The foreign exchange market in India has come a long way since it faced crisis during the 1990-91 period. Since then there was no looking back. The Forex reserves have always been on the rise, and the overall economy reflected a buyout growth. On the export and import front, the country has done exceedingly well and has been able to garner a competitive edge over several developing nations. This article provides a detailed description of these various facets of foreign exchange market in India.
The foreign exchange market is a market where dealers and brokers interact with each other around the globe. It performs an international clearing function by bringing two parties who are willing to trade currencies at agreeable exchange rates. The daily volume of business dealt within the foreign exchange markets is estimated to be about $5 tn. The Indian forex market is predominantly a transaction based market with the existence of underlying forex exposure generally being an essential requirements for market users. In India, the foreign exchange market includes customer, Authorized Dealers (ADs) in foreign exchange and Reserve Bank of India (RBI).
With the collapse of Bretten Wood Agreements, the market players occupied an important role in the forex market during the 1970's. In India as the first step, the RBI allowed banks to undertake intra-day trading in foreign exchange in 1978. Due to this, the stipulation of maintaining "square" or "near square" position was to be compiled with only at the close of business each day. During the period of 1975-92, RBI determined the exchange rate of rupee in terms of a weighted basket of currencies of India's major trading partners. RBI announced its buying and selling rates on a daily basis to ADs for merchant transactions.
There was an external payment crisis in India in 1990-91. This was due to the macroeconomic imbalances in the second half of mid-eighties such as monetization of fiscal deficit, over valued exchange rate, high tariffs and inward looking industrial policy. International factors such as recession in the industrial world, first Iraq war in August 1990, restriction of external finance by international banks were responsible for the degradation of international confidence in India. As a result, the current account deficit was around 3.2% of GDP. To keep the external competitiveness and to restore Balance of Payments (BoP) position, some structural changes were introduced. |
