Meaning of the Term “Foreign Exchange”, Exchange Market, Statutory basis of Foreign Exchange, Evolution of Exchange Control, Outline of Exchange Rate and Types, Import Export India’s Forex Scenario: BOP crisis of 1990, LOERMS, Convertibility. Introduction to International Monetary Developments: Gold standard, Bretton Woods’s system, Fixed Flexible Exchange Rate Systems, Euro market.

1. BUS4E F05 / IB05
FOREX MANAGEMENT
Finance Elective/ IB Elective
UNIVERSITY OF CALICUT
MASTER OF BUSINESS ADMINISTRATION
Prepared By:
Mr. Mohammed Jasir PV
Asst. Professor
MIIMS
Contact: 9605 69 32 66

2. • Meaning of the Term “Foreign Exchange”, Exchange
Market, Statutory basis of Foreign Exchange, Evolution of
Exchange Control, Outline of Exchange Rate and Types,
Import Export
• India’s Forex Scenario: BOP crisis of 1990, LOERMS,
Convertibility.
• Introduction to International Monetary Developments:
Gold standard, Bretton Woods’s system, Fixed Flexible
Exchange Rate Systems, Euro market.
Module I - Syllabus

3. Major currencies of the World ?

4. The Currency Market:
Where money denominated in one currency is
bought And sold with money denominated in
another currency.

5. "Foreign Currency" means any currency other
than Indian currency

6. "Foreign Exchange" means includes any instrument
drawn, accepted, made or issued under clause (8) of
section 17 of the Banking Regulation Act, 1956, all
deposits, credits and balance payable in any foreign
currency, and any drafts, traveller's cheques, letters of
credit and bills of exchange, expressed or drawn in
Indian currency but payable in any foreign currency
“Foreign Exchange”,

7. “Foreign Exchange”,
• Foreign exchange is the mechanism by which the
currency of one country gets converted into the
currency of another country.
• The conversion of currency is done by the banks
who deal in foreign exchange.
• These banks maintain stocks of one currencies in
the form of balances with banks

8. • It also refers to the stock of foreign currencies and other foreign
assets.
• The foreign exchange management ACT 1999 defines
• “Foreign exchange means foreign currency and includes
• (a) Deposits credits and balances payable in any foreign
currency.
• (b) Draft traveler’s cheques, letter or credit or bills of exchange
expressed or drawn in Indian currency but payable in any
foreign currency.
• (c) Drafts traveller’s cheques, letter of credit or bills of
exchange drawn by banks, institution or persons outside India,
but payable in Indian currency

9. Nature of foreign exchange
• Volatile, affected by hedger, speculator etc..
• Affected by demand and supply.
• Affected by rate of interest.
• Affected by balance of payment surplus and deficit.
• Affected inflation rate.
• Spot and forward rates are different.
• Affected by the economic stability of the country.
• Affected by the fiscal policy of the government.
• Affected by the political condition of the country.
• It can be quoted directly or indirectly

10. The market where the commodity traded is
Currencies.
Price of each currency is determined in term of
other currencies.
Foreign Exchange Markets

11. Exchange Rate is the price of one country's
currency expressed in another country's
currency.
In other words, the rate at which one currency
can be exchanged for another.
e.g. Rs. 70.80 per one USD
What is an Exchange Rate ?

12. ►Fixed Exchange Rate System
Fixed rates provide greater certainty for
exporters and importers.
►Flexible Exchange Rate System
Flexible exchange rate or floating exchange
rates change freely and are determined by trading
in the forex market.

13. Any financial transaction that involves more than one
currency is a foreign exchange transaction.
Most important characteristic of a foreign exchange
transaction is that it involves Foreign Exchange Risk.
What is a Foreign Exchange Transaction ?

14. All Scheduled Commercial Banks
(Authorized Dealers only).
Reserve Bank of India (RBI).
Corporate Treasuries.
Public Sector/Government.
Inter Bank Brokerage Houses.
Resident Indians
Non Residents
Exchange Companies
PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET

15. Spot Market:
Current Market) Spot market for foreign exchange is that
market which handles only spot transaction or current
transactions.
Principle characteristics:-
• Spot Market is of daily nature. It does not trade in future
deliveries.
• Spot rate of exchange is that rate which happens to prevail at
the time when transactions are incurred.
Operation of foreign exchange market:

16. Forward Market:
Forward Market for foreign exchange is that market which
handles such transaction of foreign exchange as are meant for
future delivery.
Principles Characteristics:-
• It only caters to forward transaction.
• It determines forward exchange rate at which forward transaction
are to be honoured.

18. Functions of Foreign Exchange Market

19. • The basic and the most visible function of foreign
exchange market
• The transfer of funds (foreign currency) from one
country to another for the settlement of payments.
• It basically includes the conversion of one
currency to another,
• Wherein the role of FOREX is to transfer the
purchasing power from one country to another.
1. Transfer Function:

20. • It provides credit for foreign trade.
• Useful for import and export
• Bills of exchange, with maturity period of three
months, are generally used for international
payments.
• Credit is required for this period in order to enable the
importer to take possession of goods, sell them and
obtain money to pay off the bill.
2. Credit Function

21. • To hedge foreign exchange risks.
• Hedging means the avoidance of a foreign exchange risk.
• In a free exchange market when exchange rate, i.e., the
price of one currency in terms of another currency,
change, there may be a gain or loss to the party
concerned.
• Under this condition, a person or a firm undertakes a great
exchange risk if there are huge amounts of net claims or
net liabilities which are to be met in foreign money.
• Exchange risk as such should be avoided or reduced.
3. Hedging Function

22. • For this the exchange market provides facilities for hedging anticipated or
actual claims or liabilities through forward contracts in exchange.
• A forward contract which is normally for three months is a contract to buy
or sell foreign exchange against another currency at some fixed date in the
future at a price agreed upon now.
• No money passes at the time of the contract.
• But the contract makes it possible to ignore any likely changes in exchange
rate.
• The existence of a forward market thus makes it possible to hedge an
exchange position.
• Foreign bills of exchange, telegraphic transfer, bank draft, letter of credit,
etc., are the important foreign exchange instruments used in the foreign
exchange market to carry out its functions

23. 4. Minimizing Foreign Exchange Risk:
The foreign exchange market provides "hedging" facilities
for transferring foreign exchange risk to someone else.

24. Statutory Basis for Exchange Control

25. • Foreign Exchange control was first introduced in September, 1939
under Defence of India Rules.
• ‘The Foreign Exchange Regulation Act (FERA), 1973.
• FERA was very strict and even has a provision for imprisonment.
• FERA was not suitable in the new and liberal economy, thus it was
replaced by Foreign Exchange Management Act (FEMA) 1999, which
came into effect from 1st June 2000.
• RBI plays a key role in the management of foreign exchange.
History

26. Statutory Basis for Exchange Control
The Foreign Exchange Regulation Act, 1973 (FERA
1973), as amended by the Foreign Exchange
Regulation (Amendment) Act, 1993, forms the
statutory basis for Exchange Control in India.

27. Foreign Exchange Regulation Act (FERA)
• Introduction
• It was a legislation passed by the Indian Parliament in 1973 and came
into force with effect from January 1, 1974.
• FERA emphasized strict exchange control over everything that was
specified, relating to foreign exchange.
• Law violators were treated as criminal offenders.
• Aimed at minimizing dealings in foreign exchange and foreign
securities.

28. Objectives
• To regulate certain payments.
• To regulate dealings in foreign exchange and securities.
• To regulate transactions, indirectly affecting foreign exchange.
• To regulate the import and export of currency.
• To conserve precious foreign exchange.
• The proper utilization of foreign exchange so as to promote the
economic development of the country

29. Coca –Cola Example:
• Coca-Cola was India's leading soft drink until 1977 when it left India
after a new government ordered the company to turn over its secret
formula for Coca-Cola and dilute its stake in its Indian unit as required
by the Foreign Exchange Regulation Act (FERA).
• In 1993, the company (along with PepsiCo) returned after the
introduction of India's Liberalization policy

30. Foreign Exchange Management Act (1999)
• Introduction
• The FEMA was an act passed in the winter session of Parliament
in 1999 which replaced FERA
• FERA did not succeed in restricting activities.
• The act would become FEMA to relax the control on foreign
exchange in India.
• The deals in Foreign Exchange were to be ‘managed’ instead of
‘regulated’
• The switch to FEMA shows the change on the part of the
government in terms of the foreign capital.

31. FEMA (1999)
• FEMA gives the central government the power to impose the
restrictions.
• The transactions should be made only through an authorized
person.
• Deals in foreign exchange under the current account by an
authorized person can be restricted by the Central Government,
based on public interest.
• The RBI is empowered by this Act to subject the capital account
transactions to a number of restrictions.

32. FEMA (1999)
FEMA stands for Foreign Exchange Management Act. It is
a soft, liberal & simplified law that aims at boosting foreign
trade and investment more in tune with Country’s new
economic environment of globalization of Indian economy.

33. FEMA (1999)
• Statutory Basis for Exchange Control.
• The Foreign Exchange Regulation Act, 1973 (FERA 1973), as amended by the
Foreign Exchange Management (Amendment) Act, 1999. from the statutory basis
for Exchange Control in India.
• FEMA has been introduced as a replacement of FERA.
• FEMA facilitating external trade & payments.
• Consolidate & amend the law relating to foreign exchange.
• Promoting the orderly development & maintenance of foreign exchange
market in India.
• 49 Section in the Act.

34. Objective of the Act:
• The main objectives of FEMA is to utilize foreign exchange resource
of the country effectively.
• It is facilitates external trade and payment
• For promoting orderly development & maintenance of foreign
exchange in India.
• It Is applicable to all parts of India.
• To maintain a good relation with other countries.
• It is also applicable to all branches, offices & agencies outside India
owned or controlled by a person who is a resident of India.

35. FEMA Act : (applicable to)
• The FEMA, is applicable:
• To the whole of India.
• Any Branch, office & agency, which is situated outside India, but is owned or
controlled by a person resident in India.
• Broadly speaking FEMA, covers three different types of
categories are:
a) Person.
b) Person Resident in India.
c) Person Resident outside India
• Export:
• Goods & services from India to outside.

36. FEMA Act : (applicable to)
• Foreign Currency:
• Other than Indian Currency.
• Foreign Exchange:
• Means exchange of foreign currency.
• Foreign Security:
• Security expressed in foreign currency.
• Import:
• Goods & services from outside to India.
• Security:
• Share, Stock etc. as defined in the Public Debt Act of 1994.
• Service:
• Banking, Financing, Insurance etc..

37. FEMA Act : (applicable to)
• Transfer:
• sale, Purchase, Exchange etc..
• Non-Resident Indian (NRI):
• Citizen of India residing outside.
• Overseas Corporate Body (OCB):
• A company, firm, etc… Owned at least 60% by NRIs.

38. FERA v/s FEMA
• The objective of FERA was to conserve forex and prevent its
misuse. The objective of FEMA is to facilitate external trade and
payments and maintenance of foreign exchange in India.
• Violation of FERA was considered a criminal offence. Whereas
violation of FEMA was considered a civil offence.
• Under FERA citizenship was a criteria while determining a person
as resident of India whereas under FEMA stay of more than 182
days is a criteria to determine residential status of a person.

39. Few Definitions
• "authorized person" means an authorized dealer, money
changer, off-shore banking unit or any other person for the time
being authorized under sub-section (1) of section 10 to deal in
foreign exchange or foreign securities;
• "capital account transaction" means a transaction which alters
the assets or liabilities, including contingent liabilities, outside
India of persons resident in India or assets or liabilities in India of
persons resident outside India, and includes transactions referred
to in sub-section (3) of section 6;

40. Few Definitions
• "currency" includes all currency notes, postal notes,
postal orders, money orders, cheques, drafts, travellers
cheques, letters of credit, bills of exchange and
promissory notes, credit cards or such other similar
instruments, as may be notified by the Reserve Bank;
• "currency notes" means and includes cash in the form of
coins and bank notes;

41. • "current account transaction" means a transaction other than a capital
account transaction and without prejudice to the generality of the
foregoing.
• "foreign exchange" means foreign currency and includes,-
• (i) deposits, credits and balances payable in any foreign currency,
• (ii) drafts, travellers cheques, letters of credit or bills of exchange,
expressed or drawn in Indian currency but payable in any foreign
currency,
• (iii) drafts, travellers cheques, letters of credit or bills of exchange
drawn by banks, institutions or persons outside India, but payable in
Indian currency;

42. • "person" includes –
• (i) an individual,
• (ii) a Hindu undivided family,
• (iii) a company,
• (iv) a firm,
• (v) an association of persons or a body of individuals, whether
incorporated or not,
• (vi) every artificial juridical person, not falling within any of the
preceding sub-clauses

43. • "person resident in India" means-
• (i) a person residing in India for more than one hundred and
eighty-two days during the course of the preceding financial year
• "person resident outside India"
• means a person who is not resident in India;

44. Evolution of
Exchange Control
1. Definition of Foreign exchange control
2. Objectives of Foreign Exchange Control
3. Types of Foreign Exchange Control
4. Conditions Necessitating Foreign Exchange Control.

45. Foreign Exchange Reserves
• Foreign exchange reserves are the foreign currencies
held by a country's central bank.
• They are also called foreign currency reserves or
foreign reserves.
• There are many reasons why banks hold reserves.
• The most important reason is to manage their
currencies' values.

46. Here are the countries with reserves of more than $100 billion as of
December 31, 2017
Country Reserves (in billions) Exports
China $3,236.0 Consumer products, parts.
Japan $1,264.0 Auto, parts, consumer products.
European Union $740.9 (2014) Machinery, equipment, autos.
Switzerland $811.2 Financial services.
Saudi Arabia $496.4 Oil. Hurt by low prices.
Taiwan $456.7 Machinery, electronics.
Russia $432.7 Natural gas, oil. Hurt by sanctions
Hong Kong $431.4 Electrical machinery, apparel.
India $409.8 Tech, outsourcing.
South Korea $389.2 Electronics.
Brazil $374.0 Oil, commodities.
Singapore $279.9 Consumer electronics, tech.
Thailand $202.6 Electronics, food.

47. What is Exchange Control?
• It is one of the devices adopted for the purpose of control
international trade and regulate international indebtedness arising
out of international workings and dealings.
• Foreign exchange controls are various forms of controls imposed
by a government on the purchase/sale of foreign currencies by
residents or on the purchase / sale of local currency by non-
residents.

48. Definition:
• “Foreign Exchange Control” is a method of state
intervention in the imports and exports of the country, so
that the adverse balance of payments may be corrected”.
Here the government restricts the free play of inflow and
outflow of capital and the exchange rate of currencies.

49. • According to Crowther:
“When the Government of a country intervenes
directly or indirectly in international payments and
undertakes the authority of purchase and sale of
foreign currencies it is called Foreign Exchange
Control”.

50. • According to Haberler:
“Foreign Exchange Control in the state regulation
excluding the free play of economic forces for the Foreign
Exchange Market”.
The Government regulates the Foreign Exchange
dealings by Consideration of national needs.

51. To be more clear
• Means the monopoly of the government
• In the purchase and sale of foreign currencies
• To restore the balance of payments and avoid the market
forces in the decision of monetary authority
• When tariffs and quotas do not help in correcting the
balance of payments the system of Foreign Exchange
Control is restored to by Governments.

52. Objectives of Foreign Exchange Control
1. Correcting Balance of Payments
2. To Protect Domestic Industries
3. To Maintain an Overvalued Rate of Exchange
4. To Prevent Flight of Capital
5. Policy of Differentiation
6. Other Objectives

53. 1. Correcting Balance of Payments
• Main purpose - restore the balance of
payments equilibrium
• By allowing the imports only when its
necessary
• Limiting the demands for foreign exchange up
to the available resources.

54. 2. To Protect Domestic Industries
• To protect the domestic trade and industries from foreign
competitions
• It induces the domestic industries to produce and export
more with a view to restrict imports of goods.

55. 3. To Maintain an Overvalued Rate of Exchange
• This is the principal object of exchange control.
• When the Govt. feels that the rate of exchange is not at a
particular level, Govt. involve in maintaining the rate of
exchange at that level.
• For this purpose the Government maintains a fund
• May be called Exchange Equalization Fund to limit the rate of
exchange when the rate of particular currency goes up,
• Govt. start selling that particular currency in the open market and
thus the rate of that currency falls because of increased supply.

56. 4. To Prevent Flight of Capital
When the domestic capital starts flying out of the
country, the Government may check its exports through
exchange control.

57. 5. Policy of Differentiation:
• Govt. policy of differentiation by exercising exchange control.
• Govt. may allow international trade with some
countries by releasing the required foreign currency
• Govt. may restrict the trade import and exports with
some other countries by not releasing the foreign
currency.

58. 6. Other Objectives
• To earn revenue (selling and purchasing)
• To stabilise the exchange rates
• To make imports of preferable goods possible by making
the necessary foreign exchange available
• To pay off foreign liabilities with the help of available
foreign exchange resources.

59. Methods of Exchange
Controls

60. Methods of Exchange Controls
1. Direct Methods
2. Indirect Methods

61. 1. Direct Methods
• Adopted by the central bank
• Aimed to restricting the use and the quantity
of foreign exchange.
• These include
• Intervention
• Exchange restriction
• Exchange clearing agreements
• Payments agreements

62. (i) Intervention
• By Central bank or Central Govt.
• Related to pegging
• To fix or change the exchange rate
• Sale and purchase of currency
Pegging:- Central bank or government may intervene in the foreign
exchange market with a view to raise or lower the exchange value of
home currency relative to foreign currency through the sale or purchase
of the currency.

63. (ii) Exchange Restrictions
• Strict form of exchange control
• Policies or measures as are directed to restrict or reduce compulsorily
the flow of domestic currency in the foreign exchange market.
• Compulsory reduction of the supply of its currency into the market.
• The essence of this type of control is the acquisition by the government or
the central bank of all foreign exchange earnings and receipts and their
exchange for domestic currency.
• The importers and other categories of people can purchase foreign
exchange only from the government or central banking authorities.

64. The prominent variants of exchange restrictions
are as follows
(a) Blocked Accounts
(b) Multiple Exchange Rates
(c) Allocation of Exchange According to Priorities

65. Blocked Accounts
• Central bank of an importing country maintains
the foreign exchange accounts of the foreign
exporters.
• The central bank does not permit the creditors to
use their currency holdings in their accounts for
a specified period.

66. Example
• Germany adopted this practice in 1931.
• England exercised it during 1939-45 period when large
Sterling balances, payable to India, got accumulated on
account of large scale imports of goods from the latter
during war period.
• The payment remained blocked till the termination of war.
• Only after 1945, the payments were released in instalments
at the convenience of England.

67. Multiple Exchange Rates
• An elaborate structure of exchange rates applicable to different
categories of imports, exports and capital transfers.
• Low exchange rates are maintained in exportable goods for
improve their export.
• In case of imports,
• Low exchange rates for necessaries
• High exchange rates for luxury goods or harmful products

68. Example
• South Africa from 1985 to 1995,
• China (1981 to 1985) during a period of Chinese economic reform

69. (c) Allocation of Exchange According to
Priorities
• The foreign exchange is allocated for the import of
different categories of goods and for other purposes
according to a specific order of priorities.
• Essential items (food, raw materials, intermediate
products, defence materials, machinery, and technology)
- higher priority
• luxury imports – less priority

70. (iii) Exchange Clearing Agreements
• Two or more trading countries establish accounts in their
respective countries.
• The importers of a given country make payments into that
central account in the domestic currencies.
• These amounts are paid out to the exporters for the goods
exported
• Any surplus or deficit after the clearing operations is settled
either in terms of gold or a convertible currency acceptable to
the trading partners.

71. (iv) Payments Agreements
• To overcome the difficulties of delay involved in settling
international payments
• For the centralisation of payments observed in clearing
agreements
• A creditor is paid as soon as information is received by the central
bank of the debtor country from the creditor country’s central
bank that its debtor has discharged his obligation and vice versa.
• Payment agreements have the advantage that direct relation
between the exporters and importers is maintained.

72. 2. Indirect Methods
(i) Tariff and Non-Tariff Restrictions
(ii) Export Subsidies
(iii) Increase in Interest Rates

73. (ii) Export Subsidies
• When the government follows the policy of subsidizing exports
• The home exporters to enlarge exports.
• This measure, on the one hand,
• Can bring about an improvement in the BOP deficit and,
• On the other, can raise the external value of home currency.

74. (iii) Increase in Interest Rates
• The increase in the structure of interest rates in the
home country leads to an inflow of capital from abroad
and the prevention of capital outflow.
• These changes effect improvement in the BOP situation
in addition to making the foreign exchange rate more
favourable.

75. The following are conditions where exchange
control can be function
• To check the flight of capital
• When the balance of payment is disturbed due to some
temporary reasons such as fear of war, failure of crops
or some other reasons
• When the country wants to discriminate between various
sources of supply.

76. Gold standard, Bretton Woods’s
and Exchange Rate

77. Gold Standard
• The gold standard is a monetary system where a
country's currency or paper money has a value directly
linked to gold.
• With the gold standard, countries agreed to convert paper
money into a fixed amount of gold

78. The Gold Standard (1876 – 1913)
• A system of setting currency values whereby the participating countries
commit to fix the prices of their domestic currencies in terms of a
specified amount of gold.
• The gold standard as an international monetary system gained
acceptance in Western Europe in the 1870s.
• The United States was something of a latecomer to the system, not
officially adopting the standard until 1879.

79. • The gold standard is a monetary system where a
country's currency or paper money has a value directly
linked to gold.
• With the gold standard, countries agreed to convert paper
money into a fixed amount of gold

90. Bretton Woods’s (1944)

91. 1939 to 1945
Second World War

92. Bretton Woods
• In 1994 – 730 delegates from 44 allied powers met
at Bretton Woods, New Hampshire
• To create a new post-war international monetary
system
• The Bretton Woods Agreement, implemented in
1946

93. • Each member government pledged to maintain a fixed, or
pegged, exchange rate for its currency vis-à-vis the dollar or
gold.
• Established a US Dollar - based international monetary
system
• Also established two new institutions

94. The IMF and the World Bank
• The IMF aids countries with balance of payments and
exchange rate problems
• The International Bank for Reconstruction and
Development (World Bank) helped post-war
reconstruction and since then has supported general
economic development

95. Exchange Rate
• The price of a nation’s currency in terms of another
currency.
• An exchange rate thus has two components, the domestic
currency and a foreign currency.

96. Factors influencing Exchange Rates
• As with any market, the forex
market is driven by supply and
demand
• DD increases Price Increases
• SS increases price decreases
• National economic performance
• Central bank policy
• Interest rates
• Trade balances
• Political factors (elections
and policy changes)
• Market sentiment
(expectations and rumours)
• Unforeseen events (terrorism
and natural disasters)

97. Types Of Exchange Rates
1. Fixed Exchange Rate
2. Floating/Flexible Exchange Rate
3. Managed Float

98. Fixed Exchange Rate
• This is where a government maintains a given
exchange rate over a period of time.
• This could be for a few months or even years.
• In order to maintain the exchange rate at the stated
level government uses fiscal and monetary policies
to control aggregate demand.

99. • In a fixed exchange rate system the XR is set by the
government or central bank at a particular rate.
• The forces of supply and demand do not determine the
rate.
• The central bank holds reserves of US dollars and
intervenes in order to keep the exchange rate pegged at
that level known as the Official Rate.

100. • Currency Devalued
(Deliberately devaluing their currency – making weaker)
• Currency Revalued
(Deliberately increasing the currency value – making
stronger)
Eg. Chinese Yuan

101. Advantages of Fixed Exchange Rate
1. The risk and uncertainty of trade and promoting foreign direct
investment (FDI) is reduced thus making business and
investment planning possible.
2. Reduced Currency Speculation.
3. Creates a stability in knowing the exchange rate

102. Disadvantages of Fixed Exchange Rate
1. Protecting the exchange rate requires domestic economic policies
to be frequently adjusted. Monetary policy focuses on keeping
the rate stable.
2. Reserves are needed to protect the value.
3. An improvement in an economy’s competiveness that results in lower
prices will not be fully passed on to export customers if the
exchange rate remains unchanged.
4. Exchange rate may be undervalued or overvalued.

103. Floating Exchange Rate
• A floating exchange rate regime is where the rate
of exchange is determined purely by the demand
and supply of that currency on the foreign
exchange market.

104. • The value of a currency is allowed to be determined by the forces of
demand and supply on the foreign exchange market.
• There is no government intervention
• Any change in supply or demand for a currency will cause a
depreciation or appreciation in the exchange rate.
• An increase in demand for the local currency causes it to appreciate
or rise.
• However, if there is a greater demand for the foreign currency the
value of the local currency falls or depreciates to the foreign
currency

106. Currency Appreciation
• An appreciation means an increase
in the value of a currency. It means a
currency is worth more in terms of
foreign currency.
• A rise or appreciation in the economy
in the country’s currency will mean
that the price of imports into the
country will fall and the price of the
country’s exports will rise.
• This is represented by a shift in the
supply curve to the left.

107. Currency Depreciation
 A depreciation means a decrease in
the value of a currency. It means a
currency is worth less in terms of a
foreign currency.
 A fall or depreciation in the value of
the exchange rate will mean the
opposite, that is the price of imports
into the country will rise and the price
of the country’s export will fall.
 This is represented by a shift of the
demand curve to the left.

108. Advantages
• Market determined, so it is more efficient
• No need for reserves to intervene
• Exchange rate would reflect its true value
• Absorbs economic shocks better
• Freedom of government to pursue internal policies
• Automatic BOP adjustment, less likelihood of a BOP crisis

109. Disadvantages
• Large depreciation may occur
• Instability of exchange has a negative impact on domestic economy
• Terms of trade may decline with fall in exchange rate
• Uncertainty of currency
• Speculation of currency
• Reduced investment as this would be too risky

110. Managed Floating Exchange Rate
• This is where the currency is broadly managed by the forces of
demand and supply but the government takes action to influence
the rate of change in the exchange rate.
• The Central Bank seeks to stabilize the exchange rate within a
predetermined range for a given period of time, but DOES NOT
FIX IT at any particular level. This allows for policy makers the
benefit of planning with some degree of certainty, for the
macroeconomic affairs of a country.
• Central bank intervenes to smoothen out ups and downs in the
exchange rate of home currency to its own advantage

112. Advantages
• The managed float attempts to combine the advantages of both the
fixed and flexible exchange rate systems, depending on the degree of
instability.
• The less instability, the less intervention is necessary by central
banks and they can pursue quasi-independent domestic monetary
policies to stabilize their own economies.
• The greater the instability, the more intervention is necessary by
central banks and the less free they are to pursue independent
domestic monetary policies because they are frequently required to
use their money supplies to calm disturbances in the foreign
exchange markets.

113. Disadvantages
• The big problem with a managed float comes in determining the timing
and magnitude of the instability and the necessary intervention.
• If the central banks are too quick to respond or if the amount of
intervention is inappropriate, their actions may be further destabilizing.
• This increased instability has a tendency to dampen international flows
and contract world trade. If they wait too long, permanent damage may
be done to some countries' trade and investment balances.

114. Import & Export

115. Export
• The term export is derived from the conceptual
meaning as to ship the goods and services out of the
port of a country
• The seller of such goods and services is referred as an
"exporter" who is based in the country of export
• Whereas the overseas based buyer is referred to as an
"importer"

116. • In International Trade, "exports" refers to selling goods
and services produced in the home country to other
markets
• Exporting is the most popular way for companies to
become international
• Exporting is usually the first mode of foreign entry used by
companies

117. Risk in Export
• Lack of knowledge about new market
• Unfamiliarity with foreign environments
• Payment Risk
• Damage Risk

118. TYPES OF EXPORT
• Direct export
• A manufacturer or
exporter sells directly
to an importer or
buyer located in a
foreign market
• Indirect export
• It involves the use of
independent middlemen
(brokers, bank) to
market the firm’s
products overseas

119. Export Procedure

120. Composition of India’s Exports
Agriculture and
related Products
Ores and
Minerals
Manufactured
Items
Fuel and
lubricants

121. Advantages Of Export
• Increasing your market
• Increasing sale & profits
• Reducing risk and balancing growth
• Sell excess production capacity.
• Gain new knowledge and experience

122. Disadvantages of Export
• Lead to inflation
• Extra Costs
• Financial Risk
• Export Licenses and Documentation
• Market Information

123. Disadvantages of Export
• Finding the importer is difficult
• Obtaining license and documents for export is difficult.
• Transportation cost may be high on some occasions.
• Low value-added exports can only get a small profit.
• Domestic production of other industries lack of funds or labour.
• Exports will lead to the loss of core technologies

124. Import
• The term import is derived from the conceptual
meaning as to bring in the goods and services into
the port of a country.
• The buyer of such goods and services is referred
to an "importer"

125. Types of Imports
•Industrial and consumer goods
•Intermediate goods and services

126. • Direct Import
• Direct-import refers to a type of business importation involving a major
retailer (e.g. Wal-Mart) and an overseas manufacturer. A retailer typically
purchases products designed by local companies that can be manufactured
overseas.
• Indirect Import
• In a direct-import program, the retailer bypasses the local supplier
(colloquial middle-man) and buys the final product directly from the
manufacturer, possibly saving in added costs. This type of business is fairly
recent and follows the trends of the global economy.

127. Composition of India’s Imports
Petroleum
Products
Capital Goods
Pears &
Precious Stones
Iron and steel

128. Advantages of Import
• Reduce dependence on existing markets
• Exploit international trade technology
• Extend sales potential of existing products
• Maintain cost competitiveness in your

129. Disadvantages Of Import
• Unemployment will increase.
• It leads to excessive competition
• It also increases risks of other diseases from which the
country is exporting the goods.
• Local manufacturers will lose their business orders.
• We can’t return the damage and poor quality goods easily.
• Reducing the income of our country.

133. India’s Forex Scenario

134. BOP CRISIS OF 1990 (1991 CRISIS)

135. End of 1980s
• Facing a BOP crisis
 Due to unsustainable borrowing and high expenditure
The Current Account Deficit (3.5 %) in 1990-91 massively weakened
the ability to finance deficit

136. Macroeconomic Indicators and BoP
Situation in 1990-1991
12400
16900
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1989-90 1990-91
The Trade Deficit

137. Current Account Deficit
11350
17350
1989-90 1990-91

138. The CAD/GDP Ratio
2.3 %
1989-90
to
3.1 %
1990-91
The fiscal deficit to GDP ratio was more than 7 percent
during the two years 1989-90 and 1990-91

139. Foreign Exchange Reserve
Reserve meant to cover import costs for two years
(1989-1991), were just sufficient to cover close to
two and half months of imports.

140. India’s Foreign Exchange Reserves
5227
2152
Jan-89 Jan-90
In May and July 1991, These
reserves ranged between Rs.
2,500 crore to 3,300 crore.

141. The Average Rate Of Inflation
7.5
10
13
0
2
4
6
8
10
12
14
1989-90 1990-91 1991-92

142. The GDP Growth Rate
6.5
5.5
5
5.2
5.4
5.6
5.8
6
6.2
6.4
6.6
1989-90 1990-91

143. BOP crisis affected the performance of
industrial sector
8
8.6
8.2
7.7
7.8
7.9
8
8.1
8.2
8.3
8.4
8.5
8.6
8.7
Secon Half of 1980 1989-90 1990-91

144. Indicators in BOP Crisis 1990 (1991)
• Trade deficit
• Current account deficit
• The CAD/GDP ratio
• Foreign exchange reserve
• The average rate of inflation
• The GDP growth rate
• Performance of industrial sector

145. Causes of BOP crisis of 1990-91
Break-up of the Soviet Bloc
Iraq-Kuwait War
Slow Growth of Important Trading Partners/ Global recession
Political Uncertainty and Instability
Loss of Investors’ Confidence
Fiscal Indiscipline
Increase in Non-oil Imports
Rise in External Debt

146. Break-up of the Soviet Bloc
• Rupee trade till 1980 – Stopped in 1990-91
• Glasnost and Perestroika and the break-up of the Eastern
European (Czech Republic, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania)
• Flow of new rupee trade credits declined suddenly in 1990-91.
• Decline in our exports to Eastern Europe

147. Exports to Eastern Europe
22.1
19.3
17.9
10.9
0
5
10
15
20
25
1980 1989 1990-91 1991-92

148. Iraq-Kuwait War
• August 1990.
15
35
1990 JULY 1990 OCTOBER
CRUDE OIL PRICE IN $/BARREL

149. • Cause of the loss of reserves
• Sharp rise in the imports of oil and petroleum products
• Average $ 287 million in June-august 1990
• Rise to $ 671 million in 6 months
• Trade deficit - $ 356 million per month in June-august 1990
• $ 677 million per month in the following 6 months.

150. Slow Growth of Important Trading Partners
4.5
2.25
1989-90 1990-91
The World Growth

151. Export to United States
3.90%
0.80%
-1%
1989-90 1990-91 1991-92

152. Political Uncertainty and Instability
• November 1989 to May 1991 - political uncertainty and
instability in India.
• 1 ½ years - three Prime Ministers.
• This led to delay in tackling the ongoing BOP crisis
• Led to a loss of investor confidence

153. • Rajiv Gandhi (1984–89)
• V.P. Singh (1989–90)
• Chandra Shekhar (1990–91)
• P.V. Narasimha Rao (1991–96)

154. Loss of Investors’ Confidence
• Current account deficits and reserve losses (reason)
• Downgrade of India's credit rating by credit rating agencies.
• Due to
• The loss of investors’ confidence
• Commercial bank financing became hard
• Outflows began to take place on short-term external debt

155. Fiscal Indiscipline
• Gross fiscal deficit more than 8 percent of GDP
since 1985 – 86
• 6 percent in the beginning of 1980s
• 4 percent in the mid – 1970s.

156. Increase in Non-oil Imports
• The trends - imports rise much faster than exports during
the 80’s.
• Imports increased by 2.3 percent of GDP
• Exports increased by only 0.3 percent of GDP.
• As a consequence,
• Trade deficit average of 1.2 percent of GDP in the 70’s,
• 3.2 percent of GDP in 80’s

158. Rise in External Debt
• In the second half of the 1980s,
• the current account deficit was in a rising trend and was
becoming unsustainable.
• An important issue was the way in which this deficit was being
financed.
• The current account deficit was mainly financed with costly
sources of external finance such as external commercial
borrowings, NRI deposits, etc.

159. Flows Of Concessional Assistance To India
• Mainly from the World Bank group.
89%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1980 1990
Assistance to India from multilateral sources

160. • The external debt was funnelled into financing the
government’s deficit
• India’s external debt increased
• Rs. 194.70 crore (USD 23.50 billion) in 1980-81
• Rs. 459.61 crore (USD 37.50 billion) in 1985-86.
• Rs. 1,003.76 crore (USD 58.63 billion) in 1989-90.
• Rs. 1,229.50 crore (USD 63.40 billion) in 1990-91

161. Overcoming BOP Crisis.
• The BOP situation came to the verge of collapse in 1991
• Mainly by current account deficits and by borrowing from abroad
• The economic situation of India was critical
• India's forex reserves at $1.2 billion in January 1991 and depleted
by half by June
(amount barely enough to cover roughly three weeks of essential imports)
• Only weeks way from defaulting on its external BOP obligations.

162. • Government of India's immediate response
• Emergency loan of $ 2.2 billion (IMF- pledging 67 tons of Gold)
• RBI airlifted 47 tons gold to Bank of England & 20 tons gold
to Union Bank of Switzerland to raise $ 600 million.

163. These moves helped tide over the balance
of payment crisis temporarily and kick-
started PV.Narasimha Rao’s economic reform
process.

164. LOREMS & Convertibility

165. LOREMS - LIBERALISED EXCHANGE RATE MANAGEMENT SYSTEM
• Introduced with effect from 1.3.1992.
• Partial convertibility of the rupee was introduced
• 40% of Current A/C @ Official Rate (by RBI)
• 60% of Current A/C @ Mkt Determined Rate (DD/SS)
• Except – Oil products, lifesaving medicine, defence, fertilizers and equipment
• Surrender to Authorised dealer (40 & 60)
• AD to RBI
• 1993 MLERMS (modified – more liberal- both Cr A/C & CA – No surrender )

166. Balance of Payment
Current Account
• Trade in goods
• Trade in Services
• Transfers
Capital Account
• Investments
• Loans
• Bank Capital

167. Euro Market

168. Euro Market
• The Euro market is a large market comprising many
member nations of EU and facilitates the free movement
of goods and services
• In other words efficient trade mechanisms such as low
tariffs, quotas etc. are put in place and have a centralized
monetary policy
• Using a common currency - Euro. (Most of them)
• The euro market acts as a major source for international
trade

169. More about EM
• Single market for EU
• The European commission describes the single market as "one
territory without any internal borders or other regulatory obstacles
to the free movement of goods and services."
• Free flow of goods and services
• Intended to improve efficiency, stimulate trade and help growth
etc.
• (Deeper economic integration)
• Eurozone

170. A euromarket can be used to describe the financial market
for eurocurrencies

171. • Euro-currency is a currency held by individuals and institutions in a
European country other than its country of origin.
• It is accumulated in European banks that deal in other currencies such
as American dollar, Japanese Yen, Swiss Francs, etc.
• This market is the largest market in the international monetary system.
• It has a central role in short and medium term international borrowing
and lending by large corporations and banks and for financing
international trade.

172. Eurobank
• A Eurobank is a financial institution that accepts foreign
currency denominated deposits and makes foreign
currency loans.
• Eurobank does not necessarily have to be located on the
continent of Europe; it can be anywhere in the world.
• For example, a bank located in the United States that
extends loans or holds deposits in Japanese yen is a
Eurobank.

173. • The Eurocurrency market consists of Euro Banks that accepts
deposits and offers credit in foreign currencies.
• Eurocurrency refers to a currency that is freely convertible and
is deposited in a bank present in a country where the currency
is non-domestic.
• The bank can be either a foreign bank or a foreign branch of a
US domestic bank.
• In a Eurocurrency market, commercial banks transform
deposits into long term claims on final borrowers by
intermediation.

174. Features of Euro-currency market
1. International Market:
The Euro-currency market is an international market which
accepts deposits and gives credit in currencies from throughout
the world.
2. Independent Market:
It is a free and independent market which does not function under
the control of any monetary authority.

175. 3. Wholesale Market:
• It is a wholesale market in which different currencies
are bought and sold usually above $ 1 million.
4. Competitive Market:
• It is a highly competitive market in which the supply
and demand for currencies depends on interest rate
changes of Euro-banks.

176. 5. Short-Term Market:
• It is a short-term money market in which deposits in
different currencies are usually accepted for a period
ranging from a few days to a year and interest is paid on
them.
6. Inter-Bank Market:
• It is an inter-bank market in which the Euro-banks borrow
and lend dollars and other Euro-currencies from each
other.

178. MONTI INTERNATIONAL INSTITUTE OF MANAGEMENT STUDIES
PUTHANANGADI
BUS4E F05 / IB05
FOREX MANAGEMENT
ASSIGNMENT 1
DOA: 27-02-2019 Answer all Questions DOS: 02-03-2019
• Bretton Woods’s agreement
• Euro market.