Foreign exchange refers to the exchange of one country's currency for another. The foreign exchange market allows currencies to be bought and sold. In India, the Reserve Bank of India regulates foreign exchange transactions through laws like FERA and FEMA to facilitate trade while conserving currency reserves. Exchange rates can be fixed by central banks, floating based solely on supply and demand, or managed with some central bank intervention.

1. FOREX
MANAGEMENT

2. Foreign
Exchange
• Foreign Exchange can be the exchange of money or credit
in one country for money or credit of another country.
• A Foreign exchange market is a market in which
currencies are bought and sold. (Distinguished from a
financial market where currencies are borrowed and lent)
• As per the Foreign Exchange Regulation Act of India,
foreign exchange means foreign currency and includes
All deposits, credits and cheques, letters or credit and bills
of exchange, expressed or drawn in Indian currency but
payable in any foreign currency
Any instrument payable, at the option of the drawee or
holder thereof or any other party thereto, either in Indian
currency or in foreign currency or partly in one and partly in
the other.

3. Functions of Foreign Exchange Market
Transfer purchasing power
Transfer of purchasing power from
one country to another and from
one currency to another and
facilitating international trade and
capital movement.
Provision of credit
Exporters and importers may get
pre shipment and post shipment
credit.
Provision of Heding Facilities
Covering of foreign trade risks, and
it provides a mechanism to
exporters and importers to guard
themselves against losses from
fluctuations in exchange rates.

4. Exchange Control
• Refers to the control by the government or a centralized agency, of transactions involving
foreign exchange.
• origin of 1930’s.
• Introduced in India on September 3, 1939, on a temporary basis during the second world war.
• To control over foreign exchange transactions - on a statutory basis and the Foreign Exchange
Regulations Act of 1947 was enacted.
• Scope of exchange control in India has steadily widened and the regulations have become
progressed. Appraisals and reviews of policies and procedures have been undertaken and
modifications in the national policies.
• Fluctuations in forex reserves resulted in changes and developments in statutory bodies.

5. Exchange Control
Foreign Exchange Regulations Act, 1973 was passed to replace the Act of 1947.
The Foreign Exchange Regulations Act, 1973 (FERA) was reviewed in 1993 and several
amendments were enacted as part of the on-going process of economic liberalisation
Any transaction in foreign Exchange is governed by Foreign Exchange Management
ACT 1999.​
report in 1994 recommending substantial changes in the existing Act. The Foreign
Exchange Management Act, 1999 was introduced to provide the necessary change.
Reserve Bank of India principally controls the movement of the Foreign Exchange.

6. Purpose of this is to consolidate and amend the
law regulating:
• certain payments
• dealings in foreign exchange and securities
• import and export of currency, for the conservation of the
foreign exchange resources of the country.
• proper utilization thereof in the interest of the economic
development of the country.

7. Objectives of foreign exchange control
For stability of
exchange rate
For treating the
overvaluation
of currency
For treating the
undervaluation
of currency
For treating the
bop deficit
For economic
planning
For
encouraging
local industries

8. FOREIGN
EXCHANGE
REGULATORY
ACT (FERA 1973)
(statutory)
Passed in 1973. Came into force on 1st
Jan 1974
OBJECTIVES
• To regulate payments and dealings in forex in India.
• To regulate import and export of currency and
bullion
• To regulate holding of immovable properties
outside India
• To regulate employment of foreign nationals
• To regulate foreign companies
• To conserve forex resources.

9. FOREIGN EXCHANGE REGULATORY ACT (FERA
1973) (statutory)
81 sections Rigid approach
Residential
status Based on
citizenship.
Violation is
treated as
criminal offence.
Punishment:
imprisonment
Act authorizes
only RBI to deal
with forex

10. FOREIGN
EXCHANGE
MANAGEMENT
ACT (FEMA
1999)
• On the recommendations of the Tarapore Committee.
• FEMA head office is also known as Enforcement
Directorate : Delhi
Objectives
1. To facilitate external trade and payments in India
2. To help orderly management of forex market.
Applicability
1. Import and export of goods and services
2. Foreign currency and securities
3. Banking and financial services.

11. FOREIGN
EXCHANGE
MANAGEMENT
ACT (FEMA 1999)
• 7 chapters; 49 Sections
• Residential status based on the
condition: Stay in India for
6months or more.
• Violation is considered as a civil
offense.
• Punishment: Fine
• Imprisonment if not paid in 90days

12. Foreign Exchange
Dealers Association
of India (FEDAI)
Authorized Dealers in Foreign Exchange -
Foreign Exchange Dealers Association of
India (FEDAI).
To protect the interest of the exporters,
importers, general public and also the
authorized
Was set up in 1958 as an Association of banks
dealing in foreign exchange in India.
Self regulatory body and is incorporated
under Section 25 of the Companies Act, 1956

13. Administrative set up of Forex in India

14. FUNCTIONS OF FOREIGN EXCHANGE DEPARTMENT
• Financing
Exports
• Financing
Imports
• Remittance
Facilities
• Dealings In
Foreign
Exchange
• Furnishing
Credit
Information

15. Fixed exchange
rate
system/pegged
Exchange rate
system
• Exchange rate is determined by the monetary
authority.
• Government (Central Bank) may fix the
exchange rate .
• To maintain the stability in the currency rate,
there is purchasing of foreign exchange by
the central bank or government when the rate
of foreign currency increases and selling
foreign currency when the rates fall.

16. Fixed
exchange
rate system
Advantage
• Stability in foreign exchange that encourages foreign
trade.
• Stability in the value of currency - protects from
market fluctuations.
• Promotes foreign investment for the country.
• Maintaining stable inflation rates in an economy.
Disadvantage
• Constant need for maintaining foreign reserves in
order to stabilise the economy.
• Lack the flexibility that is required to bounce back in
case an economic shock engulfs the economy.

17. Flexible exchange rate system / floating exchange rate system
Exchange rate
dependent on the
market forces of
supply and demand.
No intervention of the
central banks or the
government in the
floating exchange rate
system.

18. Floating Exchange
Rate System
Advantages
• No need to maintain foreign reserves in this
exchange system.
• Deficiencies or surplus in Balance of Payment
is automatically corrected in this system.
Disadvantages
• Encourages speculation that may lead to
fluctuations in the exchange rate .
• Fluctuations in exchange rates are too much it
can cause issues with movement of capital
between countries and also impact foreign
trade.

19. Managed floating
exchange rate system
• Combination of the fixed and floating
exchange rate systems.
• Central banks intervene or participate in
the purchase or selling of the foreign
currencies.