Foreign Exchange Market and its Structure in India


Foreign Exchange Market and its Structure in India

The foreign exchange market in India has been around for about 40 years now. The market started operating in 1978 after the government's decree. After its establishment, the forex market has seen significant growth over the years. The market is regulated by the central government and all aspects of the trade are defined by national laws. There are many things about this market that make it distinct from other markets in the world. To start with, its structure is slightly unique and defined by different market dynamics. In order to understand the forex market in India, you need to study its structure and what makes it different.

The structure of the forex market in India

Like other forex markets in the world, the forex in India consists of several stakeholders. The main stakeholders in this market are:

The three actors mentioned above play different roles in the trade. Traders are generally all individuals in the public who are also corporate customers of the banks. These customers use the banks as authorized dealers to access the forex market. There are traders of different kinds but all of them are able to access the market only through dealers. This is much like elsewhere in the world where brokers are the intermediaries between the forex and ordinary traders.

The banks, on the other hand, are the legally authorized institutions to handle currency. In India, banks exist in different tiers and there are clear laws that determine which institution is categorized as a financial institution. From these legal institutions, all those who want to trade can create accounts, access the market and choose products that they would like to trade in. The trading landscape has changed a lot over the years especially since the 1990's when the Indian regulatory authorities liberalized this market.

Lastly, the Reserve Bank of India (RBI) is the central financial institution which is responsible for the monetary policy in India. This institution has been instrumental in shaping the trading landscape in India. Before 1993, the Indian Rupee had a fixed value which was determined by the RBI. This meant that the currency only attracted a certain exchange rate even though the market dynamics were changing. In 1993, though, the RBI repealed the prevailing law at the time to allow for an exchange rate determined by the market itself. Since then, the Rupee's value has changed a lot in relation to different currencies.

The status of the forex market in India

In 2018, the forex market in India is quite vibrant. Even though it is not the market with the most daily volume, it is among the top ten markets in the world. As of 2017, the forex assets in India place it as the 8th best market in the world by forex reserves. The top asset in this market is the United States as represented by US institutional bonds and government bonds. The Indian forex reserves are also held in terms of gold. Indeed, India is the first nation in the world in terms of gold consumption.

Statistically, the Indian forex market has changed a lot. To start with, the daily turnover for the market is well over several billion dollars down from a couple of millions when it started. The Indian forex market has several forex players that facilitate the exchange of currency. The markets in these exchanges have several listed brokers and authorized institutions. There are several non-bank financial institutions that are legally authorized to facilitate trade in the Indian market. These institutions are regulated by the FEDAI and they use the USP for better rates of exchange. The market is open 24 hours every day and it is linked to the rest of the world markets.

Conclusion

In many ways, the structure of the Indian forex market is the same as other countries in the world. This market is however not as advanced as the major markets. There is a huge daily volume of transaction and the growth of the market has been steady. Since it is not as developed as the markets in the advanced economies though, the volumes of trade tend to be tilted towards particular assets. The diversity of the market is not as entrenched and the total value of the market is mostly big in terms of assets but not as big in terms of transaction rates.

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