Impact of foreign exchange rates on International Finance

Foreign Exchange

1. Presented by: IMPACT OF FOREIGN EXCHANGE RATES ON INTERNATIONAL FINANCE: THE INDIAN STORY

2. Introduction Foreign exchange means reserves of foreign currencies. More aptly, foreign exchange refers to claim to foreign money balances. Foreign exchange gives resident of one country a financial claim on other country or countries. All deposits, credits and balances payable in foreign currency and any drafts, travelers’ cheques , letters of credit and bills of exchange payable in foreign currency constitute foreign exchange. Foreign exchange market is the market where money denominated in one currency is bought and sold with money denominated in another currency.

3. Need for the study The world nations are increasingly becoming more interrelated global trade, and global investment. These international result in cross country flow of world nations. Countries hold currencies of other countries and that a market, dealing of foreign exchange results . These international result in cross country flow of world nations. Countries hold currencies of other countries and that a market, dealing of foreign exchange results. The importance of the study is to know the features of foreign exchange market in India in the context of International Finance.

4. Financial System in India India has a financial system that is regulated by independent regulators in the sectors of banking, insurance, capital markets, competition and various services sectors. In a number of sectors Government plays the role of regulator.  RBI is regulator for financial and banking system, formulates monetary policy and prescribes exchange control norms. RBI also regulates foreign exchange under the Foreign Exchange Management Act (FERA). India has liberalized its foreign exchange controls. Rupee is freely convertible on current account. Rupee is also almost fully convertible on capital account for non-residents. Profits earned, dividends and proceeds out of the sale of investments are fully repatriable for FDI. There are restrictions on capital account for resident Indians for incomes earned in India.

5. Statement of problem India is now a well-integrated with the world economy and moves in tandem with global developments, both on the economic front as well on the currency front. The development in the Indian foreign exchange (FX) derivatives market should be seen along with the steps taken to gradually reform the Indian financial markets. Significant developments in the external sector, such as, substantial increase in foreign exchange reserves, growth in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of Indian investments abroad, increased access to external commercial borrowings by Indian corporates and participation of foreign institutional investors in Indian stock market, resulted in a changed environment. K eeping in view the changed environment, the Foreign Exchange Management Act (FEMA) was enacted in 1999 to replace FERA. FEMA became effective from June 1, 2000.

6. Objectives of the study To understand the foreign exchange management in India. To study the foreign exchange management in the context of International Finance.

7. Findings and analysis Administration framework for foreign exchange in India: With the Reserve Bank has the authority to administer foreign exchange in India, it is recognized that it cannot do so by itself. Foreign exchange is received or required by a large number of exports and imports in the country spread over a vast geographical area. It would be impossible for the reserve Bank to deal with them individually. Therefore , provisions has been made in the Act, enabling the Reserve Bank to authority any person to be known as authority person to deal in the foreign exchange or foreign securities, as an authorized dealer, money changer or off- shore banking unit or any other manner as it deems fit.

8. Cont…. Role of Foreign Exchange Market in India The foreign exchange market is a financial entity that allows one country's currency to be exchanged for another's. Foreign exchange markets are the most conventional and oldest financial marketplaces.  A global over-the-counter (OTC) market determines currency exchange rates worldwide. The foreign currency markets consist of banks, dealers, commercial enterprises, investment management firms, and hedge funds. All the main currencies are traded in all major financial locations. The currency market is open 24 hours a day, five days a week. 

9. Cont… The Foreign Exchange Market's Primary Functions: The basic goal of the foreign exchange market is to make it simpler to convert one currency into another or to move purchasing power across countries. The foreign currency market, like domestic clearings, provides the transfer function by making international payments by clearing debts in both directions simultaneously. The foreign exchange market also plays a vital role in facilitating international trade by providing local and international loans. When using foreign bills of exchange in international payments, a three-month credit is required before they mature. The FOREX offers short-term loans to importers to stimulate the movement of products and services between countries. The importer can use his credit to fund overseas purchases.

10. Cont… The Foreign Exchange Market's Primary Functions: A third role of the foreign exchange market is to hedge foreign exchange risks. Hedging is the process of hedging against currency risk. In a free exchange market, when the exchange rate, or the price of one currency in terms of another currency, fluctuates, the person involved may profit or lose money. A person or corporation assumes high exchange risk when there are huge amounts of net claims or net liabilities that must be met in foreign currency.

11. Advantages of Foreign Exchange Market Adaptability:  The forex market provides traders with a tremendous amount of flexibility. This is because the amount of money that may be traded is limitless. Furthermore, market regulation is virtually nonexistent. Clarity : The forex market is massive and covers several time zones. Despite this, forex market information is widely available. Furthermore, neither the government nor the central bank has the right to corner the market or fix prices indefinitely. Some entities may gain in the near term due to the temporary lag in information flow. The forex market's size makes it fair and efficient! Trading Options : On the forex markets, traders have a wide variety of trading options. Traders can choose from a wide range of currency pairings. Investors can also select between trading on the spot market and signing a long-term contract. As a result, the Forex market provides a solution for any budgetary or investor risk appetite.

12. Exchange Rate Policy of India India’s exchange rate policy has evolved in line with the domestic exchange rate policy as well as international developments. The period after independence was marked by a fixed exchange rate authority, which was in line with the Bretton Woods system prevalent back then. An important two-step downward adjustment was made in 1991 to the exchange rate of the Rupee. In March 1992, the Liberalised Exchange Rate Management System (LERMS) involving the dual exchange rate was set in motion. A unified single market-determined exchange rate system based on the demand for and supply of foreign exchange was put in place of the LERMS effective on March 1, 1993.

13. Cont… Trading in Rupee-Foreign Currency Swaps, Foreign Currency-Rupee Options, Cross-Currency Options, Interest Rate Swaps and Currency Swaps, Foreign Rate Agreements and Currency Futures has been made possible. India's foreign exchange reserves refer to assets held by the Reserve Bank of India (RBI) in foreign currencies. These reserves act as a cushion and provide liquidity, ensuring our country can meet its external obligations. The importance of Indian forex reserves cannot be overstated, as they play a vital role in maintaining the stability of the nation’s currency and economy. The Indian forex reserves have seen significant fluctuations, reflecting the country's economic dynamics and global financial conditions. India’s foreign exchange reserves are a topic of interest for economists and policymakers alike. With fluctuations and trends reflecting the nation's economic landscape, understanding the forex reserves of India is essential.

14. Cont… There was an external payment crises in India in 1990-1991. This was due to the macroeconomics imbalances in the second half of mid-eighties such as monetization of fiscal deficit, overvalued exchange rate, high tariffs and inward looking industrial policy. Internationals factors such as recession in the industrial world, first Iraq war in august 1990, restriction of external finance by international banks were responsible for the degradation of international confidence in India. As a result, the current deficit was around 3.2% of GDP. The foreign exchange market in India has come a long way since it faced crises during the 1990-91 period. Since then there was no looking back. The Forex reserves have always been on the rise, and the overall economy reflected a buyout growth. On the export and import front, the country have exceedingly well and has been able to garner a competitive edge over several developing nations.

15. Conclusion The exchange rate regime of a country depends on the manner in which the currency of the country is managed with respect to other countries’ currencies. There are primarily three different types of exchange rate regimes – freely floating, fixed and pegged or managed floating . India has liberalized its foreign exchange controls. Rupee is freely convertible on current account. Rupee is also almost fully convertible on capital account for non-residents. Profits earned, dividends and proceeds out of the sale of investments are fully repatriable for FDI. There are restrictions on capital account for resident Indians for incomes earned in India. For the week ended September 1, India's forex reserves stood at $598.897 billion, according to the Reserve Bank of India. Previously on August 4, 2023, the Indian forex reserves latest data estimated it at $601.453 billion. Notably, on July 14, 2023, the Indian forex reserves stood at an impressive $609.02 billion, marking a 15-month high. The Indian forex reserves consist of foreign currency assets, gold, special drawing rights, and the International Monetary Fund (IMF) reserve position.