forign exchange management

1. FEMA
CMA SHIVAJI RAJMANE

2. Introduction
• Foreign Exchange means foreign currency.
• Foreign exchange (Forex or FX) is the trading
of one currency for another.
• One can swap the us doller for the rupees.
• Foreign exchange transactions can take place
on the foreign exchange market also known
as forex market
• The exchange of one currecncy for another or
conversion of one currency in to another
currency is known as forign exchange

4. Introduction
• The value of any particular currency
• is determined by market forces
• Based on Trade, investment & tourism
• Dollars,Pounds, Frances,Yens & Dinners are all
foreign currencies from indias point of view &
• Together we can refer them as foreign
exchange
• Foreign exchange includes
• foreign money as well as near money assets
denominated in foreign currency

5. Meaning
• The market determines the value
• Also known as an exchange rate, of the
majority of currencies
• Foreign exchange is as simple as changing one
currency for another at local bank
• It also involve trading currency on the forign
exchange market
• i.e A Trader is betting a central bank will ease
or tighten monetary policy & one currency will
strengthen versus the other

6. Meaning
• The foreign exchange market is where
currencies are traded
• Currencies are imp because they enable the
purchase of goods & services locally & across
borders
• International currencies need to be exchanged
to conduct foreign trade & business
• In its basic sense the forex market around for
centuries
• People have always exchanged or bartered
goods & currencies to purchase goods &
services

7. Meaning
• However the forex mkt as we understand
today , is relatively modern invention
• After Bretton woods accord began to collapse
in 1971, more currencies allowed to float
freely against one another
• The value of individual currencies vary based
on demand & circulation and are monitored
by Foreign exchange trading services

8. Foreign Exchange – Def. (FEMA)
• According to sec 2(b) of the forign exchange
management act, 1999 means foreign
exchange means foreign currency & includes
• 1) All deposits, credits & balances
• payable in any foreign currency &
• any drafts, travellers cheque,
• letters of credits & bill of exchange
• expressed or drawn in Indian currency
• but payable in foreign currency

9. Foreign Exchange – Def. (FEMA)
• 2)Any instrument payable
• at the option of drawee or holder
• thereof or any other party thereto
• either in Indian currency or in foreign currency
• or partly in one & partly in other

10. Administration of Foreign Exchange
• The exchange rate regime in India
• can be best characterised as intermediate
• It is in between of Fully managed & freely
floating regimes
• Exchange rate policy is generally viewed as
sub-serving the monetary policy stance.
• It is now common knowledge that India in the
last decade of the twentieth century
• faced a severe macroeconomic crises

11. Administration of Foreign Exchange
• One of the biggest problems facing the indian
economy was that the
• Exchange rate was grossly overvalued
• Hence the rupee was devalued at about
@18% in two stages in july 1991
• At the same time the Govt introduced the
Liberalised Exchange Rate Management
System(LERMS) & thereby ushered in a dual
exchange rate regime.
• This system was abolished in March 1993
• Since then, the external value of the indian
rupee has been determined by market forces

12. Administration of Foreign Exchange
• With the RBI intervening as and when
required to provide the desired degree of
stability.
• The period following the Unification of
Exchange Rates in March 1993 was
characterised by
• large capital inflows and a substantial
improvement in the current account.
• In the absence of sufficient demand to absorb
the surplus in the foreign exchange mkt these
inflows exerted an upward pressure on the
rupee.

13. Administration of Foreign Exchange
• In order to maintain competitiveness of indian
exports, RBI decided to absorb the excess
flows in to Reserves
• Rupee accounted current account
convertibility in August 1994
• Bilateral exchange rates between india & US
were decided by using monthly data.
• It was seen that NER was significantly
undervalued relative to the purchasing power
parity(PPP)
• The gap was widened over time, This is
attributed to large devaluations in 1991,93

14. Administration of Foreign Exchange
• The need to protect the stability of exchange
rates of rupee has been heightened since 1998,
aftermath of Nuclear explosions & their impact of
resultant economic sanctions on the net flow of
foreign capital to India & the kargil war a year
later.
• The RBI has responded to the challenges largely
by affecting short & medium term interest rates
through its monetary policies
• At the same time, it has intervened in the foreign
exchange mkt by selling us dollars both in the
spot & forward mkts
• In this way, it has tried to prop up the indian
rupee.

15. Administration of Foreign Exchange
• In india, exchange rates were deregulated &
• were allowed to be determined by mkts in 1993.
• The economic liberalisation of early nineties
• facilitated the introduction of derivatives- based
on interest rates & foreign exchange.
• However, derivative use is still a highly regulated
area due to partial convertibility of Rupee
• Currently Forwards, Swaps & options are
available in India
• & the Use of foreign currency derivatives is
permitted for hedging purposes only.

16. Administration of Foreign Exchange
• The FEMA (1999) has been introduced as a
replacement for the earlier Foreign exchange
Regulation Act (FERA)
• FEMA came into (force) act on the 1st day of June 2000
• The main obj. of FERA was
• to conserve FOREX & to prevent its misuse.
• The obj. of FEMA is
• to facilitate external trade & payments and
• maintenance of forex mkt in India to regulate dealing in
foreign exchange & securities
• It regulates transactions indirectly affecting foreign
exchange
• This act is helpful for regulating the import & export of
currency & to regulate foreign business in india. It also
helps in making proper utilisation of foreign exchange

17. Administration of Foreign Exchange
• Under FEMA, violation of foreign exchange
rules has ceased to be a criminal offence &
would now be treated as a civil offense &
• the ED would no longer have the power to
arrest persons for such offences .
• Extreme cases of money laundering, drug
trafficking & gun Running would now be dealt
with the under the proposed new legislation
aimed at curbing money laundering.

18. Role of RBI in controlling Foreign
Exchange Market
• 1) Determination of Foreign Exchange Regime
• The RBI, (central Bank)does not deal in foreign
exchange directly with the public.
• It does so through authorized dealers.
• It determines the foreign exchange regime &
• it supervises, monitors & controls- the foreign
exchange mkt with the create an active
exchange mkt at imp trading centres with
wide participation.

19. Role of RBI in controlling Foreign
Exchange Market
• 2) Determination of Buying & Selling Rate
• The RBI used to fix the days Buying & selling
Rate of rupee in terms at pound sterling of the
beginning of the day.
• Till 1947, it was pound sterling but after 1947,
it was any other foreign currency instead of
pound sterling.
• However in practice the RBI continued with
the sterling pound because it was an
intervention currency.
• The doller purchase were started by RBI from
9th oct 1972& its sale from 2 feb 1987

20. • 2) Determination of Buying & Selling Rate
• The bank provides forward cover to the
authorised dealers by purchasing pound sterling
for delivery upto 9 ,mths initially then extendable
to 12 months, us dollars upto 12 mths, Deutsche
marks & Japanese yen upto 6 months.
• 3) Determination of an Active Inter Bank Market
in Foreign Currencies
• The RBI has taken a no of steps over the yrs
• to develop an orderly, competitive & active
interbank market in Foreign Currencies
• so that they can quote fine rate as possible for
public
Role of RBI in controlling Foreign
Exchange Market

21. Role of RBI in controlling Foreign
Exchange Market
• 4) Determination of Foreign Exchange Rates-
• The RBI prescribes the rates at which the
authorised dealers could undertake foreign
exchange business, indirectly, through the
exchange bank association till 1958 & through
foreign exchange Dealers Association of
India(FEDAI) since 1958
• The FEDAI fixed & published exchange rates in
pound sterling in consultation with the bank
for Banks transactions.

22. Role of RBI in Foreign exchange
Management
• 5) Interface in Foreign Exchange Market-
• The RBI has been intervening in the FEM
actively before 1991 & passively after that
year.
• RBI nature has been of a sterilization nature &
has also been impinging on the domestic
liquidity quite sharply.
• The RBI intervention has resulted in linking up
the foreign Exchange Market with the
domestic market & unwittingly transmitting
the volatility in the former to the latter.

23. Important Provisions of FEMA
• 1) Current Account & Capital Account
Transactions-
• Sec 5 & 6 of FEMA deal with current account
& capital account transactions
• Any Person may sell or draw foreign
exchange to or from authorised person if such
sale or withdrawal is a
• A current account transaction. – Sec 5
• A capital account transaction.- Sec 6
• Sub sec 2 of sec 6 states that RBI may, in
consultation with the Central Govt.

24. Important Provisions of FEMA
• specify – i) any class or classes of capital account
transactions which are permissible
• ii) the limit up to which foreign exchange shall be
admissible for such transactions.
• 2) Realisation & Repatriation of Foreign
Exchange-
• Where any amount of foreign exchange is due
Or has accrued to any person resident in India,
• then such person
• shall take all necessary steps to realise &
repatriate to India to such foreign exchange
• Within such period & in such manner as may be
prescribed by the RBI (SEC 8)

25. Important Provisions of FEMA
• Exemptions from Realisation & Repatriation of
foreign Exchange (Sec. 9)
• i) Possession of foreign currency / foreign coins
by any person upto such limit as the RBI may
specify.
• ii)Foreign currency account held or operated by
such person or class of persons & the limit upto
which the RBI may specify
• iii) Foreign exchange acquired or received before
the 8th day of July 1947 or any income arising or
accruing thereon, which is held outside india by
any person in pursuance of permission granted by
the RBI

26. Important Provisions of FEMA
• iv) Foreign Exchange acquired from
employment, business, trade, vocation,
services, honorarium, gifts, inheritance or any
other legitimate means upto such limit as the
RBI may specify.
• 3) Directorate of Enforcement-
• Sub section 1 of sec 36 of the act states that,
the central Govt shall establish a Directorate
of Enforcement with a Director or such other
officers of the enforcement for the purpose
of this act

27. Important Provisions of FEMA
• 4) Contravention & Penalties-
• Sec 13 of the act says that,
• if any person contravenes any provisions of the
act,
• he shall, upon adjudication, be liable to a penalty
upto three times the sum involved in such
contravention where such amt is quantifiable or
• upto two lakh rupees where the amt is not
quantifiable & such contravention is a continuing
one,
• Further penalty which may extend to
• five thousand rupees for everyday
• after the first day during which the contravention
continues

28. Important Provisions of FEMA
• Sec 14 states that if the concerned person
• fails to make full payment of the penalty
imposed on him within a period of 90 days,
• he shall be liable to civil imprisonment.

29. Foreign Exchange Transactions
• A foreign currency exchange transaction refers
• to a transaction in which one party agrees to
• deliver certain amount of a specific currency
or unit of account
• in order to consider whether the other party
agrees to deliver another amount of a
different currency or unit of account,
• whether it is current or future date &
• through fund transfer the date on which
accounting records or other forms of payment
instructions or other agreed methods of
transferring credit balances were delivered

30. Foreign Exchange Transactions
• 1) Merchant operations/Transactions-
• The authorised dealers (ADs) buy & sell
foreign exchange
• from the exporters & importers respectively.
• These are known as Merchant
operations/transactions.
• These are the genuine transactions
• resulting from the exposure of customers to
physical transfer of goods & services &
• thus, speculation in this area is prohibited.

31. Foreign Exchange Transactions
2)Inter Bank Operations/Transaction-
• It refers to buying & selling foreign exchange
between any two banks.
• Indian banks are now freely allowed to deal
among themselves.
• Most of the Banks are not market makers,
• They can be said to be market users.
• As such there is neither much liquidity, nor the
depth in the foreign exchange market in India.
• Due to this even small changes in demand &
supply
• have also caused ups & downs in the market

32. Foreign Exchange Transactions
• The Reserve Bank on such occasions, is expected
to intervene.
• 3) Overseas Operations/Transactions-
• When the Indian Bank buys foreign exchange
• from sellers in the overseas foreign exchange
market or sells foreign exchange
• in overseas foreign exchange market it is called
overseas operation or transactions
• Presently the banks in India can cover their
positions arising out of their merchant
transactions or interbank dealings freely in
overseas foreign exchange market.

33. Foreign Exchange Transactions
4) Operations/Transactions between RBI &
Banks
Due to amendment in sec 40 of the RBIact,1934
& after introduction of Modified Liberalised
Exchange Rate Management system,
The RBI is no under obligation of selling foreign
exchange.
Now it buys foreign exchange from the ADS at
the market Rates
W.e.f. from 95, The RBI has discontinued the
practice of its announcing two way exchange
Rates.

34. Foreign Exchange Transactions
• This however doesn’t mean RBI remains
passive (on looker over the situation)
• It is infact empowered to intervene foreign
exchange market as & when it deems fit.
• In time Excessive supply FE- RBI buys FE
• It also resorts its intervention through Spot,
Forward & Swaps on many occasion after
Rupee became freely floating currency
•

35. Purchase & sales Transactions
• 1) Spot Transactions-
• Its agreement between 2 parties
• They agrees to buy or sell one currency with
other
• For spot transactions, delivery is generally 2 bus
days after conclusion,
• Used to immediately convert one currency to
another
• Spot transaction is also known as FX-spot
• Its agreement between 2 parties to buy one
currency against selling another currency at an
agreed price for settlement on the spot date.

36. Foreign Exchange Transactions
2)Forward Transactions-
• Forward transaction means purchase or sale
of goods or service @ certain price for delivery
on a fixed future date.
• Its agreement between 2 parties requiring
delivery at some specified future date of a
specified amount of specific currency by one
of the parties against payment in domestic
currency by other party @ agreed upon the
contract.
• Rate – Forward fx rate
• It is used for hedging or speculation.

37. Foreign Exchange Transactions
3) Swap Transaction-
It refers to purchase in the spot market & sale in the
forward market
Or sale in the spot market & purchase in forward
market
Due to various reasons, the value of currencies
fluctuates.
It may be due to political reasons, war and also due
to fluctuation in production by international
cartels like opec
In such a situation a country like India which is
intending to import goods in next 6 mths, will
have to make arrangements for foreign exchange.

38. Foreign Exchange Transactions
• 4) Option Transaction-
• The option trading in forward market is mainly
used for avoiding risk.
• It is part of exchange risk management
• We minimise the loss of current transactions
by a forward transaction or vice versa,Hedging
• Call & put option are the two types of option
• It provides choice, right to a person to exercise
• Call option gives right to buy
• Put option gives right to sell

39. Foreign Exchange Transactions
• A) Bid- it is a price offered by dealer to buy
another currency
• B) Offer- it is a rate at which dealer is willing
to sell another currency
• C) Spread- it is the difference between the bid
& offer. This is profit which the dealers book
due the difference between bid price & offer
price.

40. Foreign Exchange Transactions
• Authorised Dealers-
• The term authorised dealer refers to any type of
financial institution
• that has received authorisation from the RBI as a
dealer
• to involve in the trading of foreign currencies.
• The transactions of the authorised dealer should
have been conducted in pursuance of a legal
mode & under the framework established by law.
• An authorised dealer is any person specifically
authorised by the RBI under sec 10 (1) of FEMA,
1999 to deal in foreign exchange or foreign
securities normally include banks.

41. Foreign Exchange Transactions

42. Foreign Exchange Transactions
• Foreign currency account
• Foreign currency accounts are an option for
Indians
• who are looking to deposit overseas earnings
or those
• who want to protect themselves against
exchange rate fluctuations domestically.
• If you are domestic resident & non resident
Indian plus if you are earning in a foreign
currency then u can open foreign currency a/c

43. Foreign Exchange Transactions
• Foreign currency account is an account
offered in many banks across india.
• It is any unique because rather holding the
balance in rupees, you hold the money in
foreign currency here in India
• The account can be in the form of Savings,
Current or term deposit & it can be held by
any resident of India

44. Foreign Exchange Transactions