ROLE OF RBI IN THE MANAGEMENT OF

FOREIGN EXCHANGE MARKETS IN INDIA

Reserve bank of India

• It is the central bank of India established in 1934 under the RESERVE BANK OF INDIA ACT 1934

• Its head quarters is in Mumbai (Maharashtra)

• It has 226 offices in which four are regional offices located in metropolitan cities

Foreign Exchange Management Act

To consolidate and amend the law relating to foreign exchange

With the objective of facilitating external trade and payments

For promoting the orderly development and maintenance of foreign exchange market in India

Main Features

FEMA that gives the central government the power to impose the restrictions

Restrictions are imposed on people living in India who carry out transactions in foreign exchange

Although selling or drawing of foreign exchange is done through an authorized person

Exporters are needed to furnish their export details to RBI

What is Foreign Exchange Reserve

Management ?

The process by which public sector assets are managed in a manner that provides for the ready availability of funds, the prudent management of risks, and the generation of a reasonable return on the funds invested

Objectives

Reserve management should seek to ensure that:

• Adequate foreign exchange reserves are available

• Liquidity, market, and credit risks are controlled in a prudent manner

• Subject to liquidity and other risk constraints, reasonable earnings are generated over the medium to long term on the funds invested

Functions of RBI in foreign exchange reserves

• Support and maintain confidence in the policies for monetary and exchange rate management

• Limit external vulnerability by maintaining foreign currency

liquidity to absorb shocks

• Provide a level of confidence to markets that a country can meet

its external obligations

• Demonstrate the backing of domestic currency by external assets

• Assist the government in meeting its foreign exchange needs and external debt obligations

• Maintain a reserve for national disasters or emergencies

MANAGEMENT OF EXCHANGE RATE

EVOLUTION

LIBERALISED

APPROACH

FOREIGN INVESTMENT

S

INDIAN INVESTMENTS

ABROAD

EXTERNAL COMMERCIA

L BORROWIN

GS

LIBERALISED

REMMITENCE SCHEME

CURRENCY FUTURE

INDIAN DEPOSITORY RECIEPTS

EXCHANGE RATE

POLICY

Authority of RBI in Foreign Exchange Markets

Controlling domestic money supply to influence foreign exchange market

To actively intervene in forex market as a requirement of ‘managed float’

To review main policy relating to management of reserves

To compile and make half yearly reports on management of foreign exchange

Objectives of Forex

Department of relating to Forex

transaction

Maintainence of Forex

market of India

Collects data relating to Forex transaction

Entrusted with

responsibility of licensing

money changers

Lays down the policy guidelines for

risk management

Ensures timely

realization of exports

For capital account

transaction

Engaged on on going basis in reviewing and simplifying the procedures and

rules

“Standing Consultative

Committee on Exchange Control”

FERAFERA did not succeed in restricting

activities, especially the expansion of TNCs (Transnational Corporations)

The introduction of  FOREIGN REGULATION ACT was done in 1974, a period when India’s foreign exchange

reserve position wasn’t at its best

The buying and selling of foreign currency and other debt

instruments by businesses, individuals and governments happens in the foreign exchange market

It constantly undergoes changes and innovations, which can either be

beneficial to a country or expose them to greater risks

FEMA

NEED FOR IT’S MANAGEMENT

ROLE OF RBI IN EXPORT PROMOTION

RBI plays the role of Monetary Authority and Manager of Foreign

Exchange

The RBI has taken some measures to enable timely and hassle free

flow of credit to the export sector

Rationalization and liberalization of export credit interest rates

Including special financial package for large value exporters, export finance for agricultural exports, Gold Card Scheme for exporters,

etc.

EXPORT PROMOTION MEASURES:

With a view to making exports an effective instrument, a number of schemes have been introduced:-Assistance to States for Development of Export Infrastructure and other activities

(ASIDE) SchemeMarketing Development Assistance

(MDA)

Market Access Initiative (MAI) Scheme

Export Credit Guarantee Corporation of India Ltd (ECGC)

Export Credit

Incentives and Promotional Schemes for Agricultural Products &

Aquaculture

National Export Insurance Account (NEIA)

IMPORT PROMOTION MEASURESImports were classified into• Banned items, • Canalized items,• Restricted items, OGL

• In 1966 rupee was devalued by 36.5%

By devaluation • Expansion in export earnings; • Indian goods will become cheaper in international

market;• Import would decline as price of imported goods

would increase

• A rigid itemization of permissible imports caused an element of inflexibility in the pattern of utilization

• The transferability of licenses among same and different industries was not permissible

• This gave rise to an expanding black market in import licenses

• Hence, the import allocation system was so designed to eliminate the possibility of all domestic or foreign competition

• The Government of India has liberalized the import regime from

time to time

• At present, all controls on import have been lifted

BIBLIOGRAPHY- RRI’s official website : http://rbi.org.in/- Google Search- Wikipedia- Foreign Exchange Markets TYBFM – Vipul

Prakashan

- WEBLIOGRAPHY- rbidocs.rbi.org.in/rdocs/Content/PDFs/

FUNCWWE080910.pdf-

http://www.imf.org/external/np/mae/ferm/eng/index.htm

- http://rbidocs.rbi.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf