Foreign exchange market and it's structure in india

1. Fi Eh Mkt F
ore
ig
n
E
xc
h
an
g
e
M
ar
k
e
t
&
It’s Structure
Saturday, October 31,
2009
Nitin Kulkarni @ IF 2009 1

2. What is Foreign Exchange?
•In narrow terms, Forex simply meansforeign currency or
money other than the domestic currency or money
•In Broader Terms, Forex Means
9Stud
y
of all the currencies of the different countries
y
9How they are exchanged or traded with each other
9Exchange rates and how they are set
9
Th E h k t
9
Th
e
E
xc
h
ange mar
k
e
t
s
9The Participants
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2009
Nitin Kulkarni @ IF 2009 2

3. Function of a Forex Department
Exports
Pre/post
Imports
Opening of LC
shipment
Advance
Export
A
dvance bills
Bills for
collection
Exchange Dealings
Rate Computation
Nostro / Vostro accounts
Forward Contracts
Guarantees,LC’ S & bills for collection
Import loan and
guarantees
Forward

Contracts
Derivatives
Exchange position and
cover position
Remittances
Issue of DD
,
MT
,
TT
Statistics
Submission of
returns
,,
Cheques,sale of
Foreign currency
notes,NR deposits
returns
,
collection of
credit
information
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2009
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4. Foreign ExchangeMarket-World View
• Globall
y,
o
p
erations in the forei
g
n exchan
g
e market started
y, p g g
in a major way after the breakdown of the Bretton Woods
system in 1971, which also marked the beginning of
floatingexchangerateregimesinseveralcountries floating

exchange

rate

regimes

in

several

countries
.
• Over the years, the foreign exchange market has emerged
asthelargestmarketintheworld as

the

largest

market

in

the

world
.
• The decade of the 1990s witnessed a perceptible policy shift
inmanyemergingmarketstowardsreorientationoftheir in

many

emerging

markets

towards

reorientation

of

their

financial markets in terms of new products and
instruments, development of institutional and market
infrastructure and realignment of regulatory structure
consistent with the liberalised operational framework.
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2009
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5. Foreign ExchangeMarket in India
• The chan
g
in
g
contours were mirrored in a rapid expansion
gg
of foreign exchange market in terms of participants,
transaction volumes, decline in transaction costsand
more efficient mechanisms of risk transfer.
• The origin of the foreign exchange market in India could be
tracedtotheyear
1978
whenbanksinIndiawerepermitted
traced

to

the

year

1978
when

banks

in

India

were

permitted

to undertake intra-day trade in foreign exchange.
• However, it was in the 1990sthat the Indian foreign
exchange market witnessed far reaching changes along
with the shifts in the currency regime in India.
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2009
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6. ForeignExchangeManagementAct
Structure of Forex Market in India
Foreign

Exchange

Management
Act Central Govt.
R.B.I
.
Authorized Persons
F.E.D.A.I
.
Authorized Money Changes
Authorized Dealers
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2009
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Full Fledged
Restricted

7. Authorised Persons
Authorised Dealers
Commercial Banks -84
State Co
-
op Banks
–
1
Financial institutions FI -4 FactoringAgencies
-
5
Full Fledged
Money Changers
Department of Post
Others
Th C k
State

Co
-
op

Banks

–
1
Urban Co-op Banks -2
Factoring
Agencies

-
5
UCB,FFMC
Th
omos
C
oo
k

India Ltd.
Activities
All Permissible current
and capital account
Activities Activities related to financing of
A
ctivities
Sale/Purchase of
foreign
exchange for
Activities
S
p
ecified non
and

capital

account

transactions
financing

of

international trade
undertaken by these
institutions
exchange

for

private and
business visits
abroad
p
trade related current account transactions
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2009
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transactions

8. Authorised Persons
RtitdAthid
Authorised Dealers
Commercial Banks -84
State Co
-
op Banks
–
1
R
es
t
r
i
c
t
e
d
A
u
th
or
i
se
d

Dealers
Category – I - FI
Full Fledged
Money Changers
Department of Post
State

Co
-
op

Banks

–
1
Urban Co-op Banks -2
Activities
Activities incidental to financing
of international trade related
activities undertaken by these
UCB,FFMC
Activities
All Permissible current
and capital account
activities

undertaken

by

these

institutions.
Category – II
A
ctivities
Sale/Purchase of
foreign
exchange for
and

capital

account

transactions
Upgraded FFMC, Selected
UCB & RRB Thomos Cook
Activities
Private Visits Business Travel
exchange

for

private and
business visits
abroad
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2009
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Private

Visits
,
Business

Travel

9. F.E.D.A.I
‰Foreign Exchange Dealer's Association of India(FEDAI)
was set up in 1958 as an Association of banks dealing in
foreignexchangeinIndia(typicallycalledAuthorized foreign

exchange

in

India

(typically

called

Authorized

Dealers -ADs) as a self regulatory body and is incorporated
under Section 25 of The Companies Act, 1956.
‰It's major activities include framing of rules governing the
conductofinter
-
bankforeignexchangebusinessamong
conduct

of

inter
bank

foreign

exchange

business

among

banks vis-à-vis public and liaison with RBI for reforms and
development of Forex market.
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2009
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10. Functions of F.E.D.A.I
• Guidelines and rules for the forex business • Training of bank personnel in the areas of Forex business
Accreditationofbrokers
•
Accreditation

of

brokers
•
Advising/Assistingmemberbanksinsettlingissues Advising

/

Assisting

member

banks

in

settling

issues
,
matters in their dealings
• Represent member banks on Govt, R.B.I. and other bodies
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2009
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11. Functions of F.E.D.A.I
• Announcement of daily and periodical rates to member
banks
• Prescribing margin for calculating exchange rates for
variousmerchanttransactions various

merchant

transactions
• Formulating code of conduct for dealers working in banks
exchange brokers for dealing between each othe
r
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2009
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12. Members of F.E.D.A.I.
•
Publicandprivatesectorbanks Public

and

private

sector

banks
• Forei
g
n banks
g
• Co-operative banks • Financial institutions such as EXIM bank, I.D.B.I.,I.F.C.I.
andSIDBI andotherssuchasThomasCook(I)Ltd and

S
.
I
.
D
.
B
.
I
.
and

others

such

as

Thomas

Cook

(I)

Ltd
.
•
Ason
May2008
F.E.D.A.I.has
89
members
As

on

May

2008
F.E.D.A.I.

has

89
members
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2009
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13. Authorized Dealers
Commercial Banks, Co-Op Banks & Financial Institutions
Category
A
Category –B
Category
C
Category
–
A
ƒIt can
undertake all
types of Forex
ƒThese are
branches of the
bank ,handling all
Category
–
C
ƒThese
branches can
undertake only
types

of

Forex

Transactions
ƒCan set up
dealing room to
types of Forex
transactions and
reporting to dealing room of their bank.
undertake

only

limited type of
transactions
like sale and
dealing

room

to

handle such
transactions
room

of

their

bank.
ƒThese branches
cannot undertake
dealing room
purchase of foreign currency TC’s and Currency
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2009
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dealing

room

operations
and

Currency

14. Forex Market -Features
• The Market Has No Ph
y
sical Presence.
y
• It Is The Largest Market On The Planet “ Earth ”.
• It Is Mostly Speculative In Nature.
• It Is A 24 –Hour Market. • Some New York banks maintain 2 shifts (one arriving at
officeat3amwhenLondonandFrankfurtareopen) office

at

3

am

when

London

and

Frankfurt

are

open)
.
Large New York banks also have branches in Tokyo,
Frankfurt, and London. Thus, they are in contact with all
financial centers 24 hours.
• Daily Turn Over –2.75 To 3.00 Trillion Dollar Per Day
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2009
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15. 24 Hour Market Market
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2009
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16. Saturday, October 31,
2009
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17. Forex Market -Features
•
ItIsAMarketConnectedByAdvancedCommunication
•
It

Is

A

Market

Connected

By

Advanced

Communication

Channels Like S.W.I.F.T.
• It Is An Extremel
y
Active And Also An Un
p
redictable
yp
Market.
• The Market Is Truly Global As Trades Take Place Across
Continents Continents
.
• Most Deals Are On Spot Basis.
• The Market Is Dee
p,
Li
q
uid And Efficient.
p, q
• Deals Are Screen Based. • Market Is Volatile Because Of Floating Nature Of
ExchangeRates Exchange

Rates
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2009
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18. Foreign Exchange Market
™Interbank Market-Whole sale Market ‰Central Banks, Commercial Banks, Financial Institutions
&Corporate(UnionStates) &

Corporate

(Union

States)
‰The Average Lot Size -USD 1 -5 Mn
‰Indian Lot Size -USD 0.25 –1.0 Mn
™Retail Market ‰
Tourists
‰
Tourists
‰Individual needs Forex in the form of TC, Drafts
‰Importer
‰
Exporters
‰
Exporters

‰The amount is small in this market
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2009
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19. Wholesale Market
Corporates
Banks
Financial
IntermediaryCentral Banks
Hedge Funds
Speculators
(States)
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2009
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Funds

20. DirectQuotes
-
Spot
Exchange Rates
Direct

Quotes

-
Spot
USD / INR
base currency
Friday 10
th
2007-NY
Closing
Friday 21
st
August
2009-NY Closing
1USD=
48 6050
INR
Closing 1 USD = 40.6400 INR
1 USD = 118.4800 JPY
1 GBP = 2.0234 USD
1
€
= 1 3697 USD
1

USD

=

48
.
6050
INR
1 USD = 94.3820JPY
1 GBP = 1.6508 USD
1
€
= 1.4
3
2
6
US
D
1
€
=

1
.
3697

USD
€
36
US
1 USD = 1.0583 CHF
1 USD = 1.0812 CAD
1 AUD = 0.8348 USD
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2009
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Quoted currency
1 USD = 6.8313 CNY

21. IndirectQuotes
Exchange Rates
Indirect

Quotes
INR / USD
b b
ase

currency
100 INR = 2.5 USD
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2009
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22. Types of Exchange Rate
•Floating Rate–A completely floating exchange rate is
one whose level is determined exclusively by underlying
balanceofsupplyanddemandforthecurrencies balance

of

supply

and

demand

for

the

currencies

involved with no outside intervention i.e. Cable, Euro/$
•Fixed Rate–A fixed exchange rate is one in which case
the government guarantees a stable price for foreign
currency Thisachievedthroughinterventionsbycentral currency
.
This

achieved

through

interventions

by

central

bank whenever exchange rate varies from a stated %
from fixed rate i.e. Kuwaiti Dinar
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2009
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23. Types of Exchange Rate
•Managed Float–It is a system where the authorities
mani
p
ulate the exchan
g
e rate to suit their own
pg
objectives, sometimes intervening to fix the rate sometimes staying on the sidelines. This type of compromiseisknownasaManagedorDirtyfloat compromise

is

known

as

a

Managed

or

Dirty

float

i.e. Chinese Yuan, Indian Rupee ,(Yen )
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2009
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24. Forex Terms
•SWIFT-Society for world wide Interbank Financial
Telecommunication. It is replaces paper by electronic
fund transfer by secure SWIFT Codes ,thereby reduces
Transaction costs. It is supported by 6500 professional organizations throughout the world
•CHIPS-Clearing House for Interbank Payment system is
a US Based electronic payment system
•CHAPS-Clearing House for Automated payment system
is a UK based electronic payment system
Saturday, October 31,
2009
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25. SWIFT Codes
USD United States Dolla
r
INR Indian Rupee JPY Japanese Yen GBP Great Britain Pound CHF Swiss Franc Saturday, October 31,
2009
Nitin Kulkarni @ IF 2009 25

26. Forex Terms
•
Reuters
-
ReuterisaLondonbasedorganization
•
Reuters
-
Reuter

is

a

London

based

organization

established in the year 1851.First Electronic trading
screen which gives real time quotes was established in
theyear1973byReuters the

year

1973

by

Reuters
• Telrate-Telrate is an American organization established
in 1969 to deal in screen based trading for foreign exchange
• Fedwire –The transactions at NY-Forex market
ultimately get settled through Fedwire.It is a
communicationnetworkthatlinksthecomputersofabout communication

network

that

links

the

computers

of

about

7000 banks to the computers of Federal Reserve Banks
Saturday, October 31,
2009
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27. Foreign Currency Accounts
•Nostro Account
NostroaccountisanaccountmaintainedbyabankinIndia Nostro

account

is

an

account

maintained

by

a

bank

in

India

with a bank abroad i.e.S.B.I. may maintain an account with
Citi-Bank New York or with HSBC in London ,for $
operations and £operations respectively.
While corresponding with the Citi or HSBC SBI would refer
itsaccountwithformertwoas
Nostro
account meansour
its

account

with

former

two

as

Nostro
account
,
means

our

account with you. All foreign exchange transactions are
routed through Nostro accounts.
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2009
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28. Foreign Currency Accounts
•Vostro Account
AforeignbankmayopenrupeeaccountwithanIndian A

foreign

bank

may

open

rupee

account

with

an

Indian

bank. while corresponding with the foreign bank
maintaining an account with it, the Indian bank would refer
to the account as Vostro account meaning your account with us .Bank of Baharin and Kuwait may open an account withStateBankofIndiaanddrawdraftsontheaccount with

State

Bank

of

India

and

draw

drafts

on

the

account
.
On presentation of drafts, the Indian bank would pay to the
debit of the foreign bank’s a ccount with it. For exchange
control purposes such accounts are known as “non-
resident bank accounts”
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2009
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29. OnewayQuotes
-
Spot
Exchange Rates
One

way

Quotes

-
Spot
Big Figure
Big Figure
1 USD = 48.85 IN
R
Pips
1 USD = 93.8150 JPY 1 USD = 93.8150 JPY
Bi
g
Fi
g
ure
Pips
1 GBP = 1.6250 USD
gg
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2009
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Pips

30. Exchange Rates
Two-way Quotes -Spot
Offer
Bank sells USD
Corporate buys USD
USD / INR = 48.38/ 40
Offer
Bid
Bank buys USDS
p
read=Offer-Bid
Corporate sells USD
p
=2 Paise /USD
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2009
Nitin Kulkarni @ IF 2009 30

31. Quotes –Spot BOBaskQuote(USD/INR5)toBOI BOB

ask

Quote

(USD/INR

5)

to

BOI
Offer/Ask
BOI sells USD
BOB buys USD
USD / INR = 48.38/ 40
Offer/Ask
Bid
BOI buys USDS
p
read=Offer-Bid
BOB sells USD
p
=2 Paise /USD
BOB sa
y
s Your’s 5 USD
,
BOI
Saturday, October 31,
2009
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y,

32. Foreign Exchange Transaction
BOB
CITI
CITI
BOB’s Nostro.
a/c Dr
S
W
I
CITI
C H I
F
E
D
W
CITI
C
ITI
a/c
Dr
$5
mn
Sells 5 mn $
IF T
IP S
W
I
R
E
AMEX
Ca/c $5 Amex a/c Cr $5 Mn
BOI
AMEX
E
AMEX
BOI
’s Nostro.
BOI s

Nostro.

a/c Cr
Saturday, October 31,
2009
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33. Basis for Merchant Rates
• When the bank buys FEfrom the customer, it expects to
sell the same in the interbank market at a better rate and
thusmakeaprofitoutofthedeal Intheinterbank thus

make

a

profit

out

of

the

deal
.
In

the

interbank

market, the bank will accept the rate as dictated by the
market.
• It can,therefore,sell foreign exchange in the market at
themarketbuyingrateforthecurrencyconcerned Thus the

market

buying

rate

for

the

currency

concerned
.
Thus

the interbank buying rate forms the basis for quotation of
buying rate by the bank to its customer.
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2009
Nitin Kulkarni @ IF 2009 33

34. Basis for Merchant Rates
• When the bank sells FEto the customer, it meets the
commitment by purchasing the required foreign
h f th i t b k k t It i FE
exc
h
ange
f
rom
th
e
in
t
er
b
an
k
mar
k
e
t
.
It
can acqu
ire
FE

from the market at the market selling rate.Therefore,the
interbank selling rate forms the basis for quotation of
selling rate to the customer by the bank. Th i t b k t th b i f hi hth b k
•
Th
e
i
n
t
er
b
an
k
ra
t
e on
th
e
b
as
i
s o
f
w
hi
c
h

th
e
b
an
k

quotes its merchant rate is known as base rate
Saturday, October 31,
2009
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35. Merchant Buying Rates
Interbank Market Rate
48.3800/4000
Bank first sell
to Market
Market will buy at 48.3800
Bank will $ sell
high to market
at Market
bi t
Bank
Bank will deduct their margin and give quote to customer
b
uy
i
ng ra
t
e
hence buy $
low from
customer
Cstomer
Customer wants to sells FE
(Applicable rate will be
Saturday, October 31,
2009
Nitin Kulkarni @ IF 2009 35
C
u
stomer
(Applicable

rate

will

be

48.3800 less margin)

36. Merchant Selling Rates
Interbank Market Rate
48.3800/4000
Bank first buys
from Market
Market will sell at 48.4000
Bank will buy
low from
market at
Bank
Bank will add their margin and give quote to customer
market

at

market selling
rate and sell to
customer at
hi h t
Cstomer
Customer wants to
buy FE
hi
g
h
er ra
t
e
( Applicable rate will be
Saturday, October 31,
2009
Nitin Kulkarni @ IF 2009 36
C
u
stomer
(
Applicable

rate

will

be

48.4000 plus margin)

37. Cross Currency Rates
• We know that USD being the currency of intervention
only USD/INR exchange rate is available in the Indian
FMktdh tf ithllth F
orex
M
ar
k
e
t
an
d
exc
h
ange ra
t
es o
f
rupee w
ith
a
ll
o
th
er
foreign currencies are derived from this rate
•
SupposeMBTearned
£1mioinBriton,nowtheywantto
Suppose

MBT

earned

£

1mio

in

Briton

,now

they

want

to

remit the same to India then first they have to sell these
£ 1mio in London against the $ and those $ will be sold
inMumbaiagainstINR in

Mumbai

against

INR
• Suppose London quotes1£=1.6000 USD and Mumbai
q
uotes 1$= 48.8000 INR
q
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2009
Nitin Kulkarni @ IF 2009 37

38. Chain Rule
How Many INR = 1£ ?
If 1£ = 1.6000 $
A dif1$ 488000INR A
n
d

if

1$
=
48
.
8000

INR
Then 1£ = 1.6000 $ = (1$ *1.6000)=48.8000*1.6000 INR
Hence 1£ = 78.0800 INR
Saturday, October 31,
2009
Nitin Kulkarni @ IF 2009 38

39. Chain Rule
How Many INR = 1CAD $ ?
If 1.0880 CAD $= 1 $
A dif1$ 488000INR A
n
d

if

1$
=
48
.
8000

INR
$$
Then 1.0880 CAD
$
= 1
$
= 48.8000 INR
Then
1 CAD
$
=48.8000/1.0880=44.8530 INR
Saturday, October 31,
2009
Nitin Kulkarni @ IF 2009 39
$

40. Chain Rule
How Many INR = ¥
100
?
If 93.10 ¥ = 1 $
A dif1$ 488300INR A
n
d

if

1$
=
48
.
8300

INR
$
Then 93.10 ¥= 1
$
= 48.8300 INR
Then
¥
100
=48.8300/93.10*100=52.44 INR
Saturday, October 31,
2009
Nitin Kulkarni @ IF 2009 40