Foreign Exchange Market Overview

Foreign Exchange Market Overview        

In today’s world no economy is self sufficient, so there is need for exchange of goods and services amongst the different countries. So in this global village, unlike in the primitive age the exchange of goods and services is no longer carried out on barter basis. Every sovereign country in the world has a currency that is legal tender in its territory and this currency does not act as money outside its boundaries. So whenever a country buys or sells goods and services from or to another country, the residents of two countries have to exchange currencies. So we can imagine that if all countries have the same currency then there is no need for foreign exchange.

NEED FOR FOREIGN EXCHANGE

Let us consider a case where Indian company exports cotton fabrics to USA and invoices the goods in US dollar. The American importer will pay the amount in US dollar, as the same is his home currency. However the Indian exporter requires rupees means his home currency for procuring raw materials and for payment to the labor charges etc. Thus he would need exchanging US dollar for rupee. If the Indian exporters invoice their goods in rupees, then importer in USA will get his dollar converted in rupee and pay the exporter.

From the above example we can infer that in case goods are bought or sold outside the country, exchange of currency is necessary.

Sometimes it also happens that the transactions between two countries will be settled in the currency of third country. In that case both the countries that are transacting will require converting their respective currencies in the currency of third country. For that also the foreign exchange is required.

ABOUT FOREIGN EXCHANGE MARKET

Particularly for foreign exchange market there is no market place called the foreign exchange market. It is mechanism through which one country’s currency can be exchange i.e. bought or sold for

The currency of another country. The foreign exchange market does not have any geographic location.

Foreign exchange market is described as an OTC (over the counter) market as there is no physical place where the participant meets to execute the deals, as we see in the case of stock exchange. The largest foreign exchange market is in London, followed by the New York, Tokyo, Zurich and Frankfurt. The markets are situated throughout the different time zone of the globe in such a way that one market is closing the other is beginning its operation. Therefore it is stated that foreign exchange market is functioning throughout 24 hours a day.

In most market US dollar is the vehicle currency, viz., the currency sued to dominate international transaction. In India, foreign exchange has been given a statutory definition. Section 2 (b) of foreign exchange regulation ACT,1973 states:

Foreign exchange means foreign currency and includes :

• All deposits, credits and balance payable in any foreign currency and any draft, traveler’s cheques, letter of credit and bills of exchange. Expressed or drawn in India currency but payable in any foreign currency.
• Any instrument payable, at the option of drawee or holder thereof or any other party thereto, either in Indian currency or in foreign currency or partly in one and partly in the other.

In order to provide facilities to members of the public and foreigners visiting India, for  exchange of foreign currency into Indian currency and vice-versa. RBI has granted to various firms and individuals, license to undertake money-changing business at seas/airport and tourism place of tourist interest in India. Besides certain authorized dealers in foreign exchange (banks) have also been permitted to open exchange bureaus.

Following are the major bifurcations:

Ø  Full fledge moneychangers – they are the firms and individuals who have been authorized to take both, purchase and sale transaction with the public.

Ø  Restricted moneychanger – they are shops, emporia and hotels etc. that have been authorized only to purchase foreign currency towards cost of goods supplied or services rendered by them or for conversion into rupees.

Ø  Authorized dealers – they are one who can undertake all types of foreign exchange transaction. Banks are only the authorized dealers. The only exceptions are Thomas cook, western union, UAE exchange which though, and not a bank is an AD.

Even among the banks RBI has categorized them as follows:

Ø  Branch A – They are the branches that have nostro and vostro account.

Ø  Branch B – The branch that can deal in all other transaction but do not maintain nostro and vostro a/c’s fall under this category.

Ø  Branch C -  such branches cannot do anything with forex business.

For Indian we can conclude that foreign exchange refers to foreign money, which includes notes, cheques, bills of exchange, bank balance and deposits in foreign currencies.