Forex management – Recent developments, Indian forex market:

Recent developments in forex management in India are undergoing rapid transformation. It is increasingly getting integrated within the broad ambit of financial markets. Over the last fifteen years, momentus changes have happened in the financial sector. The global foreign exchange markets have grown manifold in the recent years. The BIS Triennial Central Bank Survey on forex and derivatives markets 2004 indicates a substantial rise in activity in foreign exchange markets across the world. Average daily turnover at US 1.9$ Trillion in April 2004 showed an increase of 57% and 36% at current and constant exchange rates, respectively compared to April 2001, reversing the fall in global trading volumes between 1998 and 2001.

Both global factors, such as search for yield and a secular deepening in Asian financial markets contributed to the strong growth. In this context, it is important to note that the share of trading between banks and financial customers rose significantly from 28 percent in 2001 to 33 percent in 2004. However, the currency composition of turnover has not changed significantly. The US dollar was on one side of 89 percent of all transactions, followed by the Euro (37 percent), the Yen (20 percent) and the Pound Sterling (17 percent).

In terms of currency pairs, US dollar/ Euro continued to be by far the most traded currency pairs in April 2004, according for 28 percent of global turnover, followed by US dollar/ Yen with 17 percent and US dollar/ Pound Sterling with 14 percent. The percentage share of the Indian Rupee, though minuscule, has almost trebled to constitute 0.3 percent of total daily turnover.

Indian Forex Market

In an open economy environment, the foreign exchange market assumes critical importance for stability of the financial system since banks’ balance sheets are influenced by the foreign capital inflow and various other external transactions directly or indirectly through credit exposures. The Indian forex market has widened and deepened since the 1990s on account of implementation of various measures recommended by the High Level Committee on Balance of payments in 1993 (Chairman: Dr. C. Rangarajan), the Expert Group on Foreign Exchange Markets in India in 1995 (Chariman: Shri O.P. Sodhani) and the Committee in Capital Accounting Convertibility in 1997 (Chairman: Shri S.S. Tarapore).

With the transaction to a market-determined exchange rate system in March 1993 and the subsequent gradual liberalization of restrictions on various external transactions, ensuring orderly conditions in the forex market in India has become one of the key objectives. The Reserve Bank has undertaken various measures towards development of spot as daily turnover increased to US $ 12.1 billion in 2004-05 (April-March) from US $ 3.7 billion in 1996-97. The top 30 banks in India account for approximately 90 percent of the overall turnover in the market.