Foreign Exchange Exposure
EXECUTIVE SUMMARYTechniques
of Foreign Exchange Exposure used in Banks and in Trading
Firms
In a floating exchange rate regime, the value of a currency
changes frequently. Such changes influence the value of those firms
that are involved in international transactions. Foreign exchange
exposure is into 2 classes. One is known as accounting or
translation exposure, while the other is known as economic
exposure. The economic exposure is further divided into transaction
exposure and real operating exposure. If such exposure results in
loss to a firm, it needs to manage these exposures. For this
purpose they use some techniques like: Forward Market Hedges
Hedging through currency futures Hedging through currency options.
Money Market Hedge. Leads and Lags Cross Hedging Currency
diversification Risk Sharing Pricing of transaction
If such exposure arises, then firms use some documents for
reducing these exposures through banks like: Letter of Credit Draft
Bill of Exchange Pre-Shipment Credit Post-Shipment Credit
Medium-term Credit Credit under duty draw-back scheme Factoring
Forfeiting
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Sub Objectives:1. What are the techniques available to reduce
the exposure involved in foreign market? 2. What are the procedures
for forecasting the future currency rates? 3. What are the
procedures, banks are following in foreign currency market? 4. What
are the practical issues used in Banks and in firms i.e., who are
actual traders? 5. What traders are expecting from banks, other
than their regular Forex trading? 6. What restrictions are involved
in foreign currency market by government or other concerns? Data
Collection for the Study: Primary Data: Questionnaire Bank
Officials in the Forex Department Secondary Data: Internet
Newspaper Magazine
Significance of the StudyThe objectives of the project is
two-fold A) To provide the guidelines/help lines to traders through
the banks for avoiding and minimizing the exposure.
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Foreign Exchange Exposure
"The government is concerned over the rapid appreciation of the
rupee against the US dollar and the central bank may have to
intervene if there is disorderly movement in the exchange rate."3 -
P Chidambaram, Finance Minister of India, in September, 2007 "The
objective of the exchange rate management has been to ensure that
the external value of the rupee is realistic and credible as
evidenced by a sustainable current account deficit and manageable
foreign exchange situation. Subject to this predominant objective,
the exchange rate policy is guided by the need to reduce excess
volatility, prevent the emergence of destabilizing speculation
activities, help maintain adequate level of reserves, and develop
an orderly foreign exchange market."4 - RBI's Policy in the Foreign
Exchange Market "I expect the rupee to appreciate vis-a-vis the
dollar through 2008. However, the appreciation will be gradual and
perhaps, not as rapid as it has been in the last few months," ABN
AMRO Bank's newly-appointed India chief Meera H Sanyal told media
here on Thursday. IN 1975, about 80% of foreign exchange
transactions (where one national currency is exchanged for another)
were to conduct business in the real economy. For instance,
currencies change hands to import oil, export cars, buy
corporations, invest in portfolios, or build factories. Real
transactions actually produce or trade goods and services. The
remaining 20% of transactions in 1975 were speculative, which means
that the sole purpose was an expected profit from buying and
selling currencies themselves, based on their changing values. So,
even in the days when the real economy was dominant, some currency
speculation was going on. There had always been that little bit of
frosting on the cake. 'Foreign exchange risk' In considering the
viewpoint of so-called real businesses (those that make cars, mine,
produce electronics, etc.), the 'foreign exchange risk' has by far
become the largest risk in international business today, often
larger than political or market risk. For example, if a German
chemical company invests in a plant in India, it makes the
investment in deutschmarks. The chemical products sold locally from
that plant are paid in rupees, India's currency. If the value of
the rupee then drops in terms of the deutschmark, the return on the
original investment will drop as well. In short, the biggest risk
of such investments is not whether Indians will buy the chemicals
(market risk) or whether the Indian government will nationalise the
plant (political risk), but the changes in the values of the
currencies involved (foreign exchange risk).
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COMPANY PROFILE
Late Sri. Ammembal Subba Rao Pai Our beloved Founder Founded as
'Canara Bank Hindu Permanent Fund' in 1906, by late Sri. Ammembal
Subba Rao Pai, a philanthropist, this small seed blossomed into a
limited company as 'Canara Bank Ltd.' in 1910 and became Canara
Bank in 1969 after nationalisation.
"A good bank is not only the financial heart of the community,
but also one with an obligation of helping in every possible manner
to improve the economic conditions of the common people" - A. Subba
Rao Pai. Founding Principles 1. 2. 3. 4. To remove Superstition and
ignorance. To spread education among all to sub-serve the first
principle. To inculcate the habit of thrift and savings. To
transform the financial institution not only as the financial heart
of the community but the social heart as well. 5. To assist the
needy. 6. To work with sense of service and dedication. 7. To
develop a concern for fellow human being and sensitivity to the
surroundings with a view to make changes/remove hardships and
sufferings.
Sound founding principles, enlightened leadership, unique work
culture and remarkable adaptability to changing banking environment
have enabled Canara Bank to be a frontline banking institution of
global standards.
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Vision To emerge as a Best Practices Bank by pursuing global
benchmarks in profitability, operational efficiency, asset quality,
risk management and expanding the global reach. Mission To provide
quality-banking services with enhanced customer orientation, higher
value creation for stakeholders and to continue as a responsive
corporate social citizen by effectively blending commercial
pursuits with social banking.
BRAND STORY
The new brand identity for Canara Bank is based on the idea of a
bond and is a representation of the close ties between the Bank and
its many stakeholders from customers and employees to investors,
institutions and society at large. With its rich heritage of
banking expertise, dedicated customer service and corporate social
responsibility, Canara Bank is a powerful enabler who helps its
stakeholders achieve their goals. The two seamlessly connected
links capture the essence of this partnership. Canara Bank has more
than 45,800 employees and serves over 31 million customers through
a network of over 2600 branches spread across the country. The
simple, memorable symbol can be easily recalled and decoded by all
of the Banks diverse audiences. The colour palette and typography
have been carefully chosen. The rich blue represents stability,
scale and depth. This contrasts with accents of bright yellow that
evoke optimism, warmth and energy. The Canara Bank logotype has
been hand-crafted. Its classic, serif letterforms communicate
heritage and stature.
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Significant Milestones1st July 1906 1910 1969 1976 1983 1984
1985 1987 1989 1989-90 1992-93 1995-96 2001-02 2002-03 2003-04
2004-05 2005-06 Canara Hindu Permanent Fund Ltd. formally
registered with a capital of 2000 shares of Rs.50/- each, with 4
employees. Canara Hindu Permanent Fund renamed as Canara Bank
Limited 14 major banks in the country, including Canara Bank,
nationalized on July 19 1000th branch inaugurated Overseas branch
at London inaugurated Cancard (the Banks credit card) launched
Merger with the Laksmi Commercial Bank Limited Commissioning of
Indo Hong Kong International Finance Limited Canbank Mutual Fund
& Canfin Homes, launched Canbank Venture Capital Fund started
Canbank Factors Limited, the factoring subsidiary launched Became
the first Bank to articulate and adopt the directive principles of
Good Banking. Became the first Bank to be conferred with ISO 9002
certification for one of its branches in Bangalore Opened a 'Mahila
Banking Branch', first of its kind at Bangalore, for catering
exclusively to the financial requirements of women clientele.
Maiden IPO of the Bank Launched Internet & Mobile Banking
Services 100% Branch computerization Entered 100th Year in Banking
Service Launched Core Banking Solution in select branches Number
One Position in Aggregate Business among Nationalized Banks Notched
up the highest ever net profit since its inception Retained Number
One Position in Aggregate Business among Nationalized Banks Singed
MoUs for Commissioning Two JVs in Insurance and Asset Management
with international majors.
2006-07
As at march 2007 the total business of the bank was over
Rs.2,40,000 crores.
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Canara Bank was awarded the "First National Award" instituted by
the Ministry of Micro, Small & Medium Enterprises, Govt. of
India for excellence in "Micro & Small Enterprises (MSE)
Lending" for 2006-07. Adjudged the 'Best Public Sector Bank' in
India under the 'Best Banks Survey' conducted by 'Financial
Express-Ernst and Young' for 2005-06. Conferred with 'Employer
Branding Awards 2007' by Indiatimes Mindscape and ITM Business
School, for excellence in human resources. Canara Bank was the
first Public sector Bank to bag this award. Won the maiden award of
'Best Performing Bank' under solar water heater finance for the
year 2005-06, instituted by the Ministry of New and Renewable
Energy, Govt. of India. Received Niryat Bandhu Gold Trophy for
outstanding performance under export finance.
As a premier commercial bank in India, Canara Bank's track
record in the service of the nation for over 100 years is both
striking and impressive. Today, Canara Bank has a CHAIRMAN'S
MESSAGE strong pan India presence with over 2600 branches and 1500
ATMs, catering to all segments of an ever growing clientele base of
exceeding 31 million. Canara Bank is recognized as a leading
financial conglomerate in India, with as many as nine
subsidiaries/sponsored institutions/joint ventures in India and
abroad. As the Bank steps into the second century, it aspires to
emerge as a Global Bank with Best Practices in its endeavour to
become a 'Speciality Financial Supermarket'.
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Introduction to TopicThe foreign exchange (also known as "forex"
or "FX") market is the place where currencies are traded. The
overall forex market is the largest, most liquid market in the
world with an average traded value that exceeds $1.9 trillion per
day and includes all of the currencies in the world. There is no
central marketplace for currency exchange, rather, trade is
conducted over-the-counter. The forex market is open 24 hours a
day, five days a week, with currencies being traded worldwide among
the major financial centers of London, New York, Tokyo, Zrich,
Frankfurt, Hong Kong, Singapore, Paris and Sydney - spanning most
time zones. The forex is the largest market in the world in terms
of the total cash value traded, and any person, firm, or country
may participate in this market. Meaning of Foreign Exchange Market
(Forex Market): The foreign exchange market is the "place" where
currencies are traded. Currencies are important to most people
around the world, whether they realize it or not, because
currencies need to be exchanged in order to conduct foreign trade
and business Foreign Exchange as a Financial Market Currency
exchange is very attractive for both the corporate and individual
traders who make money on the Forex - a special financial market
assigned for the foreign exchange. The following features make this
market different in compare to all other sectors of the world
financial system: Heightened sensibility to a large and
continuously changing number of factors; Accessibility to all
traders in the major currencies; Guaranteed quantity and liquidity
of the major currencies; Increased consideration for several
currencies, round-the clock business hours which enable traders to
deal after normal hours or during national holidays in their
country finding markets abroad open and Extremely high efficiency
relative to other financial markets. This goal of this manual is to
introduce beginning traders to all the essential aspects of foreign
exchange in a practical manner and to be a source of best answers
on the typical questions as why are currencies being traded, who
are the traders, what currencies do they trade, what makes rates
move, what instruments are used for the trade, how a currency
behavior can be forecasted and where the pertinent information may
be obtained from. Mastering the content of an appropriate section
the user will be able to make his/her own decisions, test them, and
ultimately use recommended tools and approaches for his/her own
benefit.
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Foreign Exchange in a Historical Perspective Currency trading
has a long history and can be traced back to the ancient Middle
East and Middle Ages when foreign exchange started to take shape
after the international merchant bankers devised bills of exchange,
which were transferable third-party payments that allowed
flexibility and growth in foreign exchange dealings. The modern
foreign exchange market characterized by the consequent periods of
increased volatility and relative stability formed itself in the
twentieth century. By the mid-1930s London became to be the leading
center for foreign exchange and the British pound served as the
currency to trade and to keep as a reserve currency. Because in the
old times foreign exchange was traded on the telex machines, or
cable, the pound has generally the nickname cable. In 1930, the
Bank for International Settlements was established in Basel,
Switzerland, to oversee the financial efforts of the newly
independent countries, emerged after the World War I, and to
provide monetary relief to countries experiencing temporary balance
of payments difficulties. After the World War II, where the British
economy was destroyed and the United States was the only country
unscarred by war, U.S. dollar became the prominent currency of the
entire globe. Nowadays, currencies all over the world are generally
quoted against the U.S. dollar. Reading a Quote When a currency is
quoted, it is done in relation to another currency, so that the
value of one is reflected through the value of another. Therefore,
if you are trying to determine the exchange rate between the U.S.
dollar (USD) and the Japanese yen (JPY), the quote would look like
this:
USD/JPY = 119.50
This is referred to as a currency pair. The currency to the left
of the slash is the base currency, while the currency on the right
is called the quote or counter currency. The base currency (in this
case, the U.S. dollar) is always equal to one unit (in this case,
US$1), and the quoted currency (in this case, the Japanese yen) is
what that one base unit is equivalent to in the other currency. The
quote means that US$1 = 119.50 Japanese yen. In other words, US$1
can buy 119.50 Japanese yen.
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Direct Quote vs. Indirect Quote There are two ways to quote a
currency pair, either directly or indirectly. A direct quote is
simply a currency pair in which the domestic currency is the base
currency; while an indirect quote, is a currency pair where the
domestic currency is the quoted currency. So if you were looking at
the Canadian dollar as the domestic currency and U.S. dollar as the
foreign currency, a direct quote would be CAD/USD, while an
indirect quote would be USD/CAD. The direct quote varies the
foreign currency, and the quoted, or domestic currency, remains
fixed at one unit. In the indirect quote, on the other hand, the
domestic currency is variable and the foreign currency is fixed at
one unit. For example, if Canada is the domestic currency, a direct
quote would be 0.85 CAD/USD, which means with C$1, you can purchase
US$0.85. The indirect quote for this would be the inverse (1/0.85),
which is 1.18 USD/CAD and means that USD$1 will purchase C$1.18. In
the forex spot market, most currencies are traded against the U.S.
dollar, and the U.S. dollar is frequently the base currency in the
currency pair. In these cases, it is called a direct quote. This
would apply to the above USD/JPY currency pair, which indicates
that US$1 is equal to 119.50 Japanese yen. However, not all
currencies have the U.S. dollar as the base. The Queen's currencies
those currencies that historically have had a tie with Britain,
such as the British pound, Australian Dollar and New Zealand dollar
- are all quoted as the base currency against the U.S. dollar. The
euro, which is relatively new, is quoted the same way as well. In
these cases, the U.S. dollar is the counter currency, and the
exchange rate is referred to as an indirect quote. This is why the
EUR/USD quote is given as 1.25, for example, because it means that
one euro is the equivalent of 1.25 U.S. dollars. Most currency
exchange rates are quoted out to four digits after the decimal
place, with the exception of the Japanese yen (JPY), which is
quoted out to two decimal places. Cross Currency When a currency
quote is given without the U.S. dollar as one of its components,
this is called a cross currency. The most common cross currency
pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These currency pairs
expand the trading possibilities in the forex market, but it is
important to note that they do not have as much of a following (for
example, not as actively traded) as pairs that include the U.S.
dollar, which also are called the majors.
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Foreign Exchange Exposure Bid and Ask As with most trading in
the financial markets, when you are trading a currency pair there
is a bid price (buy) and an ask price (sell). Again, these are in
relation to the base currency. When buying a currency pair (going
long), the ask price refers to the amount of quoted currency that
has to be paid in order to buy one unit of the base currency, or
how much the market will sell one unit of the base currency for in
relation to the quoted currency. The bid price is used when selling
a currency pair (going short) and reflects how much of the quoted
currency will be obtained when selling one unit of the base
currency, or how much the market will pay for the quoted currency
in relation to the base currency. The quote before the slash is the
bid price, and the two digits after the slash represent the ask
price (only the last two digits of the full price are typically
quoted). Note that the bid price is always smaller than the ask
price. Let's look at an example: USD/CAD = 1.2000/05 Bid = 1.2000
Ask= 1.2005 If you want to buy this currency pair, this means that
you intend to buy the base currency and are therefore looking at
the ask price to see how much (in Canadian dollars) the market will
charge for U.S. dollars. According to the ask price, you can buy
one U.S. dollar with 1.2005 Canadian dollars. However, in order to
sell this currency pair, or sell the base currency in exchange for
the quoted currency, you would look at the bid price. It tells you
that the market will buy US$1 base currency (you will be selling
the market the base currency) for a price equivalent to 1.2000
Canadian dollars, which is the quoted currency. Whichever currency
is quoted first (the base currency) is always the one in which the
transaction is being conducted. You either buy or sell the base
currency. Depending on what currency you want to use to buy or sell
the base with, you refer to the corresponding currency pair spot
exchange rate to determine the price. Spreads and Pips The
difference between the bid price and the ask price is called a
spread. If we were to look at the following quote: EUR/USD =
1.2500/03, the spread would be 0.0003 or 3 pips, also known as
points. Although these movements may seem insignificant, even the
smallest point change can result in thousands of dollars being made
or lost due to leverage. Again, this is one of the reasons that
speculators are so attracted to the forex market; even the tiniest
price movement can result in huge profit.
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Foreign Exchange Exposure The pip is the smallest amount a price
can move in any currency quote. In the case of the U.S. dollar,
euro, British pound or Swiss franc, one pip would be 0.0001. With
the Japanese yen, one pip would be 0.01, because this currency is
quoted to two decimal places. So, in a forex quote of USD/CHF, the
pip would be 0.0001 Swiss francs. Most currencies trade within a
range of 100 to 150 pips a day. Currency Quote Overview USD/CAD =
1.2232/37 Base Currency Quote/Counter Currency Bid Price Ask Price
Pip Currency to the left (USD) Currency to the right (CAD) 1.2232
1.2237 Price for which the market maker will buy the base currency.
Bid is always smaller than ask. Price for which the market maker
will sell the base currency.
One point move, in USD/CAD it is . The pip/point is the smallest
0001 and 1 point change would be movement a price can make. from
1.2231 to 1.2232 Spread in this case is 5 pips/points; difference
between bid and ask price (1.2237-1.2232).
Spread
Spot Market and the Forwards and Futures Markets There are
actually three ways that institutions, corporations and individuals
trade forex: the spot market, the forwards market and the futures
market. The spot market always has been the largest market because
it is the "underlying" real asset that the forwards and futures
markets are based on. In the past, the futures market was the most
popular venue for traders because it was available to individual
investors for a longer period of time. However, with the advent of
electronic trading, the spot market has witnessed a huge surge in
activity and now surpasses the futures market as the preferred
trading market for individual investors and speculators. When
people refer to the forex market, they usually are referring to the
spot market. The forwards and futures markets tend to be more
popular with companies that need to hedge their foreign exchange
risks out to a specific date in the future. Spot Market More
specifically, the spot market is where currencies are bought and
sold according to the current price. That price, determined by
supply and demand, is a reflection of many things, including
current interest rates, economic performance, sentiment towards
ongoing political situations (both locally and internationally), as
well as the perception of MBA IV Sem 12 KLESs IMSR, HUBLI
Foreign Exchange Exposure the future performance of one currency
against another. When a deal is finalized, this is known as a "spot
deal". It is a bilateral transaction by which one party delivers an
agreedupon currency amount to the counter party and receives a
specified amount of another currency at the agreed-upon exchange
rate value. After a position is closed, the settlement is in cash.
Although the spot market is commonly known as one that deals with
transactions in the present (rather than the future), these trades
actually take two days for settlement. Forwards and Futures Markets
Unlike the spot market, the forwards and futures markets do not
trade actual currencies. Instead they deal in contracts that
represent claims to a certain currency type, a specific price per
unit and a future date for settlement. In the forwards market,
contracts are bought and sold OTC between two parties, who
determine the terms of the agreement between themselves. In the
futures market, futures contracts are bought and sold based upon a
standard size and settlement date on public commodities markets,
such as the Chicago Mercantile Exchange. In the U.S., the National
Futures Association regulates the futures market. Futures contracts
have specific details, including the number of units being traded,
delivery and settlement dates, and minimum price increments that
cannot be customized. The exchange acts as a counterpart to the
trader, providing clearance and settlement. Both types of contracts
are binding and are typically settled for cash for the exchange in
question upon expiry, although contracts can also be bought and
sold before they expire. The forwards and futures markets can offer
protection against risk when trading currencies. Usually, big
international corporations use these markets in order to hedge
against future exchange rate fluctuations, but speculators take
part in these markets as well. Two types of analysis are used for
the market movements forecasting: fundamental, and technical (the
chart study of past behavior of commodity prices). The fundamental
one focuses on the theoretical models of exchange rate
determination and on the major economic factors and their
likelihood of affecting the foreign exchange rates. The main
economic theories found in the foreign exchange deal with parity
conditions. A parity condition is an economic explanation of the
price at which two currencies should be exchanged, based on factors
such as inflation and interest rates. The economic theories suggest
that when the parity condition does not hold, an arbitrage
opportunity exists for market participants. However, arbitrage
opportunities, as in many other markets, are quickly discovered and
eliminated before even giving the individual investor an
opportunity to capitalize on them. Other theories are based on
economic factors such as trade, capital flows and the way a country
runs its operations. We review each of them briefly below.
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Major Theories: Purchasing Power Parity Purchasing Power Parity
(PPP) is the economic theory that price levels between two
countries should be equivalent to one another after exchange-rate
adjustment. The basis of this theory is the law of one price, where
the cost of an identical good should be the same around the world.
Based on the theory, if there is a large difference in price
between two countries for the same product after exchange rate
adjustment, an arbitrage opportunity is created, because the
product can be obtained from the country that sells it for the
lowest price Interest Rate Parity The concept of Interest Rate
Parity (IRP) is similar to PPP, in that it suggests that for there
to be no arbitrage opportunities, two assets in two different
countries should have similar interest rates, as long as the risk
for each is the same. The basis for this parity is also the law of
one price, in that the purchase of one investment asset in one
country should yield the same return as the exact same asset in
another country; otherwise exchange rates would have to adjust to
make up for the difference. Balance of Payments Theory A country's
balance of payments is comprised of two segments - the current
account and the capital account - which measure the inflows and
outflows of goods and capital for a country. The balance of
payments theory looks at the current account, which is the account
dealing with trade of tangible goods, to get an idea of
exchange-rate directions. If a country is running a large current
account surplus or deficit, it is a sign that a country's exchange
rate is out of equilibrium. To bring the current account back into
equilibrium, the exchange rate will need to adjust over time. If a
country is running a large deficit (more imports than exports), the
domestic currency will depreciate. On the other hand, a surplus
would lead to currency appreciation. Real Interest Rate
Differentiation Model The Real Interest Rate Differential Model
simply suggests that countries with higher real interest rates will
see their currencies appreciate against countries with lower
interest rates. The reason for this is that investors around the
world will move their money to countries with higher real rates to
earn higher returns, which bids up the price of the higher real
rate currency. Asset Market Model The Asset Market Model looks at
the inflow of money into a country by foreign investors for the
purpose of purchasing assets such as stocks, bonds and other
financial instruments. If a country is seeing large inflows by
foreign investors, the price of its currency is expected to
increase, as the domestic currency needs to be purchased by these
foreign investors. This theory considers the capital account of the
balance of trade compared to the current account in the prior
theory. This model has gained more
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Foreign Exchange Exposure acceptance as the capital accounts of
countries are starting to greatly outpace the current account as
international money flow increases. Monetary Model The Monetary
Model focuses on a country's monetary policy to help determine the
exchange rate. A country's monetary policy deals with the money
supply of that country, which is determined by both the interest
rate set by central banks and the amount of money printed by the
treasury. Countries that adopt a monetary policy that rapidly grows
its monetary supply will see inflationary pressure due to the
increased amount of money in circulation. This leads to a
devaluation of the currency. These economic theories, which are
based on assumptions and perfect situations, help to illustrate the
basic fundamentals of currencies and how they are impacted by
economic factors. However, the fact that there are so many
conflicting theories indicates the difficulty in any one of them
being 100% accurate in predicting currency fluctuations. Their
importance will likely vary by the different market environment,
but it is still important to know the fundamental basis behind each
of the theories. Economic Data Economic theories may move
currencies in the long term, but on a shorter-term, day-today or
week-to-week basis, economic data has a more significant impact. It
is often said the biggest companies in the world are actually
countries and that their currency is essentially shares in that
country. Economic data, such as the latest gross domestic product
(GDP) numbers, are often considered to be like a company's latest
earnings data. In the same way that financial news and current
events can affect a company's stock price, news and information
about a country can have a major impact on the direction of that
country's currency. Changes in interest rates, inflation,
unemployment, consumer confidence, GDP, political stability etc.
can all lead to extremely large gains/losses depending on the
nature of the announcement and the current state of the country.
The number of economic announcements made each day from around the
world can be intimidating, but as one spends more time learning
about the forex market it becomes clear which announcements have
the greatest influence. Listed below are a number of economic
indicators that are generally considered to have the greatest
influence regardless of which country the announcement comes from.
Employment Data Most countries release data about the number of
people that currently are employed within that economy. In the
U.S., this data is known as non-farm payrolls and is released the
first Friday of the month by the Bureau of Labor Statistics. In
most cases, strong increases in employment signal that a country
enjoys a prosperous economy, while decreases are a sign of
potential contraction. If a country has gone recently through
economic troubles, strong employment data could send the currency
higher because it is a sign of economic health and recovery. On the
other hand, high employment can also lead to inflation, so this
data could send the currency downward. In other words, economic
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Foreign Exchange Exposure data and the movement of currency will
often depend on the circumstances that exist when the data is
released. Interest Rates As was seen with some of the economic
theories, interest rates are a major focus in the forex market. The
most focus by market participants, in terms of interest rates, is
placed on the country's central bank changes of its bank rate,
which is used to adjust monetary supply and institute the country's
monetary policy. In the U.S., the Federal Open Market Committee
(FOMC) determines the bank rate, or the rate at which commercial
banks can borrow and lend to the U.S. Treasury. The FOMC meets
eight times a year to make decisions on whether to raise, lower or
leave the bank rate the same; and each meeting, along with the
minutes, is a point of focus. Inflation Inflation data measures the
increases and decreases of price levels over a period of time. Due
to the sheer amount of goods and services within an economy, a
basket of goods and services is used to measure changes in prices.
Price increases are a sign of inflation, which suggests that the
country will see its currency depreciate. In the U.S., inflation
data is shown in the Consumer Price Index, which is released on a
monthly basis by the Bureau of Labor Statistics. Gross Domestic
Product The gross domestic product of a country is a measure of all
of the finished goods and services that a country generated during
a given period. The GDP calculation is split into four categories:
private consumption, government spending, business spending and
total net exports. GDP is considered the best overall measure of
the health of a country's economy, with GDP increases signaling
economic growth. The healthier a country's economy is, the more
attractive it is to foreign investors, which in turn can often lead
to increases in the value of its currency, as money moves into the
country. In the U.S., this data is released by the Bureau of
Economic Analysis once a month in the third or fourth quarter of
the month. Retail Sales Retail sales data measures the amount of
sales that retailers make during the period, reflecting consumer
spending. The measure itself doesn't look at all stores, but,
similar to GDP, uses a group of stores of varying types to get an
idea of consumer spending. This measure also gives market
participants an idea of the strength of the economy, where
increased spending signals a strong economy. In the U.S., the
Department of Commerce releases data on retail sales around the
middle of the month.
Technical analysisA method of evaluating securities by analyzing
statistics generated by market activity, such as past prices and
volume. Technical analyst does not attempt to measure a securitys
intrinsic value, but instead use charts to identify patterns that
can suggest future MBA IV Sem 16 KLESs IMSR, HUBLI
Foreign Exchange Exposure activity. Technical analysts believe
that the historical performance of stocks and markets are
indications of future performance. Technical analysis has become
increasingly popular over the past several years, as more and more
people believe that the historical performance of a stock is a
strong indication of future performance. People using fundamental
analysis have always looked at the past performance of companies by
comparing fiscal data from previous quarters and years to determine
future growth. The deference lies in the technical analysts beliefs
that securities move according to very predictable trends and
patterns. These trends continue until something happens to change
the trend, and until this change occurs, price levels are
predictable. TECHNICAL ANALYSIS
Identification of the current trend i.e. the direction of price
movement and spotting any trend reversal as early as possible.
Historical price and volume data analyzed with the help of charts.
For currencies, shares and commodities traded on exchanges, such
data is usually available but in the case of interbank currency
market, volume data is not available and the analyst makes use of
different indicators, which are derived from the price data. Many
of these indicators have become so popular that they are used
extensively even for financial assets and instruments traded on
exchanges. Applicable only when prices fluctuate freely in response
to market forces of demand and supply for the underlying assets.
Obviously not applicable for say a pegged exchange rate like
USD/HKD. Our focus hereafter will be on floating exchange rates
though the principles of technical analysis apply to other assets
such as commodities, stock market indices, certain heavily traded
stocks, etc. More reliable in case of broad and very liquid markets
than thin and shallow markets. Helps to judge the emotional state
of the market. The market has its own collective consciousness
distinct from the individual consciousness of the participants.
Technical Analysis in Contrast with Fundamental Analysis
Fundamental analysis is concerned with all the fundamental
factors. In the case of an exchange rate, the concerned factors are
the present and expected interest rates, inflation rates, GDP
growth rates, international trade and current account balance,
exchange rate policies of the two countries in question, state of
capital markets, etc. After analysis of all these factors, the
fundamental analyst attempts to ascertain whether a currency is
undervalued or overvalued and consequently whether it is likely to
appreciate or depreciate.
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Technical analysis, on the other hand, assumes that the price at
any given time is the result of not only the fundamental factors
but also the markets collective response to all the factors. At the
extreme, technical analysts dont even want to read newspapers lest
the popular news bias their chart analysis! For the same reasons.
some even dont want to know the identity of the underlying asset!!
Often, economists focus on certain fundamentals and prescribe how
the market ought to behave when the market behaviour is linked to
some other factors. A classic example is the euros persistent
decline since its launch. The market is labelled as crazy when it
doesnt behave in the prescribed manner. However, those who are
exposed to risk cant afford to go against the market even if they
think it is crazy. Hence, the importance of technical analysis or
proper understanding of market psychology.
Assumptions in technical analysisThe market discounts everything
All known information about a market is reflected in the price. In
other words, all the present political, economic, psychological and
any other type of information pertinent to the market price, is
already discounted or priced in. In electronic age, information
travels at the speed of light and any new information gets
disseminated and discounted quickly whereafter it ceases to be of
further relevance to the process of forecasting. Prices move in
trends - When a price moves in a particular direction, be it up or
down, it will continue to trend in that direction till some news
changes market perception of future direction and reverses the
trend itself. To sum up the markets move in the path of least
resistance. History repeats itself - This assumption arises from
the fact that mass psychology does not change. Markets overextend
because of the herd instinct leading to panic and euphoria time and
again.
Some of the Important terms used in the Technical
AnalysisSupport and resistance are price levels at which movement
should stop and reverse direction. Think of support/resistance as
levels that act as a floor or a ceiling to future price
movements.
Supports-
A price level below the current market price, at which buying
interest should be able to overcome selling pressure and thus keep
the price from going any lower.
Resistance - A price level above the current market price, at
which selling pressureshould be strong enough to overcome buying
pressure and thus keep the price from going any higher.
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Concepts of trendTrend is nothing but the direction of movement
of price. Logically the share price can ether be rising or falling
or moving narrowly (flat). Thus there are three directions in which
the price can move these three directions give rise to the three
types of trend when prices are moving upwards, the trend is said to
be rising. When prices are moving downwards it is called a falling
trend. And when prices are moving in a narrow range, the trend can
be said to be flat or choppy. Thus, the trend itself has three
directions. Upward Trend If the market makes a high and then comes
down and after that cuts the previous high makes a new high, it
means that the market is in an uptrend and it is making a higher
bottom higher top. Downward Trend If the market is falling and
making a lower bottom lower top it is said to be a downtrend
Sideways Trend (flat) If the market is just drifting and has no
clear move it is laid to be a sideways trend.
Trend lineTrend lines are straight lines drawn by connecting
either the tops or bottoms. To draw a straight line, one requires
two points. Similarly to draw trend lines, one requires at least
tow tops or bottoms. This however, does not mean that there cannot
be more than tow tops or bottoms that can be connected to draw a
trend line, infect the more the number of tops or bottoms that are
touched or connected by the trend line, the better or more powerful
the trend line. Trend lines are the simplest, yet the most
effective way of riding the trend. Just as trend has three
directions rising, falling and flat, there are three types of trend
lines to represent each of the directions of trend Up ward trend
line
An uptrend line has a positive slope and is formed by connecting
two or more low points. The second low must be higher than the
first for the line to have a positive slope. Uptrend MBA IV Sem 19
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Foreign Exchange Exposure line act as support and indicate that
net-demand (demand less supply) is increasing even as the price
rises. A rising price combined with increasing demand is
bullish.
Down trend linesA downtrend line has a negative slope and is
formed by connecting two or more high points. The second high must
be lower than the first for the line to have a negative slope.
Downtrend lines act as resistance, and indicate that net-supply
(supply less demand) is increasing even as the price declines. A
declining price combined with increasing supply is very bearish,
and shows the strong resolve of the sellers. As long as prices
remain below the downtrend line, the downtrend is solid and intact.
A break above the downtrend line indicates that net-supply is
decreasing and that a change of trend could be imminent.
Moving AveragesMoving averages are one of the most popular and
easy to use tools available to the technical analyst. They smooth a
data series and make it easier to spot trends, something that is
especially helpful in volatile markets. They also form the building
blocks for many other technical indicators and overlays. There are
three types of moving averages, namely simple moving average,
exponential moving average and weighted moving average. But the
most popular types of moving averages are the Simple Moving Average
(SMA) and the Exponential Moving Average (EMA). They are described
in more detail below.
Simple Moving AverageA simple moving average is formed by
computing the average (mean) price of a security over a specified
number of periods. While it is possible to create moving averages
from the Open, the High, and the Low data points, most moving
averages are created using the closing price. For example: a 5-day
simple moving average is calculated by adding the closing prices
for the last 5 days and dividing the total by 5. Ex: if the closing
prices are as follows: 10, 11, 12, 13, 14, 17, 12 10+11+12+13+14=60
(60/5)=12
MBA IV Sem
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Foreign Exchange Exposure Here 12 is a first moving average
obtained from the given closing prices, next moving average can be
calculated by deducting first cl price i.e 10 and adding next cl.
Price i.e 17 and again dividing it by 5.
Exponential Moving Average (EMA)In order to reduce the lag in
SMA, technicians often use EMA. EMA's reduce the lag by applying
more weight to recent prices relative to older prices. The
weighting applied to the most recent price depends on the specified
period of the moving average. The shorter the EMA's period, the
more weight that will be applied to the most recent price. For
example: a 10-period EMA weighs the most recent price 18.18% while
a 20-period EMA weighs the most recent price 9.52%. As such, it
will react quicker to recent price changes than a SMA. Here's the
calculation formula
EMA (current) = ((price (current)-EMA (prev)) x multiplier+
EMA(prev)Where, Multiplier 2/n+1 n- Number of days for which EMA is
calculated If we take the same example of SMA 5 day EMA is
calculated as follows. EMA= (12-11) X 0.666 + 11 = 11.66 Where
multiplier = 2/ (5 +1) = 0.666 For next EMA 11.66 acts as previous
EMA and so on A comparison of a 50-day EMA and a 50-day SMA for a
script shows that the EMA picks up on the trend quicker than the
SMA. The blue arrows mark points when the stock started a strong
trend. By giving more weight to recent prices, the EMA reacted
quicker than the SMA and remained closer to the actual price.
Uses of moving averages
There are many uses for moving averages, but three basic uses
stand out: 1. Trend identification/confirmation 2. Support and
Resistance level identification/confirmation 3. Trading Systems
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Moving Average Convergence and DivergenceIn this system analyst
uses a combination of two moving averages one is a short term
averages and other is long term averages. Also combination of SMA
and EMA of same period is frequently used for identification of
selling and buying points in the graph.
Elliot wave theoryR. N. Elliott believed markets had well-define
wave that could be used to predict market direction. In 1939,
Elliott detailed the Elliott Wave Theory, which states that stock
prices are governed by cycles founded upon the Fibonacci series
(1-2-3-5-8-13-21...). According to the Elliott Wave Theory, stock
prices tend to move in a predetermined number of waves consistent
with the Fibonacci series. Specifically, Elliott believed the
market moved in five distinct wave on the upside and three distinct
on the downside. The basic shape of the wave is shown below.
waves one, three and five represent the 'impulse', or minor
up-wave in a major bull move. Waves two and four represent the
'corrective,' or minor down-waves in the major bull move. The waves
lettered A and C represents the minor down-wave in a major bear
move, while B represents the one up-wave in a minor bear wave
Elliott proposed that the waves existed at many levels, meaning
there could be waves within waves. To clarify, MBA IV Sem 22 KLESs
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only represents the primary wave pattern, but it could also
represent what occurs just between points 2 and 4.
Elliott wave theory ascribes names to the waves in order of
descending size: 1. 2. 3. 4. 5. 6. 7. 8. 9. Grand Supercycle
Supercycle Cycle Primary Intermediate Minor Minute Minuette
Sub-Minuette
The major waves determine the major trend of the market, and
minor waves determine minor trends. This is similar to the Dow
theory postulates primary and secondary trends. Elliott provided
numerous variations on the main wave, and placed particular
importance on the golden mean, 0.618, as a significant percentage
for retracement. Trading using Elliott wave patterns is quite
simple. The trader identifies the main wave or Supercycle, enters
long, and then sells or shorts, as the reversal is determined. This
continues in progressively shorter cycles until the cycle completes
and the main wave resurfaces. The caution to this is that much of
the wave identification is taken in hindsight and disagreements
arise between Elliott wave technicians as to which cycle the market
is in.
Chart PatternsThe vast majority of chart patterns fall into two
main groups: reversal and continuation. Reversal patterns indicate
a change of trend and can be broken down into top and bottom
formations. Continuation patterns indicate a pause in trend and
indicate that the previous direction will resume after a period of
time. Just because a pattern forms after a significant advance or
decline does not mean it is a reversal pattern. Many patterns, such
as a rectangle, can be classified as either reversal or
continuation. Much depends on the previous price action, volume and
other indicators as the pattern evolves. This is where the science
of technical analysis becomes the art of technical analysis.
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Below is a list of common chart patterns that can be useful in
Technical Analysis. Double Top (Reversal) Double Bottom (Reversal)
Head and Shoulders Top (Reversal) Head and Shoulders Bottom
(Reversal) Falling Wedge (Reversal) Rising Wedge (Reversal)
Rounding Bottom (Reversal) Triple Top (Reversal) Triple Bottom
(Reversal) Bump and Run Reversal (Reversal) Flag, Pennant
(Continuation) Symmetrical Triangle (Continuation) Ascending
Triangle (Continuation) Descending Triangle (Continuation)
Rectangle (Continuation) Price Channel (Continuation) Measured Move
- Bullish (Continuation) Measured Move - Bearish (Continuation) Cup
with Handle (Continuation)
We shall discus some of these patterns
Double top (reversal)The double top is a major reversal pattern
that forms after an extended uptrend. As its name implies, the
pattern is made up of two consecutive peaks that are roughly equal,
with a moderate trough in-between. The double top looks like the
letter "M". The twice touched high is considered a resistance
level. Althoug h there can be variations, the classic double top
marks at least an intermediate change, if not long-term change, in
trend from bullish to bearish. Many potential double tops can form
along the way up, but until key support is broken, a reversal
cannot be confirmed. MBA IV Sem 24 KLESs IMSR, HUBLI
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Double bottom (reversal)The double bottom is a major reversal
pattern that forms after an extended downtrend. As its name
implies, the pattern is made up of two consecutive troughs that are
roughly equal, with a moderate peak in-between. The double bottom
looks like the letter "W". The twice touched low is considered a
support level. Most technical analysts believe that the advance off
of the first bottom should be 10-20%. The second bottom should form
within 3-4% of the previous low, and volume on the ensuing advance
should increase. Although there can be variations, the classic
double bottom usually marks an intermediate or long-term change in
trend. Many potential double bottoms can form along the way down,
but until key resistance is broken, a reversal cannot be
confirmed.
Head and sholder top (reversal)A Head and Shoulders reversal
pattern forms after an uptrend, and its completion marks a trend
reversal. The pattern contains three successive peaks with the
middle peak (head) being the highest and the two outside peaks
(shoulders) being low and roughly equal. The reaction lows of each
peak can be connected to form support, or a neckline. As its name
implies, the Head and Shoulders reversal pattern is made up of a
left shoulder, a head, a right shoulder, and a neckline. Other
parts playing a role in the pattern are volume, the breakout, price
target and support turned resistance.
Important words used in Technical Market:The Bulls: A bull
market is when everything in the economy is great, people are
finding jobs, GDP is growing, and stocks are rising. Pecking stocks
during the bull market is easier because everything is going up.
Bull market cannot last forever, sometime they can lead to
dangerous situations if stocks become overvalued. If a person is
optimistic, believing that stocks will go up, he or she is called a
bull and said to have a bullish outlook. The Bears: A bear market I
when the economy is bad, recession is looming, and stock prices are
falling. Bear market make it though for investors to pick
profitable stocks. One solution to this is to make money when
stocks are falling using a technique called short selling. Another
strategy is to wait on until you feel that the bear market is over,
and to buy again in anticipation of a bull market. If a person is
pessimistic, believing that stocks are going to drop, he or she is
called a bear and said to have a bearish outlook.
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Foreign Exchange Exposure Other animal on the farm- chickens and
pigs Chickens are afraid to lose anything. Their fear overrides
their need to make profits and so they turn only to money market
securities or get out of the markets altogether. Pigs are high-risk
investors looking for the one big score in a short period of time.
Pigs buy on hot tips and invest in hot companies without doing
their due diligence. They get impatient, greedy, and emotional
about their investments, and they are drawn to high risk securities
without putting in the proper time or money to learn about these
investment vehicles. Professional traders love the pigs. As its
often from their losses that the bulls and bears reap their
profits. Short Selling The selling of a security that the seller
does not own, Short sellers assume that they will be able to buy
the stock at a lower amount than the price at which they sold
short. Bear An investor who believes that a particular security or
market is headed downward. Bears attempt to profit from a decline
in prices. Bears are generally pessimistic about the state of a
given market. Intraday Another way of saying "within the day".
Intraday price movements are particularly important to short-term
traders looking to make many trades over the course of a single
trading session. The term intraday is occasionally used to describe
securities that trade on the markets during regular business hours,
such as stocks and ETFs, as opposed to mutual funds, which must be
bought from a dealer. Day Trader A stock trader who holds positions
for a very short time (from minutes to hours) and makes numerous
trades each day. Most trades are entered and closed out within the
same day Speculator A person who trades with a higher-than-average
risk, in return for a higher-thanaverage profit potential.
Speculators take large risks, especially with respect to
anticipating future price movements, or gambling, in the hopes of
making quick, large gains. Going Long Holding the security for an
extended period of time. Depending on the type of security, a
long-term asset can be held for as little as one year or more.
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Foreign Exchange Exposure Going short Selling the existing
security immediately to protect the profit made or to minimizing
the lose. Short Covering The act of purchasing securities in order
to close an open short position. This is done by buying the same
type and number of securities that were sold short. Most often,
traders cover their shorts whenever they speculate that the
securities will rise. In order to make a profit, a short seller
must cover the shorts by purchasing the security below the original
selling price. Squaring off Its an intra day trading where in the
trader first sells or buys the shares and then reverse the process
(buying/selling) within the closing of market on the same day and
pays off difference amount if he has lost or gains profit. So by
doing so at the end of the day he owns no shares in his
account.
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ANALYSIS PART Structure of Forex Market Transaction in India
RBINOSTRO
Authorized Dealer (AD)
A CategoryVOSTRO
Designated Branch (D-Branch)
B Category
Money Change (MC)
C Category
ADs are fully pledge ADs, means these ADs are having Accounts in
their own name. Vostro in the sense Foreign Bank opens its Account
in Indian Bank. Whereas Nostro means our Indian Bank opens Account
in any Foreign Banks. So Canara Bank is having both types of
accounts. Details about Canara Bank we will see in further pages.
Designated Branches are those branches, where these branches will
not trade in the name of their own account, but in the name of ADs.
They can act individually, even though they dont have accounts in
their own name. Money Change (MC)s, are comes under C category.
This category people are neither having accounts in their own name
nor fully authorized to act individually. So these are comes
reports to D-Branches or otherwise they directly related to ADs. We
can see in Mangalore or in Goa or in Mumbai small export agencies
all these agencies are comes under C category.
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Foreign Exchange Operations of Station Road Branch of Canara
Bank:First we will see the Hierarchy of Foreign Exchange Operations
in Canara Bank. First it starts with International Foreign
Exchange. Under this International Foreign Exchange, Forex
Department (FD) has existing. FD is having its own Account in their
name. So they do not dependent on any other. In India around 13
departments are situated. In Karnataka there are only 2 FDs one is
situated in Bangalore and another one is in Mangalore. Under this
FD, Foreign Exchange Cell comes. There are 22 Foreign Exchange
Cells situated in India. These Foreign Exchange Cells should report
the daily report of foreign exchange operations to Foreign
Department. Under this FD another branch also existed called it as
Designated Branch (DBranch). This D-Branch is not like a Foreign
Exchange Cell. This branch is not dependent on any other Foreign
Exchange Cells, but they have their own Account. For instance, for
foreign exchange transaction purpose a customer approaches Avenue
Branch of Bangalore. Avenue Branch is a D-Branch, so will not send
this transaction to any other Foreign Exchange Cells but it
operates in their own account under the name of Foreign Department.
In Karnataka especially in Bangalore these D-Branches are situated
viz., in Avenue Road Branch, Malleshwaram Branch etc., Apart from
all these, still another branch is there, it is called Overseas
Branch. These Overseas Branches are Operate as branches or
subsidiaries of the parent Bank. These branches are to seek
deposits and grant loans in currencies other than the currency of
the host government.
Diagrammatic way of Hierarchy of Foreign Exchange Operations in
Canara BankINTERNATIONAL FOREIGN EXCHANGE
Designated Branch
Foreign Department
Foreign Exchange Cell MBA IV Sem 29 KLESs IMSR, HUBLI
Foreign Exchange Exposure
Now Let us see particularly of Hubli Branch: For entire North
Karnataka there is only one Foreign Exchange Transaction Cell, is
situated in Hubli. Hubli Foreign Exchange Transaction is a Foreign
Exchange Cell. This is comes under Foreign Department from previous
diagram we can clarify it. This Hubli Foreign Exchange Cell has
been operating since from 1991. Till 2005 Hubli Foreign Exchange
Cell was under Mangaloe Foreign Department. But now it is shifted
to Mumbai Foreign Department. This Hubli Foreign Exchange Cell
reports daily foreign exchange operations to Mumbai Foreign
Department. So for this reporting purpose it is having a new
computer technology, by this they only press a key to submit or to
send the report at the end of the day. So for this technology they
have separate computer. Hubli Foreign Exchange Cell covers
especially almost all Districts of North Karnataka (expect
Hyderabad Karnataka). Viz., Districts of Dharwad, Belgaum, Bijapur,
Baglkot, Gadag, Koppal, Haveri etc.,
Services has been Providing by Hubli Forex Cell
IMPORTSERVICES
EXPORT
REMITTANCE
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EXPORTCollection of Bills Finance Pre & Post Shipment Cash
in Advance Hubli Forex Cell gives service to Exporter in the name
of Export Service. Here they have made 3 types of categories, as in
the above figure. Collection of Bills: Every document should be
send through banks only. It is compulsion made by RBI and also
FEMA. Here exporter must submit some documents are as follows:
Invoice, Packing List, Bill of Lading (in case of Sea) / Airway
Bill (in case of Air), Certificate of Origin, Test Certificate
etc., Statutory Declaration Form (SDF) and Shipping Bill are very
important documents where bank will check these documents very
thoroughly. And combining these important documents, and they call
it as GR Form. Exporter or consignor prepares SDF. It is a document
where exporter declares the Type of goods he is exporting, Quantity
(Kg & No.s), Name of Importer, Name of Shipping Agency etc.,
This is made in 3 copies. One is sent to RBI, another one is to any
commercial Forex traded Bank and remaining is for them.
Superidentant of Exercise Custom certifies all these copies.
Finance: (Pre & Post Shipment loan): At Sight they purchase the
document and make the payment within 15 to 20 days. Bank may
discount it as per the instruction by party like Bill of Exchange.
This may maturated at 90 days after or 90 or 120 days as per
agreement between both parties. Negotiation also made by bank to
get profits. Who takes the pre shipment loan they should
compulsorily take post shipment loan also. Because, if any one have
taken pre shipment, when goods are ready to shipment, then bank
convert this pre shipment into post shipment. For this purpose Bank
should require Purchase Order (PO), if New Importer / High value
goods then opening of L/c and Bank should take Inventory as a
Hypothesis, Guarantee from Director/partner, some times Mortgage
and some times pledge the finished goods. These loan sanctions
stage by stage. Purchase Discount Negotiation
IMPORTMBA IV Sem 31 Letter of Credit Finance Advise, Conformance
FLC KLESs IMSR, HUBLI
Foreign Exchange Exposure
Here Bank gives service to importers also as an Import Service.
Here importer can open Letter of credit, for this purpose Bank acts
as a mediator between exporter and importer. So bank will take some
risks relating to export and import of goods. Bank also acts as
advisor to importer. Incase new exporter or incase of high value
materials or incase first time importing the materials, in all
these cases banks will give advise to the importer that whether to
go or not. If any RBIs prior permission is required or not if so
require then what are the procedure all things may advise to
importer. Some times for importer also it gives a loan called
Foreign Letter of Credit (FLC). According to this if exporter fails
to supply goods then Bank will take the responsibility. But some
major responsibility will be on importer only. Outward Inward
REMITTANCE
Money Change Remittance is nothing but receiving and paying of
foreign currency in India. Outward is nothing but paying abroad.
Inward means incoming payment from abroad. Money change means if a
person wants to convert the one foreign currency into domestic
currency. Here TT, DD, Bills, Travelers Cheques, Notes, Now
recently Yatri Card etc., are the major modes of transactions held
in this type of service. For this purpose of service, any receiving
/ paying person should be a customer i.e., he should be an Account
holder in that particular Bank. But this condition is not
applicable to Tourist. For Tourist Bank only looks out the Passport
and Visa (According to FEMA).
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NON RESIDENT EXTERNAL RUPEE ACCOUNT (NRE)
Types of account you can open are: Savings, Current or Term
Deposit in Indian Rupees. You can open a NRE account by: o
Remittance from abroad (through DD/SWIFT TRANSFER) o Transfer of
funds from existing NRE/FCNR accounts with other banks in India or
from other branches of our bank. o Foreign currency
notes/travellers cheques brought in during temporary visit to
India. o Personal cheques drawn on your account abroad Unique
features of NRE deposits: o The entire credit balance inclusive of
interest earned can be repatriated outside India without reference
to RBI. o NRE accounts can be operated by Resident Indians on the
basis of the Power of Attorney Or letter of Authority issued by the
NRI account holder. However PA/LA holder can repatriate the funds
abroad to the non resident depositor only. o Joint accounts can be
opened along with other Non Resident Indians. o Local
disbursements, purchase of units of UTI, Central and State
Government securities and National Savings Certificates can be made
from these accounts. o Sale/Maturity Proceeds/ repurchase proceeds
of units of UTI, Securities or certificates originally purchased
out of funds in these accounts can be credited without reference to
RBI. o Under term deposits accounts can be opened for a minimum
period of 1 year and a maximum period of 3 years. o
Loans/overdrafts in India to deposit holders are available against
security of deposits. o Cheque book facility is available for NRE
Savings Bank account.
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NON-RESIDENT (External) RUPEE ACCOUNT SCHEME (NRE Account) Who
can open an account Joint account Nomination Currency in which
account is denominated Repatriability Type of Account Period for
fixed deposits Rate of Interest Loans a) In India (i) to the
Account holder (ii) to third parties b) Abroad > (i) to the
Account holder (ii) to third parties c) Foreign Currency Loans In
India (i) to the account holder (ii) to third parties Not permitted
Not permitted Permitted Permitted Permitted Permitted Permitted
NRIs (Individuals of Bangladesh/Pakistan nationality require prior
approval of RBI) In the names of two or more non-resident
individuals Subject to a maximum of 4 persons Permitted Indian
Rupees Repatriable Savings, Current, Recurring, Fixed Deposit
Minimum one year and maximum 3 years. Subject to RBI guidelines.
The interest rates are displayed on our web site
MBA IV Sem
34
KLESs IMSR, HUBLI
Foreign Exchange Exposure
Purpose of Loan a) In India i)Personal purposes or for carrying
on business activities * ii) Direct investment in India on
nonrepatriation basis by way of contribution to the capital of
Indian firms/ companies iii) Acquisition of flat/ house in India
for his own residential use Fund based and/or non-fund based
facilities for personal purposes or for carrying on business
activities. Fund based and/or non-fund based facilities for
bonafide purposes.
(i) to the Account holder
(ii) to third party b) Abroad To the account holder and third
party
* The loans cannot be utilized for the purpose of relending, or
carrying on agriculture or plantation activities or for investment
in real estate business. Note: a) When a person resident in India
leaves India for Nepal and Bhutan for taking up employment or for
carrying on business or vocation or for any other purposes
indicating his intention to stay in Nepal and Bhutan for an
uncertain period, his existing account will continue as a resident
account. Such account will not be designated as Non-resident
(Ordinary) Rupee Account (NRO). b) We open and maintain NRE/FCNR(B)
accounts of persons resident in Nepal and Bhutan who are citizens
of India or of Indian origin, provided the funds for opening these
accounts are remitted in free foreign exchange. Interest earned in
NRE/FCNR (B) accounts can be remitted only in Indian rupees to NRIs
and PIO resident in Nepal and Bhutan. c) We extend all types of
rupee loans under the Retail lending scheme to NRIs.
MBA IV Sem
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KLESs IMSR, HUBLI
Foreign Exchange Exposure
RESIDENT FOREIGN CURRENCY [DOMESTIC] ACCOUNT [RFCD]Types of
account you can open: Non interest bearing Current Account in
Foreign currency. A person resident in India can open an RFCD
account out of foreign exchange acquired in the form of currency
notes, bank notes and travelers cheques from the following sources:
o Acquired while on a visit to any place outside India by way of
payment for services not arising from any business in or anything
done in India; or o Acquired from any person not resident in India
and who is on a visit to India, as honorarium or gift or for
services rendered or in settlement of any lawful obligation; or o
Acquired by way of honorarium or gift while on a visit to any place
outside India; or o Unspent amount of foreign exchange acquired by
him from an authorised person for travel abroad; or o Unspent
amount of foreign exchange received as allowance by Pilots/Crew
Members/Mariners etc., of Indian Airline/Shipping companies o
Foreign exchange earnings through export of goods and/or services,
royalty/honorarium etc. by resident individuals; or o Insurance
claims/maturity value settled in foreign currency. o Gifts received
from close relatives viz., Husband and Wife Father/Mother
(including step-mother) Fathers father/Fathers mother/Mothers
mother/ Mothers father Son (including step-son)/Daughters
(including step-daughter) Sons wife/Sons son/Sons sons wife/Sons
daughter/Sons daughters husband Daughters husband/Daughters
son/Daughters sons wife/Daughters daughter/Daughters daughters
husband Brother (including step-brother)/Brothers wife Sister
(including step-sister)/Sisters husband.
RESIDENT FOREIGN CURRENCY [DOMESTIC] ACCOUNT [RFCD]
Who can open an account Joint account Nomination Permissible
currencies Type of Account
Persons Resident in India. In the names of two or more resident
individuals with a maximum of 4 persons. Permitted USD, GBP &
EUR Non interest bearing Current Account
MBA IV Sem
36
KLESs IMSR, HUBLI
Foreign Exchange Exposure
Facilities available to NRIs, PIO for investment in IndiaI. Bank
Accounts and Deposits a) Non-Resident (External) Rupee (NRE)
Accounts (Principal / Interest Repatriable)
Savings - The interest rates on NRE Savings deposits shall be at
the rate applicable to domestic savings deposits. Currently the
interest rate is 3.5%. Term deposits For 1 year to 3 years, the
interest rates on fresh repatriable NonResident (External) Rupee
(NRE) Term deposits should not exceed the LIBOR/SWAP rates, as on
the last working day of the previous month, for US dollar of
corresponding maturity plus 50 basis points.
The interest rates as determined above for three year deposits
should also be applicable in case the maturity period exceeds three
years. The changes in interest rates will also apply to NRE
deposits renewed after their present maturity period. b) FCNR (B)
(Principal/Interest Repatriable) Deposits of funds in the account
may be accepted in such permissible currencies as may be designated
by the Reserve Bank from time to time.
Presently the term deposit can be placed with ADs in India in 6
specific foreign currencies (US Dollar, Pound Sterling, EURO,
Japanese Yen, Australian Dollar and Canadian Dollar). Rate of
Interest - Fixed or floating within the ceiling rate of LIBOR/SWAP
rates for the respective currency/corresponding term minus 25 basis
points. Maturity of deposits: 1-5 years.
c) NRO Accounts (Current earnings repatriable)
Savings - Normally operated for crediting rupee earnings /
income such as dividends, interest. Currently the interest rate is
3.5 per cent. Term Deposits - Banks are free to determine interest
rates.
d) Repatriation from NRO balances Authorised Dealers can allow
remittance/s upto USD 1 million per financial year (AprilMarch) for
bonafide purposes, from balances in NRO accounts subject to payment
of applicable taxes. The limit of USD 1 million per financial year
includes sale proceeds of immovable properties held by NRIs/PIO.
MBA IV Sem 37 KLESs IMSR, HUBLI
Foreign Exchange Exposure II. Other Investments on repatriation
basis
Government dated securities/treasury bills. Units of domestic
mutual funds. Bonds issued by a public sector undertaking (PSU) in
India. Non-convertible debentures of a company incorporated in
India. Shares in Public Sector Enterprises being dis-invested by
the Government of India, provided the purchase is in accordance
with the terms and conditions stipulated in the notice inviting
bids. Shares and convertible debentures of Indian companies under
FDI scheme (including automatic route & FIPB). Shares and
convertible debentures of Indian companies through stock exchange
under Portfolio Investment Scheme. Perpetual debt instruments and
debt capital instruments issued by banks in India.
III. Other Investments on non-repatriation basis
Government dated securities (other than bearer
securities)/treasury bills. Units of domestic mutual funds. Units
of Money Market Mutual Funds in India. Non-convertible debentures
of a company incorporated in India. The capital of a firm or
proprietary concern in India, not engaged in any agricultural or
plantation activity or real estate business. Deposits with a
company registered under the Companies Act, 1956 including NBFC
registered with RBI, or a body corporate created under an Act of
Parliament or State Legislature, a proprietorship concern or a firm
out of rupee funds which do not represent inward remittances or
transfer from NRE/FCNR(B) Accounts into the NRO Account. Commercial
Paper issued by an Indian company. Shares and convertible
debentures of Indian companies other than under Portfolio
Investment Scheme.
MBA IV Sem
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KLESs IMSR, HUBLI
Foreign Exchange Exposure
IV. Investment in immovable Property
May acquire immovable property in India other than agricultural
land/ plantation property or a farmhouse out of repatriable and
non-repatriable funds.
In respect of such investments NRIs are eligible to
repatriate
Sale proceeds of immovable property acquired in India to the
extent of repatriable funds used for acquiring the property, up to
two residential properties. The balance will be repatriable through
NRO Account subject to conditions mentioned at item (I) (d). Refund
of (a) application / earnest money / purchase consideration made by
house-building agencies/seller on account of non-allotment of flats
/ plots and (b) cancellation of booking/deals for purchase of
residential/commercial properties, together with interest, net of
taxes, provided original payment is made out of NRE/FCNR(B)
account/inward remittances. Housing Loan in rupees availed of by
NRIs from ADs / Housing Financial Institutions can be repaid by the
close relatives in India of the borrower.
V. Facilities to returning NRIs/PIO Returning NRIs/ PIO
May continue to hold, own, transfer or invest in foreign
currency, foreign security or any immovable property situated
outside India, if such currency, security or property was acquired,
held or owned when resident outside India.
May open, hold and maintain with an authorised dealer in India a
Resident Foreign Currency (RFC) Account to transfer balances held
in NRE/FCNR(B) accounts. Proceeds of assets held outside India at
the time of return, can be credited to RFC account. The funds in
RFC accounts are free from all restrictions regarding utilisation
of foreign currency balances including any restriction on
investment in any form outside India.
MBA IV Sem
39
KLESs IMSR, HUBLI
Foreign Exchange Exposure
NRI REMITTANCE FACILITIESSAFE CUSTODY SERVICES This subsidiary
service is rendered by the Bank to most valued customers. Bank
undertakes the responsibility of safe custody of articles entrusted
by the customer under a contract and return the same according to
terms agreed upon. SAFE DEPOSIT LOCKERS Keep your valuables in our
lockers and have peace of mind. Lockers available at select
branches where Safe Deposit Vaults are installed. Bank lets on hire
safe deposit lockers to individuals (Singly or jointly), Firms,
Companies, Association or Clubs, Trustees on nominal rent.
NOMINATIONS This facility has been devised with an aim of
minimising the hardships caused to the family members on the death
of the depositor/s. Nominations can be made in respect of all types
of deposit accounts by the individual account holders in their own
capacity singly or jointly. CANBANK ELECTRONIC FUNDS TRANSFER
SCHEME We have a high tech remittance product called Canbank EFT
which at present is extended to the following exchange houses and
banks 1. M/s Al Razouki International Exchange Co LLC, Dubai 2. M/s
Eastern Exchange Est., Doha, Qatar 3. M/s Al Fardan Exchange Co.,
UAE 4. M/s Bahrain India International Exchange Co., Bahrain 5. M/s
UAE Exchange Centre, Abu Dhabi, UAE 6. M/s Zenj Exchange Co.,
Bahrain 7. Laxmidas Tharia Ved Exchange 8. Musandam Exchange Oman
9. Arab National Bank Riyadh Saudi Arabia 10. Canara Bank London
Residents of Dubai, Bahrain and Saudi Arabia can make use of the
above product for making remittances which enables the
beneficiaries of the remittance in India to receive the funds in
their accounts with designated Canara Bank branches within 24 hours
from the date of remittance. This facility is highly cost-effective
and secured way of remittance. At present the funds by way of EFT
can be remitted to 1022 designated branches across the Country MBA
IV Sem 40 KLESs IMSR, HUBLI
Foreign Exchange Exposure
Acquisition and Transfer of Immovable Property in India by a
person resident outside IndiaI) 1. Regulations/Directions issued by
Reserve Bank of India Regulations regarding acquisition and
transfer of immovable property in India by a person resident
outside India have been notified vide RBI Notification No. FEMA
21/2000-RB dated May 3, 2000 as amended by Notification No.FEMA
64/2002-RB dated June 29, 2002, Notification No.FEMA 65/2002RB
dated June 29, 2002, Notification No.FEMA 93/2003-RB dated June 6,
2003 and Notification No. 146/2006-RB dated 10/02/06 and relevant
directions issued in the form of A.P. (DIR Series) Circulars.
Acquisition of immovable property in India by way of purchase by a
person resident outside India. General Permission is available to
purchase only a residential/commercial property in India to a
person resident outside India who is a citizen of India (NRI) or
who is a Person of Indian Origin (PIO). For the purpose of
acquisition and transfer of immovable property in India, a PIO
means an individual (not being a citizen of Pakistan or Bangladesh
or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan),
who (i) at any time, held Indian passport; or (ii) who or either of
whose father or grandfather was a citizen of India by virtue of the
Constitution of India or the Citizenship Act, 1955 (57 of
1955).
II) 2.
3.
4.
NRI/PIO who has purchased residential/commercial property under
general permission is not required to file any documents with the
Reserve Bank.
5.
There is no restriction on number of residential/commercial
property that NRI/PIO can purchase under the general permission
available
6.
No foreign national of non-Indian origin be added as a second
holder to a residential/commercial property purchased by NRI/PIO A
foreign national of non-Indian origin resident outside India cannot
acquire any immovable property in India by way of purchase. Sec 2
(ze)
7.
MBA IV Sem
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KLESs IMSR, HUBLI
Foreign Exchange Exposure
8.
Yes. A Foreign National of non-Indian origin including a citizen
of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or
Iran or Nepal or Bhutan may acquire only residential accommodation
on lease, not exceeding five years for which he/she does not
require prior permission of Reserve Bank of India. A person
resident outside India cannot acquire by way of purchase
agricultural land/plantation property/farm house in India.
Acquisition of immovable property in India by way of gift by a
person resident outside India Yes. Under general permission
available NRI/PIO may acquire residential/commercial property by
way of gift from a person resident in India or a NRI or a PIO. No.
Under section 2 (ze) of the Foreign Exchange Management Act, 1999
transfer includes among others, gift. Therefore, a foreign national
of nonIndian origin resident outside India cannot acquire
residential/commercial property in India by way of gift. No. A
person resident outside India cannot acquire agricultural
land/plantation property/farm house in India by way of gift.
Acquisition of immovable property in India by way of inheritance by
a person resident outside India Yes. A person resident outside
India can hold immovable property acquired by way of inheritance
from a person resident in India as per the provisions of Section
6(5) of the Foreign Exchange Management Act, 1999.
9. III) 10.
11.
12. IV) 13.
14.
With the specific approval of Reserve Bank a person resident
outside India may hold any immovable property in India acquired by
way of inheritance from a person resident outside India, provided
the bequeathor had acquired such property in accordance with the
provisions of foreign exchange law in force at the time of
acquisition or under FEMA regulations.
MBA IV Sem
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KLESs IMSR, HUBLI
Foreign Exchange Exposure
V) 15.
Transfer of immovable property in India by way of sale by a
person resident outside India NRI can transfer by way of sale
residential/commercial property in India to a person resident in
India or to a NRI or a PIO.
16.
PIO can transfer by way of sale residential/commercial property
in India only to a person resident in India.
17.
No. PIO would need to seek Reserve Bank prior approval for
transfer by way of sale residential/commercial property in India to
a NRI or a PIO.
18.
No. A foreign national of non-Indian origin whether resident in
India or outside India would need to seek prior approval of Reserve
Bank for transfer by way of sale residential/property in India
acquired with the specific permission of Reserve Bank to a person
resident in India or outside India.
19.
Under the general permission available NRI/PIO may transfer by
way of sale his agricultural land/plantation property/farm house in
India to a person resident in India who is a citizen of India.
20.
A foreign national of non-Indian origin resident outside India
would need to seek prior approval of Reserve Bank for transfer, by
way of sale, agricultural land/plantation property/farm house
acquired in India.
VI) 21.
Transfer of immovable property in India by way of gift by a
person resident outside India Yes. NRI/PIO may transfer by way of
gift residential/commercial property in India to a person resident
in India or to a NRI or a PIO.
MBA IV Sem
43
KLESs IMSR, HUBLI
Foreign Exchange Exposure 22. Under the general permission
available NRI/PIO may transfer by way of gift agricultural
land/plantation property/farm house in India to a person resident
in India who is a citizen of India.
23.
No. A foreign national of non-Indian origin resident outside
India would need to seek prior approval of Reserve Bank for
transfer by way of gift agricultural land/plantation property/farm
house acquired by him in India. Transfer of residential/commercial
property in India by way of mortgage by a person resident outside
India NRI/PIO, transfer by way of mortgage his
residential/commercial property in India to a party abroad. He
should seek prior approval of RBI.
VII) 24.
25.
No. He should seek prior approval of RBI. However, immovable
property purchased by a person resident outside India who has
established a Branch Office or other place of business for carrying
on in India any activity in accordance with FERA/FEMA regulations,
may under general permission available, mortgage such a property
with an authorized dealer as a security for any borrowing.
VIII) 26.
Mode of payment for purchase of residential/commercial property
in India by NRI/PIO Under the general permission available, NRI /
PIO may purchase residential / commercial property in India out of
funds remitted to India through normal banking channel or funds
held in his NRE / FCNR (B) / NRO account. No consideration shall be
paid outside India. However, payment for acquisition of immovable
property in India by NRI/PIO cannot be made either by Travellers
cheques or by foreign currency notes.
27.
Provided original payment was made by way of inward remittance
or by debit to NRE/FCNR (B) account. For this purpose no permission
of Reserve Bank is required and they may approach the Authorised
Dealer directly in the matter. (Please refer to A. P. (DIR Series
Circular No. 46 dated November 12, 2002).
MBA IV Sem
44
KLESs IMSR, HUBLI
Foreign Exchange Exposure 28. Subject to certain terms and
conditions (Please refer to Schedule 1 and Schedules 2 to
Notification No. FEMA 5/2000-RB dated 3rd May 2000). Loans can be
repaid by the borrower by way of inward remittance through normal
banking channel or by debit to his NRE/FCNR (B)/NRO account or out
of rental income derived from renting out such property. Such loan
can also be repaid by the borrower's close relatives through their
account in India by crediting the borrower's loan account. (Please
refer to Regulation 8 to Notification No. FEMA 4/2000-RB dated 3rd
May 2000 and A.P. (DIR Series) Circular No.95 dated April 20, 2003
and A.P. (DIR Series) Circular No.94 dated May 25, 2003). NRI avail
of housing loan in rupees from his employer in India subject to
certain terms and conditions (Please refer to Regulation 8A to
Notification No. FEMA 4/2000-RB dated 3rd May 2000 and A.P. (DIR
Series Circular No.27 dated October 10, 2003). Repatriation of sale
proceeds of residential/commercial property purchased by NRI/PIO
NRI / PIO may repatriate the sale proceeds of residential /
commercial property in India acquired by way of inward remittance
through normal banking channel or by debit to NRE /FCNR (B)
account. The amount to be repatriated should not exceed the amount
paid for acquisition of residential / commercial property (a) in
foreign exchange received through normal banking channel or by
debit to FCNR (B) account or (b) the foreign currency equivalent,
as on the date of payment, of the amount paid by debit to NRE
account. From out of balances in NRO account, he may remit upto USD
one million per financial year for any bonafide purposes, eligible
balances including the sale proceeds of immovable property. 32.
Yes. Repayment of loan in foreign exchange is treated as equivalent
to the foreign exchange received for purchase of residential
accommodation. No lock in period is applicable for sale of such
property. Yes. Repatriation of sale proceeds is restricted to not
more than two residential properties.
29.
30.
IX) 31.
33. 34.
MBA IV Sem
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KLESs IMSR, HUBLI
Foreign Exchange Exposure
X) 35. XI) 36.
Remittance of sale proceeds of residential/commercial property
received by way of gift by NRI/PIO The sale proceeds of
residential/commercial property received by way of gift by NRI/PIO
should be credited to NRO account only. Remittance of sale proceeds
of immovable property inherited by a person resident outside India
Yes. Amount not exceeding USD one million, per calendar year
subject to production of documentary evidence in support of
inheritance and Tax clearance certificate/no objection certificate
from Income Tax authority to authorized dealer for remittances.
However, if a PIO is a citizen of Pakistan or Bangladesh or Sri
Lanka or Afghanistan or China or Iran he should seek prior approval
of Reserve Bank with documentary evidence in support of inheritance
and tax clearance/no objection certificate from Income Tax
authority. This remittance facility is not available to a citizen
of Nepal or Bhutan. (Please refer to Regulation 4 (3) to
Notification No. FEMA 13/RB2000 dated 3rd May 2000)
37.
Yes. Amount not exceeding USD one million, per calendar year
subject to production of documentary evidence in support of
inheritance and Tax clearance certificate/no objection certificate
from Income Tax authority to authorized dealer for remi