The government of India allowed banks to trade in the foreign exchange market in the year 1978 for the first time. The Indian foreign exchange market was the resultant establishment at this time and has over the years experienced different periods that have greatly determined the position of the Indian Rupee in the global forex market today.
During the initial period, the Indian Forex market entailed features such as forex trade confined only among banks, but a lot has changed since then, with institutions such as the Foreign Exchange Management Act of 1999 (FEMA) being established to regulate the Indian Forex market. Other fundamental facts about the Indian forex market includes its operation under the Central Government of India which has the mandate to execute foreign exchange transactions. That, however, is not enough to enable you with enough knowledge about the Indian Forex market and Forex brokers visit topbrokers.com for more information. Which is why this article has compiled the following five main features constituted in the Indian forex market, which give it the significance to be recognized within the global forex industry.
- Direct and Two Way quotations
- Commercial Banks involvement
- Spot and forward exchange rates
- Currencies futures
- Inter-bank, Merchant and Card Rates
1. Direct and Two Way Quotations
The foreign exchange price sold with reference to the Indian Rupee (INR) as the domestic currency creates a direct quotation. Price quotation which is the other name for direct quotation expresses that the foreign exchange quote is determined by how given currency associates with the INR. That, therefore, establishes an inverse relationship between the value of the INR as the domestic currency with its exchange rate. To achieve this correlation every time the INR value increases a small amount of currency has to be exchanged and when its value decreases then a large amount of the domestic currency has to be exchanged.
A two-way quotation, on the other hand, shows to potential foreign traders the selling and buying process of the INR. This quotation type enables such traders and potential investors to information pertaining to the state in liquidity of the INR’s value at that given point. This kind of information can be fundamentally utile in helping a potential investor make an informed decision concerning their participation in the Indian forex market. Information such as the difference between the bid and asking price of the INR, which can help determine its liquidity.
2. Forex Brokers and Commercial Banks’ Involvement
After the liberalization of the Indian forex market, commercial banks and Indian forex brokers were granted permission by the Central Government of India to trade in the forex market. Before liberalization, the Reserve Bank of India solely had the mandate to deal with the Indian forex market. With the shift in responsibility, commercial banks were given and still hold the power to determine the Indian exchange rates.
With over 97 commercial banks in India that partly participate in the forex market for the profits, the ability to declare their own forex rates creates a variance across the market. However, they are guided by a strict trading relationship as entities that provide a channel for forex market traders. As the largest commercial and speculative institutions within the Indian forex market, commercial banks have access to information on the Indian foreign exchange market alongside monitoring abilities on other market participants such as hedge funds, investment funds, and central banks.
Given their role in the Indian forex market, commercial banks are tasked with the responsibility of conducting forex trades on behalf of their customers which includes other banks (inter-bank market) among others.
3. Spot and Forward Exchange Rates
The price of a currency at the point of exchange for a different currency in the FX market is referred to as a spot rate. The spot rate acts as a payment price for a spot contract, which is made during what is considered as favorable forex market conditions.
In the event that the forex market shows less promise in terms of a depreciating value in the INR, then an agreement would be made among the parties involved to sell the Indian currency at a specified later date. This agreement is referred to as a forward contract, which is settled by a forward rate payment price for the agreement.
The spot rate and forward correlate in a way that allows the former to be used in the calculation determinant of the latter.
4. Currencies Futures
When two entities within the Indian FX market come to a signed agreement that allows them to exchange the Indian currency for another currency at a convenient future date at a given exchange rate; the agreement is referred to as a currency future. Given the quotation method for the Indian foreign exchange (direct quotation), the NSE price of a currency future contract is determined by the price of the INR per unit of the exchange currency.
Just like most other characteristics of the Indian forex market, the currencies futures began after the liberalization of the Indian Forex market. The liberalization introduced the Liberalization Exchange Rates Mechanism (LERMS), as a regulatory body of this feature. Over the years, however, strides have been taken in the regulation of this feature with bodies such as the Federal Reserve which monitor and control the cash market to make sure currency futures function as required.
5. Inter-bank, Merchant and Card Rates
The inter-bank rate entails the foreign exchange trading price between banks within the Indian forex market. The foreign exchange of currencies between banks is usually centralized by a commercial bank which conducts the trade and determines the inter-bank rates to other banks such as central banks and nationalized banks among others.
Merchant rates, on the other hand, consist of the foreign currency prices offered to merchants of the import and export businesses within the Indian market. These merchants get their merchant rates from any of the numerous commercial banks that deal in the Indian forex market.
Whereas card rates are currency prices that are designed for basic and minor forex transactions such as tourism and hospitality transactions.
These three foreign exchange rates have been developed over the years to improve the efficiency of the Indian foreign exchange market, by enhancing the specialization factor of the foreign exchange rates available.
In conclusion, the liberalization has had a major impact on the development factor of the Indian forex market and thus has had a great hand in the formation of the features within this article. Of course to function, as it has, it has had to have some backing which includes the formation of committees such as the Tarapore and the Sodhani committee which at given points have delivered certain liberalization measures that have facilitated its functionality. And with that, the features within the article have been formed making the Indian forex market what it is today and which will hopefully help you understand more about this Indian market.