Foreign exchange market, foreign exchange rate, exchange control, evolution of currency exchange control rate in India, types of foreign exchange rate, fixed exchange rate, pegged exchange rate, managed float, flexible exchange rate, India's forex scenario, BOP crisis of 1990,liberilised exchange rate management system, LERMS,gold standard, Bretton woods system, Euro market

1. FOREIGN EXCHANGE

2. FOREIGN EXCHANGE-MEANING
The system by which the type of money used in one country is
exchanged for another country's money, making international
trade easier.

3. Exchange Market
 A Market engaged in the buying and selling of Foreign
currencies. Such a market is required because each country
involved in international trade and investment has its own
domestic currency and this needs to be exchanged for other
currencies in order to finance trade and capital transactions.

4. Factors that influence exchange rates
The main factors that cause changes and fluctuations in
exchange rates and outlines the reasons for their volatility.
 Interest Rates
 Recession
 Current Account/Balance of Payments
 Terms of Trade
 Government Debt
 Political Stability and Performance

5. Meaning of exchange control
Foreign exchange control refers to the process of restricting
transactions involving foreign exchange either by a government or the
central bank. When foreign exchange control is in force the market
forces will not be able to operate freely because of the restrictions
imposed.
In fact, the International Monetary Fund has a specially laid out
provision named article 14, which strictly allows only transitional
economies to implement foreign exchange controls

6. Evolution of currency exchange control rate
in India
1. Until 1973, the central bank (Reserve Bank of India) kept the Rupee
linked to the Pound Sterling.
2. From 1975 onwards, a managed floating exchange rate system, linked
to a basket of currencies (major trading partners’), was followed.
3. Increased trade deficit led the RBI to devalue Rupee twice in 1991.
The central bank also adopted the Liberalized Exchange Rate
Management Systems under which a dual (effective and market) rate
was followed.
4.From 1993, market determined unified exchange rate is followed.

7. Foreign Exchange Rate
Exchange rates is an amount of the domestic
currency you will have to pay to obtain a unit
of a foreign currency

8. Types of foreign exchange rates
Fixed Exchange Rate System
Flexible Exchange Rate System
Managed Floating Rate System

9. Fixed exchange rate system/pegged exchange
rate system
Fixed exchange rate system refers to a system in which
exchange rate for a currency is fixed by the government.
A fixed currency system is relatively well protected against the
rapid fluctuations in inflation. Some countries following a
fixed rate system include Denmark, Hong Kong, Bahamas &
Saudi Arabia.

10. Flexible exchange rate /floating exchange rate
system
Flexible exchange rate system refers to a system in which exchange rate is determined by forces of
demand and supply of different currencies in the foreign exchange market. There is no official
(Government) intervention in the foreign exchange market.

11. Managed floating rate system
It refers to a system in which foreign exchange rate is
determined by market forces and central bank
influences the exchange rate through intervention in
the foreign exchange market. It is a hybrid of a fixed
exchange rate and a flexible exchange rate system.

12. India’s forex scenario
 In 2018, the forex market in India is among the top ten markets in the
world.
 In 2017, the forex assets in India is the 8th best market in the world
by forex reserves.
The top asset in this market is the United States as represented by US
institutional bonds and government bonds. The Indian forex reserves
are also held in terms of gold. India is the first nation in the world in
terms of gold consumption.

13. India’s forex scenario
The daily turnover for the market is well over several billion dollars down from a couple of millions
when it started.
The Indian forex market has several forex players that facilitate the exchange of currency. The markets
in these exchanges have several listed brokers and authorized institutions.
There are several non-bank financial institutions that are legally authorized to facilitate trade in the
Indian market. These institutions are regulated by the FEDAI and they use the USP for better rates of
exchange.
The market is open 24 hours every day and it is linked to the rest of the world markets.
The diversity of the market is not as entrenched and the total value of the market is mostly big in terms
of assets but not as big in terms of transaction rates.

14. BOP CRISIS OF 1990
During the 7th plan, between 1985-86 and 1989-90, India’s trade deficit amounted to Rs. 54, 204
Crore. The net invisible was Rs. 13157 Crore and India. The net invisible was Rs. 13157 Crore and
India’s BOP was Rs. 41047 Crore. India was under a severe BOP crisis.
The things became worse by the 1990-91 Gulf war, which was accompanied by double digit
inflation. India’s credit rating got downgraded. The country was on the verge of defaulting on its
international commitments and was denied access to the external commercial credit markets. In
October 1990, a Net Outflow of NRI deposits started and continued till 1991. The only option left to
fulfil its international commitments was to borrow against the security of India’s Gold Reserves as
collateral. The immediate response of the government was to secure an emergency loan of $2.2
billion from the International Monetary Fund by pledging 67 tons of India’s gold reserves as
collateral.
In 1991 the government started several reforms which are collectively called “Liberalization”. This
process brought the country back on the track.

15. Liberalized Exchange Rate management
System(LERMS)
LERMS was introduced in March 1992. According to this 40% of the
foreign exchange earned by an exporter is converted at the official RBI
rate, and 60% is converted at a “Market Determined Rate”, which is
bound to be higher. The 40% of the exchange surrendered to the RBI
and converted at the official rate will be used for import of essential
items such as petroleum products, fertilizers, defense expenditure and
life saving drugs

16. Gold Standard
A monetary standard under which the basic unit of currency
is equal in value to and exchangeable for a specified amount
of gold. It is a system in which the value of a currency is legally
fixed in terms of how much gold it is worth.

17. Advantages of gold standard
 Simplicity –it can be easily understood by the general public.
 Public Confidence- Gold standard promotes public confidence
because gold is universally desired because of its intrinsic value.
 Automatic Working- Under gold standard, the monetary system
functions automatically and requires no interference of the
government.
 Price Stability- Gold standard ensures internal price stability.
 Exchange Stability- Gold standard ensures stability in the rate of
exchange between countries.

18. Bretton woods system
The delegates of 44 countries met in Bretton Woods in July 1944 with
the principal goals of creating an efficient foreign exchange system,
preventing competitive devaluations of currencies, and promoting
international economic growth. The Bretton Woods Agreement and
System were central to these goals. The Bretton Woods Agreement also
created two important organizations—The International Monetary
Fund (IMF) and the World Bank. While the Bretton Woods System was
dissolved in the 1970s, both the IMF and World Bank have remained
strong pillars for the exchange of international currencies.

19. Objectives of Bretton Woods System
 Provide stable exchange rates to encourage investment and economic
growth
 Encourage countries to maintain low inflation / competitiveness – in
order to maintain value of exchange rate.
 Try to prevent competitive devaluation – where countries seek to
gain short-term advantage by reducing value of currency.

20. Euro Market
A Euromarket can be used to describe the financial market for
eurocurrencies.
The Euromarket includes countries that have fixed external tariffs and
no internal tariffs, and follow the monetary policy set by the European
Central Bank. While many member states do use the Euro as their
common currency, the Euromarket applies to all states in the EU.

21. THANK YOU