39473961 Foreign Exchange Reserves Trends and Data Analysis EBEN MESM 10 12

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UNIVERSITY OF MUMBAI

PROJECT ON

CASE STUDY OF ABBOTT LABORATORIES

MASTERS OF COMMERCE (BUSINESS MANAGEMENT)

SUBJECT: STRATEGIC MANAGMENT

SEMESTER II 2013-14

IN PARTIAL FULFILLMENT OF THE REQUIREMENT UNDER SEMESTER BASED CREDIT AND GRADING

SYSTEM FOR POST GRADUATE (PG) PROGRAMME UNDER FACULTY OF COMMERCE

SUBMTTED BY

RAZAALI MUKADAM

ROLL NO 58

PROJECT GUIDE


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DR.RAJESHWARI G

K.P.B. HINDUJA COLLEGE OF COMMERCE 315 NEW CHARNI ROAD MUMBAI 400004

M.Com (BUSINESS MANAGEMENT)

II SEMESTER

CASE STUDY OF ABBOTT LABORATORIES


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SUBMITED BY

RAZAALI MUKADAM

ROLL NO: 58

CERTIFICATE

This is to certify Mr. Razaali Mukadam of M.Com Business management semester 2nd

2013-2014 has

successfully completed the project on case study of Abbott laboratories under the guidance of

DR.Rajeshwari G.

Project Guide _________________________

Course Coordinator _________________________

Internal Examiner _________________________

External Examiner ______________________

Principal _________________________


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Date: ________

Place: Mumbai

DECLARATION

I Mr. Razaali Mukadam the student of M.Com Busniess management 2nd semester (2013-2014) hereby

declare that I have completed the project on CASE STUDY OF ABBOTT LABORATORIES

The information submitted is true and original to the best of my knowledge.

RAZAALI MUKADAM

(Signature)


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ACKNOWLEDGMENT

My sincere Thanks to Ms. DR Rajeshwari G , K.P.B. Hinduja College of Commerce, Mumbai for her

valuable guidance and support at all time.

Also, I would like to thank and remember my neighbours & friends for their effort and helping hand.

Every effort has been made to enhance the quality of work. However, I owe the sole responsibility of the

shortcoming, if any, in the study.


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RAZAALI MUKADAM

Roll No : 58

M. Com - II Semester

TABLE OF CONTENT

Sr. No TOPIC PAGE

1 Introduction 1

2 History 3

3 Key Products 4

4 Case Study 10

5 Market Research 12

6 Vision, Mission and Objectives 15

7 Internal and External Enviorment 18

8 Strategies 23


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FOREIGN EXCHANGE RESERVES TRENDS AND DATA ANALYSIS

Introduction

Foreign exchange reserves, also called Forex reserves or FX reserves, are the foreign currency

deposits and bonds held by central banks and monetary authorities. However, in general usage,

people tend to include gold, SDRs and IMF reserves also, in defining the same. In the Economist

language, the combination of all the above is termed as official international reserves or

international reserves. [1, 4]

Foreign exchange is the simultaneous buying of one currency while selling for others. It

constitutes a system by which one currency is converted into another, creating a medium for

transactions between governments or businesses in different countries. The foreign exchangemarket is a worldwide financial market, created specifically, for the trading of currencies.

Financial centers all around the world arrange for trading between a wide variety of buyers and

sellers, around the clock, with the exception of weekends. The Forex market determines the

relative values of different currencies and assists in international trade and investment, by

allowing businesses to convert one currency to another currency. It is the largest and most liquid

market in the world. A majority of the transactions in this market are conducted in US Dollars,

the adopted world currency with respect to the Bretton Woods system. The Euro, The UK

Pound Sterling and the Japanese Yen are used for the same purpose, to a lesser extent. [3, 4]

Therefore, in simpler terms, the assets held by a countrys central bank and other monetary

authorities, in different reserve currencies, used to cover its liabilities when needed, are termed

Foreign Exchange Reservesor Foreign Currency Assets. US Dollars are the most preferred

and highest stocked currency units in Foreign exchange Reserves. [4]

9 Conclusion 29

10 Bibliography 30
http://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Currency


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Foreign Currency Assets are maintained in multiple currencies, such as, US dollar, Euro,

Pound sterling, Japanese yen, etc. and are valued in terms of US dollars.

SDR (Special Drawing Rights): This includes official international reserves allocated

under special consideration by the IMF in August 2009 and September 2009. The

International Monetary Fund (IMF) designated India as a creditor under its Financial

Transaction Plan in February 2003, with the understanding that these reserves would be

used in aiding neighboring countries that needed help.

Gold includes USD 6699 million reflecting the purchase of 200 metric tonnes of gold

from IMF during October 19-30 2009.

RTP [IMF Reserves] refers to the Reserve Tranche Position in the IMF, which can be

counted as a part of a countrys official exchange reserves.[3]

In most of the tables and cases below, where gold, SDRs and IMF reserves are mentioned,

Forex reserves are representative of the official international reserves. Also, USD is used to

represent the Forex reserves for the rest of this study, even if a part of the reserves contain other

commonly used currencies.

Management of Forex Reserves [3, 4]

There are many factors that determine the demand placed on the forex reserves. The exchange

rate regimen adopted by a country, the extent of openness of its economy and the nature of the

markets operating in that country, together determine how forex reserves are held, and are used

in dealing with other countries. Central banks throughout the world have sometimes cooperated

in buying and selling official international reserves to attempt to influence exchange rates. The

guidelines of Forex management in India are similar to those of many central banks in the world,

wherein liquidity, safety and return optimization constitute the main objectives of reserve

management.

The Reserve Bank of India Act [1934] provides the legal framework for reserve management in

India. It permits deposits with other central banks and the Bank for International Settlements and


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dealing in derivatives of forex currencies. Deposits with foreign commercial banks are also

allowed. The RBI has framed the guidelines for Forex reserves management in India. It aims at

enhancing the safety and liquidity aspects of the reserves. The Foreign Exchange Regulation Act

of 1973 constituted a set of stringent rules and regulations that limited Indias expansion in terms

of Forex reserves. However, the Foreign Exchange Management Act of 1999 relaxed these terms

and facilitated Forex reserve accumulation. The effect of this change, and the subsequent

increase in Forex Reserve holdings, can be observed in the following Trend Chart. [3]

Trends in Foreign Exchange Reserve management in India [3]

The following data represents the nature and state of Indias foreign exchange reservesbetween

1991 and 2010. India had accumulated USD 5.8 billion by March 1991, and has followed a

policy of increased accumulation of USD till 2008. The Forex reserve value reached USD 54.1

billion by March 2002, and then, it went up steadily and peaked at USD 309.7 billion by March

2008. However, as a result of the financial recession in US, which led to devaluation of the US

Dollar, and other concurrent and interrelated effects, Indias Forex reserves declined to USD

252.0 billion in March 2009. Soon after this, as a part of its long term strategy in stabilizing the

countrys economy and gaining credibility in the minds of investors, Indias Forex reserves were

increased to USD 279.1 billion as of March 31, 2010.

Movement in Foreign Exchange Reserves

(USD million)

Date

FCA SDR Gold RTP Forex

Reserves

31-Mar-07 191,924 2 (1) 6,784 469 199,179

30-Sep-07 239,954 2 (1) 7,367 438 247,761

31-Mar-08 299,230 18 (11) 10,039 436 309,723

30-Sep-08 277,300 4 (2) 8,565 467 286,336

31-Mar-09 241,426 1 (1) 9,577 981 251,985

30-Sep-09 264,373 5224 (3297) 10,316 1365 281,278

31-Mar-10 254,685 5006 (3297) 17,986 1380 279,057


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The above table represents the values of Indias Forex Reserves between 2007 and 2009.[3]

The above Chart represents the value of Forex Reserves held by India between March 1991 and

March 2010. [3]


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Foreign Currency Assets

(All Units in USD Million) As on September 30, 2009 As on March 31, 2010

Foreign Currency Assets * 264,373 254,685

(a)Securities 148,012 132,110

(b) Deposits with other central

banks, BIS & IMF

111,250 117,526

(c) Deposits with foreign

commercial banks / funds placed

with EAMs

5,111 5049

The above table represents Indias Foreign Currency assets, split into Securities and Deposits.

*Excludes USD 250 million invested in foreign currency denominated bonds issued by IIFC [UK]. [3]

The figure below represents statistical data from numerous sources, which serve in helping us

understand patterns and trends observed in Forex Reserve Management. [5]

The first figure on the left distinguishes between countries with the highest and lowest

Forex Reserves. China ranks the highest and has around 2000 Billion USD in Foreign

Currency Assets.

The second figure on the left represents Forex reserves held by the top Asian Countries.

The third figure on the left represents the value of USD in rupees between 1973 and

2010.


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The first figure on the right represents the currency composition of World Forex

Reserves.

The second figure on the right represents the value of Forex Reserves held by the RBI

between September 2007 and March 2009.

The third figure on the right represents Indian Forex reserves between 1991 and 2001.


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Forex ReservesImplications [3, 4]

Adequacy of reserves is now being considered as an important parameter in measuring a

nations ability to absorb external shocks.

Countries that target a specific currency or exchange rate are said to have a fixed

exchange rate. The value of the currency held depends on the factors of supply and

demand in the market. The countrys central bank determines how it would react to

changes effected in Forex Reserve purchasing power as a result of currency value

fluctuations.

Countries that do not target any specific exchange rate are said to have a floating

exchange rate. These countries allow the market to set the exchange rate and therefore

manage Forex reserves as a function of the market situation, depending on the volatility

of the market and resultant inflation.

Having large Forex reserves will allow a government to manipulate exchange rates and as

a result, stabilize the Forex rates in order to provide a more favorable economic

environment for the functioning of the government. This will enable it to defend itself

from speculative and illegal attacks on its domestic currency. In this way, Forex reserves

help in preventing currency devaluation. The availability or unavailability of Forex reserves, in situations of debt, plays a critical

role in determining the countrys economic and fiscal policy in the later years.

However, the flipside of the coin is that there are problems to stocking large Forex

reserves too. Market fluctuations directly affect the purchasing power of the Forex

reserves. As a result, even without a currency crisis, fluctuations can cause huge losses to

a countrys economic profile.

Also, in the case of a stable and static exchange rate, the return on interest for holding

Huge Forex reserves is less than the usual inflation rate and is therefore, not beneficial.

The same money could be better employed in other fields with a higher return on

investment.


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Foreign Exchange Reserves Management in IndiaFunctions [3]

Risk management is one of the most important functions of the RBI, with respect to Forex

Reserves Management. This is accomplished by normalizing the external environment,

deployment of reserves and the system assigned to manage the above, all in consultation with the

Government of India. There are a number of risks involved in maintaining Forex reserves, a few

of which are described below.

Credit risk is defined as the possibility that a borrower will fail to meet his obligations, as

defined in a pre-agreed contract. The Reserve Bank's investments in bonds/treasury bills

represent Indias debt obligations, as well as its deposits held in the Bank for

International Settlements and other central banks. Transactions in foreign exchange and

bonds with private firms give rise to credit risk.

Currency risk arises due to uncertainty in exchange rates. It is very similar to interest rate

risk. The focus of the general Forex investment strategy is on the need to keep the interest

rate risk of the portfolio reasonably low, with a view of minimizing losses accrued as a

result of adverse interest rate movements, if any. This is important as Forex reserves act

as a market stabilizing force for all contingencies.

Liquidity risk is defined as the inability to sell Forex reserves when required, without

facing additional hurdles and costs. The reserves need to have a high level of liquidity at

all times in order to be able to face any unexpected and critical needs. Any adverse

situation as to be met with the sale of reserves, and therefore, it is critical to monitor the

reserves for possibility of immediate sale. All Foreign Currency Assets can be used on a

direct basis for debt repayment.

An element of operational risk is also observed in Forex Reserves Management.


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Methods to achieve operational efficiency in Forex Reserves Management [3]

Key operational procedures are documented.

Decentralization of the front office and back office functions.

Performing Liquidity-at-risk analyses before investing.

Setting up control systems to monitor all transaction details involving Forex Reserves.

Regular Auditing and Special Auditing of all Forex transactions.

Setting up a reporting mechanism that delivers regular information on all details

pertaining to a countrys Foreign Reserves.

Dealing in a manner compliant with the provisions of ISO 27001 standards.

Keeping all Forex Transactions transparent [adhering to the Special Data Dissemination

Standards].

FOREIGN EXCHANGE MANAGEMENT

UNIT-1

CONCEPT-Forex is the abbreviation for foreign exchange, refers to the foreign currency or the foreigncountry currency expresses which can be use in the international settlement payment means and the

property, mainly it includes the credit instrument, disbursement voucher, the negotiable securities andthe foreign exchange cash and so on.

The International Monetary Fund defined Forex as the international creditor's rights which a country has,no matter this kind of creditor's rights are express by the foreign currency or expressed by the standardcurrency.

Exchange Rate

Exchange rate, also known as the exchange price, it refers by a country currency being express byanother country currency, or it is also the price ratio between both countries currency, generally it isbeing expressed by using the price proportion of both countries. For instance: USD/JPY=105.40, is beingexpressed a US dollar equal to 105.40 Japanese Yen, US dollar is also known as the unit currency, theJapanese Yen is known as the price currency.

The exchange rate smallest change unit is, namely a final one-figure number digital change, is called anexchange rate basic point (Pip), abbreviation exchange rate spot, for example:

Euro EUR 0.0001

Japanese Yen JPY 0.01


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The foreign exchange market is the market in which foreign currencysuch as the yen or

euro or poundis traded for domestic currencyfor example, the U.S. dollar. This market

is not in a centralized location; instead, it is a decentralized network that is nevertheless

highly integrated via modernINFORMATIONandTELECOMMUNICATIONStechnology.

The exchange rate is the price of foreign currency. For example, the exchange rate

between the British pound and the U.S. dollar is usually stated in dollars per pound

sterling ($/); an increase in this exchange rate from, say, $1.80 to say, $1.83, is a

depreciation of the dollar. The exchange rate between the Japanese yen and the

U.S. dollar is usually stated in yen per dollar (/$); an increase in this exchange

rate from, say, 108 to 110 is an appreciation of the dollar. Some countries float

their exchange rate, which means that the central bank (the countrys monetary

authority) does not buy or sell foreign exchange, and the price is instead

determined in the private marketplace. Like other market prices, the exchange rate

is determined bySUPPLYandDEMANDin this case, supply of and demand for foreign

exchange.

SIGNIFICANCE OF FOREIGN EXCHANGE

foreign exchange rate means that 1 usd = 10 pesos. When you exchange currency, understand that it

fluctuates, sometimes higher and sometimes lower. Do your trading when it's higher b\c you get more

of their dollars for your. All you can do it watch the exchange rates.

Foreign exchange risk is the level of uncertainty that a company must manage for changes inforeign exchange rates, that will adversely affect the money the company receives for goods andservices over a period of time.For example, a company sells goods to a foreign company. They ship the goods today, but willnot receive payment for several days, weeks or months. During this grace period, the exchangerates fluctuate. At the time of settlement, when the foreign company pays the domestic companyfor the goods, the rates may have traveled to a level that is less than what the companycontemplated. As a result, the company may suffer a loss or the profits may erode.To minimize or manage the risk, companies enter into contracts to buy foreign currency at aspecified rate. This allows the companies to minimize the uncertainty of the risk, so that they canprice their products accordingly.

Functions of foreign exchange Department

Departments

With the introduction of the Foreign Exchange Management Act 1999, (FEMA) with effect fromJune 1, 2000, the objective of the Foreign Exchange Department has shifted from conservation of
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foreign exchange to "facilitating external trade and payment and promoting the orderlydevelopment 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

o 8 transactions prohibited by the Government of India.o 11 transactions which require prior permission of the Government of India ando 16 transactions on which indicative limits are fixed by the Government and

release of foreign exchange beyond those limits requires permission from theReserve Bank. All Regional Offices of the Department have in turn beenauthorised to release exchange for such transactions.

For capital account transactions, the Reserve Bank regulations provide for generalpermissions/automatic routes for investments in India by non-residents, investmentsoverseas by residents and borrowings abroad, etc.

The Department ensures timely realisation of export proceeds and reviews, on acontinuous basis, the existing rules in the light of suggestions received from various tradebodies and exporters' fora.

The Department collects data relating to forex transactions from authorised dealers on adaily basis for exchange rate management and on a fortnightly basis for monthly quickestimates of balance of payments and quarterly balance of payments compilation.

The Department lays down policy guidelines for risk management relating to forextransactions in banks.

The Department is also entrusted with the responsibility of licensing banks/moneychangers to deal in foreign exchange and inspecting them.

There is a "Standing Consultative Committee on Exchange Control" consisting ofrepresentatives from various trade bodies and authorised dealers which meets twice ayear and makes recommendations for policy formulation.

With a view of further improving facilities available to NRIs and removing irritants, theDepartment is also engaged, on an ongoing basis, in reviewing and simplifying theprocedures and rules.

Foriegn Exchange department in a bank has following functions:

EXPORTS

Pre-shipment Advances Post-shipment Advances Export Guarantees Advising/Confirming Letter of Credit Facilitating project exports Bills for collection

IMPORTS


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Opening letters of credit Advance bills Import loans and guarantees.

EXCHANGE DEALINGS

Rate computation Nostro/Vostro Accounts Forward contracts Derivatives Exchange position and cover operations

REMITTANCES

Issue of DD, MT, TT etc. Encashment of cheques, DD, MT, TT etc.

Issue and encashment of travelers' cheques Sale and encashment of foreign currency notes Non-resident deposits

STATISTICS

Submission of returns Collection of credit information

FOREIGN EXCHANGE MARKETS

The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counterfinancial market for the trading of currencies. Financial centers around the worldfunction as anchors of trading between a wide range of different types of buyers and sellersaround the clock, with the exception of weekends.

The purpose of the foreign exchange market 'Forex' is to assist international trade andinvestment. The foreign exchange market allows businesses to convert one currency to anotherforeign currency. For example, it permits a U.S. business to import European goods and payEuros, even though the business's income is in U.S. dollars. Some experts, however, believe that

the unchecked speculative movement of currencies by large financial institutions such as hedgefunds impedes the markets from correcting global current account imbalances. This carry trademay also lead to loss of competitiveness in some countries.[1]

In a typical foreign exchange transaction a party purchases a quantity of one currency by payinga quantity of another currency. The modern foreign exchange market started forming during the1970s when countries gradually switched to floating exchange rates from the previous exchangerate regime, which remained fixed as per the Bretton Woods system.
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The foreign exchange market is unique because of

trading volume results in market liquidity

geographical dispersion

continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 UTC on Sunday

until 22:00 UTC Friday

the variety of factors that affect exchange rates

the low margins of relative profit compared with other markets of fixed income

the use ofleverage to enhance profit margins with respect to account size

The foreign exchange market is the largest and most liquid financial market in the world. Tradersinclude large banks, central banks, currency speculators, corporations, governments, and otherfinancial institutions. The average daily volume in the global foreign exchange and relatedmarkets is continuously growing. Daily turnover was reported to be overUS$3.2 trillion in April2007 by the Bank for International Settlements.[2]Since then, the market has continued to grow.According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and2008.[3]

FUNCTIONS

A foreign exchange market is a place in which foreign exchange transactions take place. In

other words it is a market where foreign money are bought and sold. It is a part of money

market in the financial center.

The basic and primary function of a foreign exchange market is to transfer purchasing power

between countries. The transfer function is performed through T.T, M.T, Draft, Bill of exchange,

Letters of credit, etc. the bill of exchange is the most important and effective method of

transferring purchasing power between two parties located in different countries.

Another important function of foreign exchange market is to provide credit to the importer

debtor. The exporters draw the bill of exchange on importers on their bankers. On acceptance

of the bills by the importer or their bankers, the exporter will get the money realized on the

maturity of the bills. In case the exporters are anxious to receive the payment earlier, the bills

can be discounted from their bankers, or foreign exchange banks or discount houses.

The foreign exchange market performs the hedging function covering the risks on foreign

exchange transactions. There are frequent fluctuations in exchange rates. If the rate is
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favourable, the exporter will gain and vice verse. In order to avoid the risk involved, the foreign

exchange market provides hedges or actual claims through forward contracts in exchange

against such fluctuations. The agencies offoreign currencies

guarantee payment of foreign exchange at a fixed rate. The exchange agencies bear the risksof fluctuation of exchange rates.

ROLE AND FUNCTIONS OF RBI

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve

Bank of India.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all

denominations. The distribution of one rupee notes and coins and small coins all over the country is

undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue

Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue

Department are kept separate from those of the Banking Department. Originally, the assets of the Issue

Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities

provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the

assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and

promissory notes payable in India. Due to the exigencies of the Second World War and the post-was

period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to

maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should

be in gold. The system as it exists today is known as the minimum reserve system.

Banker to Government

The second important function of the Reserve Bank of India is to act as Government banker, agent and

adviser. The Reserve Bank is agent of Central Government and of all State Governments in India

excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government
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business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on

behalf of the Government and to carry out their exchange remittances and other banking operations. The

Reserve Bank of India helps the Government - both the Union and the States to float new loans and to

manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It

makes loans and advances to the States and local authorities. It acts as adviser to the Government on all

monetary and banking matters.

Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking

Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash

balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an

amendment of 1962, the distinction between demand and time liabilities was abolished and banks havebeen asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum

cash requirements can be changed by the Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get

financial accommodation in times of need or stringency by rediscounting bills of exchange. Since

commercial banks can always expect the Reserve Bank of India to come to their help in times of banking

crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort.

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit

created by banks in India. It can do so through changing the Bank rate or through open market

operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any

particular bank or the whole banking system not to lend to particular groups or persons on the basis of

certain types of securities. Since 1956, selective controls of credit are increasingly being used by the

Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money market. Every

bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence

can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will

have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank

must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of
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the Bank to call for information is also intended to give it effective control of the credit system. The

Reserve Bank has also the power to inspect the accounts of any commercial bank.

As supereme banking authority in the country, the Reserve Bank of India, therefore, has the following

powers:

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative controls.

(c) It controls the banking system through the system of licensing, inspection and calling for information.

(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to

the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of

sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the

Bank was able to maintain the exchange rate fixed at lsh.6d. though there were periods of extreme

pressure in favour of or against

the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank

has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of

India's reserve of international currencies. The vast sterling balances were acquired and managed by the

Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain non-monetary

functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve

Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision

and control over commercial and co-operative banks, relating to licensing and establishments, branch

expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction,
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and liquidation. The RBI is authorised to carry out periodical inspections of the banks and to call for

returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in

July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit

policies towards more rapid development of the economy and realisation of certain desired social

objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of

banking in India to develop on sound lines and to improve the methods of their operation.

Promotional functions

With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's

functions has steadily widened. The Bank now performs a varietyof developmental and promotional

functions, which, at one time, were regarded as outside the normal scope of central banking. The

Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urbanareas, and establish and promote new specialised financing agencies. Accordingly, the Reserve Bank

has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962,

the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural

Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972.

These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to

mobilise savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the

Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only

since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-

operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route

its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development

Corporation to provide long-term finance to farmers.

Classification of RBIs functions

The monetary functions also known as the central banking functions of the RBI are related to control and regulation of

money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the

Government and to the money market. Monetary functions of the RBI are significant as they control and regulate thevolume of money and credit in the country.

Equally important, however, are the non-monetary functions of the RBI in the context of India's economic

backwardness. The supervisory function of the RBI may be regarded as a non-monetary function (though many

consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI


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has been given wide and drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licencing

of banks, branch expansion, liquidity of their assets, management and methods of working, inspection,

amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has

greatly improved. Commercial banks have developed into financially and operationally sound and viable units. The

RBI's powers of supervision have now been extended to non-banking financial intermediaries. Since independence,

particularly after its nationalisation 1949, the RBI has followed the promotional functions vigorously and has been

responsible for strong financial support to industrial and agricultural development in the country.

UNIT-2

EXCHANGE CONTROL

OBJECTIVES OF EXCHANGE CONTROL

Conclusion [4]

Maintenance of Forex Reserves is ultimately important for all developing countries, as it is a

readily available asset that acts as a stabilization fund and can be liquidated in order to settle

international debts. Also, it helps in creating an image of credibility, based on which the chances

for foreign investments in trade and commerce are greatly increased. However, the whole

process has to be regulated and maintained in a way such that the ill-effects of major changes in

the international and local scenario are relatively minimal.


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References

1. http://www.onlineforextrading.com/glossary

2. Doing Business in India; an Ernst and Young Publication; Pgs 22, 23, 25, 81, 163,

164 and 180.

3. Half Yearly Report on Management of Foreign Exchange Reserves; 2009-10; RBI.

4. www.wikipedia.org

Foreign Exchange Market

Foreign Exchange Reserves

Foreign Exchange Management Act

5. www.google.co.in/images/

Foreign Exchange

Foreign Exchange Trends; India.
http://www.onlineforextrading.com/glossaryhttp://www.wikipedia.org/http://www.google.co.in/images/http://www.google.co.in/images/http://www.wikipedia.org/http://www.onlineforextrading.com/glossary

39473961 Foreign Exchange Reserves Trends and Data Analysis EBEN MESM 10 12

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