Indian Economy

Foreign Exchange Control – Definition and Objectives

Exchange controls, like currency devaluations, form a part of expenditure-switching policy package. Because, they, too, like devaluation, aim at directing domestic spending away from foreign supplies and investment. Exchange controls try to divert domestic spending into consumption of domestically produced goods and services on the one hand and into domestic investment on the other.

Exchange controls represent the most drastic means of BOP adjustment. A full-fledged system of exchange controls establishes a complete government control over the foreign exchange market of the country. Foreign exchange earned from exports and other sources must be surrendered to the government authorities. The available supply of foreign exchange is then allocated among the various buyers (importers) according to the criterion of national needs and established priorities.… Read the rest

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Foreign Exchange Management Policy in India

Overview of Indian Foreign Exchange Policy

Independence ushered in a complex web of controls for all external transactions through a legislation i.e., Foreign Exchange Regulation Act (FERA), 1947. There were further amendments made to the FERA in 1973 where the regulation was intensified. The policy was designed around the need to conserve Foreign Exchange Reserves for essential imports such as Petroleum goods and food grains. The year 1991 was an important milestone for the Economy. There was a paradigm shift in the Foreign Exchange Policy. It moved from an Import Substitution strategy to Export Promotion with sufficient Foreign Exchange Reserves. The adequacy of the Reserves was determined by the Guidotti Rule, though the actual implementation of the rule was modified to meet our requirements.… Read the rest

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Capital Account Convertibility and India

According to the Tarapore Committee provided a succinct and subtle definition: Capital Account Convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world.

IMF’s Role in Capital Account Convertibility

Convertibility is an IMF clause that all the member countries must adhere to in order to work towards the common goals of the organization. However CONVERTIBILITY per se can be looked into from various perspectives and incorporated accordingly by the member nations.… Read the rest

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Exchange Rate System in India

The rupee was historically linked i.e. pegged to the pound sterling. Earlier, during British regime and till late sixties, most of India’s trade transactions were dominated to pound sterling. Under Bretton Woods system, as a member of IMF Indian declared its par value of rupee in terms of gold. The corresponding rupee sterling rate was fixed 1 GBP = RS 18.

When Bretton Woods system bore down in August 1971, the rupee was de-linked from US $ and the exchange rate was fixed at 1 US $ = Rs 7.50. Reserve bank of India, however, remained pound sterling as the currency of intervention.… Read the rest

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Factors influencing exchange rates

Foreign exchange rates are extremely volatile and it is incumbent on those involved with foreign exchange – either as a purchaser, seller, speculator or institution – to know what causes rates to move.

Actually, there are a variety of factors – market sentiment, the state of the economy, government policy, demand and supply and a host of others.

The more important factors that influence exchange rates are discussed below:

  • Strength of the Economy :The strength of the economy affects the demand and supply of foreign currency. If an economy is growing fast and is strong it will attract foreign currency thereby strengthening its own.
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Indian Perspective on Capital Account Convertibility

Just like in any other country, India’s foreign exchange transactions (transactions in dollars, pounds, or any other currency) are also broadly classified into two accounts, namely, the current account transactions and capital account transactions.

A “current account transaction” could be exemplified where an Indian citizen needing foreign exchange of smaller amounts, say $3,000, for travelling abroad or for educational purposes, can obtain the same from a bank or a money-changer.

On the other hand, a “capital account transaction” involves someone who wants to import plant and machinery or invest abroad, and needs a large amount of foreign exchange, say $1 million.… Read the rest

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