chapter 1 Indian Forex management .docx - Chapter 5: Indian...

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Chapter 5: Indian Forex Market1.Indian Forex MarketIntroductionMoney as medium of exchangeForex market: structure and featuresDifferent types of accounts: nostro, vostro, loro etcSpot rate, forward rate, future spot rateoBid, Ask, spreadoQuotations: direct, indirect, crossoForward market premiumArbitrageoGeographical arbitrageoMoney market arbitrageoTwo point arbitrageoThree point arbitrageSettlement or closing of positionThe USD as a vehicle currency/ international currencyEURO , yuan, yen andRupee as international currencyTrends in forex tradingPayment networks for international transactions: SWIFT, CHIPSIndian Forex marketINDIAN FOREIGN EXCHANGE MARKET: A HISTORICAL PERSPECTIVEEarly Stages: 1947-1977:The evolution of India’s foreign exchange market may be viewed inline with the shifts in India’s exchange rate policies over the last few decades from a par valuesystem to a basket-peg and further to a managed float exchange rate system. During the periodfrom 1947 to 1971, India followed the par value system of exchange rate. Initially the rupee’sexternal par value was fixed at 4.15 grains of fine gold. The Reserve Bank maintained the par
value of the rupee within the permitted margin of ±1 per cent using pound sterling as theintervention currency. Since the sterling-dollar exchange rate was kept stable by the USmonetary authority, the exchange rates of rupee in terms of gold as well as the dollar and othercurrencies were indirectly kept stable. The devaluation of rupee in September 1949 and June1966 in terms of gold resulted in the reduction of the par value of rupee in terms of gold to 2.88and 1.83 grains of fine gold, respectively. The exchange rate of the rupee remained unchangedbetween 1966 and 1971.Given the fixed exchange regime during this period, the foreign exchange market for allpracticalpurposes was defunct. Banks were required to undertake only cover operations and maintain a‘square’ or ‘near square’ position at all times. The objective of exchange controls was primarilyto regulate the demand for foreign exchange for various purposes, within the limit set by theavailable supply. The Foreign Exchange Regulation Act initially enacted in 1947 was placed on apermanent basis in 1957. In terms of the provisions of the Act, the Reserve Bank, and in certaincases, the Central Government controlled and regulated the dealings in foreign exchangepayments outside India, export and import of currency notes and bullion, transfers of securitiesbetween residents and non-residents, acquisition of foreign securities, etc.With the breakdown of the Bretton Woods System in 1971 and the floatation of majorcurrencies, the conduct of exchange rate policy posed a serious challenge to all central banksworld wide as currency fluctuations opened up tremendous opportunities for market players totrade in currencies in a borderless market. In December 1971, the rupee was linked with poundsterling. Since sterling was fixed in terms of US dollar under the Smithsonian Agreement of

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Term
Fall
Professor
professor_unknown
Tags
Passing, Foreign exchange market

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