Banking & Finance

Currency Exchange Control5

The RBI supervises and regulates the foreign exchange market in India through the Foreign Exchange Management Act, 1999 (FEMA). It issues licenses to banks and other institutions to act as Authorized Dealers in the foreign exchange market. The RBI has undertaken substantial elimination of licensing, quantitative restrictions, and other regulatory and discretionary controls.

The foreign exchange market in India comprises of - Authorized Persons (banks, money changers, and other entities) in the foreign exchange business; foreign exchange brokers who act as intermediaries; and customers – individuals as well as companies – who need foreign exchange for their transactions. The customer segment is dominated by major public sector entities, the Indian government, and large private sector companies. FIIs have emerged as an essential constituent in the equity market and, thus, contribute significantly to the foreign exchange market activity. The Indian foreign exchange market primarily comprises two segments – the spot market (the dominant segment) and the derivatives market.

A unified, single, market-determined exchange rate system based on the demand and supply of foreign exchange has been effective from 1 March 1993. The RBI’s exchange rate policy focuses on ensuring orderly conditions in the foreign exchange market; therefore, it closely monitors developments in financial markets in India and abroad. When necessary, it intervenes in the market by buying or selling foreign currencies. The RBI has gradually allowed the rupee to be used to settle foreign trades and is steadily allowing the rupee to depreciate against the US dollar. This was a significant step towards making the rupee move more freely in line with market forces. Market operations are undertaken either directly or through public sector banks.

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Virender Bhasin
Executive Director
Entity Set-up & Management

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