FOREIGN EXCHANGE MARKET
Forex is the international market for free trade of currencies. Traders place
orders to buy one currency with another currency.
 Foreign exchange market is that market in which national currencies are
traded for one another.
 The major participants in this market are Commercial Banks, Forex Brokers,
Authorised Dealers and the Monetary Authorities.
 Besides, transfer of funds from one country to another, speculations is an
important dimension of foreign exchange market.
 Its where money in one currency is exchanged for another.

 It’s already the world’s largest market and it’s still grooming quickly.
 It makes extensive use of Information technology – making it available to
everyone.
 Traders can profit from both strong and weak economies.
 Traders can place very short term orders which are prohibited in some
other markets.
 The market is not regulated.
 Brokerage commissions are very low or nil.
 The market is open 24 hours in a day during weekdays.
ADVANTAGES OF FOREX MARKET

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 currency in the form of
balances with banks.
The term foreign exchange implies two things, Foreign Currency and
Exchange rate.
(a) Foreign Currency: Foreign exchange generally refers to foreign currency
e.g., For India it is Dollar, Euro, Yen etc. &
(b) Exchange rate: The other part of foreign exchange is exchange rate which
is the price of one currency in terms of other currency.

VARIOUS AUTHORITIES SUPERVISING
FOREX BUSINESS
1) Ministry of Commerce through DGFT
a) FTP 2015-20
b) ITC (HS)Classification
c) IEC No.
d) License
2) Ministry of finance
3) RBI guidelines through A.P.(DIR)Circulars, Master Circulars.

RBI has delegated powers to A.P. All transactions in Forex have to be
routed through A.P. (Authorised Person).
A.P. comprises of Authorized Dealers, Money Changers, Off shore
Banking Units etc.
Authorized dealer Banks are further classified into :
A Category: Position Maintaining Branch
B Category: All transactions (except Position Maintaining)
C Category : Routing Business through A/B Category Branches
VARIOUS AUTHORITIES SUPERVISING
FOREX BUSINESS

FOREIGN EXCHANGE
RBI’s Role in Forex Market
1. To manage the exchange rate mechanism.
2. To regulate Inter-bank forex transactions and
monitor the foreign exchange risk of the banks.
3. Keep the exchange rate stable.
4. Manage and maintain country’s foreign
exchange reserves.

WHICH ACT GOVERNS FOREIGN EXCHANGE
TRANSACTIONS?
FEMA 1999 has replaced FERA
Effective 01-06-2000
Rules and regulations have been issued under the
act to govern various Forex transactions and for
orderly development of Forex Market.

IMPORTANT ORGANISATIONS
FEDAI (Foreign Exchange Dealer's Association of India )
ECGC (Export Credit Guarantee Corporation of India Ltd.)
I.C.C. (International Chamber of Commerce)
SWIFT (Society for Worldwide Interbank Financial
Telecommunications)

FOREIGN EXCHANGE MARKET
Spot Market – (Current market) – 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.
Forward Market – Forward market for foreign exchange is that
market which handles such transactions of foreign exchange as
are meant for future delivery. It only caters to forward
transactions. It determines forward exchange rate at which
forward transactions are to be honoured.

FOREIGN EXCHANGE RATE
Fixed Exchange Rate System – Fixed rates provide greater
certainty for exporters and importers. Fixed rate is the official
rate set by the monetary authorities of the governance for one
or more currencies.
Floating (Flexible)Exchange Rate System – Flexible exchange
rate or floating exchange rates changes freely and are
determined by trading in forex market. Under Floating rate,
the value of the currency is decided by supply and demand
factors.

FOREIGN EXCHANGE RATE
Direct and Indirect Exchange Rates
Direct Rate : Under this, a given number of units of local currency per
unit of foreign currency is quoted. They are designed as direct /
certain rates because the Rupee cost of single foreign currency unit
can be obtained directly. Direct quotation is also called Home
Currency Quotation. (Rs. 100 = $ 1.34 / 40).
Indirect Rate : Under this, a given number of unit of foreign currency
per unit of local currency is quoted. Indirect quotation is also called
Foreign Currency Quotation. ($1 = Rs. 67 /68 )

Spot and Forward rates
The delivery under a foreign exchange transaction can be settled in
one of the following ways –
Ready or cash – To be settled on the same day.
TOM – The transaction to be settled on the next working day of
transaction.
Spot – To be settled on the second working day from the date of
contract.
Forward – To be settled at a date farther than the spot date.
FOREIGN EXCHANGE RATE

FOREIGN EXCHANGE ACCOUNTS
NOSTRO, VOSTRO and LORO Accounts
NOSTRO – Our account with banks abroad. RBI maintains various
NOSTRO accounts in a number of countries.
VOSTRO – Their accounts with us. Many multinational agencies (e.g.
IMF, World Bank) maintains their NOSTRO accounts with RBI.
LORO – Their account with you. E.g. Bank of India has an account in
US dollars with Manhattan Bank in New York. When bank of Baroda
wishes to refer the account of Bank Of India with Manhattan Bank, it
would refer to it as LORO account.

FOREIGN EXCHANGE DEALINGS IN INDIA
The Reserve Bank of India (RBI) is the regulator of foreign
exchange dealings in India.
It prohibits, restricts, and regulates the opening, holding
and maintaining of foreign currency accounts, and the
limits up to which a person resident in India can hold the
amount in such accounts.
These regulations are known as Foreign Exchange
Management (foreign currency accounts by a person
resident in India) (FEMA) Regulations, 2015 and contain
separate provisions for resident and non-residents.

DEFINITION OF NRI AND PIO
You are considered an Indian resident for a financial year if you satisfy any of
the conditions below:
1) When you are in India for at least 6 months (182 days to be exact) during the
financial year.
2) You have been in India for 2 months (60 days) in the previous year and have
lived for one whole year (365 days) in the last four years.
The following persons (other than individuals) are treated as person resident in
India:
• Person or body corporate which is registered or incorporated in India;
• An office, branch or agency in India, even if it is owned or controlled by a
person resident outside India; or
• An office, branch or agency outside India, if it is owned or controlled by a
person resident in India.

WHO IS PERSON OF INDIAN ORIGIN
A PIO refers to a citizen of any country (other than
Bangladesh, Pakistan, Afghanistan, Bhutan, China, Nepal
and Sri Lanka) if:
A) He / She held an Indian passport OR
B) He / She or either of his parents or any of his
grandparents was a citizen of India OR
C) The person is a spouse of an India citizen or a person
referred to in (A) or (B)

WHO IS OVERSEAS CITIZEN OF INDIA (OCI)
A foreign national, -
(i) who was a citizen of India at the time of, or at any time after 26th
January, 1950; or
(ii) who was eligible to become a citizen of India on 26th January, 1950; or
(iii) who belonged to a territory that became part of India after 15th August,
1947; or
(iv) who is a child or a grandchild or a great grandchild of such a citizen;
or
(v) who is a minor child of such persons mentioned above; or
(vi) who is a minor child and whose both parents are citizens of India or
one of the parents is a citizen of India –
is eligible for registration as OCI cardholder.

LIBERALIZED REMITTANCE SCHEME (LRS)
The FEMA regulations allow a resident to remit an
aggregate sum of US$ 250,000 per financial year (April 1
to March 31) for any permissible current account or
capital account transaction under the Liberalized
Remittance Scheme (LRS) without any approval from
RBI.
The LRS is a scheme established by the RBI to grant
permission to citizens of India to transfer funds abroad
for permitted current or capital account transactions or
for both.

NON-RESIDENT (EXTERNAL) RUPEE ACCOUNT
NRE ACCOUNT
 The Non-Resident (External) Rupee Account NR(E)RA scheme, also known
as the NRE scheme, was introduced in 1970.
 Any NRI/PIO can open an NRE account. It allows non-residents as well as
Persons of Indian Origin (PIO) to transfer foreign earnings easily to India.
 Joint accounts can be opened by two or more NRIs and/or PIOs or by an
NRI/PIO with a resident relative(s) on ‘former or survivor’ basis. However,
during the life time of the NRI/PIO account holder, the resident relative can
operate the account only as a Power of Attorney holder.
 Credits permitted to this account as inward remittance are interest accruing
on the account, interest on investment, transfer from other NRE/ FCNR(B)
accounts, maturity proceeds if such investments were made from this
account or through inward remittance.

 This is a repatriable account and transfer from another NRE account or FCNR(B)
account is also permitted.
 An NRE rupee account may be opened as current, savings or term deposit. Local
payments can be freely made from NRE accounts. Since this account is
maintained in Rupees, the depositor is exposed to exchange risk.
 NRIs / PIOs have the option to credit the current income to their Non-Resident
(External) Rupee accounts, provided the authorised dealer is satisfied that the
credit represents current income of the non-resident account holders and
income-tax thereon has been deducted / provided for.
 Taxations: There is no tax on interest earned from NRE accounts, and no wealth
tax. The tax exemptions are available only for an NRE Account held by an
individual and not for those maintained by overseas corporate bodies.
NON-RESIDENT (EXTERNAL) RUPEE
ACCOUNT- NRE ACCOUNT

NON-RESIDENT ORDINARY ACCOUNTS
(NRO)
 An NRO deposit account allows non-residents (including foreign nationals) for collecting
their funds from local bonafide transactions.
 The account can be credited with inward remittances from outside India, legitimate dues in
India and rupee gift or loan made by a resident to an NRI or PIO relative subject to the limit
prescribed under LRS.
 NRO accounts being Rupee accounts, the exchange rate risk on such deposits is borne by
the depositors themselves.
 When a resident becomes an NRI, his existing Rupee accounts are designated as NRO.
 Such accounts also serve the requirements of foreign nationals’ resident in India.
 AD Category-I banks may permit foreign nationals who have come to India on employment
and are eligible to open/hold a resident savings bank account to re-designate their resident
account maintained in India as NRO account on leaving the country after their employment
to enable them to receive their legitimate dues subject to certain conditions.
 NRO accounts can be maintained as current, saving, recurring or term deposits.

Only current income such as rent, pension, and interest, can be
remitted from an NRO account outside India.
In addition to this, balances in the NRO account may be repatriated
abroad or to an NRE account only up to US$1 million in a financial
year (April to March).
Repatriation of an amount in excess of US$1 million may be
permitted by the RBI under the approval route in exceptional
circumstances.
NRO accounts can be maintained in the form of savings account,
fixed deposit, or recurring deposit account.
Taxation: Interest earned in this account is taxable.
NON-RESIDENT ORDINARY ACCOUNTS
(NRO)

FOREIGN CURRENCY (NON-RESIDENT) ACCOUNT
(BANKS) SCHEME (FCNR (B) ACCOUNT)
Foreign Currency Non-Resident Account Bank or FCNR (B) was first introduced in
1993. It replaced the existing FCNR (A) scheme.
FCNR (B) accounts are maintained only in the form of term deposits of one to five
years.
FCNR is a fixed deposit foreign currency account that allows non-residents to keep
their deposits in foreign currency.
Earlier this account is opened by the NRIs in 6 designated currencies US Dollars,
Pounds Sterling, Euro, Japanese Yen, Australian Dollars, and Canadian Dollars.
only, but Based on the recommendations of the Committee to Review the Facilities for
Individuals under FEMA, 1999, Foreign Exchange Department (FED) has permitted
banks to accept FCNR (B) deposits in any permitted currency with effect from October
19, 2011.

FCNR (B) ACCOUNT
 Repatriation of funds in foreign currencies is permitted.
 If the account holder so wishes these accounts can also be transferred
to other NRE/FCNR accounts before the maturity period.
 Such transfers are subjected to penalties that are charged for
premature withdrawals of the deposit.
 Transfer of funds from existing NRE accounts to FCNR (B) accounts
and vice versa of the same account holder is permissible without prior
approval of RBI.
 Other conditions such as credits/debits, joint accounts, loans /
overdrafts, operation by power of attorney etc., as applicable to an NRE
account will be applicable to FCNR (B) account as well.
 The entire deposit (principal and interest) is exempt from tax.

Foreign currency accounts by
a person resident in India

EXCHANGE EARNERS’ FOREIGN
CURRENCY ACCOUNT (EEFC)
A person resident in India may open, hold and maintain
with an authorised dealer in India, a Foreign Currency
Account to be known as Exchange Earners’ Foreign
Currency (EEFC) Account.

RESIDENT FOREIGN CURRENCY ACCOUNT
A person resident in India may open, hold and maintain with an authorised dealer in India a
Foreign Currency Account, to be known as a Resident Foreign Currency (RFC) Account,
out of foreign exchange –
received as pension or any other superannuation or other monetary benefits from his
employer outside India; or
realised on conversion of the assets referred to in sub-section (4) of section 6 of the Act,
and repatriated to India; or
received or acquired as gift or inheritance from a person referred to in sub-section (4) of
section 6 of the Act; or
referred to in clause (c) of section 9 of the Act, or acquired as gift or inheritance there from;
or
received as the proceeds of life insurance policy claims/ maturity/ surrender values settled
in foreign currency from an insurance company in India permitted to undertake life
insurance business by the Insurance Regulatory and Development Authority.

FOREIGN EXCHANGE FINANCE
Pre-shipment Credit
Pre-shipment credit refers to the credit extended to exporters prior to the
shipment of goods for the execution of export order. It refers to any loan
granted to an exporter for financing the purchase, processing,
manufacturing or packing of goods as defined by RBI.
Pre-shipment finance is issued by a financial institution when the seller
wants the payment of the goods before shipment.
It is also known as “Packing Credit”.
Eligibility – 1. Exporter, 2. Confirm Orders 3. An irrevocable Letter of Credit
opened in favour of exporter.

FOREIGN EXCHANGE FINANCE
Post-shipment Finance
Credit extended to the exporters after shipment
of goods for meeting working capital
requirements.
Purpose : Meeting Working capital needs,
Custom duties, Insurance, ECGC premium etc.