A study on functioning of foreign exchange market

PROJECT REPORT ON

“A Study on Functioning of Foreign Exchange Market”

Submitted toUniversity of Mumbai

In Partial Fulfillment of the Requirement

For

M.Com (Accountancy) Semester IIIn the subject

Economics

By

Name of the student : - Vivek ShriramMahajanRoll No. : - 14 -7288

Name and address of the collegeK. V. Pendharkar College

Of Arts, Science & CommerceDombivli (E), 421203

APRIL 2015

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DECLARATION

I VIVEK SHRIRAM MAHAJAN Roll No. 14 – 7288, the student of

M.Com (Accountancy) Semester II (2015), K. V. Pendharkar College,

Dombivli, Affiliated to University of Mumbai, hereby declare that the

project for the subject Strategic Management of Project report on “A Study

on Functioning of Foreign Exchange Market” submitted by me to

University of Mumbai, for semester II examination is based on actual work

carried by me.

I further state that this work is original and not submitted anywhere else for any examination.

Place : Dombivli

Date:

Signature of the Student

Name: - Vivek Shriram Mahajan Roll No: - 14 -7288

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ACKNOWLEDGEMENT

It is a pleasure to thank all those who made this project work possible.

I Thank the Almighty God for his blessings in completing this task. The successful completion of this project is possible only due to support and cooperation of my teachers, relatives, friends and well-wishers. I would like to extend my sincere gratitude to all of them.

I am highly indebted to Principal A.K.Ranade, Co-ordinater P.V.Limaye, and my subject teacher Ms. Neha Salagare for their encouragement, guidance and support.

I also take this opportunity to express sense of gratitude to my parents for their support and co-operation in completing this project.

Finally I would express my gratitude to all those who directly and indirectly helped me in completing this project.

Name of the studentVivek Shriram Mahajan

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Table of Contents:CHAPTER No Topic Page no

CHAPTER 1 Introduction

Introduction to Subject………………………..Introduction to Foreign Exchange…………

56

CHAPTER 2 Types of Exchange Rate

Fixed Exchange Rates………………….Floating Exchange Rates........................

88

CHAPTER 3 Functions of Foreign Exchange Market

Transfer Function ………......……………….........Credit Function.....……………………...…...........Hedging Function...................................................

101010

CHAPTER 4 Foreign Exchange Markets in India

A brief background on Foreign Exchange Market.......Regulation of cross-border currency flows...............The Dynamics of Swelling Reserves.........................Enforcement of Foreign Exchange Market................

12161718

CHAPTER 5 Conclusion

Conclusion………………………………….. 34

Bibliography………………………………………….

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CHAPTER 1: Introduction

Introduction to Subject

During 2003-04 the average monthly turnover in the Indian foreign exchange market touched about 175 billion US dollars. Compare this with the monthly trading volume of about 120 billion US dollars for all cash, derivatives and debt instruments put together in the country, and the sheer size of the foreign exchange market becomes evident. Since then, the foreign exchange market activity has more than doubled with the average monthly turnover reaching 359 billion USD in 2005-2006, over ten times the daily turnover of the Bombay Stock Exchange. As in the rest of the world, in India too, foreign exchange constitutes the largest financial market by far.

Liberalization has radically changed India’s foreign exchange sector. Indeed the liberalization process itself was sparked by a severe Balance of Payments and foreign exchange crisis. Since 1991, the rigid, four-decade old, fixed exchange rate system replete with severe import and foreign exchange controls and a thriving black market is being replaced with a less regulated, “market driven” arrangement. While the rupee is still far from being “fully floating” (many studies indicate that the effective pegging is no less marked after the reforms than before), the nature of intervention and range of independence tolerated have both undergone significant changes. With an overabundance of foreign exchange reserves, imports are no longer viewed with fear and skepticism. The Reserve Bank of India and its allies now intervene occasionally in the foreign exchange markets not always to support the rupee but often to avoid an appreciation in its value. Full convertibility of the rupee is clearly visible in the horizon. The effects of these development s are palpable in the explosive growth in the foreign exchange market in India.

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Introduction to Foreign Exchange

Definition

The exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX."

INVESTOPEDIA EXPLAINS 'FOREIGN EXCHANGE'

Foreign exchange transactions encompass everything from the conversion of currencies by a traveler at an airport kiosk to billion-dollar payments made by corporate giants and governments for goods and services purchased overseas. Increasing globalization has led to a massive increase in the number of foreign exchange transactions in recent decades. The global foreign exchange market is by far the largest financial market, with average daily volumes in the trillions of dollars.

As Kindle-Berger put, “the foreign exchange market is a place where foreign moneys are bought and sold.” Foreign exchange market is an institutional arrangement for buying and selling of foreign currencies. Exporters sell the foreign currencies. Importers buy them.

The foreign exchange market is merely a part of the money market in the financial centres. It is a place where foreign moneys are bought and sold. The buyers and sellers of claim on foreign money and the intermediaries together constitute a foreign exchange market.

It is not restricted to any given country or a geographical area. Thus, the foreign exchange market is the market for a national currency (foreign money) anywhere in the world, as the financial centres of the world are united in a single market.

There is a wide variety of dealers in the foreign exchange market. The most important among them are the banks. Banks dealing in foreign exchange have branches with substantial balances in different countries. Through their branches and correspondents, the services of such banks, usually called “Exchange Banks,” are available all over the world.

These banks discount and sell foreign bills of exchange, issue bank drafts, effect telegraphic transfers and other credit instruments, and discount and collect amounts on the basis of such documents. Other dealers in foreign exchange are bill brokers who help sellers and buyers in foreign bills to come together. They are intermediaries and unlike banks are not direct dealers.

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Acceptance houses are another class of dealers in foreign exchange. They help effect foreign remittances by accepting bills on behalf of customers. The central bank and treasury of a country are also dealers in foreign exchange. Both may intervene in the market occasionally.

Today, however, these authorities manage exchange rates and implement exchange controls in various ways. In India, however, where there is a strict exchange control system, there is no foreign exchange market as such.

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CHAPTER 2: Types of Exchange Rate

An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for U.S. dollars is 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other.

Fixed Exchange Rates

There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.

If, for example, it is determined that the value of a single unit of local currency is equal to US$3, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank that it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation) and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.

Floating Exchange Rates

Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting," as any differences in supply and demand will automatically be corrected in the market. Look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing.

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In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency reflects its true value against its pegged currency, a "black market" (which is more reflective of actual supply and demand) may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market.

In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation. However, it is less often that the central bank of a floating regime will interfere.

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CHAPTER 3: Functions of Foreign Exchange Market

1. To transfer finance, purchasing power from one nation to another. Such transfer is affected through foreign bills or remittances made through telegraphic transfer. (Transfer Function).

2. To provide credit for international trade. (Credit Function).

3. To make provision for hedging facilities, i.e., to facilitate buying and selling spot or forward foreign exchange.

1. Transfer Function

The basic function of the foreign exchange market is to facilitate the conversion of one currency into another, i.e., to accomplish transfers of purchasing power between two countries. This transfer of purchasing power is effected through a variety of credit instruments, such as telegraphic transfers, bank draft and foreign bills.

In performing the transfer function, the foreign exchange market carries out payments internationally by clearing debts in both directions simultaneously, analogous to domestic clearings.

2. Credit Function

Another function of the foreign exchange market is to provide credit, both national and international, to promote foreign trade. Obviously, when foreign bills of exchange are used in international payments, a credit for about 3 months, till their maturity, is required.

3. Hedging Function

A third function of the foreign exchange market is to hedge foreign exchange risks. Hedging means the avoidance of a foreign exchange risk. In a free exchange market when exchange rate, i. e., the price of one currency in terms of another currency, change, there may be a gain or loss to the party concerned. Under this condition, a person or a firm undertakes a great exchange risk if there are huge amounts of net claims or net liabilities which are to be met in foreign money.

Exchange risk as such should be avoided or reduced. For this the exchange market provides facilities for hedging anticipated or actual claims or liabilities through forward contracts in exchange. A forward contract which is normally for three months is a contract to buy or sell foreign exchange against another currency at some fixed date in the future at a price agreed upon now.

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No money passes at the time of the contract. But the contract makes it possible to ignore any likely changes in exchange rate. The existence of a forward market thus makes it possible to hedge an exchange position.

Foreign bills of exchange, telegraphic transfer, bank draft, letter of credit, etc., are the important foreign exchange instruments used in the foreign exchange market to carry out its functions.

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CHAPTER 4: Foreign Exchange Markets in India

Foreign Exchange Markets in India – a brief background

The foreign exchange market in India started in earnest less than three decades ago when in 1978 the government allowed banks to trade foreign exchange with one another. Today over 70% of the trading in foreign exchange continues to take place in the inter-bank market. The market consists of over 90 Authorized Dealers (mostly banks) who transact currency among themselves and come out “square” or without exposure at the end of the trading day. Trading is regulated by the Foreign Exchange Dealers Association of India (FEDAI), a self regulatory association of dealers. Since 2001, clearing and settlement functions in the foreign exchange market are largely carried out by the Clearing Corporation of India Limited (CCIL) that handles transactions of approximately 3.5 billion US dollars a day, about 80% of the total transactions.

The liberalization process has significantly boosted the foreign exchange market in the country by allowing both banks and corporations greater flexibility in holding and trading foreign currencies. The Sodhani Committee set up in 1994 recommended greater freedom to participating banks, allowing them to fix their own trading limits, interest rates on FCNR deposits and the use of derivative products.

The growth of the foreign exchange market in the last few years has been nothing less than momentous. In the last 5 years, from 2000-01 to 2005-06, trading volume in the foreign exchange market (including swaps, forwards and forward cancellations) has morethan tripled, growing at a compounded annual rate exceeding 25%. Figure 1 shows the growth of foreign exchange trading in India between 1999 and 2006. The inter-bankforex trading volume has continued to account for the dominant share (over 77%) of total trading over this period, though there is an unmistakable downward trend in thatproportion. (Part of this dominance, though, result s from double-counting since purchaseand sales are added separately, and a single inter-bank transaction leads to a purchase as well as a sales entry.) This is in keeping with global patterns.

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In March 2006, about half (48%) of the transactions were spot trades, while swap transactions (essentially repurchase agreements with a one-way transaction – spot or forward – combined with a longer- horizon forward transaction in the reverse direction)accounted for 34% and forwards and forward cancellations made up 11% and 7% respectively. About two-thirds of all transactions had the rupee on one side. In 2004,according to the triennial central bank survey of foreign exchange and derivative markets conducted by the Bank for International Settlements (BIS (2005a)) the Indian Rupee featured in the 20th position among all currencies in terms of being on one side of all foreign transactions around the globe and its share had tripled since 1998. As a host offoreign exchange trading activity, India ranked 23rd among all countries covered by the BIS survey in 2004 accounting for 0.3% of the world turnover. Trading is relativelymoderately concentrated in India with 11 banks accounting for over 75% of the trades covered by the BIS 2004 survey.

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Features of the Forward premium on the Indian rupee

The two main functions of the foreign exchange market are to determine the price of the different currencies in terms of one another and to transfer currency risk from more risk-averse participants to those more willing to bear it. As in any market essentially the demand and supply for a particular currency at any specific point in time determines its price (exchange rate) at that point. However, since the value of a country’s currency hassignificant bearing on its economy, foreign exchange markets frequently witness government intervention in one form or another, to maintain the value of a currency at or near its “desired” level. Interventions can range from quantitative restrictions on tradeand cross-border transfer of capital to periodic trades by the central bank of the country or its allies and agents so as to move the exchange rate in the desired direction. In recent years India has witnessed both kinds of intervention though liberalization has implied a long-term policy push to reduce and ultimately remove the former kind. It is safe to say that over the years since liberalization, India has allowed restricted capital mobility and followed a “managed float” type exchange rate policy.

During the early years of liberalization, the Rangarajan committee recommended that India’s exchange rate be flexible. Officially speaking, India moved from a fixed exchange rate regime to “market determined” exchange rate system in 1993. The overt objective of India’s exchange rate policy, according to various policy pronouncements, has been to manage “volatility” in exchange rates without targeting any specific levels. This has been hard to do in practice.

The Indian rupee has had a remarkably stable relationship with the US dollar. Meanwhile the dollar appreciated against major currencies in the late 90’s and then went into an extended decline particularly during 2003 and 2004. The lock-step pattern of the US dollar and the Rupee is best reflected in the movements in the two currencies againsta third currency like the Euro. The correlation of the exchange rates of the two currencies against the Euro during 1999-2004 was 0.94. Several studies have established the pegged nature of the rupee in recent years (see Chakrabarti (2006) for a more detailed discussion). Based on volatility, India had a de facto crawling peg to the US dollar between 1979 and 1991 which changed to a de facto peg from mid-1991 to mid-1995, with a major devaluation in March 1993. From mid-1995 to end-2001, the rupee reverted to a crawling peg arrangement in practice. An analysis of the ratio of the variance of theexchange rate to the sum of the variances of the interest rate and the foreign exchangereserves reveals a move even closer to the fixed exchange rate system. A comparison of the sensitivity (beta) of the Dollar-rupee rate with the Euro-rupee rate for a three year period (1999 through 2001), indicates that India had a dollar beta of 1.01 – tenth highest among the 53 countries considered. More importantly, the US dollar-Euro exchange rate explained about 97% of all movements in the Indian rupee-Euro exchange rate – highestamong all the 53 countries considered. Clearly the Indian rupee has been an excellent“tracker” of the US dollar.

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It is instructive to consider the Rupee-Dollar exchange rate in the light of the purchasing power parity (PPP) holding that the exchange rate between two currencies should equal the ratio of price levels in two countries. In its dynamic form PPP holds that that the rate of depreciation of a currency should equal the excess of its inflation rate to that in the other country. Over a reasonably long period of time, the devaluation in the Indian Rupee, vis-à-vis the US dollar does seem to have an association with the difference in the inflation rates in the two countries. Between 1991 and 2003, the two variables have had visible co- movements with a correlation of about 0.57 (Chakabarti (2006)). This may be a result of Indo-US trade flows dominating the exchange rate markets but it is perhaps more likely that it reflects the exchange rate management principles of the monetary authorities.

The Reserve Bank of India has used a varied mix of techniques in intervening in the foreign exchange market – indirect measures such as press statements (sometimes called “open mouth operations” in central bank speak) and, in more extreme situations, monetary measures to affect the value of the rupee as well as direct purchase and sale inthe foreign exchange market using spot, forward and swap transactions (see Ghosh (2002)). Till around 2002, the measures were mostly in the nature of crisis managementof saving-the-rupee kind and sometimes the direct deals would be repeated over several days till the desired outcome was accomplished. Other public sector banks, particularly the SBI often aided or veiled the intervention process.

The exact details of the interventions are shrouded in mystery, not unusual for central banks ever wary of disclosing too much of their hand to the currency speculators. The Tarapore Committee report had urged more transparency in the intervention process and recommended, in 1997, that a ‘Monitoring Exchange Rate Band’ of ± 5% be used around an announced neutral real effective exchange rate (REER), with weekly publication of relevant figures, something yet to be implemented. In a recent survey on foreign exchange market intervention in emerging markets, the Bank for International Settlements (BIS (2005b)) found that out of 11 emerging market countries considered,India gave out most complete information on intervention strategy (along with three others); no information on actual interventions (five others did the same) and did not cover foreign exchange intervention in annual reports (like two other countries). On thewhole it ranked fourth most opaque in matters of foreign exchange intervention among the eleven countries compared.

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Regulation of cross-border currency flows

A feature of the economy that is intricately related with the exchange rate regime followed is the freedom of cross-border capital flows. This relationship comes from theso-called “impossible trinity” or “trilemma” of international finance, which essentially states that a country may have any two but not all of the following three things – a fixed exchange rate, free flow of capital across its borders and autonomy in its monetary policy. Since liberalization, India has been having close to a de facto peg to the dollar and simultaneously has been liberalizing its foreign currency flow regime.

Close on the heels of the adoption of market determined exchange rate (within limits) in 1993 came current account convertibility in 1994. In 1997, the Tarapore committee, on Capital Account Convertibility, defined the concept as “the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange” and laid down fiscal consolidation, a mandated inflation target and strengthening of the financial system as its three main preconditions.

Meanwhile capital flows have been gradually liberalized, allowing, on the inflow side, foreign direct and portfolio investments, and tapping foreign capital markets by Indian companies as well as considerably better remittance privileges for individuals; and on the outflow side, international expansion of domestic companies. In 2000, the infamousForeign Exchange Regulation Act (FERA) was replaced with the much milder Foreign Exchange Management Act (FEMA) that gave participants in the foreign exchange market a much greater leeway.

The ultimate goal of capital account convertibility now seems to be within the government’s sights and efforts are on to chalk out the roadmap for the last leg, though it is not expected to be accomplished before 2009. Expectedly, the wisdom of the move has been hotly debated . Advocates of convertibility cite the “consumption smoothing” benefits of global funds flow and point out that it actually improves macroeconomic discipline because of external monitoring by the global financial markets. Convertibility can spur domestic investment and growth because of easier and cheaper financing. It can also contribute to greater efficiency in the banking and financial systems. On the other hand, skeptics like Williamson (2006), for instance, points out that India is yet to fulfill at least one of the three major preconditions to Capital Account Convertibility set out by the Tarapore committee, viz. fiscal discipline, with a public sector deficit of 7.6% of the GDP and the ratio of public debt to GDP of over 83% in 2005-06. In any case, the argument goes, the benefits of convertibility do not necessarily outweigh the risks and cross-border short-term bank loans – usually the last item to be liberalized – are the most volatile. It is generally held that it was, in fact, the lack of convertibility that protected India from contamination during the Asian contagion in 1997-98.

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The Dynamics of Swelling Reserves

An important corollary of India’s foreign exchange policy has been the quick and significant accumulation of foreign currency reserves in the past few years. Starting from a situation in 1990-91 with foreign exchange reserves level barely enough to cover two weeks of imports, and about $32 billion at the beginning of 2000, India’s foreign exchange position rocketed to one of the largest in the world with over $155 billion in mid-2006. Since 2000, this implies a compounded annual growth rate of about 28% with the years 2003 and 2004 having the most stunning rises at 48% and 45% respectively. During these two years the US dollar fell against the Euro by 19% and against the rupee by 9%. Without RBI intervention, the latter figure is likely to have been larger and the reserves accumulation less spectacular.

A sizable foreign exchange reserve acts as liquidity cover and protects against a run on the country’s currency, and reduces the rate of interest on Indian debt in the world market by lowering the country risk perception by international rating agencies. However, beyond a point, it begins to affect the money supply in the country, and interest rates. There are significant “sterilization costs” to avoid this and the RBI loses money by earning low returns on the safe assets used to park the reserves. Given this low rate of return, there has been discussion about the unique proposal to use part of the reserves to fund infrastructure projects.

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Enforcement of Foreign Exchange Market

Classes of officers of Enforcement

There shall be the following classes of officers of Enforcement, namely:-

a. Directors of Enforcement;

b. Additional Directors of Enforcement;

c. Deputy Directors of Enforcement;

d. Assistant Directors of Enforcement and

e. such other class of officers of Enforcement as may be appointed for the purposes of this Act.

Appointment and powers of officers of Enforcement

(a) The Central Government may appoint such persons as it thinks fit to be officers of Enforcement.

(b) Without prejudice to the provisions of sub-section (1), the Central Government may authorize a Director of Enforcement or an Additional Director of Enforcement or a Deputy Director of Enforcement or an Assistant Director of Enforcement to appoint officers of Enforcement below the rank of an Assistant Director of Enforcement.

(c) Subject to such conditions and limitations as the Central Government may impose, an officer of Enforcement may exercise the powers and discharge the duties conferred or imposed on him under this Act.

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Entrustment of functions of Director

The Central Government may, by order and subject to such conditions and limitations as it thinks fit to impose, authorize any officer of customs or any Central Excise Officer or any police officer or any other officer of the Central Government or a State Government to exercise such of the powers and discharge such of the duties of the Director of Enforcement or any other officer of Enforcement under this Act as may be specified in the order.

Authorized dealers in foreign exchange

(a) The Reserve Bank may, on an application made to it in this behalf, authorize any person to deal in foreign exchange.

(b) An authorization under this section shall be in writing and -

may authorize transactions of all descriptions in foreign currencies or may be restricted to authorizing dealings in specified foreign currencies only;

may authorize dealings in all foreign currencies or may be restricted to authorizing specified transactions only;

may be granted to be effective for a specified period, or within specified amounts;

may be granted subject to such conditions as may be specified therein.

(c) Any authorization granted under sub-section (1) may be revoked by the Reserve Bank at any time if the Reserve Bank is satisfied that, -

it is in the public interest to do so; or the authorized dealer has not complied with the conditions subject to

which the authorization was granted or has contravened any of the provisions of this Act or of any rule, notification, direction or order made there under:

Provided that no such authorization shall be revoked on the ground specified in clause

Unless the authorized dealer has been given a reasonable opportunity for making a representation in the matter.

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(d) Any authorized dealer shall, in all his dealings in foreign exchange and in the exercise and discharge of the powers and of the functions delegated to him under section 74, comply with such general or special directions or instructions as the Reserve Bank may, from time to time, think fit to give, and, except with the previous permission of the Reserve Bank, an authorized dealer shall not engage in any transaction involving any foreign exchange which is not in conformity with the terms of his authorization under this section.

(e) An authorized dealer shall, before undertaking any transaction in foreign exchange on behalf of any person, require that person to make such declarations and to give such information as will reasonably satisfy him that the transaction will not involve, and is not designed for the purpose of, any contravention or evasion of the provisions of this Act or of any rule, notification, direction or order made there under, and where the said person refuses to comply with any such requirement or makes only unsatisfactory compliance therewith, the authorized dealer shall refuse to undertake the transaction and shall, if he has reason to believe that any such contravention or evasion as aforesaid is contemplated by the person, report the matter to the Reserve Bank.

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Money-changers

(a) The Reserve Bank may, on an application made to it in this behalf, authorize any person to deal in foreign currency.

(b) An authorization under this section shall be in writing and -

i. may authorize dealings in all foreign currencies or may be restricted to authorizing dealings in specified foreign currencies only;

ii. may authorize transactions of all descriptions in foreign currencies or may be restricted to authorizing specified transactions only;

iii. may be granted with respect to a particular place where alone the money changer shall carry on his business;

iv. may be granted to be effective for a specified period, or within specified amounts;

v. may be granted subject to such conditions as may be specified therein.

(c) Any authorization granted under sub-section (1) may be revoked by the Reserve Bank at any time if the Reserve Bank is satisfied that -

i. it is in the public interest to do so; or the money-changer has not complied with the conditions subject to which the authorization was granted or

ii. has contravened any of the provisions of this Act or of any rule, notification, direction or order made there under: Provided that no such authorization shall be revoked on the ground specified in clause (ii) unless the money-changer has been given a reasonable opportunity for making a representation in the matter.

(d) The provisions of sub-sections (4) and (5) of section 6 shall, in so far as they are applicable, apply in relation to a money-changer as they apply in relation to an authorized dealer.

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Restrictions on dealing in foreign exchange

 (a) Except with the previous general or special permission of the Reserve Bank, no person other than an authorized dealer shall in India, and no person resident in India other than an authorized dealer shall outside India, purchase or otherwise acquire or borrow from, or sell, or otherwise transfer or lend to or exchange with, any person not being an authorized dealer, any foreign exchange: Provided that nothing in this sub-section shall apply to any purchase or sale of foreign currency effected in India between any person and a money-changer.

(b) Except with the previous general or special permission of the Reserve Bank, no person, whether an authorized dealer or a money-changer or otherwise, shall enter into any transaction which provides for the conversion of Indian currency into foreign currency or foreign currency into Indian currency at rates of exchange other than the rates for the time being authorized by the Reserve Bank.

(c) Where any foreign exchange is acquired by any person, other than an authorized dealer or a money-changer, for any particular purpose, or where any person has been permitted conditionally to acquire foreign exchange, the said person shall not use the foreign exchange so acquired otherwise than for that purpose or, as the case may be, fail to comply with any condition to which the permission granted to him is subject, and where any foreign exchange so acquired cannot be so used or the conditions cannot be complied with, the said person shall, within a period of thirty days from the date on which he comes to know that such foreign exchange cannot be so used or the conditions cannot be complied with, sell the foreign exchange to an authorized dealer or to a money-changer.

(d) For the avoidance of doubt, it is hereby declared that where a person acquires foreign exchange for sending or bringing into India any goods but sends or brings no such goods or does not send or bring goods of a value representing the foreign exchange acquired, within a reasonable time or sends or brings any goods of a kind, quality or quantity different from that specified by him at the time of acquisition of the foreign exchange, such person shall, unless the contrary is proved, be presumed not to have been able to use the foreign exchange for the purpose for which he acquired it or, as the case may be, to have used the foreign exchange so acquired otherwise than for the purposes for which it was acquired.

(e) Nothing in this section shall be deemed to prevent a person from buying from any post office, in accordance with any law or rules made there under for the time being in force, any foreign exchange in the form of postal orders or money orders.

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Restrictions on payments

(a) Save as may be provided in and in accordance with any general or special exemption from the provisions of this sub-section which may be granted conditionally or unconditionally by the Reserve Bank, no person in, or resident in, India shall -

make any payment to or for the credit of any person resident outside India; Receive, otherwise than through an authorized dealer, any payment by

order or on behalf of any person resident outside in India.

Explanation - For the purposes of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorized dealer) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorized dealer;

sraw, issue or negotiate any bill of exchange or promissory note or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favour of any person resident outside India;

make any payment to, or for the credit of, any person by order or on behalf of any person resident outside India;

place any sum to the credit of any person resident outside India; make any payment to, or for the credit of, any person or receive any

payment for, or by order or on behalf of, any person as consideration for or in association with

a. the receipt by any person of a payment or the acquisition by any person of property outside India,

b. the creation or transfer in favour of any person of a right (whether actual or contingent) to receive payment or acquire property outside India;

draw, issue or negotiate any bill of exchange or promissory note, transfer any security or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favour of any person as consideration for or in association with any matter referred to in clause

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(b) Nothing in sub-section (1) shall render unlawful -

the making of any payment already authorized either with foreign exchange obtained from an authorized dealer or a money-changer under section 8 or with foreign exchange retained by a person in pursuance of an authorization granted by the Reserve Bank;

The making of any payment with foreign exchange received by way of salary or payment for services not arising from any business in, or anything done while in, India.

(c) Save as may be provided in, and in accordance with, any general or special exemption from the provisions of this sub-section, which may be granted conditionally or unconditionally by the reserve Bank, no person shall remit or cause to be remitted any amount from any foreign country into India except in such a way that the remittance is received in India only through an authorized dealer.

(d) Nothing in this section shall restrict the doing by any person of anything within the scope of any authorization or exemption granted under this Act.

(e) For the purposes of this section and section 19, "security" includes coupons or warrants representing dividends or interest and life or endowment insurance policies.

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Blocked accounts

(i) Where an exemption from the provisions of section 9 is granted by the Reserve Bank in respect of payment of any sum to any person resident outside India and the exemption is made subject to the condition that the payment is made to a blocked account -

the payment shall be made to a blocked account in the name of that person in such manner as the Reserve Bank may, by general or special order, direct;

the crediting of that sum to that account shall, to the extent of the sum credited, be a good discharge to the person making the payment.

(ii) No sum standing at the credit of a blocked account shall be drawn on except in accordance with any general or special permission, which may be granted conditionally or otherwise by the Reserve Bank.

(iii) In this section, "blocked account" means an account opened, whether before or after the commencement of this Act, as a blocked account at any office or branch in India of a bank authorised in this behalf by the Reserve Bank, or an account blocked, whether before or after such commencement, by order of the Reserve Bank.

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Restrictions on import and export of certain currency

(i) The Central Government may, by notification in the Official Gazette, order that, subject to such exemption, if any, as may be specified in the notification, no person shall, except with the general or special permission of the Reserve Bank and on payment of the fee, if any, prescribed, bring or send into India any foreign exchange or any Indian currency.

Explanation - For the purposes of this sub-section, the bringing or sending into any port or place in India of any such article as aforesaid intended to be taken out of India without being removed from the ship or conveyance in which it is being carried shall nonetheless be deemed to be a bringing, or, as the case may be, sending, into India of that article.

(ii) No person shall, except with the general or special permission of the Reserve Bank or the written permission of a person authorized in this behalf by the Reserve Bank, take or send out of India any Indian currency or foreign exchange other than foreign exchange obtained by him from an authorized dealer or from a money-changer.

Acquisition by Central Government of foreign exchange

The Central Government may, by notification in the Official Gazette, order every person in, or resident in, India -

(a) who owns or holds such foreign exchange as may be specified in the notification, to offer it, or cause it to be offered, for sale to the Reserve Bank on behalf of the Central Government or to such person, as the Reserve Bank may authorize for the purpose, at such price as the Central Government may fix, being a price which is not less than the price calculated at the rate of exchange for the time being authorized by the Reserve Bank;

(b) who is entitled to assign any right to receive such foreign exchange as may be specified in the notification, to transfer that right to the Reserve Bank on behalf of the Central Government on payment of such consideration therefore as the Central Government may fix having regard to the rate for the time being authorized by the Reserve Bank in pursuance of sub-section (2) of section 8 for conversion into Indian currency of the foreign currency in which such foreign exchange is expressed:

Provided that the Central Government may, by the said notification or by a separate order, except any person or class of persons from the operation of the order made in the said notification: Provided further that nothing in this section shall apply to any foreign exchange acquired by a person from an authorized dealer or from a money-changer and retained by him with the permission of the Reserve Bank for any purpose.

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Duty of persons entitled to receive foreign exchange

(i) No person who has a right to receive any foreign exchange or to receive from a person resident outside India a payment in rupees shall, except with the general or special permission of the Reserve Bank, do or refrain from doing anything, or take or refrain from taking any action, which has the effect of securing -

that the receipt by him of the whole or part of that foreign exchange or payment is delayed, or

that the foreign exchange or payment ceases in whole or in part to be receivable by him.

(ii) Where a person has failed to comply with the requirements of sub-section (1) in relation to any foreign exchange or payment in rupees, the Reserve Bank may give to him such directions as appear to be expedient for the purposes of securing the receipt of the foreign exchange or payment, as the case may be.

Payment for exported goods

(i) (a) The Central Government may, by notification in the Official Gazette, prohibit the taking or sending out by land, sea or air (hereafter in this section referred to as export) of all goods or of any goods or class of goods specified in the notification from India directly or indirectly to any place so specified unless the exporter furnishes to the prescribed authority a declaration in the prescribed form supported by such evidence as may be prescribed or so specified and true in all material particulars which, among others, shall include the amount representing -

(ii) the full export value of the goods; or

(iii) if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in the overseas market, and affirms in the said declaration that the full export value of the goods (whether ascertainable at the time of export or not) has been, or will within the prescribed period be, paid in the prescribed manner.

(b) If the Central Government is of opinion that it is necessary or expedient in the public interest so to do, it may, by notification in the Official Gazette, specify any goods, from among those goods to which a notification under clause (a) applies, and direct that in respect of the goods so specified, where an exporter makes a declaration under sub-clause (ii) of clause (a) of the value which he, having regard to the prevailing market conditions expects to receive on the sale of such goods in the overseas market, he shall not, except with the permission of the Reserve Bank on an application made to the Reserve Bank by

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the exporter in this behalf, authorize or permit or allow or in any manner be a party to, the sale of such goods for a value less than that declared.

Provided that no permission shall be refused by the Reserve Bank under this clause unless the exporter has been given a reasonable opportunity for making a representation in the matter: Provided further that where the exporter makes an application to the Reserve Bank for permission under this clause and the Reserve Bank does not, within a period of twenty days from the date of receipt of the application, communicate to the exporter that permission applied for has been refused, it shall be presumed that Reserve Bank has granted such permission.

Where any export of goods, to which a notification under clause (a) of sub-section (1) applies, has been made, no person shall, except with the permission of the Reserve Bank, do or refrain from doing anything, or take or refrain from taking any action, which has the effect of securing -

(A) in a case falling under sub-clause (i) or sub-clause (ii) of clause (a) of sub-section (1),-

(a) that payment for the goods -

is made otherwise than in the prescribed manner, or is delayed beyond the period prescribed under clause (a) of sub-section (1), or

(b) that the proceeds of sale of the goods exported do not represent the full export value of the goods subject to such deductions, if any, as may be allowed by the Reserve Bank; and

(B) in a case falling under sub-clause (ii) of clause (a) of sub-section (1), also that the sale of the goods is delayed to an extent which is unreasonable having regard to the ordinary course of trade: Provided that no proceedings in respect of any contravention of the provisions of this sub-section shall be instituted unless the prescribed period has expired and payment for the goods representing the full export value has not been made in the prescribed manner within the prescribed period.

(3) Where in relation to any goods to which a notification under clause (a) of sub-section (1) applies the prescribed period has expired and payment therefore has not been made as aforesaid, it shall be presumed, unless the contrary is proved by the person who has sold or is entitled to sell the goods or to procure the sale thereof, that such person has not taken all reasonable steps to receive or recover the payment for the goods as aforesaid and he shall accordingly be presumed to have contravened the provisions of sub-section (2).

(4) Where in relation to any goods to which a notification under clause (a) of sub-section (1) applies the prescribed period has expired and payment therefor has not been made as aforesaid, the Reserve Bank may give to any person who has sold the goods or who is

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entitled to sell the goods or procure the sale thereof, such directions as appear to it to be expedient for the purpose of securing -

(i) if the goods have been sold, the payment therefor, or

(ii) if the goods have not been sold, either the sale of the goods and payment therefor as aforesaid, or the re-import of the goods into India as the circumstances permit, within such period as the Reserve Bank may specify in this behalf and without prejudice to the generality of the foregoing provision, may direct that the goods, the right to receive the payment therefor or any other right to enforce such payment shall be transferred or assigned to the Central Government or to a person specified in the directions.

(5) Where any goods or a right to receive payment or any other right to enforce such payment, are or is transferred or assigned in accordance with sub-section (4), the Central Government shall pay to the person transferring or assigning the same, the amount recovered by or on behalf of the Central Government in respect of the goods, after deducting all costs, charges and expenses incurred by the Central Government in selling the goods or in recovering or realising the amount in respect of such goods.

Payment for lease, hire or other arrangement

No person shall, except with the general or special permission of the Reserve Bank, take or send out by land, sea or air any goods from India to any place on lease or hire or under any arrangement other than sale or disposal in any other manner of such goods.

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Regulation of export and transfer of securities

(1) Notwithstanding anything contained in section 81 of the Companies Act, 1956, no person shall, except with the general or special permission of the Reserve Bank,

a. take or send any security to any place outside India;b. transfer any security, or create or transfer any interest in a security, to or in favour

of a person resident outside India;c. Deleted by Act 29 of 1993;d. issue, whether in India or elsewhere, any security which is registered or to be

registered in India, to a person resident outside India;e. Acquire, hold or dispose of any foreign security.

(2) Where the holder of a security is a nominee, neither he nor any person through whose agency the exercise of all or any of the holder's rights in respect of the security is controlled shall, except with the general or special permission of the Reserve Bank, do any act, whereby he recognizes or gives effect to the substitution of another person as the person from whom he directly receives instructions, unless both the person previously instructing and the person substituted for that person were, immediately before the substitution, resident in India.

(3) The Reserve Bank may, for the purpose of securing that the provisions of this section are not evaded, require that the person transferring any security and the person to whom such security is transferred shall subscribe to a declaration that the transferee is not resident outside India.

(4) Notwithstanding anything contained in any other law, no person shall, except with the permission of the Reserve Bank, -

a. enter any transfer of securities in any register or book in which securities are registered or inscribed if he has any ground for suspecting that the transfer involves any contravention of the provisions of this section, or

b. enter in any such register or book, in respect of any security whether in connection with the issue or transfer of the security or otherwise, an address outside India except by way of substitution for any such address in the same country or for the purpose of any transaction for which permission has been granted under this section with knowledge that it involves entry of the said address.

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Restrictions on issue of bearer securities

Except with the general or special permission of the Reserve Bank, no person shall, in India, and no person resident in India shall, outside India, create or issue any bearer certificate or coupon or so alter any document that it becomes a bearer certificate or coupon.

Restriction on settlement

No person resident in India shall, except with the general or special permission of the Reserve Bank, settle, or make a gift of, any property so that a person who at the time of the settlement or the making of the gift is resident outside India, elsewhere than in the territories notified in this behalf by the Reserve Bank, will have an interest in the property, or exercise any power for payment in favour of a person who at the time of the exercise of the power is resident outside India elsewhere than in such notified territories:

Provided that any settlement or gift made or any power exercised as aforesaid without the permission of the Reserve Bank shall not be invalid merely on the ground that such permission has not been obtained.

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Restriction on acquisition, holding, etc., of immovable property in India

(1) No person who is not a citizen of India and no company (other than a banking company) which is not incorporated under any law in force in India shall, except with the previous general or special permission of the Reserve Bank, acquire or hold or transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise any immovable property situate in India:

Provided that nothing in this sub-section shall apply to the acquisition or transfer of any such immovable property by way of lease for a period not exceeding five years.

(2) Any person or company referred to in sub-section (1) and requiring a special permission under that sub-section for acquiring, or holding, or transferring, or disposing of, by sale, mortgage, lease, gift, settlement or otherwise any immovable property situate in India may make an application to the Reserve Bank in such form and containing such particulars as may be specified by the Reserve Bank.

(3) On receipt of an application under sub-section (2), the Reserve Bank may, after making such inquiry as it deems fit, either grant or refuse to grant the permission applied for: Provided that no permission shall be refused unless the applicant has been given a reasonable opportunity for making a representation in the matter: Provided further that if before the expiry of a period of ninety days from the date on which the application was received by the Reserve Bank, the Reserve Bank does not communicate to the applicant that the permission applied for has been refused, it shall be presumed that the Reserve Bank has granted such permission.

Explanation - In computing the period of ninety days for the purposes of the second proviso, the period, if any, taken by the Reserve Bank for giving an opportunity to the applicant for making a representation under the first proviso shall be excluded.

(4) Every person and company referred to in sub-section (1) holding at the commencement of this Act any immovable property situate in India shall, before the expiry of a period of ninety days from such commencement or such further period as the Reserve Bank may allow in this behalf, make a declaration in such form as may be specified by the Reserve Bank regarding the immovable property or properties held by such person or company.

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Power to search suspected persons and to seize documents

(1) If any officer of Enforcement authorized in this behalf by the Central Government, by general or special order, has reason to believe that any person has secreted about his person or in anything under his possession, ownership or control any documents which will be useful for, or relevant to, any investigation or proceeding under this Act, he may search that person or such thing and seize such documents.

(2) When any officer of Enforcement is about to search any person under the provisions of this section, the officer of Enforcement shall, if such person so requires, take such person without unnecessary delay to the nearest gazetted officer of Enforcement superior in rank to him or a magistrate.

(3) If such requisition is made, the officer of Enforcement may detain the person making it until he can bring him before the gazetted officer of Enforcement or the magistrate referred to in sub-section (2).

(4) The gazetted officer of Enforcement or the magistrate before whom any such person is brought shall, if he sees no reasonable ground for search, forthwith discharge the person but otherwise shall direct that search be made.

(5) Before making a search under the provisions of this section, the officer of Enforcement shall call upon two or more persons to attend and witness the search and may issue an order in writing to them or any of them so to do; and the search shall be made in the presence of such persons and a list of all documents seized in the course of such search shall be prepared by such officer and signed by such witnesses.

(6) No female shall be searched by any one excepting a female.

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CHAPTER 5: Conclusion

Liberalization has transformed India’s external sector and a direct beneficiary of this has been the foreign exchange market in India. From a foreign exchange-starved, control-ridden economy, India has moved on to a position of $150 billion plus in international reserves with a confident rupee and drastically reduced foreign exchange control. As foreign trade and cross-border capital flows continue to grow, and the country moves towards capital account convertibility, the foreign exchange market is poised to play an even greater role in the economy, but is unlikely to be completely free of RBI interventions any time soon.

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Bibliography

http://www.rbi.org.inhttp://en.wikipedia.orghttp://www.investopedia.comhttp://www.yourarticlelibrary.comhttp://www.preservearticles.com

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