Pie chart of return in currency market 66
15 Pie chart of service provided by broker 67

x
Objective of the study
Primary Objective:
To Study Impact of Currency market in Indian economy.
Secondary Objective:
To study the on board aspects of corporate.
To Study the various services provided by Broker house to their clients.
To know investors experience in Forex market,
To study what other services investors expect from their broker house.
Limitations of the study
Theoretical data are taken from internet; possibilities of wrong data can take in the report.
Respondent could provide wrong data.
Shortage of time.
May small sample size doesnt cover the all population characteristics.


Chapter 1. Introduction
The foreign exchange market or Currency market is a global, worldwide decentralized over-
the-counter financial market for trading currencies. Financial centers around the world
function as anchors of trading between a wide range of different types of buyers and sellers
around the clock, with the exception of weekends.
The foreign exchange market determines the relative values of different currencies. The
primary purpose of the foreign exchange is to assist international trade and investment, by
allowing businesses to convert one currency to another currency. For example, it permits a
US business to import British goods and pay Pound Sterling, even though the business's
income is in US dollars.
It also supports direct speculation in the value of currencies, and the carry trade, speculation
on the change in interest rates in two currencies. In a typical foreign exchange transaction, a
party purchases a quantity of one currency by paying a quantity of another currency.
The modern foreign exchange market began forming during the 1970s after three decades of
government restrictions on foreign exchange transactions (the Bretton Woods system of
monetary management established the rules for commercial and financial relations among the
worlds major industrial states after World War II), when countries gradually switched to
floating exchange rates from the previous exchange rate regime, which remained fixed as per
the Bretton Woods system.


Chapter 2. Company Profile
2.1. Introduction of the Company
Religare is a global financial services group with a presence across Asia, Africa, Middle
East, Europe and the Americas. Religare is promoted by the promoters of Ranbaxy
pharmaceuticals Limited. In India, Religares largest market, the group offers a wide array
of products and services ranging from insurance, asset management, broking and lending
solutions to investment banking and wealth management.
The group has also pioneered the concept of investments in alternative asset classes such as
arts and films. With over 10,000 employees across multiple geographies, Religare serves over
a million clients, including corporate and institutions, high net worth families and individuals,
and retail investors. Religare operate from six regional offices and 25 sub-regional offices
and have a presence in 330 cities and towns controlling 979 locations which are managed
either directly by Religare or by our Business Associates all over India, the company have a
representative office in London. While the majority of Religare offices provide the full
complement of its services yet it has dedicated offices for investment banking, institutional
brokerage, portfolio management services and priority client services.
The Company is empanelled with UTI, IDBI, IFCI, SBI, BOI-MF, Punjab National Bank,
PNB-MF, Oriental Insurance, GIC, UTI-Offshore, ICICI Can bank MF, Punjab & Sind Bank,
Pioneer ITI, SUN F&C, IDBI Principal, Prudential ICICI, ING Baring and J M Mutual Fund.
RELIGARE was founded with the vision of providing integrated financial care driven by the
relationship of trust.
The bouquet of services offered by RELIGARE includes Broking (Stocks, currency and
Commodities), Depository Participant Service, Advisory on Mutual Fund Investments and
Portfolio Management Services. RELIGARE is a pioneer in the concept of partnership to
reach multiple locations in order to effectively service its large base of individual clients.
Besides the reach of RELIGARE, the clients of the company greatly benefit by its strong
research capability, which encompasses fundamentals as well as technical knowledge.



Name
Religare is a Latin word that translates as 'to bind together'. This name has been chosen to
reflect the integrated nature of the financial services the company offers.
Symbol
The Religare name is paired with the symbol of a four-leaf clover. Traditionally, it is
considered good fortune to find a four-leaf clover as there is only one four-leaf clover for
every 10,000 three-leaf clovers found. For us, each leaf of the clover has a special meaning. It
is a symbol of Hope, Trust, Care, and Good Fortune. For the world, it is the symbol of
Religare. For us, each leaf of the clover has a special meaning. It is a symbol of Hope,
Trust, Care, And Good Fortune. For the world, it is the symbol of Religare.
The first leaf of the clover represents Hope. The aspirations to succeed. The dream of
becoming. Of new possibilities. It is the beginning of every step and the foundation on which
a person reaches for the stars.

The second leaf of the clover represents Trust. The ability to place ones own faith in
another. To have a relationship as partners in a team. To accomplish a given goal with the
balance that brings satisfaction to all, not in the binding, but in the bond that is built.
The third leaf of the clover represents Care. The secret ingredient that is the cement in
every relationship. The truth of feeling that underlines sincerity and the triumph of diligence
in every aspect. From it springs true warmth of service and the ability to adapt to evolving
environments with consideration to all.
The fourth and final leaf of the clover represents Good Fortune. Signifying that rare
ability to meld opportunity and planning with circumstance to generate those often looked for
remunerative moments of success.
Hope, Trust, Care, Good Fortune. All elements perfectly combine in the emblematic
and rare, four-leaf clover to visually symbolize the values that bind together and form the
core of the Religare vision.


2.2. Religare Securities Limited
Religare Securities Limited (RSL), a 100% subsidiary of Religare Enterprises Limited is a
leading equity and securities firm in India. The company currently handles sizeable volumes
traded on NSE and in the realm of online trading and investments; it currently holds a
reasonable share of the market. The major activities and offerings of the company today are
Equity Broking, Depository Participant Services, Portfolio Management Services,
International Advisory Fund Management Services, Institutional Broking and Research
Services. To broaden the gamut of services offered to its investors, the company offers an
online investment portal armed with a host of revolutionary features.
RSL is a member of the National Stock Exchange of India, Bombay Stock Exchange of
India, Depository Participant with National Securities Depository Limited and Central
Depository Services (I) Limited, and is a SEBI approved Portfolio Manager.
Religare has been constantly innovating in terms of product and services and to offer such
incisive services to specific user segments it has also started the NRI, FII, HNI and Corporate
Servicing groups. These groups take all the portfolio investment decisions depending upon a
clients risk / return parameter.
Religare has a very credible Research and Analysis division, which not only caters to the
need of our Institutional clientele, but also gives their valuable inputs to investment dealers.
VISION AND MISSION
Vision To build Religare as a globally trusted brand in the financial services domain and
present it as the Investment Gateway of India'.
Mission Providing complete financial care driven by the core values of diligence and
transparency.
Brand Essence Core brand essence is Diligence and Religare is driven by ethical and
dynamic processes for wealth creation.
Major Players of Online Trading in India
(table 1)
Religare Securities Angel Trade
Share Khan ICICI Direct
India bulls Reliance Money
Motilal Oswal Standard Chartered
HDFC IDBI Paisa Builder
HSBC Geojit
Networth Kotak Securities


2.3. Religare securities offering different services.
a). Equity & Derivative:
Religare is one of the heavyweight equity players in India with membership of National
Stock Exchange of India and Bombay Stock Exchange - both major exchanges of India. We
believe in innovative services that could cater a range of customers according to their
requirements.
b). Commodities: Religare Commodities Limited is a member of both the exchanges (MCX
& NCDEX) that allows you to trade in all the commodities traded at both the exchanges. At
present, trading in commodities is restricted to futures contracts only. Religare is currently
offering special services to our esteemed investors in commodities:. Portfolio Advisory
Services (COMPASS) - This allows investors to get the benefit of our in-depth research
services and generate better returns with minimal risk.
c). Depository Services: Religare is among the few major Depository Participants holding
securities worth more than Rs.6000 crore under its management. RSL provides depository
services to investors as a Depository Participant with NSDL and CDSL.
d). Portfolio Management Services The main idea behind Portfolio Management Services is
to manage our client's wealth more efficiently, reduce risk by diversifying across assets,
sectors and funds, and maximizing returns.



2.4. Group of companies
Insurance
Religare
assets
Managem
ent
Company
Aegon
Religare
Life
insurance
Religare
Health
Insurance
Group of companies
RELIGARE
ENTERPRI
SE LTD
Religare
Securities
Ltd
Religareli
gare
finvest
limited
Religare
Capital
Market
Limited
Religare
Insurance
Broaking
Limited


Religareli
gare
finvest
limited
Religare
Finance
limited
Religare
Commodit
ies
Limited


2.5. General information
Name- Religare Securities Limited
Corporate office address - Religare Securities Limited,
D3, P3B, District Centre,
Saket, New Delhi-110017,
Phone: +91-11-39125000
Board of directors -
1. Mr. Sunil Godhwani
Chairman and Managing Director
2. Mr Shachindra Nath
Group CEO
3. Mr. Anil Saxena
Chief Financial Officer
4. Mr. Harpal Singh
Non Executive Director
5. Mr. Deepak Ramchand Sabnani
Independent Director
6. Ms. Kathryn Matthews
Independent Director
7. Mr. Padam Bahl
Independent Director
8. Mr. J. W. Balani
Independent Director
9. Ms. Sunita Naidoo
Independent Director
10. Mr. Stuart D Pearce
Independent Director
11. Mr. Ravi Mehrotra
Board Member
12. Mr. R. K. Shetty
Alternate to Mr. J. W. Balani
13. Capt. G. P. S. Bhalla
Alternate to Mr. Deepak Sabnani

Chapter 3. Research Methodology
3.1. Research Design
A research design is a framework or blueprint for conducting t
It specifies the details of the procedures necessar
structure and solve marketing research problems.
Research Methodology
design is a framework or blueprint for conducting the marketing research project.
It specifies the details of the procedures necessary for obtaining the information needed to
structure and solve marketing research problems.

he marketing research project.
y for obtaining the information needed to


RESEARCH DESIGE:-
1. Exploratory research
2. Conclusive research
1. Exploratory Design:-
In exploratory design first collect the information about research.
Understand foreign exchange market
About foreign exchange market in India
About Indian economy
Impact of currency market in Indian economy
Collection of primary data from past research.
Then collection secondary data from Books, Magazines, Internet etc.
Then start qualitative research in this the interview of branch manager &
relationship manager of Religare securities limited.
2. Conclusive research design:
In conclusive research main part is survey.
In this research design we get perfect conclusion.
It is structure.
In conclusive research design two types
a. Causal research
b. Descriptive research
In this research use Descriptive research
descriptive research two types
i. Cross sectional
ii. Longitudinal design
In cross sectional
In cross sectional use Single cross sectional design because in our research the
information collects only ones a time.
In longitudinal design use panel.


Research design :- 1. Exploratory research
2. Conclusive research
1. Exploratory research :- a. Secondary research
b. Qualitative research
I. Focus group interview
II. In-depth interview
2. Conclusive research > Descriptive research.
Descriptive research > I. cross sectional
Cross-sectional > signal cross-sectional
3.2. Define the target population
1. Target population: The collection of elements or objects that process the information
sought by the researcher and about which inferences are to be made.
2. Elements: An object that possesses the information sought by the researcher.
3. Sampling unit: The basic unit containing the elements of the population to be
sampled.
4. Sampling frame: A representation of the elements of the target population.
It consists of a list or set of direction for identifying the target population.
5. Extent: Extent refers to the geographical boundaries.
6. Time: Time is time period under consideration.
Target population: All the account holders of Religare Securities Limited, who trade in
currency.
Elements: investors of currency market.
Sampling unit: investors of currency market
Sampling frame: Not available.
Extent: Ahemadabad
Time: 11.00 A.M to 5.00 P.M


3.3. The six W
1. Who: who are respondent?
The accounts holder in Religare Securities who are trading in Forex Market
2. What: what information should be obtained from the respondent?
A wide variety of information could be obtained, including:
a. What are income criteria?
b. In which financial instrument they invest in?
c. Factors they determine before investing.
3. When: when should the information is obtained from the respondent?
11.00a.m. to 5.00p.m.
4. Where: where should the respondent is contacted to obtain the required information?
The information was collected from the Religare Securities, Parimal Garden, Ahmedabad.
5. Why: why are we obtaining information from the respondent?
It is the necessary step to determine the factors of currency market impact in Indian economy
because of the research project assigned.
6. Way: In what way are we going to obtain information from the respondent?
a. Personal interview with questioners
b. Expert opinion


Chapter 4. Foreign Exchange Markets in India
Historically the value of goods was expressed through some other goods, for example - a
barter economy where individuals exchange goods. The obvious disadvantages of such a
system encouraged establishment of more generally accepted and understand means of goods
exchange long time ago in history - to set a common scale of value. In different places
everything from teeth to jewelry has served this purpose but later metals, and especially gold
and silver, were introduced as an accepted means of payment, and also a reliable form of
value storage.
Originally, coins were basically minted from the metal, but stable political systems
introduced a paper form of IOUs (I owe you) which gained wide acceptance during the
middle Ages. Such paper IOUs became the basis of our modern currencies.
Before First World War most central banks supported currencies with gold. Even though
banknotes always could be exchanged for gold, in reality this did not happen that often,
developing an understanding that full reserves are not really needed.
Sometimes huge supply of banknotes without gold support led to giant inflation and hence
political instability. To protect national interests foreign exchange controls were introduced to
demand more responsibility from market players.
Closer to the end of World War II, the Bretton Woods agreement was signed as the initiative
of the USA in July 1944. The Bretton Woods Conference rejected John Maynard Keynes
suggestion for a new world reserve currency in favor of a system built on the US dollar.
Other international institutions such as the IMF, the World Bank and GATT (General
Agreement on Tariffs and Trade) were created in the same period as the emerging victors of
WW2 searched for a way to avoid the destabilizing monetary crises which led to the war. The
Bretton Woods agreement resulted in a system of fixed exchange rates that partly reinstated
the gold standard, fixing the US dollar at USD35/oz and fixing the other main currencies to
the dollar - and was intended to be permanent.
The Bretton Woods system came under increasing pressure as national economies moved in
different directions during the sixties. A number of realignments kept the system alive for a
long time, but eventually Bretton Woods collapsed in the early seventies following president
Nixon's suspension of the gold convertibility in August 1971. The dollar was no longer
suitable as the sole international currency at a time when it was under severe pressure from
increasing US budget and trade deficits.
The following decades have seen foreign exchange trading develop into the largest global
market by far. Restrictions on capital flows have been removed in most countries, leaving the
market forces free to adjust foreign exchange rates according to their perceived values.


But the idea of fixed exchange rates has by no means died. The EEC (European Economic
Community) introduced a new system of fixed exchange rates in 1979, the European
Monetary System. This attempt to fix exchange rates met with near extinction in 1992-93,
when pent-up economic pressures forced devaluations of a number of weak European
currencies. Nevertheless, the quest for currency stability has continued in Europe with the
renewed attempt to not only fix currencies but actually replace many of them with the Euro in
2001.
The lack of sustainability in fixed foreign exchange rates gained new relevance with the
events in South East Asia in the latter part of 1997, where currency after currency was
devalued against the US dollar, leaving other fixed exchange rates, in particular in South
America, looking very vulnerable.
But while commercial companies have had to face a much more volatile currency
environment in recent years, investors and financial institutions have found a new
playground. The size of foreign exchange markets now dwarfs any other investment market
by a large factor. It is estimated that more than USD 3,000 billion is traded every day, far
more than the world's stock and bond markets combined.
Forex (Foreign Exchange) is the international financial market used for trade of world
currencies. It has been working since 70s of the 20th century - from the moment when the
biggest world nations decided to switch from fixed exchange rates to floating ones. Daily
volume of Forex trade exceeds 4 trillion United States dollars, and this number is always
growing .Main currency for Forex operations is the United States dollar (USD).
Unlike stock exchanges, Forex market doesn't have any fixed schedule or operating hours -
it's open 24 hours per day, 5 days per week from Monday to Friday, since buy/sell orders are
performed by world banks any time during the day or night (some banks even work on
Saturdays and Sundays). Just like any other exchange, Forex market is driven by supply and
demand of a particular tool. For instance, there are buyers and sellers for "Euro vs US dollar".
Exchange rates at Forex are changing constantly, and fluctuations may happen many times
per second - this market is very liquid.



4.1. Market Size and liquidity
The foreign exchange market is the most liquid financial market in the world. Traders include
large banks, central banks, institutional investors, currency speculators, corporations,
governments, other financial institutions, and retail investors. The average daily turnover in
the global foreign exchange and related markets is continuously growing. According to the
2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements,
average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998). Of this
$3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded
in outright forwards, FX swaps and other currency derivatives.
Trading in the UK accounted for 36.7% of the total, making UK by far the most important
global center for foreign exchange trading. In second and third places, respectively, trading in
the USA accounted for 17.9%, and Japan accounted for 6.2%.
Turnover of exchange-traded foreign exchange futures and options have grown rapidly in
recent years, reaching $166 billion in 2010 (double the turnover recorded in April 2007).
Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. FX
futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are
actively traded relative to most other futures contracts.
Most developed countries permit the trading of FX derivative products (like currency futures
and options on currency futures) on their exchanges. All these developed countries already
have fully convertible capital accounts. A number of emerging countries do not permit FX
derivative products on their exchanges in view of controls on the capital accounts. The use of
foreign exchange derivatives is growing in many emerging economies. Countries such as
Korea, South Africa, and India have established currency futures exchanges, despite having
some controls on the capital account.
Foreign exchange trading increased by 20% between 2007 and 2010 and has more than
doubled since 2004. The increase in turnover is due to a number of factors: the growing
importance of foreign exchange as an asset class, the increased trading activity of high-
frequency traders, and the emergence of retail investors as an important market segment. The
growth of electronic execution methods and the diverse selection of execution venues have
lowered transaction costs, increased market liquidity, and attracted greater participation from
many customer types. In particular, electronic trading via online portals has made it easier for
retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to
account for up to 10% of spot FX turnover, or $150 billion per day.





Top 10 currency traders
Rank Name
1 Deutsche Bank
2 Barclays Capital
3 UBS AG
4 Citi
5 JPMorgan
6 HSBC
7 Royal Bank of Scotland
8 Credit Suisse
9 Goldman Sachs
10 Morgan Stanley
Because foreign exchange is an
negotiate directly with one another, there is no central exch
biggest geographic trading center is the UK, primar
UK estimates has increased its share of global turnove
in April 2007 to 36.7% in April 2010. Due to London
currency's quoted price is usually the London marke
calculates the value of its SDRs
day.

Top 10 currency traders % of overall volume, May 2011
Market share
Deutsche Bank 15.64%
Barclays Capital 10.75%
10.59%
8.88%
JPMorgan 6.43%
6.26%
Royal Bank of Scotland 6.20%
Credit Suisse 4.80%
Goldman Sachs 4.13%
Morgan Stanley 3.64%
Because foreign exchange is an OTC (over-the-counter) market where brokers/de
directly with one another, there is no central exchange or clearing house. The
biggest geographic trading center is the UK, primarily London, which according to
estimates has increased its share of global turnover in traditional transactions from 34.6%
in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular
currency's quoted price is usually the London market price. For instanc
SDRs every day, they use the London market prices at noo

% of overall volume, May 2011
Market share
15.64%
10.75%
10.59%
8.88%
6.43%
6.26%
6.20%
4.80%
4.13%
3.64%
(Table 2)
market where brokers/dealers
ange or clearing house. The
ily London, which according to The City
r in traditional transactions from 34.6%
's dominance in the market, a particular
t price. For instance, when the IMF
every day, they use the London market prices at noon that


4.2. Market participants
Unlike a stock market, the foreign exchange market is divided into levels of access. At the
top is the inter-bank market, which is made up of the largest commercial banks and securities
dealers. Within the inter-bank market, spreads, which are the difference between the bid and
ask prices, are razor sharp and not known to players outside the inner circle. The difference
between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies
such as the EUR) as you go down the levels of access. This is due to volume. If a trader can
guarantee large numbers of transactions for large amounts, they can demand a smaller
difference between the bid and ask price, which is referred to as a better spread. The levels of
access that make up the foreign exchange market are determined by the size of the "line" (the
amount of money with which they are trading). The top-tier interbank market accounts for
53% of all transactions. From there, smaller banks, followed by large multi-national
corporations (which need to hedge risk and pay employees in different countries), large hedge
funds, and even some of the retail FX market makers. According to Galati and Melvin,
Pension funds, insurance companies, mutual funds, and other institutional investors have
played an increasingly important role in financial markets in general, and in FX markets in
particular, since the early 2000s. (2004) In addition, he notes, Hedge funds have grown
markedly over the 20012004 period in terms of both number and overall size. Central
banks also participate in the foreign exchange market to align currencies to their economic
needs.
a. Banks
The interbank market caters for both the majority of commercial turnover and large amounts
of speculative trading every day. Many large banks may trade billions of dollars, daily. Some
of this trading is undertaken on behalf of customers, but much is conducted by proprietary
desks, which are trading desks for the bank's own account. Until recently, foreign exchange
brokers did large amounts of business, facilitating interbank trading and matching anonymous
counterparts for large fees. Today, however, much of this business has moved on to more
efficient electronic systems. The broker squawk box lets traders listen in on ongoing
interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than
just a few years ago.
b. Commercial companies
An important part of this market comes from the financial activities of companies seeking
foreign exchange to pay for goods or services. Commercial companies often trade fairly small
amounts compared to those of banks or speculators, and their trades often have little short
term impact on market rates. Nevertheless, trade flows are an important factor in the long-
term direction of a currency's exchange rate. Some multinational companies can have an
unpredictable impact when very large positions are covered due to exposures that are not
widely known by other market participants.


c. Central banks
National central banks play an important role in the foreign exchange markets. They try to
control the money supply, inflation, and/or interest rates and often have official or unofficial
target rates for their currencies. They can use their often substantial foreign exchange
reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing
speculation" is doubtful because central banks do not go bankrupt if they make large losses,
like other traders would, and there is no convincing evidence that they do make a profit
trading.
d. Forex Fixing
Forex fixing is the daily monetary exchange rate fixed by the national bank of each country.
The idea is that central banks use the fixing time and exchange rate to evaluate behavior of
their currency. Fixing exchange rates reflects the real value of equilibrium in the forex
market. Banks, dealers and online foreign exchange traders use fixing rates as a trend
indicator.
The mere expectation or rumor of central bank intervention might be enough to stabilize a
currency, but aggressive intervention might be used several times each year in countries with
a dirty float currency regime. Central banks do not always achieve their objectives. The
combined resources of the market can easily overwhelm any central bank. Several scenarios
of this nature were seen in the 199293 ERM collapse, and in more recent times in Southeast
Asia.
e. Hedge funds as speculators
About 70% to 90% of the foreign exchange transactions are speculative. In other words, the
person or institution that bought or sold the currency has no plan to actually take delivery of
the currency in the end; rather, they were solely speculating on the movement of that
particular currency. Hedge funds have gained a reputation for aggressive currency
speculation since 1996. They control billions of dollars of equity and may borrow billions
more, and thus may overwhelm intervention by central banks to support almost any currency,
if the economic fundamentals are in the hedge funds' favor.
f. Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers
such as pension funds and endowments) use the foreign exchange market to facilitate
transactions in foreign securities. For example, an investment manager bearing an
international equity portfolio needs to purchase and sell several pairs of foreign currencies to
pay for foreign securities purchases. Some investment management firms also have more
speculative specialist currency overlay operations, which manage clients' currency exposures
with the aim of generating profits as well as limiting risk. Whilst the number of this type of


specialist firms is quite small, many have a large value of Assets Under Management (AUM),
and hence can generate large trades.
g. Retail foreign exchange traders
Individual Retail speculative traders constitute a growing segment of this market with the
advent of retail forex platforms, both in size and importance. Currently, they participate
indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in
the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange
scams. To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter
requirements, particularly in relation to the amount of Net Capitalization required of its
members. As a result many of the smaller and perhaps questionable brokers are now gone or
have moved to countries outside the US. A number of the forex brokers operate from the UK
under FSA regulations where forex trading using margin is part of the wider over-the-counter
derivatives trading industry that includes CFDs and financial spread betting.
There are two main types of retail FX brokers offering the opportunity for speculative
currency trading: brokers and dealers or market makers. Brokers serve as an agent of the
customer in the broader FX market, by seeking the best price in the market for a retail order
and dealing on behalf of the retail customer. They charge a commission or mark-up in
addition to the price obtained in the market. Dealers or market makers, by contrast, typically
act as principal in the transaction versus the retail customer, and quote a price they are willing
to deal at.
h. Non-bank foreign exchange companies
Non-bank foreign exchange companies offer currency exchange and international payments
to private individuals and companies. These are also known as foreign exchange brokers but
are distinct in that they do not offer speculative trading but rather currency exchange with
payments (i.e., there is usually a physical delivery of currency to a bank account).
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign
Exchange Companies. These companies' selling point is usually that they will offer better
exchange rates or cheaper payments than the customer's bank. These companies differ from
Money Transfer/Remittance Companies in that they generally offer higher-value services.
i. Money transfer/remittance companies and bureau de changes
Money transfer companies/remittance companies perform high-volume low-value transfers
generally by economic migrants back to their home country. In 2007, the Aite Group
estimated that there were $369 billion of remittances (an increase of 8% on the previous
year). The four largest markets (India, China, Mexico and the Philippines) receive $95
billion. The largest and best known provider is Western Union with 345,000 agents globally
followed by UAE Exchange

Bureau de change or currency transfer companies provide low value fo
services for travelers. These are typically located
and allow physical notes to be exchanged from one c
foreign exchange markets via banks or non bank forei
Most traded currencies (May 2011)
(Table 3)
Rank Currency
1
United States
dollar
2 Euro
3 Japanese yen
4 Pound sterling
5 Australian dollar
6 Swiss franc
7 Canadian dollar
8 Hong Kong dollar
9 Swedish krona
10
New Zealand
dollar
11 South Korean won
12 Singapore dollar
13 Norwegian krone
14 Mexican peso
15 Indian rupee
16 Other Currencies
Total
or currency transfer companies provide low value fo
services for travelers. These are typically located at airports and stations or at tourist locations
and allow physical notes to be exchanged from one currency to another. They access the
oreign exchange markets via banks or non bank foreign exchange companies.
Most traded currencies (May 2011)
ISO 4217 code (Symbol) % daily share
United States
USD ($) 84.9%
EUR () 39.1%
Japanese yen JPY () 19.0%
Pound sterling GBP () 12.9%
Australian dollar AUD ($) 7.6%
CHF (Fr) 6.4%
Canadian dollar CAD ($) 5.3%
Hong Kong dollar HKD ($) 2.4%
Swedish krona SEK (kr) 2.2%
New Zealand
NZD ($) 1.6%
South Korean won KRW 1.5%
Singapore dollar SGD ($) 1.4%
Norwegian krone NOK (kr) 1.3%
Mexican peso MXN ($) 1.3%
INR 0.9%
- 12.2%
200%

or currency transfer companies provide low value foreign exchange
at airports and stations or at tourist locations
urrency to another. They access the
gn exchange companies.

% daily share
84.9%
39.1%
19.0%
12.9%
7.6%
6.4%
5.3%
2.4%
2.2%
1.6%
1.5%
1.4%
1.3%
1.3%
0.9%
12.2%
200%


4.3. Trading characteristics
There is no unified or centrally cleared market for the majority of FX trades, and there is very
little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets,
there are rather a number of interconnected marketplaces, where different currencies
instruments are traded. This implies that there is not a single exchange rate but rather a
number of different rates (prices), depending on what bank or market maker is trading, and
where it is. In practice the rates are often very close, otherwise they could be exploited by
arbitrageurs instantaneously. Due to London's dominance in the market, a particular
currency's quoted price is usually the London market price. A joint venture of the Chicago
Mercantile Exchange and Reuters, called Fx market space opened in 2007 and aspired but
failed to the role of a central market clearing mechanism.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all
important centers as well. Banks throughout the world participate. Currency trading happens
continuously throughout the day; as the Asian trading session ends, the European session
begins, followed by the North American session and then back to the Asian session,
excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by
expectations of changes in monetary flows caused by changes in gross domestic product
(GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity,
Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses,
large cross-border M&A deals and other macroeconomic conditions. Major news is released
publicly, often on scheduled dates; so many people have access to the same news at the same
time. However, the large banks have an important advantage; they can see their customers'
order flow.
Currencies are traded against one another. Each currency pair thus constitutes an individual
trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY
are the ISO 4217 international three-letter code of the currencies involved. The first currency
(XXX) is the base currency that is quoted relative to the second currency (YYY), called the
counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD)
1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. The
market convention is to quote most exchange rates against the USD with the US dollar as the
base currency (e.g. USDJPY, USDCAD, USDCHF). The exceptions are the British pound
(GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and the euro (EUR) where
the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).
The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive
currency correlation between XXXYYY and XXXZZZ.
On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral
currency pairs were:


EURUSD : 28%
USDJPY : 14%
GBPUSD : 9%
and the US currency was involved in 84.9% of transactions, followed by the euro (39.1%),
the yen (19.0%), and sterling (12.9%). Volume percentages for all individual currencies
should add up to 200%, as each transaction involves two currencies.
Trading in the euro has grown considerably since the currency's creation in January 1999, and
how long the foreign exchange market will remain dollar-centered is open to debate. Until
recently, trading the euro versus a non-European currency ZZZ would have usually involved
two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an
established traded currency pair in the interbank spot market. As the dollar's value has eroded
during 2008, interest in using the euro as reference currency for prices in commodities (such
as oil), as well as a larger component of foreign reserves by banks, has increased
dramatically. Transactions in the currencies of commodity-producing countries, such as
AUD, NZD, CAD, have also increased.
4.4. Determinants of FX rates
The following theories explain the fluctuations in FX rates in a floating exchange rate regime
(In a fixed exchange rate regime, FX rates are decided by its government):
I. International parity conditions: Relative Purchasing Power Parity, interest rate parity,
Domestic Fisher effect, International Fisher effect. Though to some extent the above
theories provide logical explanation for the fluctuations in exchange rates, yet these
theories falter as they are based on challengeable assumptions [e.g., free flow of
goods, services and capital] which seldom hold true in the real world.
II. Balance of payments model: This model, however, focuses largely on tradable goods
and services, ignoring the increasing role of global capital flows. It failed to provide
any explanation for continuous appreciation of dollar during 1980s and most part of
1990s in face of soaring US current account deficit.
III. Asset market model: views currencies as an important asset class for constructing
investment portfolios. Assets prices are influenced mostly by peoples willingness to
hold the existing quantities of assets, which in turn depends on their expectations on
the future worth of these assets. The asset market model of exchange rate
determination states that the exchange rate between two currencies represents the
price that just balances the relative supplies of, and demand for, assets denominated in
those currencies.
None of the models developed so far succeed to explain FX rates levels and volatility in the
longer time frames. For shorter time frames (less than a few days) algorithms can be devised
to predict prices. It is understood from the above models that many macroeconomic factors
affect the exchange rates and in the end currency prices are a result of dual forces of demand


and supply. The world's currency markets can be viewed as a huge melting pot: in a large and
ever-changing mix of current events, supply and demand factors are constantly shifting, and
the price of one currency in relation to another shifts accordingly. No other market
encompasses (and distills) as much of what is going on in the world at any given time as
foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any
single element, but rather by several. These elements generally fall into three categories:
economic factors, political conditions and market psychology.
a. Economic factors
These include: (a) economic policy, disseminated by government agencies and central
banks, (b) economic conditions, generally revealed through economic reports, and
other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and
monetary policy (the means by which a government's central bank influences the
supply and "cost" of money, which is reflected by the level of interest rates).
Government budget deficits or surpluses: The market usually reacts negatively to
widening government budget deficits, and positively to narrowing budget deficits.
The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the
demand for goods and services, which in turn indicates demand for a country's
currency to conduct trade. Surpluses and deficits in trade of goods and services reflect
the competitiveness of a nation's economy. For example, trade deficits may have a
negative impact on a nation's currency.
Inflation levels and trends: Typically a currency will lose value if there is a high level
of inflation in the country or if inflation levels are perceived to be rising. This is
because inflation erodes purchasing power, thus demand, for that particular currency.
However, a currency may sometimes strengthen when inflation rises because of
expectations that the central bank will raise short-term interest rates to combat rising
inflation.
Economic growth and health: Reports such as GDP, employment levels, retail sales,
capacity utilization and others, detail the levels of a country's economic growth and
health. Generally, the more healthy and robust a country's economy, the better its
currency will perform, and the more demand for it there will be.
Productivity of an economy: Increasing productivity in an economy should positively
influence the value of its currency. Its effects are more prominent if the increase is in
the traded sector.
b. Political conditions
Internal, regional, and international political conditions and events can have a
profound effect on currency markets.


All exchange rates are susceptible to political instability and anticipations about the
new ruling party. Political upheaval and instability can have a negative impact on a
nation's economy. For example, destabilization of coalition governments in Pakistan
and Thailand can negatively affect the value of their currencies. Similarly, in a
country experiencing financial difficulties, the rise of a political faction that is
perceived to be fiscally responsible can have the opposite effect. Also, events in one
country in a region may spur positive/negative interest in a neighboring country and,
in the process, affect its currency.
c. Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a
variety of ways:
Flights to quality: Unsettling international events can lead to a "flight to quality," a
type of capital flight whereby investors move their assets to a perceived "safe haven."
There will be a greater demand, thus a higher price, for currencies perceived as
stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and
gold have been traditional safe havens during times of political or economic
uncertainty.
Long-term trends: Currency markets often move in visible long-term trends. Although
currencies do not have an annual growing season like physical commodities, business
cycles do make themselves felt. Cycle analysis looks at longer-term price trends that
may rise from economic or political trends.
"Buy the rumor, sell the fact": This market truism can apply to many currency
situations. It is the tendency for the price of a currency to reflect the impact of a
particular action before it occurs and, when the anticipated event comes to pass, react
in exactly the opposite direction. This may also be referred to as a market being
"oversold" or "overbought". To buy the rumor or sell the fact can also be an example
of the cognitive bias known as anchoring, when investors focus too much on the
relevance of outside events to currency prices.
Economic numbers: While economic numbers can certainly reflect economic policy,
some reports and numbers take on a talisman-like effect: the number itself becomes
important to market psychology and may have an immediate impact on short-term
market moves. "What to watch" can change over time. In recent years, for example,
money supply, employment, trade balance figures and inflation numbers have all
taken turns in the spotlight.


4.5. Financial instruments
A. Spot
A spot transaction is a two-day delivery transaction (except in the case of trades between the
US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next
business day), as opposed to the futures contracts, which are usually three months. This trade
represents a direct exchange between two currencies, has the shortest time frame, involves
cash rather than a contract; and interest is not included in the agreed-upon transaction.
B. Forward
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this
transaction, money does not actually change hands until some agreed upon future date. A
buyer and seller agree on an exchange rate for any date in the future, and the transaction
occurs on that date, regardless of what the market rates are then. The duration of the trade can
be one day, a few days, months or years. Usually the date is decided by both parties. Then the
forward contract is negotiated and agreed upon by both parties.
C. Swap
The most common type of forward transaction is the FX swap. In an FX swap, two parties
exchange currencies for a certain length of time and agree to reverse the transaction at a later
date. These are not standardized contracts and are not traded through an exchange.
D. Future
Futures are standardized and are usually traded on an exchange created for this purpose. The
average contract length is roughly 3 months. Futures contracts are usually inclusive of any
interest amounts.
E. Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the
owner has the right but not the obligation to exchange money denominated in one currency
into another currency at a pre-agreed exchange rate on a specified date. The FX options
market is the deepest, largest and most liquid market for options of any kind in the world.
4.6. Speculation
Controversy about currency speculators and their effect on currency devaluations and
national economies recurs regularly. Nevertheless, economists including Milton Friedman
have argued that speculators ultimately are a stabilizing influence on the market and perform
the important function of providing a market for hedgers and transferring risk from those
people who don't wish to bear it, to those who do. Other economists such as Joseph Stiglitz


consider this argument to be based more on politics and a free market philosophy than on
economics.
Large hedge funds and other well capitalized "position traders" are the main professional
speculators. According to some economists, individual traders could act as "noise traders"
and have a more destabilizing role than larger and better informed actors.
Currency speculation is considered a highly suspect activity in many countries. While
investment in traditional financial instruments like bonds or stocks often is considered to
contribute positively to economic growth by providing capital, currency speculation does not;
according to this view, it is simply gambling that often interferes with economic policy. For
example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest
rates for a few days to 500% per annum, and later to devalue the krona. Former Malaysian
Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the
devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who
simply help "enforce" international agreements and anticipate the effects of basic economic
"laws" in order to profit.
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle
their national economies, and foreign exchange speculators made the inevitable collapse
happen sooner. A relatively quick collapse might even be preferable to continued economic
mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics
of speculation are viewed as trying to deflect the blame from them for having caused the
unsustainable economic conditions.


4.7. Foreign exchange reserves
Introduction
Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense
are only the foreign currency deposits and bonds held by central banks and monetary
authorities. However, the term in popular usage commonly includes foreign exchange
and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but
it is more accurately termed official international reserves or international reserves. These
are assets of the central bank held in different reserve currencies, mostly the US dollar, and to
a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities,
e.g. the local currency issued, and the various bank reserves deposited with the central bank,
by the government or financial institutions.
History
Official international reserves, the means of official international payments, formerly
consisted only of gold, and occasionally silver. But under the Bretton Woods system, the
US dollar functioned as a reserve currency, so it too became part of a nation's official
international reserve assets. From 1944-1968, the US dollar was convertible into gold through
the Federal Reserve System, but after 1968 only central banks could convert dollars into gold
from official gold reserves, and after 1973 no individual or institution could convert US
dollars into gold from official gold reserves. Since 1973, no major currencies have been
convertible into gold from official gold reserves. Individuals and institutions must now buy
gold in private markets, just like other commodities. Even though US dollars and other
currencies are no longer convertible into gold from official gold reserves, they still can
function as official international reserves.
Purpose
In a flexible exchange rate system, official international reserve assets allow a central bank to
purchase the domestic currency, which is considered a liability for the central bank (since it
prints the money or fiat currency as IOUs). This action can stabilize the value of the domestic
currency.
Central banks throughout the world have sometimes cooperated in buying and selling official
international reserves to attempt to influence exchange rates.
Changes in reserves
The quantity of foreign exchange reserves can change as a central bank implements monetary
policy. A central bank that implements a fixed exchange rate policy may face a situation
where supply and demand would tend to push the value of the currency lower or higher (an
increase in demand for the currency would tend to push its value higher, and a decrease
lower). In a flexible exchange rate regime, these operations occur automatically, with the


central bank clearing any excess demand or supply by purchasing or selling the foreign
currency. Mixed exchange rate regimes ('dirty floats', target bands or similar variations) may
require the use of foreign exchange operations (sterilized or unsterilized) to maintain the
targeted exchange rate within the prescribed limits .
Foreign exchange operations that are unsterilized will cause an expansion or contraction in
the amount of domestic currency in circulation, and hence directly affect monetary policy and
inflation: An exchange rate target cannot be independent of an inflation target. Countries that
do not target a specific exchange rate are said to have a floating exchange rate, and allow the
market to set the exchange rate; for countries with floating exchange rates, other instruments
of monetary policy are generally preferred and they may limit the type and amount of foreign
exchange interventions. Even those central banks that strictly limit foreign exchange
interventions, however, often recognize that currency markets can be volatile and may
intervene to counter disruptive short-term movements.
To maintain the same exchange rate if there is increased demand, the central bank can issue
more of the domestic currency and purchase the foreign currency, which will increase the
sum of foreign reserves. In this case, the currency's value is being held down; since (if there
is no sterilization) the domestic money supply is increasing (money is being 'printed'), this
may provoke domestic inflation (the value of the domestic currency falls relative to the value
of goods and services).
Since the amount of foreign reserves available to defend a weak currency (a currency in low
demand) is limited, a foreign exchange crisis or devaluation could be the end result. For a
currency in very high and rising demand, foreign exchange reserves can theoretically be
continuously accumulated, although eventually the increased domestic money supply will
result in inflation and reduce the demand for the domestic currency (as its value relative to
goods and services falls). In practice, some central banks, through open market operations
aimed at preventing their currency from appreciating, can at the same time build substantial
reserves.
In practice, few central banks or currency regimes operate on such a simplistic level, and
numerous other factors (domestic demand, production and productivity, imports and exports,
relative prices of goods and services, etc) will affect the eventual outcome. As certain impacts
(such as inflation) can take many months or even years to become evident, changes in foreign
reserves and currency values in the short term may be quite large as different markets react to
imperfect data.
Costs, benefits, and criticisms
Large reserves of foreign currency allow a government to manipulate exchange rates -
usually to stabilize the foreign exchange rates to provide a more favorable economic


environment. In theory the manipulation of foreign currency exchange rates can provide the
stability that a gold standard provides, but in practice this has not been the case. Also, the
greater a country's foreign reserves, the better position it is in to defend itself
from speculative attacks on the domestic currency.
There are costs in maintaining large currency reserves. Fluctuations in exchange markets
result in gains and losses in the purchasing power of reserves. Even in the absence of a
currency crisis, fluctuations can result in huge losses. For example, China holds huge U.S.
dollar-denominated assets, but if the U.S. dollar weakens on the exchange markets, the
decline results in a relative loss of wealth for China. In addition to fluctuations in exchange
rates, the purchasing power of fiat money decreases constantly due to devaluation
through inflation. Therefore, a central bank must continually increase the amount of its
reserves to maintain the same power to manipulate exchange rates. Reserves of foreign
currency provide a small return in interest. However, this may be less than the reduction in
purchasing power of that currency over the same period of time due to inflation, effectively
resulting in a negative return known as the "quasi-fiscal cost". In addition, large currency
reserves could have been invested in higher yielding assets.
Excess reserves
Foreign exchange reserves are important indicators of ability to repay foreign debt and for
currency defense, and are used to determine credit ratings of nations, however, other
government funds that are counted as liquid assets that can be applied to liabilities in times of
crisis include stabilization funds, otherwise known as sovereign wealth funds. If those were
included, Norway, Singapore and Persian Gulf States would rank higher on these lists,
and UAE's $1.3 trillion Abu Dhabi Investment Authority would be second after China. Apart
from high foreign exchange reserves, Singapore also has significant government and
sovereign wealth funds including Temasek Holdings, valued in excess of $145 billion
and GIC, valued in excess of $330 billion. India is also planning to create its own investment
firm from its foreign exchange reserves.
On May 2011, an estimated that Asia has $3.5 trillion of foreign reserves or is around two-
thirds of the world's reserves and a stark contrast to the indebtedness in many developed
Western economies.

The following is a list of the top 20 largest countries
(table 4)
Rank Country
1 People's Republic of China
2 Japan
3 Russia
4 Saudi Arabia
5 Republic of China (Taiwan)
6 Brazil
7 India
8 South Korea
9
Switzerland
10 Hong Kong
11 Singapore
12 Germany
13 Thailand
14 France
15 Italy
16 Algeria
17 United States
18 Mexico
19 United Kingdom
20 Malaysia
following is a list of the top 20 largest countries by foreign exchange reserves:
Billion USD (end of
s Republic of China $ 3045 (Mar 2011)
$ 1140 (May 2011)
$ 525 (Apr 2011)
$ 466 (Mar 2011)
Republic of China (Taiwan) $ 400 (Apr 2011)
$ 333 (May 2011)
$ 310 (May 2011)
$ 307 (Apr 2011)
$ 280 (Mar 2011)
$ 277 (Apr 2011)
$ 243 (Apr 2011)
$ 221 (Mar 2011)
$ 190 (Apr 2011)
$ 173 (Mar 2011)
$ 164 (Mar 2011)
$ 155 (Dec 2010)
$ 143 (Apr 2011)
$ 128 (Mar 2011)
United Kingdom $ 119 (Apr 2011)
$ 114 (Mar 2011)

by foreign exchange reserves:
Billion USD (end of month)
$ 3045 (Mar 2011)
$ 1140 (May 2011)
$ 525 (Apr 2011)
$ 466 (Mar 2011)
$ 400 (Apr 2011)
$ 333 (May 2011)
$ 310 (May 2011)
(Apr 2011)
$ 280 (Mar 2011)
$ 277 (Apr 2011)
$ 243 (Apr 2011)
$ 221 (Mar 2011)
$ 190 (Apr 2011)
$ 173 (Mar 2011)
$ 164 (Mar 2011)
$ 155 (Dec 2010)
$ 143 (Apr 2011)
$ 128 (Mar 2011)
$ 119 (Apr 2011)
$ 114 (Mar 2011)

The following is a list of inter
organizations.
(Table 5)
Rank Country
1 European Economic Area
2 European Union
3 Eurozone
These few holders account for more than 60% of tota
adequacy of the foreign exchange reserves is more o
but as a percentage of short-term foreign debt, money supply, or average monthly

The following is a list of inter-governmental free-trade associations and supranational

Billion USD (end of
European Economic Area $ 1 416 (Feb 2011)
European Union $ 1 356 (Feb 2011)
$ 798 (Feb 2011)
These few holders account for more than 60% of total world foreign currency reserves. The
adequacy of the foreign exchange reserves is more often expressed not as an absolute level,
term foreign debt, money supply, or average monthly

trade associations and supranational

Billion USD (end of month)
$ 1 416 (Feb 2011)
(Feb 2011)
l world foreign currency reserves. The
expressed not as an absolute level,
term foreign debt, money supply, or average monthly imports.


Chapter 5. Economy of India
Social democratic policies governed India's economy from 1947 to 1991. The economy was
characterized by extensive regulation, protectionism, public, pervasive corruption and slow
growth. Since 1991, continuing economic liberalization has moved the country towards
market. A revival of economic reforms and better economic policy in first decade of the 21st
century accelerated India's economic growth rate. In recent years, Indian cities have
continued to liberalize business regulations. By 2008, India had established itself as the
world's second-fastest growing major economy.
However, as a result of the financial crisis of 20072010, coupled with a poor monsoon,
India's gross domestic product (GDP) growth rate significantly slowed to 6.7% in 200809,
but subsequently recovered to 7.4% in 200910, while the fiscal deficit rose from 5.9% to a
high 6.5% during the same period. Indias current account deficit surged to 4.1% of GDP
during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 20092010,
according to the state Labor Bureau, was 9.4% nationwide, rising to 10.1% in rural areas,
where two-thirds of the 1.2 billion populations live.
India's large service industry accounts for 57.2% of the country's GDP while the industrial
and agricultural sectors contribute 28.6% and 14.6% respectively. Agriculture is the
predominant occupation in India, accounting for about 52% of employment.
The service sector makes up a further 34%, and industrial sector around 14%. However,
statistics from a 2009-10 government survey, which used a smaller sample size than earlier
surveys, suggested that the share of agriculture in employment had dropped to 45.5%.
Major industries include telecommunications, textiles, chemicals, food processing, steel,
transportation equipment, cement, mining, petroleum, machinery, information technology-
enabled services and pharmaceuticals. The labor totals 500 million workers. Major
agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes,
cattle, water buffalo, sheep, goats, poultry and fish. In 2009-2010, India's top five trading
partners are United Arab Emirates, China, United States, Saudi Arabia and Germany.
Previously a closed economy, India's trade and business sector has grown fast. India currently
accounts for 1.5% of world trade as of 2007 according to the World Trade Statistics of the
WTO in 2006, which valued India's total merchandise trade (counting exports and imports) at
$294 billion and India's services trade at $143 billion. Thus, India's global economic
engagement in 2006 covering both merchandise and services trade was of the order of $437
billion, up by a record 72% from a level of $253 billion in 2004. India's total trade in goods
and services has reached a share of 43% of GDP in 200506, up from 16% in 199091.
India's total merchandise trade (counting exports and imports) stands at $ 606.7 billion and is
currently the 11th largest in the world.


5.1. Post-liberalization period (since 1991)
In the late 1970s, the government led by Morarji Desai eased restrictions on capacity
expansion for incumbent companies, removed price controls, reduced corporate taxes and
promoted the creation of small scale industries in large numbers. He also raised the income
tax levels at one point to a maximum of 97.5%, a record in the world for non-communist
economies. However, the subsequent government policy of Fabian socialism hampered the
benefits of the economy, leading to high fiscal deficits and a worsening current account. The
collapse of the Soviet Union, which was India's major trading partner, and the Gulf War,
which caused a spike in oil prices, resulted in a major balance-of-payments crisis for India,
which found itself facing the prospect of defaulting on its loans. India asked for a $1.8 billion
bailout loan from the International Monetary Fund (IMF), which in return demanded reforms.
In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan
Singh, initiated the economic liberalization of 1991. The reforms did away with the Licence
Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic
approval of foreign direct investment in many sectors. Since then, the overall thrust of
liberalization has remained the same, although no government has tried to take on powerful
lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws
and reducing agricultural subsidies. By the turn of the 20th century, India had progressed
towards a free-market economy, with a substantial reduction in state control of the economy
and increased financial liberalization. This has been accompanied by increases in life
expectancy, literacy rates and food security, although the beneficiaries have largely been
urban residents.
While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been
raised to investment level in 2003 by S&P and Moody's. In 2003, Goldman Sachs predicted
that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK
and Russia by 2025 and Japan by 2035, making it the third largest economy of the world,
behind the US and China. India is often seen by most economists as a rising economic
superpower and is believed to play a major role in the global economy in the 21st century.


5.2. Sectors
Industry and services
Industry accounts for 28% of the GDP and employ 14% of the total workforce. In absolute
terms, India is 12th in the world in terms of nominal factory output. The Indian industrial
sector underwent significant changes as a result of the economic reforms of 1991, which
removed import restrictions, brought in foreign competition, led to privatization of certain
public sector industries, liberalized the FDI regime, improved infrastructure and led to an
expansion in the production of fast moving consumer goods. Post-liberalization, the Indian
private sector was faced with increasing domestic as well as foreign competition, including
the threat of cheaper Chinese imports. It has since handled the change by squeezing costs,
revamping management, and relying on cheap labor and new technology. However, this has
also reduced employment generation even by smaller manufacturers who earlier relied on
relatively labor-intensive processes.
Textile manufacturing is the second largest source of employment after agriculture and
accounts for 20% of manufacturing output, providing employment to over 20 million
people. Ludhiana produces 90% of woollens in India and is known as the Manchester of
India. Tirupur has gained universal recognition as the leading source of hosiery, knitted
garments, casual wear and sportswear.
India is 13th in services output. The services sector provides employment to 23% of the work
force and is growing quickly, with a growth rate of 7.5% in 19912000, up from 4.5% in
195180. It has the largest share in the GDP, accounting for 55% in 2007, up from 15% in
1950. Information technology and business process outsourcing are among the fastest
growing sectors, having a cumulative growth rate of revenue 33.6% between 199798 and
200203 and contributing to 25% of the country's total exports in 200708. The growth in the
IT sector is attributed to increased specialization, and an availability of a large pool of low
cost, highly skilled, educated and fluent English-speaking workers, on the supply side,
matched on the demand side by increased demand from foreign consumers interested in
India's service exports, or those looking to outsource their operations. The share of the Indian
IT industry in the country's GDP increased from 4.8 % in 200506 to 7% in 2008. In 2009,
seven Indian firms were listed among the top 15 technology outsourcing companies in the
world.
Mining forms an important segment of the Indian economy, with the country producing 79
different minerals (excluding fuel and atomic resources) in 200910, including iron
ore, manganese, mica,bauxite, chromite, limestone, asbestos, fluorite, gypsum, ochre, phosph
oric and silica sand Organized retail supermarkets accounts for 24% of the market as of
2008. Regulations prevent most foreign investment in retailing. Moreover, over thirty
regulations such as "signboard licenses" and "anti-hoarding measures" may have to be
complied before a store can open doors. There are taxes for moving goods from state to state,
and even within states. Tourism in India is relatively undeveloped, but growing at double
digits. Some hospitals woo medical tourism.


Agriculture
Farmers work outside a rice field in Andhra Pradesh. India
is the second largest producer of rice in the world after
China, and Andhra Pradesh is the second largest rice
producing state in India with West Bengal being the largest.
India ranks second worldwide in farm output. Agriculture
and allied sectors like forestry, logging and fishing
accounted for 15.7% of the GDP in 200910, employed
52.1% of the total workforce, and despite a steady decline of its share in the GDP, is still the
largest economic sector and a significant piece of the overall socio-economic development of
India. Yields per unit area of all crops have grown since 1950, due to the special emphasis
placed on agriculture in the five-year plans and steady improvements in irrigation,
technology, application of modern agricultural practices and provision of agricultural credit
and subsidies since the Green Revolution in India. However, international comparisons reveal
the average yield in India is generally 30% to 50% of the highest average yield in the world.
India receives an average annual rainfall of 1,208 millimeters (47.6 in) and a total
annual precipitation of 4000 billion cubic meters, with the total utilizable water resources,
including surface and groundwater, amounting to 1123 billion cubic meters. 546,820 square
kilometers (211,130 sq mi) of the land area, or about 39% of the total cultivated area, is
irrigated. India's inland water resources including rivers, canals, ponds and lakes and marine
resources comprising the east and west coasts of the Indian ocean and other gulfs and bays
provide employment to nearly six million people in the fisheries sector. In 2008, India had
the world's third largest fishing industry.
India is the largest producer in the world of milk, jute and pulses, and also has the world's
second largest cattle population with 175 million animals in 2008. It is the second largest
producer of rice, wheat, sugarcane, cotton and groundnuts, as well as the second largest fruit
and vegetable producer, accounting for 10.9% and 8.6% of the world fruit and vegetable
production respectively. India is also the second largest producer and the largest consumer of
silk in the world, producing 77,000 million tons in 2005.
Banking and finance
The Indian money market is classified into the organized sector, comprising private, public
and foreign owned commercial banks and cooperative banks, together known as scheduled
banks, and the unorganized sector, which includes individual or family owned indigenous
bankers or money lenders and non-banking financial companies. The unorganized sector
and microcredit are still preferred over traditional banks in rural and sub-urban areas,
especially for non-productive purposes, like ceremonies and short duration loans.
Prime Minister Indira Gandhi nationalized 14 banks in 1969, followed by six others in 1980,
and made it mandatory for banks to provide 40% of their net credit to priority sectors like
agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks

fulfill their social and developmental goals. Since
increased from 8,260 in 1969 to 72,170 in 2007 and
decreased from 63,800 to 15,000 during the same per
from 5,910 crore (US$1.32 billion)
200809. Despite an increase of rural branches, from 1,8
branches in 1969 to 30,590 or 42% in 2007, only 32,
by a scheduled bank.
India's gross domestic saving
32.7%. More than half of personal savings are invested in
houses, cattle, and gold. The public sector banks hold over 75% of total assets o
industry, with the private and foreign banks holdin
liberalization, the government has approved signifi
relate to nationalized banks, like encouraging mergers, reduc
increasing profitability and competitiveness, other
insurance sectors to private and foreign players.
Energy and power
As of 2010, India imported about 70% of its crude oil
requirements. Shown here is an
High in the Arabian Sea, one
production.
India's oil reserves meet 25% of the country's domestic oil demand.
proven oil reserves stood at 775 million metric
cubic meters. Oil and natural gas fields are located offshore at
Godavari Basin and the Cauvery Delta
of Assam, Gujarat and Rajasthan
imported $82.1 billion worth of oil
effect on its current account deficit
sector companies such as Oil and Natural Gas Corporation
Corporation Limited (HPCL) and Indian Oil Corporation Limited (IOCL). T
major private Indian companies in the oil sector su
which operates the world's largest oil refining com
India has the world's fifth largest
of 9,587 MW. Shown here is a
As of 2010, India had an installed power generation
which thermal power contributed 64.6%,
energy 7.7%, and nuclear power
through its 106 billion tons of
energy with significant future potential such as
fulfill their social and developmental goals. Since then, the number of bank branches has
increased from 8,260 in 1969 to 72,170 in 2007 and the population covered by a
decreased from 63,800 to 15,000 during the same period. The total bank deposits
1.32 billion) in 197071 to 3,830,922 crore (US$
09. Despite an increase of rural branches, from 1,860 or 22% of the total number of
branches in 1969 to 30,590 or 42% in 2007, only 32,270 out of 500,000 villages are covered
saving in 200607 as a percentage of GDP stood at a high
More than half of personal savings are invested in physical assets such as land,
public sector banks hold over 75% of total assets o
industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
liberalization, the government has approved significant banking reforms. While some of these
nationalized banks, like encouraging mergers, reducing government interference and
increasing profitability and competitiveness, other reforms have opened up the banking and
insurance sectors to private and foreign players.
India imported about 70% of its crude oil
Shown here is an ONGC platform at Mumbai
, one of the few sites of domestic
meet 25% of the country's domestic oil demand. As of 2009, India's total
proven oil reserves stood at 775 million metric tons while gas reserves stood at 1074 billion
Oil and natural gas fields are located offshore at Mumbai High
Cauvery Delta, and onshore mainly in the states
Rajasthan. India is the fourth largest consumer of oil in the
imported $82.1 billion worth of oil in the first three quarters of 2010, which had an a
current account deficit. The petroleum industry in India mostly consists o
Oil and Natural Gas Corporation (ONGC), Hindustan Petroleum
(HPCL) and Indian Oil Corporation Limited (IOCL). T
major private Indian companies in the oil sector such as Reliance Industries Limited
which operates the world's largest oil refining complex.
world's fifth largest wind power industry, with an installed wind power capacity
of 9,587 MW. Shown here is a wind farm in Muppandal, Tamil Nadu.
As of 2010, India had an installed power generation capacity of 164,835 megawatts (MW), of
contributed 64.6%, hydroelectricity 24.7%, other sources of
nuclear power 2.9%. India meets most of its domestic energy demand
through its 106 billion tons of coal reserves. India is also rich in certain renewable sources of
energy with significant future potential such as solar, wind and biofuels (jatropha, sugarcane).

then, the number of bank branches has
the population covered by a branch
bank deposits increased
US$854.3 billion) in
60 or 22% of the total number of
270 out of 500,000 villages are covered
07 as a percentage of GDP stood at a high
physical assets such as land,
public sector banks hold over 75% of total assets of the banking
g 18.2% and 6.5% respectively. Since
cant banking reforms. While some of these
ing government interference and
reforms have opened up the banking and
As of 2009, India's total
tons while gas reserves stood at 1074 billion
Mumbai High, Krishna
, and onshore mainly in the states
India is the fourth largest consumer of oil in the world and
in the first three quarters of 2010, which had an adverse
. The petroleum industry in India mostly consists of public
Hindustan Petroleum
(HPCL) and Indian Oil Corporation Limited (IOCL). There are some
Reliance Industries Limited (RIL)
industry, with an installed wind power capacity
capacity of 164,835 megawatts (MW), of
24.7%, other sources of renewable
India meets most of its domestic energy demand
India is also rich in certain renewable sources of
and biofuels (jatropha, sugarcane).

India's huge thorium reserves
country's ambitious nuclear energy program
reserves stagnated the growth of nuclear energy in
the Indo-US nuclear deal has paved the way for India to import uranium from
5.3. External trade and investment
Global trade relations
A map showing the global distribution of
Indian exports in 2006 as a percentage of
the top market (USA - $20,902,500,000).
Until the liberalization of 1991, India was
largely and intentionally isolated from the
world markets, to protect its economy and to
achieve self-reliance. Foreign trade was
subject to import tariffs, export taxes and quantit
investment (FDI) was restricted by upper
technology transfer, export obligations and governm
needed for nearly 60% of new FDI in the industrial
averaged only around $200 millio
the capital flows consisted of foreign aid, commerc
Indians. India's exports were stagnant for the first 15 year
neglect of trade policy by the government of that p
industrialization being nascent, consisted predominantly of machinery, raw mate
consumer goods.
Since liberalization, the value of India's internat
contribution of total trade in goods and services t
43% in 200506. India's major trading partners are the
States and the United Arab Emirates.
engineering goods, petroleum products, chemicals an
textiles and garments, agricultural products, iron
commodities included crude oil and related products
silver. In November 2010, exports increased 22.3% year
billion), while imports were up 7.5% at
the same month dropped from
40,070 crore (US$8.94 billion)
India is a founding-member of
and its successor, the WTO. While participating act
India has been crucial in voicing the concerns of t
has continued its opposition to the inclusion of su
and other non-tariff barriers to trade
reserves about 25% of world's reserves are expected to fuel the
nuclear energy program in the long-run. India's dwindling uranium
reserves stagnated the growth of nuclear energy in the country for many years.
has paved the way for India to import uranium from
External trade and investment
global distribution of
Indian exports in 2006 as a percentage of
$20,902,500,000).
Until the liberalization of 1991, India was
largely and intentionally isolated from the
world markets, to protect its economy and to
nce. Foreign trade was
subject to import tariffs, export taxes and quantitative restrictions, while
(FDI) was restricted by upper-limit equity participation, restrictions on
technology transfer, export obligations and government approvals; these approvals were
needed for nearly 60% of new FDI in the industrial sector. The restrictions ensured that FDI
averaged only around $200 million annually between 1985 and 1991; a large percentag
the capital flows consisted of foreign aid, commercial borrowing and deposits of
India's exports were stagnant for the first 15 years after independence, due to general
neglect of trade policy by the government of that period. Imports in the same period, due to
ent, consisted predominantly of machinery, raw mate
Since liberalization, the value of India's international trade has increased sharply,
contribution of total trade in goods and services to the GDP rising from 16% in 1990
India's major trading partners are the European Union, China, the United
States and the United Arab Emirates. In 200607, major export commodities included
engineering goods, petroleum products, chemicals and pharmaceuticals, gems and jewellery,
textiles and garments, agricultural products, iron ore and other minerals. Major import
commodities included crude oil and related products, machinery, electronic go
In November 2010, exports increased 22.3% year-on-year to 85,063
billion), while imports were up 7.5% at 125,133 crore (US$27.9 billion). Trade deficit for
dropped from 46,865 crore (US$10.45 billion)
8.94 billion) in 2010.
member of General Agreement on Tariffs and Trade (GATT) since 1947
and its successor, the WTO. While participating actively in its general council meetings,
India has been crucial in voicing the concerns of the developing world. For instance, India
has continued its opposition to the inclusion of such matters as labor and environment issues
tariff barriers to trade into the WTO policies.

are expected to fuel the
run. India's dwindling uranium
the country for many years. However,
has paved the way for India to import uranium from other countries.
ative restrictions, while foreign direct
limit equity participation, restrictions on
ent approvals; these approvals were
sector. The restrictions ensured that FDI
n annually between 1985 and 1991; a large percentage of
ial borrowing and deposits of non-resident
s after independence, due to general
eriod. Imports in the same period, due to
ent, consisted predominantly of machinery, raw materials and
ional trade has increased sharply, with the
o the GDP rising from 16% in 199091 to
, China, the United
07, major export commodities included
d pharmaceuticals, gems and jewellery,
ore and other minerals. Major import
, machinery, electronic goods, gold and
85,063 crore (US$18.97
27.9 billion). Trade deficit for
10.45 billion) in 2009 to
(GATT) since 1947
ively in its general council meetings,
. For instance, India
ch matters as labor and environment issues

Balance of payments
Cumulative Current Account Balance 1980
India's balance of payments
liberalization in the 1990s, precipitated by a bala
consistently, covering 80.3% of its imports in 2002
from 66.2% in 199091. However, the global economic slump
followed by a general deceleration in world trade s
exports as a percentage of imports drop to 61.4% in
09. India's growing oil import bill is seen as the main
behind the large current account deficit,
200809. Between January and October 2010, India imported $8
oil.
Due to the global late-2000s recession
and 39.2% respectively in June 2009.
the global recession, such as United States and mem
more than 60% of Indian exports.
compared to the decline in exports, India's trade d
billion). As of June 2011, exports and imports have
monthly exports reaching $25.9 billion for the mont
reaching $40.9 billion for the same month. This represents a year
for exports and 54.1% for imports.
India's reliance on external assistance and concess
liberalization of the economy, and the
4.4% in 200809. In India, Exte
from non-resident lenders, are being permitted by the Govern
source of funds to Indian corporate. The
through ECB policy guidelines issued by the Reserve
Exchange Management Act of 1999.
from $5.8 billion in March 1991 to $283.5 billion i
Foreign direct investment
As the fourth-largest economy in the world in PPP terms, India is
FDI; India has strengths in telecommunication, informati
areas such as auto components, chemica
surge in foreign investments, rigid FDI policies we
to positive economic reforms aimed at deregulating
investment, India has positioned itself as one of the front
growing Asia-Pacific region. India has a large pool of skilled managerial and
expertise. The size of the middle
growing consumer market.
Current Account Balance 19802008 based on IMF data Since independence,
balance of payments on its current account has been negative. Since economic
liberalization in the 1990s, precipitated by a balance of payment crisis, India's exports rose
consistently, covering 80.3% of its imports in 200203, up
However, the global economic slump
followed by a general deceleration in world trade saw the
exports as a percentage of imports drop to 61.4% in 2008
India's growing oil import bill is seen as the main driver
behind the large current account deficit, which rose to $118.7 billion, or 9.7% of GDP, in
Between January and October 2010, India imported $82.1 billion worth of crude
00s recession, both Indian exports and imports declined by 29.2%
and 39.2% respectively in June 2009. The steep decline was because countries hit hardest
the global recession, such as United States and members of the European Union, account for
n 60% of Indian exports. However, since the decline in imports was much shar
compared to the decline in exports, India's trade deficit reduced to 25,250
billion). As of June 2011, exports and imports have both registered impressive growth with
monthly exports reaching $25.9 billion for the month of May 2011 and monthly imports
billion for the same month. This represents a year on year growth of 56.9%
for exports and 54.1% for imports.
India's reliance on external assistance and concessional debt has decreased since
liberalization of the economy, and the debt service ratio decreased from 35.3% in 1990
External Commercial Borrowings (ECBs), or commercial loans
resident lenders, are being permitted by the Government for providing an additional
source of funds to Indian corporate. The Ministry of Finance monitors and regulates them
through ECB policy guidelines issued by the Reserve Bank of India under the
of 1999. India's foreign exchange reserves have steadily risen
from $5.8 billion in March 1991 to $283.5 billion in December 2009.
largest economy in the world in PPP terms, India is a preferred destination for
India has strengths in telecommunication, information technology and other significant
areas such as auto components, chemicals, apparels, pharmaceuticals, and jeweler. Despite
surge in foreign investments, rigid FDI policies were a significant hindrance. However, due
to positive economic reforms aimed at deregulating the economy and stimulating foreign
ositioned itself as one of the front-runners of the rapidly
. India has a large pool of skilled managerial and
of the middle-class population stands at 300 million and represen

2008 based on IMF data Since independence,
has been negative. Since economic
nce of payment crisis, India's exports rose
hich rose to $118.7 billion, or 9.7% of GDP, in
2.1 billion worth of crude
, both Indian exports and imports declined by 29.2%
The steep decline was because countries hit hardest by
bers of the European Union, account for
However, since the decline in imports was much sharper
25,250 crore (US$5.63
both registered impressive growth with
h of May 2011 and monthly imports
on year growth of 56.9%
ional debt has decreased since
decreased from 35.3% in 199091 to
(ECBs), or commercial loans
ment for providing an additional
monitors and regulates them
Bank of India under the Foreign
have steadily risen
a preferred destination for
on technology and other significant
ls, apparels, pharmaceuticals, and jeweler. Despite a
re a significant hindrance. However, due
the economy and stimulating foreign
runners of the rapidly
. India has a large pool of skilled managerial and technical
class population stands at 300 million and represents a

Share of top five investing countries in FDI inflow
(table 6)
Rank Country
1 Mauritius
2 Singapore
3 USA
4 UK
5 Netherlands
During 200010, the country attracted $178 billion as FDI.
from Mauritius is due to routing of international funds through the country
tax advantages; double taxation is avoided due to a
and Mauritius is a capital gains
India's recently liberalized FDI policy (2005) allo
Industrial policy reforms have substantially reduce
removed restrictions on expansion and facilitated e
foreign direct investment FDI. The upward
owes some credit to a booming economy and liberaliz
government amended the rules to allow 100% FDI in t
up infrastructure and constructio
premises, hospitals, educational institutions, recr
level infrastructure. Despite a number of changes in the FDI policy to re
sectors, there still remains an unfinished agenda of permitting gre
sensitive areas such as insurance and retailing. Th
200809 stood at 122,919 cror
the previous period.
Share of top five investing countries in FDI inflows. (20002010)
Inflows
(million USD)
Inflows (%)
50,164 42.00
11,275 9.00
8,914 7.00
6,158 5.00
4,968 4.00
10, the country attracted $178 billion as FDI. The inordinately high investment
routing of international funds through the country
tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius,
and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI channel.
India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures.
Industrial policy reforms have substantially reduced industrial licensing requirements,
removed restrictions on expansion and facilitated easy access to foreign technology and
foreign direct investment FDI. The upward moving growth curve of the real
owes some credit to a booming economy and liberalized FDI regime. In March 2005, the
government amended the rules to allow 100% FDI in the construction sector, including built
up infrastructure and construction development projects comprising housing, commerci
premises, hospitals, educational institutions, recreational facilities, and city
Despite a number of changes in the FDI policy to remove caps in most
till remains an unfinished agenda of permitting greater FDI in politically
sensitive areas such as insurance and retailing. The total FDI equity inflow into India in
crore (US$27.41 billion), a growth of 25% in rupee terms over


Inflows (%)
42.00
9.00
7.00
5.00
4.00
The inordinately high investment
routing of international funds through the country given significant
between India and Mauritius,
taxation FDI channel.
ws up to a 100% FDI stake in ventures.
d industrial licensing requirements,
asy access to foreign technology and
moving growth curve of the real-estate sector
ed FDI regime. In March 2005, the
he construction sector, including built-
n development projects comprising housing, commercial
eational facilities, and city- and regional-
Despite a number of changes in the FDI policy to remove caps in most
ater FDI in politically
e total FDI equity inflow into India in
27.41 billion), a growth of 25% in rupee terms over


5.4. Indian currency exchange
MCX-SX
MCX Stock Exchange Ltd (MCX-SX), Indias new stock exchange, appositely reflects how
the worlds most evolved and hi-tech new-generation exchanges should look like in future.
With cutting-edge technology, world-class services and cost optimization, MCX-SX has
altered the face of the Indian financial markets.
Within a year of its launch, MCX-SX has proved its mettle as the thought leader and
innovator of the industry by introducing innovative services and pioneering market
development initiatives. Recognized by the market regulator Securities and Exchange Board
of India, MCX-SX currently has more than 600 members and trading terminals in 486 cities
and towns across India.
Through deployment of state-of-the-art technology and global best practices for regulatory
compliance and investor protection, MCX-SX enables importers, exporters, investors,
corporations and banks to hedge their currency risks with greater transparency and safety.
Furthermore, it guarantees settlement of all transactions, through its clearing corporation
(MCX-SX Clearing Corporation Ltd), which enhances safety by eliminating the counterparty
risk.
MCX-SX believes in Systematic development of markets through Information, Innovation,
Education and Research. Its constant Endeavour, therefore, has been to ensure that its
nationwide electronic trading platform is used by market participants more extensively and
effectively. MCX-SX is the first stock exchange in India to launch pioneering market
development initiatives and join hands with Indias reputed industry & trade bodies and
educational institutions to conduct awareness and financial literacy programmes for financial
literacy and financial inclusion.
MCX-SXs currency derivatives segment offers an India-wide electronic platform for trading
in currency futures under the regulatory control of Securities and Exchange Board of India
(SEBI) and Reserve Bank of India (RBI).
MCX Stock Exchange (MCX-SX), India's new stock exchange, was launched on October 7,
2008, under the regulatory framework of Securities & Exchange Board of India (SEBI). The
exchange received approval from SEBI and Reserve Bank of India (RBI) to launch a
nationwide electronic platform for trading in currency derivatives.
Currently MCX-SX offers currency futures contracts in US Dollar-Indian Rupee
(USDINR), Euro-Indian Rupee (EURINR), Pound Sterling-Indian Rupee
(GBPINR) and Japanese Yen-Indian Rupee (JPYINR). Clearing and Settlement is
conducted through the MCX-SX Clearing Corporation Ltd (MCX-SX CCL).


Within a year of its launch, MCX-SX has achieved a stupendous growth in average daily
turnover and open interest. The average daily turnover increased from Rs 355.66 crore during
in the first month of its operations (Oct 7, 2008 till Nov 6, 2008) to Rs 14617.24 crore for the
month of January 2010.
MCX-SX witnesses participation from over 480 cities and towns across India and has a
strong member base of over 600. Among hosts of benefits this state-of-the-art transparent
national trading platform offers to a wide range of financial market participants -- hedgers
(i.e. exporters, importers, corporate and banks), investors and arbitrageurs -- price discovery
and price risk management are of foremost importance.
True to its philosophy of "Systematic development of markets through Information,
Innovation, Education and Research", MCX-SX endeavors to ensure continuous
innovation and to introduce products that conform to the needs of diverse market participants.
The stock exchange is committed to continuously expand its menu of offerings by
introducing trading in new asset classes under the extant regulatory framework. To begin
with, MCX-SX will introduce trades in Equity, Debt, Interest Rates, Index and Exchange
Traded Funds, subject to regulatory clearances.
1) Benefits of MCX-SX
A wide range of financial market participants -- hedgers (i.e. exporters, importers, corporate
and banks), investors and arbitrageurs are benefitted by price discovery and price risk
management on the transparent trading platform of MCX-SX.
Hedgers:
MCX-SX provides a high-liquidity platform for hedging against the effects of unfavorable
fluctuations in foreign exchange rates. Banks, importers, exporters and corporate can hedge
on MCX-SX.
Investors:
All those interested in taking a view on appreciation (or depreciation) of exchange rates in the
long and short term, can participate in the MCX-SX currency futures. For example, if one
expects depreciation of Indian rupee against US dollar, then he can hold on long (buy)
position in the USD/INR contract for returns. Contrarily, he can sell the contract if he sees
appreciation of the Indian rupee. Similar, long or short positions can be taken in EURINR,
GBPINR and JPYINR if investors see any fluctuation in the Indian currency against other
currencies like Euro, Sterling Pound and Japanese Yen


Arbitrageurs:
Arbitrageurs get the opportunity of trading in currency futures by simultaneous purchase and
sale in two different markets, taking advantage of price differential between the markets.
2) How it works
Presently, all futures contracts on MCX-SX are cash settled. There are no physical
contracts.
All trade on MCX-SX takes place on its nationwide electronic trading platform that
can be accessed from dedicated terminals at locations of the members of the
exchange.
All participants on the MCX-SX trading platform have to participate only through
trading members of the Exchange.
o Participants have to open a trading account and deposit stipulated
cash/collaterals with the trading member.
MCX-SX stands in as the counterparty for each transaction; so participants need not
worry about default.
o In the event of a default, MCX-SX will step in and fulfil the obligations of the
defaulting party, and then proceed to recover dues and penalties from them.
Those who entered either by buying (long) or selling (short) a futures contract can
close their contract obligations by squaring-off their positions at any time during the
life of that contract by taking opposite position in the same contract.
o A long (buy) position holder has to short (sell) the contract to square off
his/her position or vice versa.
o Participants will be relieved of their contract obligations to the extent they
square off their positions.
All contracts that remain open at expiry are settled in Indian rupees in cash at the
reference rate specified by RBI.


3) Shareholders
(table 7)
Sr. No. Name of Shareholder % holding
1 Allahabad Bank 4.60
2 Andhra Bank 4.60
3 Axis Bank 1.84
4 Bank of Baroda 4.60
5 Bank of India 4.60
6 Corporation Bank 4.60
7 Financial Technologies (India) Ltd. 5.00
8 HDFC Bank 2.21
9 IFCI Limited 13.23
10 IL & FS Financial Services Ltd. 5.00
11 Indian Bank 4.60
12 Indian Overseas Bank 4.60
13 MCX Stock Exchange ESOP Trust 1.00
14 Multi Commodity Exchange of India Ltd. 5.00
15 Oriental Bank of Commerce 4.60
16 Punjab & Sind Bank 0.92
17 Punjab National Bank 9.20
18 State Bank of Indore 1.84
19 Syndicate Bank 2.30
20 UCO Bank 0.46
21 Union Bank of India 11.50
22 United Bank of India 1.84
23 Vijaya Bank 1.84
Total 100.00


4) Products
MCX-SX started live operations on October 7, 2008 by launching monthly contracts in the
USDINR currency pair under the regulatory framework of Securities and Exchange Board of
India (SEBI), and Reserve Bank of India (RBI). Consequently, the stock exchange expanded
its currency derivatives offerings to Euro-Indian Rupee (EURINR), Pound Sterling-Indian
Rupee (GBPINR) and Japanese Yen-Indian Rupee (JPYINR).
Each of these currency contracts on MCX-SX has a life of 12 months from the month in
which it is launched.
I. Contract Specifications for USD INR (table 8)
Symbol USDINR
Instrument Type FUTCUR
Unit of trading 1 (1 unit denotes 1000 USD)
Underlying USD
Quotation/Price
Quote
Rs. per USD
Tick size 0.25 paise or INR 0.0025
Trading hours Monday to Friday ,9:00 a.m. to 5:00 p.m.
Contract trading
cycle
12 month trading cycle.
Last trading day Two working days prior to the last business day of the expiry month at 12 noon.
Final settlement
day
Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.
Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contract.
Price operating
range
Tenure upto 6 months Tenure greater than 6 months
+/-3 % of base price +/- 5% of base price
Position limits
Clients Trading Members Banks
Higher of 6% of total open
interest or USD 10 million
Higher of 15% of the total open
interest or USD 50 million
Higher of 15% of the total open
interest or USD 100 million
Minimum initial
margin
1.75% on first day & 1% thereafter.
Extreme loss
margin
1% of MTM value of gross open position.
Calendar spreads Rs. 400/- for a spread of 1 month, Rs. 500/- for a spread of 2 months, Rs. 800/- for a spread of 3 months &
Rs. 1000/- for a spread of 4 months or more
Settlement Daily settlement : T + 1 , Final settlement : T + 2
Mode of settlement Cash settled in Indian Rupes


Daily settlement
price (DSP)
DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or
such other price as may be decided by the relevant authority from time to time.
Final settlement
price (FSP)
RBI reference rate


II. Contract Specifications for Euro-INR (table 9)
Symbol EURINR
Instrument Type FUTCUR
Unit of trading 1 (1 unit denotes 1000 EURO)
Underlying EURO
Quotation/Price Quote Rs. per EUR
Tick size 0.25 paise or INR 0.0025
Trading hours Monday to Friday, 9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Settlement price RBI Reference Rate on the date of expiry
Last trading day Two working days prior to the last business day of the expiry month at 12 noon.
Final settlement day Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.
Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contract
Price operating range
Tenure upto 6 months Tenure greater than 6 months
+/-3 % of base price +/- 5% of base price
Position limits
Clients Trading Members Banks
Higher of 6% of total open
interest or EUR 5 million
Higher of 15% of the total open
interest or EUR 25 million
Higher of 15% of the total open
interest or EUR 50 million
Minimum initial margin 2.8% on First day & 2% thereafter
Extreme loss margin 0.3% of MTM value of gross open positions.
Calendar spreads Rs.700/- for a spread of 1 month, 1000/- for a spread of 2 months, Rs.1500/- for a spread of 3 months
or more
Settlement Daily settlement : T + 1 , Final settlement : T + 2
Mode of settlement Cash settled in Indian Rupees


Daily settlement price
(DSP)
DSP shall be calculated on the basis of the last half an hour weighted average price of such contract
or such other price as may be decided by the relevant authority from time to time.
Final settlement price
(FSP)
RBI reference rate
III. Contract Specifications for Pound Sterling-INR (table 10)
Symbol GBPINR
Instrument Type FUTCUR
Unit of trading 1 (1 unit denotes 1000 POUND STERLING)
Underlying POUND STERLING
Quotation/Price Quote Rs. per GBP
Tick size 0.25 paise or INR 0.0025
Trading hours Monday to Friday. 9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Settlement price Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for
US$ and Euro.
Last trading day Two working days prior to the last business day of the expiry month at 12 noon.
Final settlement day Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.
Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contract
Price operating range
Tenure upto 6 months Tenure greater than 6 months
+/-3 % of base price +/- 5% of base price

Position limits
Clients Trading Members Banks
Higher of 6% of total open
interest or GBP 5 million
Higher of 15% of the total open
interest or GBP 25 million
Higher of 15% of the total open
interest or GBP 50 million
Minimum initial margin 3.2% on first day & 2% thereafter
Extreme loss margin 0.5% of MTM value of gross open positions.
Calendar spreads Rs.1500/- for a spread of 1 month, 1800/- for a spread of 2 months, Rs.2000/- for a spread of 3 months
or more
Settlement Daily settlement : T + 1 , Final settlement : T + 2
Mode of settlement Cash settled in Indian Rupees
Daily settlement price
(DSP)
DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or
such other price as may be decided by the relevant authority from time to time.


Final settlement price
(FSP)
Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for
US$ and Euro.
IV. Contract Specifications for Japanese Yen-INR (table 11)
Symbol JPYINR
Instrument Type FUTCUR
Unit of trading 1 (1 unit denotes 100000 YEN)
Underlying JPY
Quotation/Price Quote Rs per 100 YEN
Tick size 0.25 paise or INR 0.0025
Trading hours Monday to Friday, 9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Settlement price Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$
and Euro.
Last trading day Two working days prior to the last business day of the expiry month at 12 noon.
Final settlement day Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.
Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contract
Price operating range
Tenure upto 6 months Tenure greater than 6 months
+/-3 % of base price +/- 5% of base price
Position limits
Clients Trading Members Banks
Higher of 6% of total open
interest or JPY 200 million
Higher of 15% of the total open
interest or JPY 1000 million
Higher of 15% of the total open
interest or JPY 2000 million

Minimum initial margin 4.50% on first day & 2.30% thereafter
Extreme loss margin 0.7% of MTM value of gross open positions.
Calendar spreads Rs. 600 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs 1500 for a spread of 3 months
or more
Settlement Daily settlement : T + 1 , Final settlement : T + 2
Mode of settlement Cash settled in Indian Rupees
Daily settlement price
(DSP)
DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or
such other price as may be decided by the relevant authority from time to time.


Final settlement price
(FSP)
Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$
and Euro.
5.5. Foreign Exchange Department of RBI
With the introduction of the Foreign Exchange Management Act 1999, (FEMA) with effect
from June 1, 2000, the objective of the Foreign Exchange Department has shifted from
conservation of foreign exchange to "facilitating external trade and payment and promoting
the orderly development and maintenance of foreign exchange market in India".
The new Act has brought about structural changes in the exchange control administration.
Regulations have been framed for dealing with various types of transactions. These
regulations are transparent and have eliminated case-by-case approvals.
All current account transactions are free from restrictions except 8 transactions prohibited by
the Government of India. 11 transactions which require prior permission of the Government
of India and 16 transactions on which indicative limits are fixed by the Government and
release of foreign exchange beyond those limits requires permission from the Reserve Bank.
All Regional Offices of the Department have in turn been authorized to release exchange for
such transactions.
For capital account transactions, the Reserve Bank regulations provide for general
permissions/automatic routes for investments in India by non-residents, investments overseas
by residents and borrowings abroad, etc.
The Department ensures timely realization of export proceeds and reviews, on a continuous
basis, the existing rules in the light of suggestions received from various trade bodies and
exporters' fera.
The Department collects data relating to forex transactions from authorized dealers on a daily
basis for exchange rate management and on a fortnightly basis for monthly quick estimates of
balance of payments and quarterly balance of payments compilation.
The Department lays down policy guidelines for risk management relating to forex
transactions in banks. The Department is also entrusted with the responsibility of licensing
banks/money changers to deal in foreign exchange and inspecting them. There is a "Standing
Consultative Committee on Exchange Control" consisting of representatives from various
trade bodies and authorized dealers which meets twice a year and makes recommendations
for policy formulation.
With a view of further improving facilities available to NRIs and removing irritants, the
Department is also engaged, on an ongoing basis, in reviewing and simplifying the
procedures and rules.


5.6. FEMA Rules & Policies
The Foreign Exchange Management Act, 1999 (FEMA) came into force with effect from
June 1, 2000. With the introduction of the new Act in place of FERA, certain structural
changes were brought in. The Act consolidates and amends the law relating to foreign
exchange to facilitate external trade and payments, and to promote the orderly development
and maintenance of foreign exchange in India.
From the NRI perspective, FEMA broadly covers all matters related to foreign exchange,
investment avenues for NRIs such as immovable property, bank deposits, government bonds,
investment in shares, units and other securities, and foreign direct investment in India.
FEMA vests with the Reserve Bank of India, the sole authority to grant general or special
permission for all foreign exchange related activities mentioned above.
Section 2 - The Act here provides clarity on several definitions and terms used in the context
of foreign exchange. Starting with the identification of the Non-resident Indian and Persons
of Indian origin, it defines "foreign exchange" and "foreign security" in sections 2(n) and 2(o)
respectively of the Act. It describes at length the foreign exchange facilities and where one
can buy foreign exchange in India. FEMA defines an authorized dealer, and addresses the
permissible exchange allowed for a business trip, for studies and medical treatment abroad,
forex for foreign travel, the use of an international credit card, and remittance facility
Section 3 prohibits dealings in foreign exchange except through an authorized person.
Similarly, without the prior approval of the RBI, no person can make any payment to any
person resident outside India in any manner other than that prescribed by it. The Act restricts
non-authorized persons from entering into any financial transaction in India as consideration
for or in association with acquisition or creation or transfer of a right to acquire any asset
outside India.
Section 4 restrains any person resident in India from acquiring, holding, owning, possessing
or transferring any foreign exchange, foreign security or any immovable property situated
outside India except as specifically provided in the Act.
Section 6 deals with capital account transactions. This section allows a person to draw or sell
foreign exchange from or to an authorized person for a capital account transaction. RBI in
consultation with the Central Government has issued various regulations on capital account
transactions in terms of sub-sect ion (2) and (3) of section 6.
Section 7 covers the export of goods and services. All exporters are required to furnish to the
RBI or any other authority, a declaration regarding full export value.
Section 8 puts the responsibility of repatriation on the people resident in India who has any
amount of foreign exchange due or accrued in their favor to get the same realized and
repatriated to India within the specific period and in the manner specified by the RBI.
The duties and liabilities of the Authorized Dealers have been dealt with in Sections 10, 11
and 12, while Sections 13 to 15 cover penalties and enforcement of the orders of the
Adjudicating Authority as well as the power to compound contraventions under the Act.


Chapter 6. Impact of Currency market in Indian economy
6.1. GDP & GNP
The Gross Domestic Product (GDP) in India expanded 7.8 percent in the first quarter of 2011
over the same quarter, previous year. From 2004 until 2010, India's average quarterly GDP
Growth was 8.40 percent reaching an historical high of 10.10 percent in September of 2006
and a record low of 5.50 percent in December of 2004. India's diverse economy encompasses
traditional village farming, modern agriculture, handicrafts, a wide range of modern
industries, and a multitude of services. Services are the major source of economic growth,
accounting for more than half of India's output with less than one third of its labor force. The
economy has posted an average growth rate of more than 7% in the decade since 1997,
reducing poverty by about 10 percentage points. India's economy rose 7.8 percent in the three
months ended March 31 from a year earlier, after a revised 8.3 percent gain in the previous
quarter, the Central Statistical Office said in a statement in New Delhi on May 31. Thats the
slowest pace in five quarters.
Manufacturing rose 5.5 percent in the three months through March from a year earlier,
compared with a 6 percent gain in the previous quarter. Finance and insurance services grew
9 percent after a 10.8 percent jump in the previous quarter. Farm output rose 7.5 percent
while mining advanced 1.7 percent, according to the report.
The sectors which registered significant growth rates are agriculture, forestry and fishing at
7.5 percent, electricity, gas and water supply at 7.8 percent, construction at 8.2 percent, trade,
hotels, transport and communication at 9.3 percent, and financing, insurance, real estate and
business services at 9.0 percent.
(Table 12)
Particulars Latest Chg - last quarter Estimated / Last Last Update
Gross Domestic Product (%) 7.8 May 2011
Gross National Product (GNP) (%)
Net National Product (NNP) (%)
Index of Industrial Production (IIP) (%) 10.8 Oct 6.4 4.4 Sep Dec 2010
Wholesale Prices Index (WPI)(%) -
Consumer Price Index (CPI)(%) 10.4 Sep -0.9 11.3 July Dec 2010
Balance Of Payment (BOP)
Inflation 7.48 Nov -1.10 8.58 Oct Dec 2010


Monetary Policy Rates: India (table 13)
Particulars Latest Chg - last quarter Last Qtr Last Update
Cash Reserve Ratio (CRR) (%) 6.0 - 6.0 Jan 2011
Bank Rate (%) 6.0 - 6.0 Jan 2011
Statutory Liquidity Ratio (SLR) (%) 24.0 - 24.0 Jan 2011
Repo Rate (%) 6.5 0.25 6.25 Jan 2011
Reverse Repo Rate (%) 5.5 0.25 5.25 Jan 2011
Lending & Deposit Rates: India (table 14)

Particulars Latest Chg - last quarter Last Qtr Last Update
Base Rate (%) 7.60-8.50 0.10-0.50 7.50-8.00 Jan 2011
Savings Bank Rate (%) 3.5 - 3.5 Jan 2011
Deposit Rate (%) 7.0-8.0 1.0-0.50 6.00-7.50 Jan 2011


6.2. Exports & Imports in FY'11
India's exports surged by 37.5 per cent for the financial year ended March 31, 2011 to touch
$245.9 billion shooting well past the $200-billion target set for the year.
Commerce and industry minister Anand Sharma while releasing the trade figures said,
"Exports have indeed exceeded our expectations. This is the highest annual percentage
growth ever. Imports for the same period stood at $350.3 billion and the good news is that the
trade deficit figure has come down to $104.4 billion, While there has been an improvement in
the demand for Indian goods in the US and in EU, my hunch is that export growth also came
from new markets, particularly from Latin America,
Since export growth had fallen in 2009-10, the export expansion looks high due to the
comparison with these low base figures. However, even if this base effect was not there the
export growth would have been around 30 per cent, Engineering goods, which comprise
high-value added goods, formed the largest component of the country's exports surpassing the
$60-billion mark to register a growth of 84.76 per cent over the previous year.
Petroleum product exports were valued at $ 42.45 billion, registering a growth of 50.58 per
cent, reflecting the increased refining capacity in the country. The gems & jewellery sector,
which provides large-scale employment to people, recorded an export growth of 15.34 per
cent to touch $33.54 billion. The UAE emerged as the largest export market for Indian gems
and jewellery with 47 per cent of the shipments followed by Hong Kong with 22 per cent and
the US in the third spot with 11 per cent. At present, India exports 95 per cent of the world's
diamonds.
The Indian drugs and pharmaceuticals sector, which is fast gaining a global footprint, saw
total exports to the tune of $10.32 billion, 15.08 per cent higher than the previous year.
Readymade garment exports crossed $11.1 billion showing a growth of 4.23 per cent. Cotton
yarn fabrics saw exports of $5.66 billion registering a growth of 42.87 per cent. Exports of
carpets, jute and leather goods which are labor intensive industries, also recorded high
growth. Agricultural exports and allied sectors, including tea, coffee, tobacco, spices, cashew,
oil meals, fruits and vegetables and marine products crossed $12.92 billion. However, iron
exports went down by 25per cent to $4.5 billion as the government had clamped down on
illegal mining. Based on the current performance, it will achieve the target of $450 billion for
exports in 2013-14 set in the draft strategy paper." However, imports figures may be revised
upwards leading to the trade gap increasing to $110-115 billion. The good show by exports
has lessened worries on the current account deficit, is likely to be at $25-35 billion.
Exports for March rose by a robust 43.9 per cent to $29.1 billion compared to the growth in
the same month in the previous financial year. Imports in March totaled $34.7 billion, up 17.3
per cent year-on-year.

Chapter 7 Interpretation of questioner
7.1 Demographic questions
Gender
Gender
Male
Female
Interpretation:
Form the above depicted chart we can interpret that
currency market than the female. The percentage of
market. Only 24% of women invest in currency market that is a po
are also taking interest in the currency market. Th
female & awareness of this money market in female.
Chapter 7 Interpretation of questioner

No. of respondent No. of respondent in %
38
12
Form the above depicted chart we can interpret that male gender are more interested in
currency market than the female. The percentage of male gender is 76% which cover large
24% of women invest in currency market that is a positive sign that
are also taking interest in the currency market. This shows the increasing education level of
female & awareness of this money market in female.



(table 15)
No. of respondent in %
76
24
(Chart 1)
male gender are more interested in
76% which cover large
sitive sign that the women
is shows the increasing education level of

Age (years)
Age (years):
20 30
30 40
40 50
50 & Above
Interpretation:
The chart reflects age vise division of currency in
people having between 30 to 40 years is more intere
of currency market is more in this age group & risk
group, any broking firm can target this age group a
40 to 50 years are invest more in currency market.



No. of respondent




The chart reflects age vise division of currency investor; we can see that the number of
people having between 30 to 40 years is more interested in currency market. The
of currency market is more in this age group & risk taking aptitude is more than other age
group, any broking firm can target this age group and can get benefits, at second age between
40 to 50 years are invest more in currency market.

A

(table 16)
No. of respondent
in %
20
52
15
13
(Chart 2)
vestor; we can see that the number of
sted in currency market. The awareness
taking aptitude is more than other age
nd can get benefits, at second age between

Education Qualification:
Education Qualification
H.S.C
Graduate
Post Graduate
Other
Interpretation:
The above graph shows the education level
graduate & 32% of the respondents were post graduate. The gradua
invest in currency market. Majority of the investor
majority investors are graduate & taking much in
criteria investors can be targeted to get benefit t

PSC

No. of respondent No. of respondent in %




ph shows the education level of investor. There is 54% of the respondent were
% of the respondents were post graduate. The graduates are more interested to
invest in currency market. Majority of the investor in currency market are graduates.
majority investors are graduate & taking much interest in currency market these education
criteria investors can be targeted to get benefit to attract by broking firm.

PSC C C C


No. of respondent in %
10
54
32
4
(Chart 3)
he respondent were
tes are more interested to
in currency market are graduates. The
terest in currency market these education

Occupation:
Occupation
Business
Self employment
Service
Student
House Wife
Other
Interpretation:
The 44% of the investors were having business & on
service. The awareness of currency market. The majo
business of import & export. The main object of the


No. of respondent No. of respondent in %






The 44% of the investors were having business & on second the 26% of investors are having
service. The awareness of currency market. The majority of the business men were having
business of import & export. The main object of their investment in currency was hedging.



No. of respondent in %






(Chart 4)
% of investors are having
rity of the business men were having
ir investment in currency was hedging.
8
S
S
S
P W
C

Annual Income (Rs):
Annual Income (Rs):
2, 00,000
2, 00,000- 3, 50,000
3, 50001- 5, 00,000
5, 00,001
Interpretation:
The income criteria of the investors were 40% of th
350000 to 500000 Rs. And on second position 38% of
2lakhs to 3.5lakhs. the income of the investor in t
currency market. The income between 3.5 to 5 lakhs is more investing in
and is having business.

A l 8

No. of respondent No. of respondent in %
4
19
20
7
The income criteria of the investors were 40% of the investor are having income of between
350000 to 500000 Rs. And on second position 38% of investors were having income between
2lakhs to 3.5lakhs. the income of the investor in the main influencing factor
income between 3.5 to 5 lakhs is more investing in




No. of respondent in %
8
38
40
14
(Chart 5)
e investor are having income of between
investors were having income between
he main influencing factor of inflow for the
income between 3.5 to 5 lakhs is more investing in currency market


1. What are investment avenues which you are presently
Interpretation:
The graph reflects the investment avenues of the re
investing in currency and also invest in several av
equity. On second 14 respondents are investing in c
insurance, sip, & bonds are not so popular to inves
also use to invest in currency market. The awarenes
but as a view of future its a developing market.

What are investment avenues which you are presently investing?


The graph reflects the investment avenues of the respondent. This all respondents are
investing in currency and also invest in several avenues. The 41 respondents are investing in
equity. On second 14 respondents are investing in commodity. The ipo, mutual
insurance, sip, & bonds are not so popular to invest in. the much number of equity investors
also use to invest in currency market. The awareness of currency market is very less in India
its a developing market.


S

investing?
(Chart 6)
spondent. This all respondents are
enues. The 41 respondents are investing in
ommodity. The ipo, mutual fund,
t in. the much number of equity investors
s of currency market is very less in India


2. In Which currency do you prefer to invest?
Currency
USD
EURO
GBP
YEN
OTHER
Interpretation
The survey I have carried out in which 40
more trading volume in USD. The EURO is on second p
respondent prefer to invest in EURO.
more respondent prefer to invest in USD. The volume
the other currencies.

rrency do you prefer to invest?


No. of respondent No. of respondent in %
20
15
11
3
1
y I have carried out in which 40% of the respondent are invest
more trading volume in USD. The EURO is on second position to be traded. The 30% of the
respondent prefer to invest in EURO. 22% of the respondent prefers to invest in GBP. The
more respondent prefer to invest in USD. The volume USD in currency market is higher than

uSu Lu8C C8 ?Ln C1PL8




No. of respondent in %
40
30
22
6
2
(Chart 7)
% of the respondent are invest in USD. There is
osition to be traded. The 30% of the
to invest in GBP. The
rrency market is higher than

3. What is the primary objective of your investment in
Objectives
Hedging
Volatility
Speculation
Arbitrage
Interpretation
The table reflects that there are
hedging purpose. Main and primary object to invest
stage speculation is also a one object to invest in
was having business of import & export. They get be
broking firm can target the importer or exporter fo

P
What is the primary objective of your investment in currency?
No. of respondent No. of respondent in %




The table reflects that there are 46% of the respondents are investing in currency for
hedging purpose. Main and primary object to invest in currency is hedging and on second
stage speculation is also a one object to invest in currency market. The investor of currency
was having business of import & export. They get benefit from the currency by hedging. The
broking firm can target the importer or exporter for new customers.

P v S


No. of respondent in %
46
34
16
4
(Chart 8)
% of the respondents are investing in currency for their
in currency is hedging and on second
The investor of currency
nefit from the currency by hedging. The

4. What is the time duration you invest in currency?
Time period
Intraday
Less than 1 months
1-2 months
2-3 months
More than 3 months
Interpretation
The time period for holding currency by the inve
respondent hold investment for less than 1 month and the 20
to 2 months in currency. There are only 4
market.

l L
What is the time duration you invest in currency?
No. of respondent No. of respondent in %





The time period for holding currency by the investor is less than 1 month, the 5
for less than 1 month and the 20% of respondent were hold for 1
hs in currency. There are only 4% of respondent do intraday trading in currency


L


No. of respondent in %
10
52
28
6
4
(Chart 9)
than 1 month, the 52% of the
% of respondent were hold for 1
% of respondent do intraday trading in currency


5. What factors do you determine at the
Factors to determine
Economy
Political
Industrial
Export-Import
Infrastructure
Other
Interpretation
As pre the survey 40% of the respondent determines economic factors bef
currency and 24% of the respondent determine the export & import p
before investing in currency market.
factors before investing. The main factors affect the currency rates are econ
the export-imports of the country.
L
What factors do you determine at the time of investing in currency?
No. of respondent No. of respondent in %






% of the respondent determines economic factors bef
% of the respondent determine the export & import position of the country
before investing in currency market. The 20% of the respondent were determine industrial
The main factors affect the currency rates are econ
imports of the country.

l Ll l

time of investing in currency?
No. of respondent in %
40
10
20
24
6
0
(Chart 10)
% of the respondent determines economic factors before investing in
osition of the country
ere determine industrial
The main factors affect the currency rates are economic factors and
l C

6. How many percentage of money do you invest in curre
10 %
11 % - 20 %
21 %- 30 %
31 %
Interpretation:
The criteria for investing money from the income are 50% of respondent inv
money and the second position is
income in currency market. The %age of investing in currency is around 11 to 2


How many percentage of money do you invest in currency from your income?
No. of respondent No. of respondent in
%




ing money from the income are 50% of respondent inv
ey and the second position is 22% of respondent invest less than 10
The %age of investing in currency is around 11 to 2



ncy from your income?

No. of respondent in
22
50
18
10
(Chart 11)
ing money from the income are 50% of respondent invest 11 to 20% of
22% of respondent invest less than 10% of money from
The %age of investing in currency is around 11 to 20% majorly.

7. Which currency do you most rely on?
USD
EURO
GBP
YEN
OTHER

Interpretation
Form the above mention graph we can analyze the gre
for future investment there are grater no. of i
respondent are relay on the USD and on s
22 % of the respondent thinks that GBP will rise in
of USD & EURO are higher in future.

Which currency do you most rely on?


No. of respondent No. of respondent in %
18
16
11
5
0

Form the above mention graph we can analyze the greater market share is covered by USD
for future investment there are grater no. of investor to invest in USD, the 36
respondent are relay on the USD and on second stage 32% of respondent are relay on EURO.
22 % of the respondent thinks that GBP will rise in future. But as per my opinion the chances
of USD & EURO are higher in future.

uSu Lu8C C8 ?Ln C1PL8




No. of respondent in %
36
32
22
10
0
(Chart 12)
ater market share is covered by USD
nvestor to invest in USD, the 36% of the
% of respondent are relay on EURO.
future. But as per my opinion the chances

8. Type of return you expect in cur
Scale 1
No. of
respondent
2
No. of
respondent in %
4
Interpretation:
In the survey I have used liker scale, a 5 point sc
market. As per the respondents response 32
respondent think currency market gains high return. But 4
very good return in currency market.
Currency market is future market. The investor can earn a han
investment with long term investment.


Type of return you expect in currency market?
2 3 4
6 16 22
12 32 44
In the survey I have used liker scale, a 5 point scale to measure the return from the currency
the respondents response 32% of respondent were neutral and 44
think currency market gains high return. But 4% of respondent think they gain
very good return in currency market. The rates of the currency dont vary much in a day.
arket is future market. The investor can earn a handsome profit from this
investment with long term investment.




5
4
8
(Chart 13)
ale to measure the return from the currency
f respondent were neutral and 44% of
% of respondent think they gain
The rates of the currency dont vary much in a day.
dsome profit from this


9. How much riskier is Currency Market?
Low 1
No. of
respondent
20
No. of
respondent in %
40
Interpretation:
The risk in currency market is very low only becaus
volatile. As per the respondents statement the
of respondent think that currency market i
answered that currency market is high risky. As far
less volatile & the similarly less speculate. Curre
than investing in equity or commodity.


How much riskier is Currency Market?
2 3 4
16 10 3
32 20 6
The risk in currency market is very low only because of the currency rates were not so
volatile. As per the respondents statement there are 20% of respondent were neutral & 40
of respondent think that currency market is less risky in nature but the 6% of respondent were
answered that currency market is high risky. As far as my opinion the currency rates were
less volatile & the similarly less speculate. Currency market is a good option to invest rather
or commodity.

5



5
1
2
(Chart 14)
e of the currency rates were not so
of respondent were neutral & 40 %
% of respondent were
as my opinion the currency rates were
ncy market is a good option to invest rather

10. Which service of broker you give highest weight age
Particulars
Research & Advisory Based Call
Less Margin
Low Brokerage
Good Trading Software
Interpretation:
Here I have used rank order to measure the customer
from the broker. There are several type of investor
respondent rated Research & Advisory call on the fi
prefer the low brokerage. The fewer margin is on th
forth good trading software is preferred. The perso
good trading software. And the most p
attract new clients broker can attract with low bro

8
A 8 C

Which service of broker you give highest weight age?


Rank
1 2 3
Research & Advisory Based Call 20 18 8
12 10 24
18 20 10
3 4 12
Here I have used rank order to measure the customers preference towards service provided
from the broker. There are several type of investors and their preference also varies. The 20
respondent rated Research & Advisory call on the first rank. On second rank 20 respondent
prefer the low brokerage. The fewer margin is on third position 24 respondent rank it & on
forth good trading software is preferred. The person who does online trading are prefer a
good trading software. And the most preferable service is advisory calls & low brokerage
attract new clients broker can attract with low brokerage slab & research & advisory call.
L M L 8 C 1
S

S S S S


4
4
14
2
31
(Chart 15)
s preference towards service provided
s and their preference also varies. The 20
st rank. On second rank 20 respondent
ird position 24 respondent rank it & on
n who does online trading are prefer a
referable service is advisory calls & low brokerage. To
kerage slab & research & advisory call.
C 1
S



Chapter 8. Conclusion
The survey I have carried out on Impact of currency market in India. The conclusion of the
survey is as follows.
The awareness of the forex market in India is very low in compare to other financial
instruments. Only fewer people know about the currency trading. As the gender wise male
investors are more investing than women investors. But the education level is as well a
positive sign of women also taking interest in forex market. The equity and commodity
investors are as well investing in currency. In India USD, EURO, GBP, and JPY are the
currencies been traded most.
USD and EURO are the most preferred currency in response from the respondents. there is
high volume in this two currency pair in India. USD is on first position to trade in India, as
per the data of MCX-SX the volume of USD/INR of June contract 3588917 in lots as on 3
rd
June 2011. The EURO is on second to be traded in India. The data of MCX-SX volume in
EURO/INR is 156556 in lots, as on 3
rd
June 2011. GBP and JPY are been traded in India on
3
rd
and 4
th
position respectively. The volume in GBP/INR was 58255 in lots and volume in
JPY/INR was 23628 in lots as on 3
rd
June 2011 respectively.
In future 36% & 32% of respondent are relay on USD & EURO respectively. But in future as
per the report of Bank Of Japan Change in the total quantity of domestic currency in
circulation and current account deposits held at BOJ, It's positively correlated with interest
rates-early in the economic cycle an increasing supply of money leads to additional spending
and investment, and later in the cycle expanding money supply leads to inflation. This release
would be affect the JPY rate.
The earning in currency market is low in comparison of Equity or Commodity market. The
volatility in currency rates is very less. It doesnt volatile as equity or commodity market. The
risk is also very less in the currency market. The main or primary object of investing in
currency market by investor is hedging. More number of respondents is connected in the
business of Import-Export. They use to hedge the currency market for future payment and
earn the deference.
The impact of currency market in Indian economy can be measure from the Gross Domestic
product and Gross national product. The GDP of current year if 7.8%. It is a positive in
compare to last financial year; the second factor is foreign reserve. As on may 2011 India is
having $ 3010 billion of foreign reserve as per the IMF data. Export of the country is as well
increased as exports surged by 37.5 per cent for the financial year ended March 31, 2011 to
touch $245.9 billion shooting well past the $200-billion target set for the year. Currency
market in India is having a wide scope for development in future.



Chapter 9 Annexure
9.1 Questioner
Dear Sir/Madam.
I am student of M.B.A at Ganpat University, undergoing Summer Internship Program at Religare
Securities Limited, Ahmadabad. Undergoing a Project report on Impact of Currency Market in
Indian economy. So give your opinion for the same, the information will not be disclosed and will
be used for project purpose.
[Note- please tick() to your selected option]
Name
Gender: [ ] Male [ ] Female
Age (years): [ ] 20 30 [ ] 30 40
[ ] 40 50 [ ] 50 & Above
Education Qualification:
[ ] H.S.C [ ] Graduate
[ ] Post Graduate [ ] Other
Occupation: [ ] Business [ ] Self employment [ ] Service
[ ] Student [ ] House Wife [ ]Other
Annual Income (Rs):
[ ] 2, 00,000 [ ] 2, 00,000- 3, 50,000
[ ] 3, 50001- 5, 00,000 [ ] 5, 00,001
1. What are investment avenues which you are presently investing?
[ ] Equity [ ] Currency [ ] Commodity
[ ] IPO [ ] Mutual Fund [ ] Insurance
[ ] SIP [ ] Bonds [ ] Other
2. In Which currency do you prefer to invest?
[ ] USD [ ] EURO [ ] GBP [ ] JPY
[ ] Other__________
3. What is the primary objective of your investment in currency?
[ ] Hedging [ ] Volatility [ ] Speculation
[ ] Arbitrage [ ] Other_________
4. What is the time duration you invest in currency?
[ ] Intraday [ ] Less than 1 months [ ] 1-2 months
[ ] 2-3 months [ ] more than 3 months


5. What factors do you determine at the time of investing in currency?
[ ] Economy [ ] Industrial [ ] Political
[ ] Export-Import [ ] Infrastructure [ ] Other__________
6. How many percentage of money do you invest in currency from your income?
[ ] 10 % [ ] 11 % - 20 %
[ ] 21 %- 30 % [ ] 31 %
7. Which currency do you most rely on?
[ ] USD [ ] EURO [ ] GBP
[ ] JPY [ ] Other__________
8. Type of return you expect in currency market?
Low 1 2 3 4 5 High

9. How much riskier is Currency Market?
Low 1 2 3 4 5 High

10. Which service of broker you give highest weight age? (Rate among 1 to 4)
Particulars Rank
Research & Advisory Based Call
Less Margin
Low Brokerage
Good Trading Software
11. Any suggestions for Religare Securities Limited./Improvement in service (feedback)
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
____________



Chapter 10. Bibliography

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