BASICS OF FOREIGN EXCHANGE

What is Foreign Exchange

Foreign Exchange means conversion of one currency into
another currency.
Foreign Exchange also means foreign money. In simple terms
all claims to Foreign currency payable abroad
e.g. Cheque, Drafts, TCs, FCY, Electronic Transfer (SWIFT)
A letter of credit denominated in FCY is also treated as Foreign
Exchange
Why Foreign Exchange
No country is self sufficient.
All countries depend on other country for goods and
services.
There is no universal currency in the world.
Settlement has to be done for the goods and services in a
currency which is a legal tender of that country.
Conversion of home currency into foreign currency or foreign
currency into home currency is necessitated.
Dealing in Foreign Exchange
In India dealing in foreign exchange is permitted only with
the approval of RBI.
RBI is the authority to administer exchange control in India.
It also has the responsibility to maintain the external value of
rupee.
AD is the person authorised by RBI in the form of a licence to
deal in foreign exchange.

 RBI has permitted another category of organisations to buy

and sell foreign currency / coins / FTC called Full Fledged
Money Changers (FFMC).
FOREIGN EXCHANGE
SOURCES/INFLOW

USES/OUTFLOW

1. INWARD REMITTANCES.
DD/MT/TT/CREDIT CARD

OUTWARD REMITTANCE
DD/MT/TT/CREDIT CARD

2. REMITTANCE TO NRE/
FCNR(B)/NRO ACCOUNTS

OUTWARD REMITTANCE

3. EXPORT RECEIVABLES.
4. BORROWING BY
COMPANIES,AID & LOANS
5. TOURIST INCOME.

IMPORT PAYMENTS.
LOAN REPAYMENT, LOAN
SERVICING.
TOUR, TRAVEL RELATED
PAYMENTS, EXPORT
RELATED PAYMENTS
LIKE LEGAL EXPENSES,

COMMISSION ETC.
SETTLEMENT OF ACCOUNTS:
Whenever, there is an international trade and inflow and
outflow of foreign exchange, there must be some mechanism
for settlement of these transactions.
The need for settlement leads to opening of accounts by
banks in other countries.

Nostro account:
A bank in India maintaining a Foreign Currency Account with a
bank abroad is known as Nostro Account

Vostro account:
A bank abroad maintaining an INR account with the Bank in India
is known as Vostro account.

Loro Account
This terminology is used when one bank refers to the NOSTRO/
VOSTRO account of another bank.

Mirror Account
As the very name suggests it is the reflection of Nostro
account.
The banks maintain the REPLICA of the NOSTRO account
they have with the foreign banks.
These mirror accounts mainly helps in reconciliation of the
account and is maintained in both foreign currency and in
Indian rupees.
FOREIGN EXCHANGE MARKETS
Forex. market can be classified as follows:
Merchant Market: It is the retail market, which involves the
transaction of customer with AD.

Inter bank Market: It is the market where transaction between

ADs in India and also with RBI.
International Market: It is the market, where transaction takes
place between banks in different countries.
PARTICIPANTS IN A FOREIGN EXCHANGE MARKET:
Merchant / Other Customers
Banks
Corporates who wish to hedge their exposures: MMTC, STC
and IFFCO, etc.
Brokers
RBI
Speculators
VALUE DATES IN FOREX
TRANSACTIONS
MERCHANT MARKET

SPOT
FORWARD
Rate decided today
decided today
And transaction today
Transaction at a Future date

Rate

INTER BANK MARKET & INTERNATIONAL

MARKET
--------------------------------------------------------------------------------------------

CASH
TOM
SPOT
FORWARD
Rate Today
Rate Today
Rate Today
Rate Today
Settlement
Settlement on Settlement on
Settlement
from
The same Day/ First Succeeding
Second Succeeding
Third
Succeeding
Working day
Business Day
Business Day
Business Day
Permitted Currency:
The word permitted currency is used to indicate a foreign
currency,
which is freely convertible.
Currency which is permitted by the rules and regulations of
the country concerned to be converted in to major reserve
currencies like US$, GBP, EUR and for which a fairly active
market exists for dealing against major currencies.

 AD may maintain positions or have balances in any

permitted currencies.
Quotation of Rates
In India quotation of rates is done in Direct Method
US $ 1 = Rs.56.25
Keeping the foreign currency constant
currency is known as direct quote.

and varying the home

Our Treasury Department quotes 8 different rates for each

currency. The basis of arriving rate is Inter Bank rate i.e. the rate
at which the banks are buying and selling foreign exchange
between them.
Following are the rates quotes by our Treasury Foreign Exchange
TT BUYING
TT SEELING

BILLS BUYING
BILLS SELLING

T.C. BUYING
T.C. SELLING

FCY BUYING
FCY SELLING

(NOTE: The Sale or Purchase of Foreign Exchange is to be

viewed from the Bankers angle and
not from the
Customers angle)
If the sum is not quantifiable, the penalty can be up to Rs.2
lakhs. In respect of continuing contraventions, an additional
penalty up to Rs.5000/- per day has also been provided for.
FOREIGN EXCHANGE DEALERS ASSOCIATION (FEDAI) OF
INDIA

FEDAI is a company registered under Sec.25 of Companies Act,

1956. It is an association of all ADs in foreign exchange. It has its
head quarters in Mumbai and local offices at Bangaluru, Chennai,
Calcutta, New Delhi, Kochi & Jaipur
The principal functions of FEDAI are as follows.
To frame rules for the conduct of foreign exchange business
in India.
The basic objective is to bring uniformity in Forex.
transactions.
These rules cover various aspects like Hours of Business,
Export

Transactions,

Import

transactions,

Clean

instruments, Foreign Exchange Contracts, Early Delivery,

Extension and cancellation of Contracts, Business through
intermediaries, Interbank settlements.
To co-ordinate with RBI in proper administration of
exchange management.
To promote sound foreign
exchange policy in cooperation and consultation with RBI.
To circulate information likely to be of interest to members.
Ex. Informations regarding international trade received
from International Chamber of Commerce.
To conduct work shop/training for the officers of member
banks om foreign exchange.
ROLE OF RBI
RBI plays a pivotal role in the control and management of
Foreign Exchange in India.

 It regulates the investments & trading, commercial activities

in India of foreigners and foreign companies.
ROLE OF ASIAN CLEARING UNION
This is a group of countries comprising the central banks of
India, Iran, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan,
Maldives and Myanmar formed with the following objectives.
It has its head quarters in Tehran, Iran.
To reduce the use of extra regional currencies to settle such
transactions by promoting the currencies of participating
countries.
To contribute to the expansion of trade and promotion of
monetary co-operation among the member countries.
ACU has two currencies of Settlements ACU Dollar and ACU
Euro
One ACU Dollar is equal to one USD
One ACU euro is equal to 1 euro.
Trade transactions can also be settled in the following
manner:
All transactions between a person resident in India and a person
resident in Nepal or Bhutan may be settled in Indian Rupees.
However, in case of export of goods to Nepal, where the importer
has been permitted by the Nepal Rashtra Bank to make payment
in free foreign exchange, such payments shall be routed through
the ACU mechanism.
Trade transactions with Iran
In
view
of
the
difficulties
being
experienced
by
importers/exporters in payments to / receipts from Iran, it has

been decided that with effect from December 27, 2010, all eligible
current account transactions including trade transactions with
Iran should be settled in any permitted currency outside the ACU
mechanism, until further notice.
Switching from Barter Trade to Normal Trade at IndoMyanmar Border
In supersession of instructions contained in A.P. (DIR Series)
Circular No. 17 dated October 16, 2000, barter system of trade at
the Indo-Myanmar border will be switched over to normal trade
with effect from December 1, 2015. Accordingly, all trade
transactions with Myanmar, including those at the Indo-Myanmar
border with effect from December 1, 2015 would be settled in any
permitted currency in addition to the Asian Clearing Union
mechanism.
Export of Currency
In terms of Foreign Exchange Management (Export and Import of
Currency) Regulations, 2000 notified vide Notification No. FEMA 6/
2000-RB dated 3rd May 2000, as amended from time to time,
permission of Reserve Bank is required for any export of Indian
currency except to the extent permitted under any general
permission granted under the Regulations as under:
(i) Any person resident in India may take outside India (other than
to Nepal and Bhutan) currency notes of Government of India and
Reserve Bank of India notes up to an amount not exceeding
Rs.25,000 (Rupees twenty five thousand only); and
(ii) Any person resident outside India, not being a citizen of
Pakistan and Bangladesh and also not a traveler coming from and
going to Pakistan and Bangladesh, and visiting India may take
outside India currency notes of Government of India and Reserve
Bank of India notes up to an amount not exceeding Rs. 25,000
(Rupees twenty five thousand only) while exiting only through an
airport.