The Reserve Bank of India (RBI) plays a key role in managing foreign exchange in India according to the Foreign Exchange Management Act, with its main functions including controlling foreign exchange dealings, specifying conditions for capital account transactions, and regulating certain transactions involving foreign exchange or assets. RBI oversees India's foreign exchange reserves and licenses authorized dealers in the foreign exchange market, though it has moved to a more liberalized approach with reduced regulatory constraints. The Foreign Exchange Dealers Association of India (FEDAI) also establishes guidelines and rules for its member banks that deal in foreign exchange.
2. Role of RBI in forex Management
Foreign Exchange Management Act
(“FEMA”) envisages that Reserve Bank of
India (“RBI”) will have a key role in
management of foreign exchange. The main
functions of RBI under FEMA are as follows:
3. Role of RBI in forex Management
Controlling dealings in foreign exchange by giving
general or special permission for dealing in foreign
exchange, excluding those cases where specific
provisions have been made in Act, Rules or
Regulations.
4. Role of RBI in forex Management
RBI cannot impose any restrictions on current
account transactions. These can be imposed only by
Central Government in consultation with RBI.
However, in certain cases, prior approval of RBI is
required for current account transactions as
provided in Foreign Exchange Management (Current
Account Transactions) Rules, 2000
5. Role of RBI in forex Management
Specifying conditions for payment in respect of capital
account transaction.
Specifying conditions for payment in respect of capital
account transaction.
6. Role of RBI in forex Management
Regulate/prohibit/restrict the following, by issuing Regulations:
Transfer or issue of foreign security to resident and Indian security to
non-resident;
Borrowing and lending in foreign exchange or to a foreign person;
Export/import of currency or currency notes;
Transfer of immovable property outside India;
Giving guarantee or surety where foreign exchange transaction is
involved .
7. Role of RBI in forex Management
Specify (by regulation) period and manner in which foreign exchange due
from export of goods and services should be received.
To grant exemption from repatriation .
Granting authorisation to ‘Authorised Person’ to deal in foreign
exchange, to give directions to them and to inspect the authorised
person .
8. Difference between Current Account and
Capital Account
Current Account Capital Account
Definition
The current account mainly focuses
on recording the export and import
of merchandise along with any
unilateral transfers that are
completed within the year by a
country.
The capital account mainly focuses
on recording the trading of foreign
assets and liabilities during a year by
a country.
9. Function of RBI in forex Management
Because of its scarcity, foreign exchange in India was long considered a
strictly regulated and managed commodity. Controlling demand for foreign
currency in the early phases of foreign exchange management in the country
was based on the fact that there was a limited supply of it.
The Reserve Bank was given the authority to control and regulate
transactions involving foreign exchange payments outside India, the export
and import of currency notes and bullion, the transfer of securities between
residents and non-residents, acquisition of foreign securities, and acquisition
of immovable property, among other transactions.
10. Implication
The current account reflects the total
net income of a country within a year.
The capital account reflects the net
change in the ownership of national
assets of a country within a year.
Transaction
The current account mainly focuses on
the receipts and disbursements related
to the cash and non-cap
tal items.
The capital account mainly focuses on
the sources and utilisation of capital.
11. Components
The main components within a current
account are as follows:
Export and import of goods and
services
Investment income and
Current transfers
The main components within a capital
account are as follows:
Foreign direct investment
Portfolio investment
Loans by the government of one
country to another
Evaluation
The main purpose of a current account
is that it helps the investors find out
the trade deficit or trade surplus of a
country.
The main purpose of a capital account is
to help the investors determine the net
investment position of a country.
12. Balance
If the current account balance is
negative, then a country is a net
borrower. Similarly, if the account
balance is positive, then the country
is a net lender.
If there is a surplus in the capital
account, it indicates an inflow of
money for a country. Similarly, if there
is a deficit in the capital account, it
indicates an outflow of currency from
the country.
Objective
The current account is mainly
concerned with the receipts and
payment of cash and non-capital
items.
The capital account is mainly
concerned with the sources and
utilisations of the capital items.
13. Function of RBI in forex Management
Liberalized Approach
To become an authorized dealer in the foreign currency market, a bank or
other financial institution must be granted a license by the Reserve Bank.
The Reserve Bank has significantly reduced licensing, quantitative limits, and
other regulatory and discretionary constraints due to the march toward
liberalization.
14. Function of RBI in forex Management
Investment from abroad
From a variety of sources, foreign investment enters India.
The Reserve regulates the investment.
Management of Foreign Exchange Reserves
The Reserve Bank of India safeguards its foreign exchange
reserves and oversees its investment portfolio in India.
15. Foreign exchange reserve management at the Reserve Bank is guided
by three main principles: safety, liquidity, and returns. India’s Reserve Bank of
India Act allows the Reserve Bank of India to invest its reserves in the
following instruments:
Deposits at the Bank for International Settlements (BIS) and other central
banks made in foreign commercial banks
Debt instruments reflect governmental or sovereign-guaranteed liabilities
with a residual maturity of no more than 10 years.
According to the Act, the Central Board of the Reserve Bank may approve
additional instruments and institutions.
There are some forms of derivatives.
16. FEDAI
Established in 1958, FEDAI (Foreign
Exchange Dealers' Association of India) is a
group of banks that deals in foreign
exchange in India as a self regulatory body
under the Section 25 of the Indian
Company Act (1956).
17. The role and responsibilities of FEDAI
Formulations of FEDAI guidelines and FEDAI rules for Forex business.
Training of bank personnel in the areas of Foreign Exchange Business.
Accreditation of Forex Brokers.
Advising/Assisting member banks in settling issues/matters in their dealings.
Represent member banks on Government/Reserve Bank of India and other
bodies.
Rules of FEDAI also include announcement of daily and periodical rates to its
member banks.