Foreign Exchange Market

Topics: Foreign exchange market, Monetary policy, Central bank Pages: 44 (14674 words) Published: January 23, 2013

The Indian foreign exchange market has operated in a liberlised environment for more than a decade. A cautious and well-caliberated approach was followed while liberlising the foreign exchange market and the focus was on gradually dismantling controls and providing an enabling environment to all entities engaged in external transactions. Hence, in view of the high volumes of Foreign Exchange Reserve (FER) and their currency composition, the need for and the significance of its management has emerged as an extensive issue of debate in India since the aftermath of recent Asian crises. The issues are mainly centered on the desirability, form and content of capital control, risk containment strategies in external debt management and the desirable sequence of capital account liberalization. Though the desire to accumulate FER arises for several reasons, the full and push factors are also equally responsible for the flow of reserves to the emerging economies including India. But the movments in the behaviour of the exchange rate policies seen in most of the emerging economies have influenced to greater dgree the Indian system as well during the postunification period. Further, the volatilities in the exchange rate regimes since 1992, certainly awakend the monetary authories to take up appropriate policy initiaties to ensure stability and confidence among the participants in the exchange market world over. Against these backdrops, this paper focuses on the evolution of the movements of exchange rate regimes undergone since 1992 onwards. Besides, this, the paper also examines the emerging policy concerns in the light of the initiative to fuller capital account convertibility approach recently in India. The paper concludes with needed future agenda in view of impacts of recent global financial imbalances on different economies. ______________________________________________________________________ * Reader, Department of Economics, Mangalore University, Mangalagangothri, Karnataka574199, India


Introduction Over the years, the foreign exchange market has emerged as the largest market in the world and the breakdown of the Bretton Woods system in 1971 marked the beginning of floating exchange rate regimes in several countries. The decade of the 1990s witnessed a perceptible policy shift in many emerging markets towards reorientation of their financial markets and these changing contours were mirrored in a rapid expansion of foreign exchange market in terms of participants, transaction volumes, decline in transaction costs and more efficient mechanisms of risk transfer. In India the foreign exchange market has originated in 1978 begeining with the banks to undertake intra-day trade in foreign exchange. Before the reform process the Indian foreign exchange system was in a critical juncture and in the 1990s the Indian foreign exchange market witnessed far reaching changes along with the shifts in the currency regime. Following the recommendations of Rangarajan Committee on Balance of Payments, the exchange rate of the rupee pegged earlier was floated partially in March 1992 and fully in March 1993. Thus, the unification of the exchange rate was instrumental in developing a market-determined exchange rate of the rupee and an effort towards current account convertibility. Further, following the recommendations O.P.Sodhani Expert Committee, since 1996, wide-ranging reforms have been undertaken for deepening and widening of the Indian foreign exchange market. An Internal Technical Group on the Foreign Exchange Market was constituted in 2005 to undertake a comprehensive review of the measures initiated by the Reserve Bank and identify areas for further liberalisation or relaxation of restrictions in a medium-term framework. These efforts have resulted in the momentous developments in the enhanced risk-bearing...
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