INDEX
SERIAL
NO.
TOPIC
PAGE NO.
1
FOREIGN EXCHANGE MARKET
1
2
MARKET PARTICIPANTS
2-5
SPECULATION
6
4
FOREIGN EXCHNAGE MARKET IN INDIA
7-8
5
NEED FOR FOREIGN EXCHANGE
9-10
6
FACTORS AFFECTING FOREX RATES
11-15
7
FOREX MARKET DEVELOPMENT IN INDIA
16-19
8
FOREIGN DIRECT INVESTMENT
20-24
9
FOREIGN TRADE POLICY OF INDIA
10
THE FUTURE OF THE FOREIGN EXCHANGE
MARKETS
3
11
12
13
CONCLUSION
ACKNOWLEDGEMENT & BIBLIOGRAPHY
DONE BY
25-26
27-28
29-30
31
32
0
Foreign Exchange Market
The foreign exchange (currency or forex or FX) market exists wherever one
currency is traded for another. It is by far the largest market in the world, in
terms of cash value traded, and includes trading between large banks, central
banks, currency speculators, multinational corporations, governments, and other
financial markets and institutions.
Retail traders (small speculators) are a small part of this market. They may only
participate indirectly through brokers or banks and may be targets of forex
scams.
Market size and liquidity
The foreign exchange market is unique because of:
• its trading volume,
• the extreme liquidity of the market,
• the large number of, and variety of, traders in the market,
• its geographical dispersion,
• its long trading hours - 24 hours a day (except on weekends).
• the variety of factors that affect exchange rates,
Average daily international foreign exchange trading volume was $1.9 trillion
in April 2004 according to the BIS study Triennial Central Bank Survey 2004
• $600 billion spot
• $1,300 billion in derivatives, ie
• $200 billion in outright forwards
• $1,000 billion in forex swaps
• $100 billion in FX options.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago
Mercantile Exchange and are actively traded relative to most other futures
contracts.
Forex futures volume has grown rapidly in recent
years, but only accounts for about 7% of the total
foreign exchange market volume, according to
The Wall Street Journal Europe (5/5/06, p. 20).
1
Market participants
According to the BIS study Triennial Central Bank Survey 2010
• 53% of transactions were strictly interdealer (ie interbank);
• 33% involved a dealer (ie a bank) and a fund manager or some other nonbank financial institution;
• and only 14% were between a dealer and a non-financial company.
Banks
The interbank market caters for both the majority of commercial turnover and
large amounts of speculative trading every day. A
large bank may trade billions of dollars daily.
Some of this trading is undertaken on behalf of
customers, but much is conducted by proprietary
desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large
amounts of business, facilitating interbank trading
and matching anonymous counterparts for small fees. Today, however, much of
this business has moved on to more efficient electronic systems, such as EBS,
Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange,
Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on
ongoing interbank trading and is heard in most trading rooms, but turnover is
noticeably smaller than just a few years ago.
Commercial Companies
An important part of this market comes from the financial activities of
companies seeking foreign exchange to pay for goods or services. Commercial
companies often trade fairly small amounts compared to those of banks or
speculators, and their trades often have little short term impact on market rates.
Nevertheless, trade flows are an important factor in the long-term direction of a
currency's exchange rate. Some multinational companies can have an
unpredictable impact when very large positions are covered due to exposures
that are not widely known by other market participants.
Central Banks
National central banks play an important role in the foreign exchange markets.
They try to control the money supply, inflation, and/or interest rates and often
have official or unofficial target rates for their currencies. They can use their
often substantial foreign exchange reserves, to stabilize the market.
2
Milton Friedman argued that the best stabilization strategy would be for central
banks to buy when the exchange rate is too low, and to sell when the rate is too
high - that is, to trade for a profit.
Nevertheless, central banks do not go bankrupt if they make large losses, like
other traders would, and there is no convincing evidence that they do make a
profit trading.
The mere expectation or rumor of central bank intervention might be enough to
stabilize a currency, but aggressive intervention might be used several times
each year in countries with a dirty float currency regime. Central banks do not
always achieve their objectives, however. The combined resources of the
market can easily overwhelm any central bank. Several scenarios of this nature
were seen in the 1992-93 ERM collapse, and in more recent times in South East
Asia.
Investment Management Firms
Investment Management firms (who typically
manage large accounts on behalf of customers such
as pension funds, endowments etc.) use the Foreign
exchange market to facilitate transactions in
foreign securities. For example, an investment
manager with an international equity portfolio will
need to buy and sell foreign currencies in the spot
market in order to pay for purchases of foreign
equities. Since the forex transactions are secondary
to the actual investment decision, they are not seen as speculative or aimed at
profit-maximisation.
Some investment management firms also have more speculative specialist
currency overlay units, which manage clients' currency exposures with the aim
of generating profits as well as limiting risk. The number of this type of
specialist is quite small, their large assets under management (AUM) can lead to
large trades.
Hedge Funds
Hedge funds, such as George Soros's Quantum fund have gained a reputation
for aggressive currency speculation since 1990. They control billions of dollars
of equity and may borrow billions more, and thus may overwhelm intervention
by central banks to support almost any currency, if the economic fundamentals
are in the hedge funds' favor.
3
Retail Forex Brokers
Retail forex brokers or market makers handle a minute fraction of the total
volume of the foreign exchange market. According to CNN, one retail broker
estimates retail volume at $25-50 billion daily, which is about 2% of the whole
market.
CNN also quotes an official of the National Futures Association "Retail forex
trading has increased dramatically over the past few years. Unfortunately, the
amount of forex fraud has also increased dramatically."
All firms offering foreign exchange trading online are either market makers or
facilitate the placing of trades with market makers.
In the retail forex industry market makers often have two separate trading
desks- one that actually trades foreign exchange (which determines the firm's
own net position in the market, serving as both a proprietary trading desk and a
means of offsetting client trades on the interbank market) and one used for offexchange trading with retail customers (called the "dealing desk" or "trading
desk").
Many retail FX market makers claim to "offset"
clients' trades on the interbank market (that is, with
other larger market makers), e.g. after buying from the
client, they sell to a bank. Nevertheless, the large
majority of retail currency speculators are novices and
who lose money, so that the market makers would be
giving up large profits by offsetting.
Offsetting does occur, but only when the market maker judges its clients' net
position as being very risky.
The dealing desk operates much like the currency exchange counter at a bank.
Interbank exchange rates, which are displayed at the dealing desk, are adjusted
to incorporate spreads (so that the market maker will make a profit) before they
are displayed to retail customers.
Prices shown by the market maker do not neccesarily reflect interbank market
rates. Arbitrage opportunities may exist, but retail market makers are efficient at
removing arbitrageurs from their systems or limiting their trades.
A limited number of retail forex brokers offer consumers direct access to the
interbank forex market. But most do not because of the limited number of
clearing banks willing to process small orders. More importantly, the dealing
desk model can be far more profitable, as a large portion of retail traders' losses
are directly turned into market maker profits.
4
While the income of a marketmaker that offsets trades or a broker that
facilitates transactions is limited to transaction fees (commissions), dealing desk
brokers can generate income in a variety of ways because they not only control
the trading process, they also control pricing which they can skew at any time to
maximize profits.
The rules of the game in trading FX are highly disadvantageous for retail
speculators. Most retail speculators in FX lack trading experience and and
capital (account minimums at some firms are as low as 250-500 USD). Large
minimum position sizes, which on most retail platforms ranges from $10,000 to
$100,000, force small traders to take imprudently large positions using
extremely high leverage.
Professional forex traders rarely use more than 10:1 leverage, yet many retail
Forex firms default client accounts to 100:1 or even 200:1, without disclosing
that this is highly unusual for currency traders.
This drastically increases the risk of a margin call (which, if the speculator's
trade is not offset, is pure profit for the market maker).
According to the Wall Street Journal (Currency Markets Draw Speculation,
Fraud July 26, 2005) "Even people running the trading shops warn clients
against trying to time the market. 'If 15% of day traders are profitable,' says
Drew Niv, chief executive of FXCM, 'I'd be surprised.' "
In the US, "it is unlawful to offer foreign currency futures and option contracts
to retail customers unless the offeror is a regulated financial entity" according to
the Commodity Futures Trading Commission.
Legitimate retail brokers serving traders in the U.S. are most often registered
with the CFTC as "futures commission merchants" (FCMs) and are members of
the National Futures Association (NFA).
Potential clients can check the broker's FCM status at the NFA. Retail forex
brokers are much less regulated than stock brokers and there is no protection
similar to that from the Securities Investor Protection Corporation. The CFTC
has noted an increase in forex scams .
5
Speculation
Controversy about currency speculators and their effect on currency
devaluations and national economies recurs regularly. Nevertheless, many
economists (e.g. Milton Friedman) argue that speculators perform the important
function of providing a market for hedgers and transferring risk from those
people who don't wish to bear it, to those who do.
Other economists (e.g. Joseph Stiglitz) however, may consider this argument to
be based more on politics and a free market philosophy than on
economics.Large hedge funds and other well capitalized "position traders" are
the main professional speculators.
Currency speculation is considered a highly suspect activity in many countries.
While investment in traditional financial instruments like bonds or stocks often
is considered to contribute positively to economic growth by providing capital,
currency speculation does not, according to this view. It is simply gambling,
that often interferes with economic policy.
For example, in 1992, currency speculation forced the Central Bank of Sweden
to raise interest rates for a few days to 150% per annum, and later to devalue the
krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known
proponent of this view. He blamed the devaluation of the Malaysian ringgit in
1997 on George Soros and other speculators.
Gregory Millman reports on an opposing
view, comparing speculators to "vigilantes"
who simply help "enforce" international
agreements and anticipate the effects of basic
economic "laws" in order to profit.In this
view, countries may develop unsustainable
financial bubbles or otherwise mishandle
their national economies, and forex
speculators only made the inevitable collapse
happen sooner.
A relatively quick collapse might even be preferable to continued economic
mishandling. Mahathir Mohamad and other critics of speculation are viewed as
trying to deflect the blame from themselves for having caused the unsustainable
economic conditions.
6
Foreign Exchange Market in India
Foreign Exchange Market in India works under the central government in India and executes
wide powers to control transactions in foreign exchange.
The Foreign Exchange Management Act, 1999 or FEMA regulates the whole foreign
exchange market in India. Before this act was introduced, the foreign exchange market in
India was regulated by the reserve bank of India through the Exchange Control Department,
by the FERA or Foreign Exchange Regulation Act, 1947. After independence, FERA was
introduced as a temporary measure to regulate the inflow of the foreign capital. But with the
economic and industrial development, the need for conservation of foreign currency was
urgently felt and on the recommendation of the Public Accounts Committee, the Indian
government passed the Foreign Exchange Regulation Act, 1973 and gradually, this act
became famous as FEMA.
Until 1992 all foreign investments in India and the repatriation of foreign capital required
previous approval of the government. The Foreign-Exchange Regulation Act rarely allowed
foreign majority holdings for foreign exchange in
India. However, a new foreign investment policy
announced in July 1991, declared automatic approval
for foreign exchange in India for thirty-four industries.
These industries were designated with high priority, up
to an equivalent limit of 51 percent. The foreign
exchange market in India is regulated by the reserve
bank of India through the Exchange Control
Department.
Initially the government required that a company`s routine approval must rely on identical
exports and dividend repatriation, but in May 1992 this requirement of foreign exchange in
India was lifted, with an exception to low-priority sectors. In 1994 foreign and nonresident
Indian investors were permitted to repatriate not only their profits but also their capital for
foreign exchange in India. Indian exporters are enjoying the freedom to use their export
earnings as they find it suitable. However, transfer of capital abroad by Indian nationals is
only allowed in particular circumstances, such as emigration. Foreign exchange in India is
automatically made accessible for imports for which import licenses are widely issued.
Indian authorities are able to manage the exchange rate easily, only because foreign exchange
transactions in India are so securely controlled. From 1975 to 1992 the rupee was coupled to
a trade-weighted basket of currencies.
In February 1992, the Indian government started to make the rupee convertible, and in March
1993 a single floating exchange rate in the market of foreign exchange in India was
implemented.
7
In July 1995, Rs 31.81 was worth US$1, as compared to Rs 7.86 in 1980, Rs 12.37 in 1985,
and Rs17.50 in 1990.
Since the onset of liberalization, foreign exchange markets in India have witnessed explosive
growth in trading capacity. The importance of the exchange rate of foreign exchange in India
for the Indian economy has also been far greater than ever before. While the Indian
government has clearly adopted a flexible exchange rate regime, in practice the rupee is one
of most resourceful trackers of the US dollar.
Predictions of capital flow-driven currency crisis have held India back from capital account
convertibility, as stated by experts. The rupee`s deviations from Covered Interest Parity as
compared to the dollar) display relatively long-lived swings. An inevitable side effect of the
foreign exchange rate policy in India has been the ballooning of foreign exchange reserves to
over a hundred billion dollars. In an unparalleled move, the government is considering to use
part of these reserves to sponsor infrastructure investments in the country.
The foreign exchange market India is growing very rapidly, since the annual turnover of the
market is more than $400 billion. This foreign exchange transaction in India does not include
the inter-bank transactions. According to the record of foreign exchange in India, RBI
released these transactions. The average monthly turnover in the merchant segment was $40.5
billion in 2003-04 and the inter-bank transaction was $134.2 for the same period. The average
total monthly turnover in the sector of foreign exchange in India was about $174.7 billion for
the same period. The transactions are made on spot and also on forward basis, which include
currency swaps and interest rate swaps.
The Indian foreign exchange market is made up of the buyers, sellers, market mediators and
the monetary authority of India. The main center of foreign exchange in India is Mumbai, the
commercial capital of the country. There are several other centers for foreign exchange
transactions in India including the major cities of Kolkata, New Delhi, Chennai, Bangalore,
Pondicherry and Cochin. With the development of technologies, all the foreign exchange
markets of India work collectively and in much easier process.
Foreign Exchange Dealers Association is a voluntary association that also provides some help
in regulating the market. The Authorized Dealers and the attributed brokers are qualified to
participate in the foreign Exchange markets of India. When the foreign exchange trade is
going on between Authorized Dealers and RBI or between the Authorized Dealers and the
overseas banks, the brokers usually do not have any role to play. Besides the Authorized
Dealers and brokers, there are some others who are provided with the limited rights to accept
the foreign currency or travelers` cheque, they are the authorized moneychangers, travel
agents, certain hotels and government shops. The IDBI and Exim bank are also permitted at
specific times to hold foreign currency.
The Foreign Exchange Market in India is a flourishing ground of profit and higher initiatives
are taken by the central government in order to strengthen the foundation.
8
Need for Foreign Exchange
In today’s world no country is self sufficient, consequently there is a need for
exchange of goods & services amongst different countries. Every sovereign
country in the world has a currency which is a legal tender in its territory & this
currency does not act as money outside its boundaries. Therefore whenever a
country buys or sells goods and services from one country to another, the
residents of two countries have to exchange currencies. Hence, Forex markets
acts as a facilitating mechanism through which one countrys currency can be
exchanged i.e. bought or sold for the currency of another company.
Features of the market
Liquidity:
The market operates the enormous money
supply and gives absolute freedom in
opening or closing a position in the current
market quotation. High liquidity is a
powerful magnet for any investor, because it
gives him or her freedom to open or to close
a position of any size whatever.
Promptness:
With a 24-hour work schedule, participants in the FOREX market need not wait
to respond to any given event, as is the case in many markets.
Availability:
A possibility to trade round-the-clock; a market participant need not wait to
respond to any given event.
Flexible regulation of the trade arrangement system:
A position may be opened for a predetermined period of time in the
FOREX market, at the investor’s discretion, which enables to plan the timing of
ones future activity in advance.
Value:
The Forex market has traditionally incurred no service charges, except for the
natural bid/ask market spread between the supply and the demand price.
9
One-valued quotations:
With high market liquidity, most sales may be carried out at the uniform market
price, thus enabling to avoid the instability problem existing with futures and
other forex investments where limited quantities of currency only can be sold
concurrently and at a specified price.
Market trend:
Currency moves in a quite specific direction that can be tracked for rather a long
period of time. Each particular currency demonstrates its own typical temporary
changes, which presents investment managers with the opportunities to
manipulate in the FOREX market.
Margin:
The credit leverage (margin) in the FOREX market is only determined by an
agreement between a customer and the bank or the brokerage house that pushes
it to the market and is normally equal to 1:100. That means that, upon making a
$1,000 pledge, a customer can enter into transactions for an amount equivalent
to $100,000. It is such extensive credit leverages, in conjunction with highly
variable currency quotations, which makes this market highly profitable but also
highly risky.
10
Factors affecting
Forex Rates
There are various factors with affect the forex market
and its exchange rate. Right from the government
intervention to demand and supply to investors appetite,
attitude and analysis all these factors plays an important
role in
deciding forex market operation and particularly on exchange rate
determination.
Price determination:
The law of supply and demand essentially governs the Forex market like any
other market. The law of supply states, as prices rises for a given commodity or
currency, the quantity of the item that is supplied will increase; conversely, as
the price falls, the quantity provided will fall. The law of demand states that as
the price for an item rises, the quantity demanded will fall. As the price for an
item falls, the quantity demanded will rise.
In the case of currency, it is the demand and supply of both domestic and
foreign currency that is considered for price determination. It is the interaction
of these basic forces that results in the movement of currency prices in the
Forex market.
Broadly we can divide these factors in two categories:
[A] FUNDAMENTAL FACTORS
[B] TECHNICAL FACTORS
A. Fundamental Factor:
Fundamental factor shows future price movements of a financial instrument
based on economic, political, environmental and other relevant factors, as well
as data that will affect the basic supply and demand of forex market. Some of
the major fundamental factors are:
Factors responsible for exchange rate determination:
Balance of payment: If the exports to other countries are more than import
then the exchange rate will be stronger as there will be inflow of foreign
currency. More relies on imports, weaker will be the exchange rate because
there will be outflow of domestic currency. A favorable balance of payment on
current account indicates greater demand of goods & services of that country
11
abroad. As due to export the supply of foreign currency is greater than the
demand of foreign currency at home, so the home currency is likely to
appreciate with respect to foreign currency.
Exchange rate policy and regime: Fixing an exchange rate is policy matter but
in India it is largely dismantled as market force determines the exchange rates
with certain exchange control regulations (in capital account).
Monetary policy & fiscal policy: If a government runs into deficit, it has to
Borrow money (by selling bonds). If it can't borrow from its own citizens, it
must borrow from foreign investors. That means selling more of its currency,
increasing the supply and thus driving the prices down.
Domestic Financial Market: Strong domestic financial markets will also lead
to the strengthening of domestic currency, as investors will be less worried
about their investments and foreign investor will also be attracted.
Central bank intervention in Forex market: By open market operation or by
increasing / decreasing key rates or by purchasing and selling the forex, central
bank directly or indirectly affects the forex market operation.
Capital account liberalization: Till now convertibility of capital account is not
fully permitted by government. Convertibility of capital account means freedom
to convert local financial assets to foreign financial assets and vice versa.
We can foresee the situation that if market becomes fully open on capital
account issue then lots of inflow and outflow will take place on account of
capital assets, which may have great impact of exchange rate determination.
Interest rate differentials: If there are higher interest rates in home country
then it will attract investments from abroad in the form of FII, FDI and
increased borrowings. This will lead to increased supply of foreign currency.
On the other hand, if the interest rates are higher in the other country,
investments will flow out leading to decreased supply of foreign currency.
Inflation differentials: If inflation rates are high in one country then the other
then the country which is having low inflation rate will be in position to
maintain the price level of commodity in such a manner that will lead to
improve the demand of its goods and hence its currency. So, due to higher
inflation rate country’s currency depreciates (as it purchasing power decreases)
till the differential of the other base currency.
Stock Market: Stock market has direct relationship with forex market. In the
surging market the foreign investor wants to invest in the stock and get the
12
benefit. In this case they bring more foreign currency (Dollar) in Indian market
and sell for investing in equity. So, the price of dollar comes down and
ultimately rupee appreciates.
Prices of non-tradable goods relative to tradable goods : Price of nontradable good are having indirect impact in exchange rate determination as
many of the tradable good are directly dependent on such non-tradable good and
prices of that tradable good are having direct impact on the forex. As the price
of the non-tradable goods goes up the inflation increase which have adverse
impact on exchange rate and it continues to depreciates.
Productivity differentials: Demand of goods produced in a country explains
the demand of the particular currency. So, economic data such as labor reports
(payrolls, unemployment rate and average hourly earnings), Consumer Price
Indices (CPI),Gross Domestic Product (GDP), International Trade, Productivity,
Industrial Production, Consumer Confidence etc, also affect fluctuations in
currency exchange rates.
Business Environment: Positive indications (in terms of government policy,
competitive advantages, market size, etc.) increase the demand for currency, as
more and more enterprises want to invest there. Any positive indications abroad
will lead to strengthening of foreign currency.
GDP growth and phases of business cycle: If the domestic economy is strong
then there will be lots of investments from abroad which will lead to increased
supply of foreign currency, ultimately leading to strengthening of domestic
currency. And if there were weaker domestic economy it would lead to outflow
of funds from a country. Also the phase of business cycle plays an important
role as different phase of business have different feature. For maximum in flow
of foreign fund the country’s business cycle should be in growth phase, which
ultimately results in appreciating the home currency.
Global economic situation and financial crisis: Global scenario of the world
acts an indicator of the forex market. If there is no financial crisis and economy
is doing well then forex market is also suppose to do well as it�s revealed from
the forex triennial survey done by Bank of International settlement. In situation
of crisis the interest rates may go down which results in devaluation of that
particular currency. As we have seen during
2007-2008 financial crisis that due to economic slowdown, subprime loan
default and lowering interest rate USD keep dwindling (depreciating) against all
the major currencies the market became so volatile that no market maker was
ready to give competitive quotes.
13
USD was all time low for the EURO and GBP. Indian forex market was under
pressure because of the reversal of the capital flow as part of global deleveraging process. Also corporate were converting the Rupee liability into
Foreign currency liability to meet external obligations, which ultimately put
pressure on the rupee.
Political factors: All exchange rates are susceptible to political instability and
anticipations about the new government. All the market players get worried
about the policies and may start unwinding their positions thereby affecting the
demand and supply.
Sovereign risk rating: Sovereign is the country health indicator on various
parameter. It tells the risk involved in a particular country based on the
parameter like political and financial indicator. If a country has got high rating
that means the country is politically sound and is able to meets its foreign
obligation with any difficulty. Higher the rating of county more likely to
appreciate the host country currency.
Rumors: Any rumor in the markets also leads to fluctuation in the values. Any
Favorable news will lead to strengthening of domestic currency and any
negative rumor will lead to weakening of the currency.
B. Technical Factors:
Technical factors predicts price movements and future market trends by
studying what has occurred in the past using various charts. Technical factor is
built on three essential principles:
1. Market (price) action discounts everything: This means that the actual
price is a reflection of everything that is known to the market that could affect
it.
2. Prices move in trends: used to identify patterns of market behavior,
3. History repeats itself: Forex chart patterns have been recognized and
categorized for over 100 years, and the manner in which many patterns are
repeated leads to the conclusion that human psychology changes little over time.
Since patterns have worked well in the past, it is assumed that they will
continue to work well into the future.
14
TOP 10 CURRENCY TRADERS
(% OF OVERALL VOLUME )
RANK
1
2
3
4
5
6
7
8
9
10
NAME
Deutsche Bank
UBS AG
Barclays Capital
Citi Bank
Royal Bank of Scotland
J P Morgan
HSBC
Lehman Brothers**
Goldman Sachs
Morgan Stanley
VOLUME
21.70%
15.80%
9.12%
7.49%
7.30%
4.19%
4.10%
3.58%
3.47%
2.86%
FOREX MARKET DEVELOPMENT IN
INDIA
Every nation has its own currency. For international financial transactions most
of the country involve in an exchange of ones currency to another. The rate
(conversion of one currency to another) of one currency in terms of another is
15
known as exchange rate. In India the rates are quoted in USD/INR terms, where
USD is termed as base currency and INR is known as variable currency.
In practice the rates are quoted by direct method. In India USD is used as
intervention currency for quoting the rates. For getting the rates of other
currency we use the cross currency method to determine their price.
The majority of all foreign exchange trades involve the US dollar against
another currency due to the fact that the US economy is the largest in the world
and being global leader it is used for benchmarking.
Average daily trading volume of Indian Forex market is nearly $34 billion as
per Bank for International settlement survey. The origin of the forex market
development in India could be traced back to 1978 when banks were permitted
to undertake intra-day trades. However, the market witnessed major activities
only after 1990s with the floating of the currency in March 1993, following the
recommendations of Rangarajan committee.
FOREX V/S OTHER MARKETS
Relationship between Forex Market and other markets:
Forex versus Other Financial Markets
The Forex (or currency) market is one of four financial markets. These markets
include the stock, bond, commodity, and currency markets. Each market has its
own special characteristics that attract banks and financial institutions to trade
16
its products. Individuals have only recently been permitted to trade in the
currency markets. Previously, the Forex market was traded primarily by banks,
large financial institutions, and governments. ndividuals have been trading in
the other financial markets for many years.
Lets take a look at a few basic characteristics of the other markets and their
major differences with the Forex market.
The Stock Market
The stock market is a system that permits the buying and selling (or trading) of
a companys shares and derivatives. There are stock markets around the world.
The worldwide stock market is valued at $51 trillion.
Key differences from the Forex Market
100:1 in Forex).
remedies.
The Bond Market
The bond market is a loosely connected system in which buyers and sellers
trade fixed income assets and securities. Bond and other fixed income assets are
traded informally in the over-the-counter market. The worldwide bond market is
valued at $45 trillion.
Key differences from Forex Market
�s largest investment sector.
The bond market has lower volatility and risk.
The bond market has limited trading hours.
The bond market is a decentralized market without a common exchange.
The Commodities Market
The commodities market is an exchange where raw goods or products are
traded. Like the stock market, there are commodities markets around the world.
Commodities from apples to zinc are sold in commodities exchanges.
Key differences from Commodities Market
The commodities market has lower leverage (10:1 vs. 100:1 in Forex).
The commodities market has lower liquidity.
The commodities market tends to have longer trends.
17
The commodities market has limited trading hours.
The commodities market has more errors and slippage (misquoted prices).
These four markets are operating simultaneously. Each has its own advantages
and challenges. Many Forex traders will study how these markets work
together, which is called Intermarket Analysis.
Other markets Forex markets Available trading hours are dictated by the trading
schedule of the exchange floor and the local time-zone. This limits market
open times. The forex market is open 24 hours a day,5.5 days a week. Because
of the decentralized clearing of trades and overlap of major financial markets
throughout the world, the forex market remains open, thus creating trading
volume throughout the day and overnight. Liquidity can be greatly diminished
after market hours, or when many market participants limit their trading or
move to markets that are more popular.
Forex is the most liquid market in the world, eclipsing all others in comparison.
Because currency is the basis of all world commerce, exchange activities are
constant. Liquidity — particularly in the majors — often does not dry up during
"slow times." Traders are charged multiple fees, such as commissions, clearing
fees, exchange fees and government fees as well as platform and charting fees.
All you pay is the spread, which is built into the buy and sell prices — although
market makers like GFT are compensated by revenues from their activities as a
currency dealer. Trading restricted by large minimum capital requirements —
sometimes as One consistent margin rate 24 hours a day allows forex traders to
leverage their high as $50,000 — and high margin rates. Capital, as much as
100:1. In fact, GFT green accounts allow traders to begin with
as little as $200 and 100:1 leverage. It is important to know that without
appropriate use of risk management, a high degree of leverage can lead to large
losses as well as gains.
Margin requirements can be as much as 50 percent of your capital in order to
take a position. No restrictions on short-selling (placing a sell order when you
think the market will trend down), because you are simultaneously buying one
currency while NM selling another. Restrictions on short selling and stop
orders. GFT offers multiple order types, including stop orders and trailing stop
orders to help you manage your trading equity, which you can use even when
short selling.
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FOREIGN DIRECT INVESTMENT
With strong governmental support, FDI has helped the Indian economy grow
tremendously. But with $34 billion in FDI in 2007, India gets only about 25%
of the FDI in China.
Foreign direct investment (FDI) in India has played an important role in the
development of the Indian economy. FDI in India has in a lot of ways enabled
India to achieve a certain degree of financial stability, growth and development.
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This money has allowed India to focus on the areas that needed a boost and
economic attention, and address the various problems that continue to challenge
the country.
India has continually sought to attract FDI from the world’s major investors. In
1998 and 1999, the Indian national government announced a number of reforms
designed to encourage and promote a favorable business environment for
investors. FDIs are permitted through financial collaborations, through private
equity or preferential allotments, by way of capital markets through euro issues,
and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal or
mining industries.
A number of projects have been implemented in areas such as electricity
generation, distribution and transmission, as well as the development of roads
and highways, with opportunities for foreign investors.
The Indian national government also granted
permission for FDIs to provide up to 100% of the
financing required for the construction of bridges
and tunnels, but with a limit on foreign equity of
INR 1,500 crores, approximately $352.5 million.
Currently, FDI is allowed in financial services,
including the growing credit card business. These
also include the non-banking financial services
sector. Foreign investors can buy up to 40% of the
equity in private banks, although there is condition
that these banks must be multilateral financial organizations. Up to 45% of the
shares of companies in the global mobile personal communication by satellite
services (GMPCSS) sector can also be purchased.
In 2007, India received $34 billion in FDI, a huge growth compared to the
previous years, but significantly less than the $134 billion that flowed into
China. Although the Chinese approval process is complex, China continues to
outshine India as a choice destination for foreign investors. Why does India, a
country with resources and a skilled workforce, lag so far behind China in FDI
amounts?
Physical infrastructure is the biggest hurdle that India currently faces, to the
extent that regional differences in infrastructure concentrates FDI to only a few
specific regions.
While many of the issues that plague India in the aspects of
telecommunications, highways and ports have been identified and remedied, the
slow development and improvement of railways, water and sanitation continue
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to deter major investors.
Federal legislation is another perverse impediment for India.
Local authorities in India are not part of the approval process and the large
bureaucratic structure of the central government is often perceived as a breeding
ground for corruption. Foreign investment is seen as a slow and inefficient way
of doing business, especially in a paperwork system that is shrouded in red tape.
Foreign direct investment in India
As the third-largest economy in the world in PPP terms, India is a preferred
destination for foreign direct investments (FDI); India has strengths in
information technology and other important areas such as auto components,
apparels, chemicals, pharmaceuticals, jewellery and so on. Although India has
always held promise for global investors, but its rigid FDI policies were a
significant hindrance in this context.
However, as a result of a series of ambitious and positive economic reforms
aimed at deregulating the economy and stimulating foreign investment, India
has positioned(projected) itself as one of the front-runners in Asia Pacific
Region. India has a large pool of skilled managerial and technical expertise. The
size of the middle-class population at 300 million exceeds the population of
both the US and the EU, and represents a powerful consumer market.
India's recently liberalised FDI policy permits up to a 100% FDI stake in
ventures. Industrial policy reforms have substantially reduced industrial
licensing requirements, removed restrictions on expansion and facilitated easy
access to foreign technology and FDI. The upward moving growth curve of the
real-estate sector owes some credit to a booming economy and liberalized FDI
regime. A number of changes were approved on the FDI policy to remove the
cap in most of the sectors. Restrictions will be relaxed in sectors as diverse as
civil aviation, construction development, industrial parks, commodity
exchanges, petroleum and natural gas, credit-information services, Mining and
so on. But this still leaves an unfinished agenda of permitting greater foreign
investment in politically sensitive areas like insurance and retailing. According
to the government's Secretariat for Industrial Assistance, FDI inflows into India
reached a record US$19.5bn in fiscal year 2006/07 (April-March). This was
more than double the total of US$7.8bn in the previous fiscal year. Between
April and September 2007, FDI inflows were US$8.2bn.
There is no doubt about the fact that there has been a worldwide stir about
foreign direct investment in India. India's growth rate of 8% certainly owes a lot
to foreign equity capital and foreign direct investment.
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Here are the highlights of the latest trend figures concerned with FDI in India:
* Increase in total FDI: 46.8%
* Rise in foreign equity: 36%
* Reinvested foreign earnings and other capital: $3.2 billion
* Total FDI earnings (inward) in Apr-Jan 2005-06: $5.7 billion
* Total FDI earnings (outward) increase: 2000-01: $757 million
2004-05: $2.4 billion
In the backdrop of this flourishing Indian economy The Associated Chambers
of Commerce and Industry of India (ASSOCHAM) has projected India to
double its GDP reaching a phenomenal USD 1100 billion from present USD
550 billion by 2010. Why do you think so? Well statistics also say that an
average Indian will be growing richer as per capita income rises from USD 600
per annum to USD 1200 per annum by 2010.
The GDP investments will likewise increase from current 5% to 35% by 2010.
No wonder India has tremendous potential to attract USD 50 billion FDI in the
next 5 years. With so much of visibility of MNCs, JVs, foreign investors etc it is
little contradictory to say that the current flow of foreign direct investment India
has been only 0.8% of GDP, compared to other nations of south-east Asia like
Malaysia and Thailand with a FDI flow of 3% of GDP.
Hence with more liberalization and opening of other sectors of the economy
like the latest relaxation in FDI policies in real estate or direct foreign
investment in real estate India etc, FDI will increase by at least 1.6% of GDP in
the next 5 years.
Indian Government has a key role to play as far as investment laws are
concerned. In this regard it is noteworthy to highlight some of the positive
reforms that have brought a positive growth in the Indian economy in terms of
GDP growth.
1. Govt. has removed 10% voting limit in banks.
2. Higher ceiling in FDI in airport revamp ventures and real estate investment.
3. Revisit foreign shareholding norms in telecom is welcome change.
4. Removal of unwarranted restrictions on hindrances to foreign investments
has exceptionally increased FDI in India.
5. Govt. of India has already allowed FDI up to 51% with prior government
approval in the retail trade of "single brand" products.
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THE IMPORTANCE OF FOREX IN
INTERNATIONAL TRADE
Trade has since ages, man has used this means of communication to improve
their living and development of all humanity through out the world. Forex or
foreign currency, the main role is to support investment and international trade,
helping entrepreneurs to change one currency to another.
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Financial centres all over the world play an important role as trade with anchors,
so that different types of sell and buy transaction should take place. In forex
helps to determine the value of the currency of a nation. It also provides support
in trade, which means that investors borrow currencies with a low value and
invest in high value currencies.
Particular forex transaction involves any party who purchases a considerable
amount of one currency and pay as usual via a different currency.
Forex market is unique because it has a large trade in volume, to different parts
of the world.
It is one of the major causes of increased currency value of a country and it
boosts the economy of a country.
Forex market is experiencing an increase since the introduction of a number of
reasons that growing the value of foreign currency which turns it into an asset,
trading activity among retailers has increased enormously and private investors
have begun to play an important role in the financial market.
With the new technology and its implementation on the market, has lowered
transaction costs that have led to an increase in liquidity in the market. Online
trading has made it easier for retailers to carry out their transactions in other
currencies on the Forex market.
Forex is the largest and liquid based financial markets throughout the world.
Commercial transactions involving corporate houses, large bank, institutional
investors, Governments, non-professional investors and other financial
institutions. There are no fixed prices in forex trade as it could be exploited by
companies or financial institutions.
The main reason that determine exchange rates, demand and availability of a
particular currency. The whole world can be seen if observed closely to the
constantly changing mixture of events around the world to keep moving and to
a change of price in one currency to another.
The most important factors that play an important role in this change are
economic factors, market psychology and political conditions for a nation.
Foreign Trade Policy Of India
Foreign Trade Policy of India
To become a major player in world trade, a comprehensive approach needs to
be taken through the Foreign Trade Policy of India . Increment of exports is of
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utmost importance, India will have to facilitate imports which, are required for
the growth Indian economy. Rationality and consistency among trade and other
economic policies is important for maximizing the contribution of such policies
to development. Thus, while incorporating the new Foreign Trade Policy of
India, the past policies should also be integrated to allow developmental scope
of India’s foreign trade. This is the main mantra of the Foreign Trade Policy of
India.
Objectives of the Foreign Trade Policy of India Trade propels economic growth and national development. The primary purpose
is not the mere earning of foreign exchange, but the stimulation of greater
economic activity.
The Foreign Trade Policy of India is based on two major objectives, they
are 

To double the percentage share of global merchandise trade within the
next five years.
To act as an effective instrument of economic growth by giving a thrust
to employment generation.
Strategy of Foreign Trade Policy of India 
Removing government controls and creating an atmosphere of trust and
transparency to promote entrepreneurship, industrialization and trades.

Simplification of commercial and legal procedures and bringing down
transaction costs.

Simplification of levies and duties on inputs used in export products.

Facilitating development of India as a global hub for manufacturing,
trading and services.

Generating additional employment opportunities, particularly in semiurban and rural areas, and developing a series of ‘Initiatives’ for each of
these sectors.

Facilitating technological and infrastructural upgradation of all the sectors
of the Indian economy, especially through imports and thereby increasing
25
value addition and productivity, while attaining global standards of
quality.

Neutralizing inverted duty structures and ensuring that India's domestic
sectors are not disadvantaged in the

Free Trade Agreements / Regional Trade Agreements / Preferential Trade
Agreements that India enters into in order to enhance exports.

Upgradation of infrastructural network, both physical and virtual, related
to the entire Foreign Trade chain, to global standards.

Revitalizing the Board of Trade by redefining its role, giving it due
recognition and inducting foreign trade experts while drafting Trade
Policy.

Involving Indian Embassies as an important member of export strategy
and linking all commercial houses at international locations through an
electronic platform for real time trade intelligence, inquiry and
information dissemination.
Partnership Foreign Trade Policy of India foresees merchant exporters and manufacturer
exporters, business and industry as partners of Government in the achievement
of its stated objectives and goals.
Road ahead of Indian foreign trade policy This Foreign Trade Policy of India is a stepping stone for the development of
India’s foreign trade. It contains the basic principles and points the direction in
which it propose to go. A trade policy cannot be fully comprehensive in all its
details it would naturally require modification from time to time with changing
dynamics of international trade.
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The Future of the Foreign
Exchange Markets
It provides a comprehensive study of the key issues affecting the market
including the dramatic developments taking place in trading technology, the
impact of the EMU and the opportunities and threats posed by emerging
markets.
The Future of the Foreign Exchange Markets discusses the new foreign
exchange clearing bank, the CLSS and considers its implications for the future
structure of the global foreign exchange market, specifically the reduction of
settlement risk. It reviews the emergence of Contracts for Differences (CFDs)
which avoid the need for any settlement. The expected effects of EMU on the
size and structure of the market are analysed, with issues such as the likely size
and distribution of activity in the euro being specifically addressed.
Structure and Scope
The Future of the Foreign Exchange Markets addresses the critical issues
including:
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• Developments in the foreign exchange markets including the spot market, the
forwards market and foreign exchange options and derivatives market.
• Trading Technology - in particular the development of electronic matching
systems and their new dominance of trading in the market.
• Netting and Settlement systems, with particular reference to the new foreign
exchange clearing bank, CLSS. The rise of CFDs will also be considered.
• EMU - a discussion on the size and structure of the market, both during the
first year of its implementation and once stage three of monetary union is
completed.
• Emerging Markets - considering the growing proportion of forex trading
devoted to emerging market currencies and whether this growth and
development will continue in the face of the turmoil in Asia and Russia.
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CONCLUSION
Key Benefits
As a result of this report you will be able to:
• Assess where the the market is today and put into perspective where it is going
tomorrow.
• Review forcasts on the future of emerging markets currency trading and assess
which currencies are most likely to be extensively traded and why.
• Evaluate the planned global foreign exchange clearing service, CLSS and
assess how it will decrease worldwide settlement risk.
• Identify how EMU is changing the foreign exchange market and evaluate how
much impact it will ultimately have.
• Access the thoughts of prominent bank foreign exchange executives on the
directions the market is taking and what they are doing to prepare.
• Assess whether the proportion of trading conducted over electronic matching
systems has a natural limit and whether it will prove as successful in the
forward and options markets as it has in the spot markets.
In the near future the change in Forex market should revolve
around following key areas:
Capital account convertibility :
We can expect lots of liberalization towards capital account during the next 3-5
years as the new stable government has formed which is committed to economic
liberalization. Here government may take some cautious approach because once
capital market is open it is very difficult to control the price of rupee due to
large amount and volume involved.
Exchange traded derivatives:
As over the counter Forex market doesnt have much transparency and trading is
not allowed we can expect more exchange traded product will be launched after
the initial success of currency futures, which was launched last year. Due
to lots of restriction on OTC derivatives in Indian market the entities outside
finds it difficult to hedge their direct or indirect exposure in Indian rupee market
and these exchange-traded derivatives may help in hedging. These products not
only brings transparency but also eliminate counter party risk, brings mark to
market concept and provides access to all type of market participants.
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Role of Reserve Bank of India:
Role of reserve Bank will be changed from regulatory, monitoring & controlling
authority to regulatory & monitoring authority as it does not have to come
frequently in market to sell or buy Forex to influence the rupee rate
Customized and exotic product:
We have recently seen that the many corporates has suffered huge loss on Forex
derivatives exposure due depreciation of rupee on account of USD. These losses
lead to credit risk for the banks who has offered the derivative product. In such
scenario we can expect more customized product as per the requirement of
customer in the market.
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ACKNOWLEDGEMENT
For this project we would sincerely like to thank teacher Suri Ma’am for giving
us this opportunity to do this project and understand THE ROLE OF FOREX
IN TRADE AND DEVELOPMENT. Through this project we have studied in
detail about the FOREX MARKET and hence have expanded and applied our
knowledge. Your invaluable contribution will truly help us grow in wisdom.
Thank you.
BIBLIOGRAPHY
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www.forex.com
Moneycontrol.com
www.google.com
www.wikipedia.com
www.investopedia.com
www.scribd.com
www.infibeam.com
business.mapsofindia.com
www.netvert.biz
www.yahoo.com
economictimes.indiatimes.com
31
DONE BY
Paridhi Khaitan
(22)
Karishma Marfatia
(30)
Gaurangi Sambhoo
(47)
Natasha Shail
(55)
Rahul Singhania
(56)
Dhaval Gala
(59)
CLASS:
T.Y.B.B.I.
TOPIC:
THE ROLE OF FOREX IN TRADE AND DEVELOPMENT
SUBJECT:
INTERNATIONAL BANKING AND FINANCE
GROUP NO.: 11
32