 Currency:

Any form of money that is in public circulation.

Currency includes both hard money (coins) and soft
money (paper money). Typically currency refers to money that
is legally designated as such by the governing body, but in
some cultures currency can refer to any object that has a
perceived value and can be exchanged for other objects.

Currency Exchange
An exchange rate (also known as a foreign-exchange rate, forex
rate, FX rate or Agio) between two currencies is the rate at which
one currency will be exchanged for another. It is also regarded as
the value of one country's currency in terms of another currency
 The exchange of one currency for another , or the
conversion of one currency into another currency.
Foreign exchange also refers to the global market
where currencies are traded virtually around-the-
clock. The term foreign exchange is usually
abbreviated as "forex" and occasionally as "FX."

 The foreign exchange (FX) market is the largest

and most liquid sector of the global financial
system.
 According to the Bank for International Settlements
“Triennial Central Bank Survey of Foreign Exchange and
Derivatives Market Activity 2004,

FX turnover averages USD 1.9 trillion per day in the cash

exchange market and an additional USD 1.2 trillion per day
in the over-the-counter (OTC) FX and interest rate
Derivatives market.

 The foreign exchange market is one of the largest markets in

the world. By some estimates, about 3.2 trillion USD worth
of currency changes hands every day.
 Historical Background of INDIAN RUPEE

Dates Currency system

From 1835 rupee = 6 ananas = 96 paise= 192 pies
From 1 April 1957 1 rupee = 100 naya paise
From 1 June 1964 1 rupee = 100 paise

Before Independence

the value of the rupee was on a par with the American dollar

SINCE INDEPENDENCE

India has faced two major financial crises and two consequent
devaluations of the rupee: In 1966 and 1991
The Rupee was The rupee was pegged at 4.79 against a dollar
between 1948 and 1966.
As in 1966, India faced high inflation and large government budget
deficits. This led the government to devalue the rupee to 7.57 against
the dollar.
IN 1971, the rupee's link with the British currency was broken and it
was linked directly to the US dollar.
In 1975, value of the Indian rupee was pegged at 8.39 against a
dollar.
In 1985, it was further devalued to 12 against a dollar.
In 1991, the currency was devalued to 17.90 against a dollar.
In 1993, the currency was devalued to 31.37 against a dollar.
Between 2000-2010, The rupee traded in range of 40-50. In
2007,rupee touched high of 39 against dollar.

The Current exchange rate is Rs.60.28 against dollar

 Foreign exchange means 'foreign currency' and includes:-
(U/S 2(n) of FEMA,1999)
Deposits, credits and balances payable in any foreign currency;
Drafts, travellers' cheques, letters of credit or bills of exchange, expressed
or drawn in Indian currency but payable in any foreign currency; and
Drafts, travellers' cheques, letters of credit or bills of exchange drawn by
banks, institutions or persons outside India, but payable in Indian
currency

 "capital account transaction" means a transaction which alters the

assets or liabilities, including contingent liabilities, outside India of
persons resident in India or assets or liabilities in India of persons
resident outside India, and includes transactions like:
Changes in Assets/ Liabilities
Transfer/ issue of security
Borrowing/ Lending
Export, import or holding of currency or currency notes
Giving guarantee -sec 2(e)
 The Act defines the term 'current account transaction' as a transaction
other than a capital account transaction and without prejudice to the
generality of the foregoing such transaction includes,

 Payments due in connection with Foreign trade, other current

business Services, and Short-term banking and credit facilities in the
ordinary course of business;
• Payments due as Interest on loans and Net income from investments,
Remittances for living expenses of parents, spouse and children
residing abroad, and
 Expenses in connection with Foreign travel, Education and Medical
care of parents, spouse and children.-sec 2(j)
 c. For the purpose of provisions, a person shall include any of the
following:
 An individual
 A Hindu Undivided family
 A company
 A Firm
 An association of persons or a body of individuals, whether
incorporated or not,
  Every artificial judicial person, not falling within any of the
preceding sub clauses, and
 Any agency, office or branch owned or controlled by such person-
-sec 2(u)

 Person residing in India:

 A person who has been residing in India for more than 182 days, in
the last financial year. This means if a person has to be assessed, as to
whether he is person resident in India, for any offence committed in
August 2001, then he should be residing in India for more than 182
days during April 2000 to March 2001

 Any person or body corporate registered or incorporated in India,

or
 An office, branch or agency in India owned or controlled by a
person resident outside India, or

 An office, branch or agency outside India owned or controlled by a

person resident in India.-sec 2(v)
 Foreign security means any security, in the form of shares,
stocks, bonds, debentures or any other instrumental
denominated or expressed in foreign currency and includes
securities expressed in foreign currency but where redemption
or any form of return such as interest or dividends is payable in
Indian currency.-sec 2(o)
 Authorized person: means any authorized dealer, money
exchanger authorized to deal with foreign exchanges-sec 2(c)

 Person non-resident in India:

Simply putting it, "a person resident outside India" means "a
person who is not resident in India“-sec 2(w)
 The Foreign exchange market is the place in which
individuals, Firms & banks buy and sell foreign
currencies or foreign exchange. The purpose of foreign
exchange is to permit the transfer of purchasing power
denominated in one currency to another
 The demand for foreign currencies arises when
tourists visits another country and need to exchange
their national currency for the currency of the country
they are visiting.

 2.The foreign firms wants to import from other nations

or when the individual wants to invest abroad and so
on
The participants in the foreign exchange market
can be categorized as follows:
 (i) Non-bank Entities: Many multinational
companies exchange currencies to meet their
import or export commitments or hedge their
transactions against fluctuations in exchange
rate. Even at the individual level, there is an
exchange of currency as per the needs of the
individual.
(ii) Banks: Banks also exchange currencies as
per the requirements of their clients.
(iii) Speculators: This category includes commercial
and investment banks, multinational companies
and hedge funds that buy and sell currencies with
a view to earn profit due to fluctuations in the
exchange rates.
(IV) Arbitrageurs: This category includes those
investors who make profit from price differential
existing in two markets by simultaneously
operating in two different markets.
(v)Governments: The governments participate in
the foreign exchange market through the central
banks. They constantly monitor the market and
help in stabilizing the exchange rates.
 Most traded currencies by value
Currency distribution of global foreign exchange market turnover
Rank Currency Symbol % daily share

1 United States dollar USD ($) 43.5%

2 Euro EUR (€) 16.7%

3 Japanese yen JPY (¥) 11.5%
4 Pound sterling GBP (£) 5.9%
5 Australian dollar AUD ($) 4.3%
6 Swiss franc CHF (Fr) 2.6%
7 Canadian dollar CAD ($) 2.3%
8 Mexican peso MXN ($) 1.25%
9 Chinese yuan CNY (¥) 1.1%

10 New Zealand dollar NZD ($) 1.0%

11 Swedish krona SEK (kr) 0.9%

12 Russian ruble RUB (₽) 0.8%
13 Hong Kong dollar HKD ($) 0.7%
14 Singapore dollar SGD ($) 0.7%
15 Turkish lira TRY 0.65%
Other 6.1%
Total 100%
 Real exchange rate is commonly known as a measure of
international competitiveness. It is also known as index of
competitiveness of currency of any country and an inverse
relationship between this index and competitiveness exists.
Lower the value of this index in any country, higher the
competitiveness of currency of that country will be.

 When the gross domestic product increases it decrease the home

currency depreciation. So the gross domestic product is
influencing the exchange rate fluctuation.
Findings of the research are as under; R=84.4%, it
means that there are strong relationship between
the exchange rate fluctuation and the gross
domestic product (GDP). The coefficient of
determination i.e. R2 is 71.1%. It means that 71.1%
changes in exchange rate fluctuation is caused by
the changes in the gross domestic product.
INDIA’S FOREX RESERVES
 Seven currencies are the most actively
traded of the world’s monies, and they are
called the majors.
 € Euro (EUR`)
 $ U.S. dollar (USD)
 ¥ Japanese yen (JPY)
 F Swiss franc (CHF)
 £ British pound (GBP)
 C$ Canadian dollar (CAD)
 A$ Australian dollar (AUD
 Major Currency pairs
These are the most liquid currencies, I.e. they are the most actively traded
currencies in the world.

 Euro vs. US dollar (EUR/USD) Nickname: ‘euro dollar’

 US dollar vs. Japanese yen (USD/JPY) Nickname: ‘dollar yen’
 British pound vs. US dollar (GBP/USD) Nickname: ‘cable’
 Australian dollar vs. US dollar (AUD/USD) Nickname: ‘aussie dollar’
 US dollar vs. Swiss franc (USD/CHF) Nickname: ‘dollar swissy’
 US dollar vs. Canadian dollar (USD/CAD) Nickname: ‘loonie’

Minor Currency Pairs

These are not traded as heavily as the major currencies, and so tend
to fluctuate more often

 Euro vs. Japanese yen (EUR/JPY) Nickname: ‘euro yen’

 Australian dollar vs. New Zealand dollar (AUD/NZD) Nickname: 'aussie kiwi'
 Euro vs. Nokkie (EUR/NOK) Nickname: 'euro nokkie'
 Euro vs. Stokkie (EUR/SEK) Nickname: 'euro stokkie‘
TYPES OF EXCHANGE RATES
 FIXED AND FLOATING EXCHANGE RATES

A fixed, or pegged, rate is a rate the government

(central bank) sets and maintains as the official exchange
rate.

a floating exchange rate is determined by the private

market through supply and demand.
Sell rate – this is the rate at which we sell foreign currency in
exchange for local currency. For example, if you were
heading to Canada, you would exchange your currency for
Canadian dollars at the sell rate.

Buy rate – this is the rate at which we buy foreign currency

back from travelers to exchange into local currency. For
example, if you were returning from America, we would
exchange your dollars back into Euros at the buy rate.

Holiday money rate or tourist rate – another term for a sell rate.
Spot rate – The spot exchange rate that calls for payment and receipt
of the foreign exchange within two business days from the date when
the transaction was made.

Spread – This is the difference between the buy and sell rates
offered by a foreign-exchange provider.

Cross rate – This is the rate we give to customers who want to

exchange currencies that do not involve the local currency. For
example, if you want to exchange Australian dollars into US dollars

Commission – This is a common fee that foreign-exchange providers

charge for exchanging one currency to another.
 EXCHANGE RATE QUOTATIONS

An exchange rate quotation is given by stating the number of

units of “term currency” or “price currency” that can be bought
in terms of 1 unit currency (also called base currency ).

Quotations can be of two types:-

1. Direct quote: A direct quote is the home currency of one

unit of foreign currency.
Ex. $1=Rs.60.28 is a direct quote for an Indian

2. Indirect quote: An indirect quote is the foreign currency

price of unit of the home currency.
Ex. Rs.1=$.016589 is an indirect for Indian.
 Factors Driving Exchange Rate Movements

A number of factors may influence foreign exchange rates,

including :
•Balance-of-payments position. A country experiencing a
trade deficit usually faces downward pressure on its foreign
exchange rate.

•Speculation over future currency values. Speculators buy or

sell currencies when they see profitable opportunities.

•Domestic economic and political conditions. Deteriorating

economic conditions and inflation typically have an adverse
affect on foreign exchange rates.

•Central bank intervention. Central banks may buy or sell

currencies to influence the value of their currency.
US DOLLAR /INDIAN RUPEE FX SPOT RATE
 Foreign Exchange (Regulation) Act,1973

 Foreign Exchange Management Act,1999

Foreign Exchange Regulation Act:
 The Foreign Exchange Regulation Act (FERA) was legislation
passed by the Indian Parliament in 1973.
 It came into force with effect from January 1, 1974.
 FERA imposed stringent regulations on certain kinds of payments.
 It deals in foreign exchange and securities and the transactions
which had an indirect impact on the foreign exchange and the
import and export of currency.
 The purpose of the act, inter alia, was to "regulate certain payments,
dealings in foreign exchange and securities, transactions indirectly
affecting foreign exchange and the import and export of currency,
for the conservation of foreign exchange resources of the country".
 FERA was repealed in 1999 by the government of Atal Bihari
Vajpayee.
 It replaced by the Foreign Exchange Management Act, which
liberalized foreign exchange controls and restrictions on foreign
investment.
Foreign Exchange Management Act (FEMA)

 The Foreign Exchange Management Act(FEMA) was an act

passed in the winter session of Parliament in 1999 which
replaced Foreign Exchange Regulation Act.
 This act seeks to make offenses related to foreign exchange civil
offenses.
 It extends to the whole of India.
 FEMA, which replaced Foreign Exchange Regulation
Act(FERA).
 It had become the need of the hour since FERA had become
incompatible with the pro-liberalization policies of
the Government of India.
 FEMA has brought a new management regime of Foreign
Exchange consistent with the emerging framework of
the World Trade Organization(WTO).
 It is another matter that the enactment of FEMA also brought
with it the Prevention of Money Laundering Act 2002, which
came into effect from 1 July 2005.
1) To help RBI in maintaining exchange rate stability.

2) To conserve precious foreign exchange.

3) To prevent/regulate Foreign business in India.

4) To consolidate and amend the law relating to foreign exchange with the object to
facilitating external trade and payments and for promoting the foreign exchange
market in India.
5) So the new law is for the management of foreign exchange instead of regulation
of foreign exchange.

6) The draconian provisions were dropped out in new enactment.

7) The size of the bare act got reduced to 49 sections in place of 81 sections in FERA
8) To facilitate external trade and payments.

9) To promote the orderly development and maintenance of foreign exchange

market
 The older version had very strict laws (for example, a person was
assumed guilty unless proven otherwise.) All the unnecessary
restrictions were removed. The rules regarding foreign
investments were simplified to encourage more foreign
investment in India and consequently ensure better foreign cash
flow. However, FERA was not in accordance with the pro-
liberalization policies of the Indian Government. Finally, in 1999
the FEMA was passed which replaced the FERA, though certain
provisions of FERA 1973 still exist under FEMA 1999.

 FEMA came into effect from 1st June, 2000. Some structural
changes were made. The FEMA combines and improves the laws
relating to foreign exchange It makes the procedure for foreign
investment easy and consequently encourages foreign exchange in
India.
1.The objective of FERA was to conserve forex and to
prevent its misuse where as FEMA is to facilitate external
trade and payments and maintenance of forex market in
India
2.Violation of FERA was a criminal offence whereas
violation of FEMA is a civil offence.
3. Offences under FERA were not compoundable. Offences
under FEMA are compoundable.
4. Citizenship was a criterion to determine the residential
status of a person under FERA. while stay of more than
182 days in India is the criteria to decide residential status
under FEMA.
5. Almost all current account transactions are free, except a
few.
Two golden rules or principles in FEMA are
mentioned as follows:
 all current account transactions are
permitted unless otherwise prohibited.
 all capital account transactions are
prohibited unless otherwise permitted.
 “Repatriate to India" means bringing into India the
realized foreign exchange and-

 the selling of such foreign exchange to an authorized

person in India in exchange for rupees, or

 the holding of realized amount in an account with an

authorized person in India to the extent notified by the
Reserve Bank,

 It includes use of the realized amount for discharge of a

debt or liability denominated in foreign exchange
 The Act requires central Government to appoint,
 Adjudicating Authorities for holding enquires related to the
contravention of the Act
 one or more Special Directors (appeals) to hear appeals against the
order of the Adjudicating authorities.

 Central Government shall have to establish

 1. An Appellate Tribunal for foreign Exchange to hear appeals against
the order of the Adjudicating Authorities and the Special Directors
 2. A Director of Enforcement with a Director and such officers or class
of officers as it thinks fit for taking up for investigation the
contravention under this Act
 The Penalty could be up to thrice the sum involved where
amount is quantifiable
 If the Amount is not quantifiable , penalty up to Rs 2 lakhs can
be imposed
 If contravention is of continuing nature, further penalty up to Rs
5000 per day during which the contravention continues can be
imposed
 Foreign exchange risk (also known as FX risk, exchange rate risk or
currency risk) is a financial risk that exists when a financial transaction
is denominated in a currency other than that of the base currency of
the company. Foreign exchange risk also exists when the foreign
subsidiary of a firm maintains financial statements in a currency other
than the reporting currency of the consolidated entity.

 Firms with exposure to foreign exchange risk may use a number of

foreign exchange hedging strategies to reduce the exchange rate risk.
Transaction exposure can be reduced either with the use of the money
markets, foreign exchange derivatives such as forward contracts,
futures contracts, options, and swaps, or with operational techniques
such as currency invoicing, leading and lagging of receipts and
payments, and exposure netting.
Any Questions ?????