The foreign exchange market in India is patterned after the markets in the UK and the USA. There is no market in the general sense where the dealers meet to transact. The market consists of different dealers operating from their business places contacting each through telephone with exchange brokers acting as intermediaries. Such markets exist in Bombay, Calcutta, Madras and New Delhi.
The market consists of banks authorized to deal in foreign exchange (authorized dealers), exchange brokers and Reserve Bank of India. The main role is played by the authorized dealers. The dealings of authorized dealers may be:
(a) Between an authorized dealer and customers (merchant dealing);
(b) Between an authorized dealer and another authorized dealer (inter-bank dealings);
(c) Between an authorized dealer and the Reserve Bank; and
(d) dealing of an authorized dealer in international market.
The Reserve Bank, deriving its power from the Foreign Exchange Regulation Act, 1973, has authorized certain banks in India to deal in foreign exchange. Authorized dealers may purchase and sell foreign exchange from the public in accordance with exchange control regulations. Any person who acquires foreign exchange is required to surrender it to an authorized dealer. In their dealings with the public the authorized dealers are governed by the Exchange Control Regulations of Reserve Bank and the rules of Foreign Exchange Dealers’ Association of India.
The dealings with public may end in excess purchase or excess sale of a foreign currency for a dealer. This excess is disposed of by the bank in the inter-bank market by either selling or purchasing. In the inter-bank market the dealing is done through accredited exchange brokers who ai e members of the Exchange Brokers Association of India. The brokerage on the deal is payable both by the purchasing and selling banks.
The hours of business are determined by the local committees of the FEDAI. No dealings take place on Saturdays. Most of the dealings in the inter-bank market take place in currencies like pound-sterling, US dollars, Swiss francs and Deutsche marks. The dealings in the inter-bank market are subject to the rules of FEDAI.
Where the amount of the transaction is too large and cannot be met in the inter-bank market, the authorized dealer may deal with international markets. The transaction with overseas banks should be to cover a genuine transaction With a customer in India or for purpose of adjustment of authorized dealer’s own position in in the currency. The dealing with an overseas bank may also be for transactions in a currency which is not normally dealt with in the inter-bank market.
Reserve Bank buys US dollars from authorized dealers for spot deliveries and sells US dollars to authorized dealers for spot deliveries for purposes approved by the Government of India.
Reserve Bank does not ordinarily purchase spot pound-sterling, Deutsche Mark and Japanese Yen nor does it buy any currency forward. But it is prepared to enter into swap transactions under which it will buy US dollar and sell forward for two to six months.
In order to provide facilities for encashment of foreign currency from tourists, etc., the Reserve Bank has granted limited licences to certain established firms, hotels and other organisations permitting them to deal in foreign currency notes, coins and traveler cheques. These organisations are known as ‘authorized money changers’. Authorized money changers are required to surrender ultimate foreign exchange accumulation to an authorized dealer.