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FOREX MANAGEMENT
Group 2
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Name
Scarlet Almeida
Mihir D Bhammar
Deepa Karappan
Kunal Doshi
Dipti Gawas
Siddesh Kurdikar
Sandeep Pandita
Roll No
04
05
13
15
19
33
39
FOREX MARKETS INTRODUCTION
The FOREX market provides the physical and institutional structure
through which the money of one country is exchanged for that of
another country.
A foreign exchange transaction is an agreement between a buyer
and a seller that a fixed amount of one currency will be delivered for
some other currency at a specified rate.
"Foreign Exchange" is the simultaneous buying of one currency and
selling of another. Currencies are traded in pairs, for example Euro/US
Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).
HISTORY OF FOREX MARKETS
• International Trade - Barter
• Bond issues to finance infrastructure projects in developing
countries (19th century)
• Gold Standard (1879 - 1934)
• Bretton Woods (1944 - 1971)
• 1960s: Decline of U.S Economy
• 1971: Devaluation of Dollar
• Managed / Dirty float
• America, Germany first to free capital flows
• Britain, 1979, Japan, 1980 (mostly)
• France, Italy remove restrictions in 1990
• Currency Board in Hongkong, Argentina- Dollarisation?
• Creeping peg in Brazil
INTRODUCTION – FX MARKETS
There are six main characteristics of the FOREX markets
 The geographic extent
 The three main functions.
(transferring purchasing power, funding inventory in transit by letter of credits, hedging forex risk)
 The market’s participants
(2 tier – wholesale market or interbank & retail market) (3 tier system in India)
(Bank and non bank foreign exchange dealers, Individuals and firms, conducting commercial or
investment transactions,Speculators and arbitragers, Central banks and treasuries, Foreign
exchange brokers)
 Its daily transaction volume
 Types of transactions including spot, forward and swaps
 Methods of stating exchange rates, quotations, and changes in exchange
rates.
FOREX Market Geography
Measuring FOREX Market Activity: Average Electronic Transactions Per Hour
25,000
20,000
15,000
10,000
5,000
GMT
0
1
2
3
4
5
6
10 AM
Lunch Europe
In Tokyo In Tokyoopening
7
8
9
Asia
closing
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Americas London
open
closing
Afternoon
in America
6 pm Tokyo
In NY opens
TRANSACTIONS IN FOREX MARKETS
GLOBAL FOREX TURNOVER
Forex Market Daily turn over
Options and other
products, 207, 5%
Currency Swaps, 43,
1%
Spot Transactions,
1400, 36%
Spot Transactions
Outright forwards
Forex swaps
Forex Swaps, 1765,
46%
Currency swaps
options and other products
Outright Forwards, 475,
12%
Amount in Bn USD
Daily turnover to be approximate 3.98 trillion USD
Daily turnover of Indan forex market is approximated between 2 to 3 bn USD.
FOREX RESERVES - 2009
Current forex reserves are 298.31bn USD
Forex Markets
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Forex" or simply "FX," allows banks and other institutions, as well as individuals, to
buy and sell different types of currencies on a worldwide-scale.
 The foreign currency market is unique and important because of:
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High trading volumes,
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Relatively large liquidity,
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Factors that can influence exchange rates.
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A higher exchange rate means that it is more costly to "buy" units of that foreign
currency (in terms of another currency) than a lower exchange rate.
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Exchange rates are a function of the supply and demand for currency.
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Exchange rates fluctuate for a variety of reasons related to the supply and demand
model, such as relative changes in levels of income, inflation, employment and
output between countries.
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The foreign exchange market is one of the largest markets in the world. By some
estimates, about 3.2 trillion USD worth of currency changes hands every day
F ore ig n C ur re nc y
A c c ounts
FOREIGN
CURRENCY
ACCOUNT
NOSTRO
ACCOUNT
VOSTRO
ACCOUNT
LORO
ACCOUNT
Foreign Currency Accounts
 NOSTRO ACCOUNTS
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Foreign exchange transactions are settled through Nostro and Vostro accounts
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NOSTRO Account:: Our Account with you;
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A nostro is our account of our money, held by you
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The account maintained by an Authorized Dealer ( Indian Bank) with a foreign
bank is called "NOSTRO" Account meaning "Our Account with You".
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Eg BOI’s USD ACCOUNT WITH CITI BANK NY
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Nostro accounts are mostly commonly used for currency settlement, where a bank
or other financial institution needs to hold balances in a currency other than its
home accounting unit.
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A Nostro account is a specific designation for a type of banking account that
shows who the owner of the capital is.
Foreign Currency Accounts
 VOSTRO ACCOUNTS
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A VOSTRO is our account of your money, held by us
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A Vostro Account is an account where money is being held by an outside party.
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The bank calls it a Vostro account because it is the customer’s money that the
bank is holding.
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Foreign banks (Correspondents) also maintain accounts with any bank in India in
Indian Rupees for the purpose of settling their rupee transactions and these
accounts are called "VOSTRO" Accounts meaning "Your Account with us".
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Eg. CITI BANK RUPEE ACCOUNT WITH BANK OF INDIA
Foreign Currency Accounts
 LORO ACCOUNTS
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A LORO is our account of their money, held by you
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It is a record of an account held by a second bank on behalf of a third party
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My record of their account with you
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In practice this is rarely used, the main exception being complex syndicated
financing.
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Eg: State bank Of India maintaining an account with foreign correspondent say
BNP New York, Canara Bank may also maintain a Nostro Account with them.
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When SBI advises BNP New York for transfer of funds to Canara Bank Account
with them, Canara Bank Account is titled as LORO Account "i.e. their account
with you".
SWIFT
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Society for Worldwide Interbank Financial Telecommunication
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Founded in 1973, headquartered in Brussels, Belgium.
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It is a worldwide financial messaging network where messages are
securely and reliably exchanged between banks and other financial
institutions
 Why SWIFT ?
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Secure network
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Set of syntax standards for financial messages
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Set of connection software and services, allowing financial institutions to
transmit messages over SWIFT network.
SWIFT
 Advantages of SWIFT
• Improved cash forecasting, liquidity management and internal control
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integration with existing systems, for example with TMS and enterprise resource
planning (ERP) systems, especially in a multi-bank situation.
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The cash management service gives the ability to move money around securely
and efficiently.
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Information: the corporate has the ability to query where the payment is in a
situation where the beneficiary claims non-receipt.
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Implementing SWIFT is becoming less expensive resulting in savings to be realised
on compliance costs and banking fees and the reduction in number of potential
errors.
ROLE OF SWIFT
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SWIFT has a broad role to play in helping to define and implement the next
generation of generic standards for the FX market.
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At one level SWIFT plays an 'active' role in developing new standards and is
currently focusing on building business and logical message models for FX orders,
confirmations and options for the treasury market.
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At another level, its role is entirely 'proactive', bringing disparate parties together
to achieve, at a very minimum, a convergence of purpose - not to mention, an
economy of effort - in mapping out a standards approach across the FX
community.
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SWIFT is working proactively with its members to overcome message
incompatibility between different industry segments.
Message Type(MT) - SWIFT
 A specific type of Standards message that is expressed in the SWIFT
proprietary syntax and is identified by a unique 3-digit number. e.g.
MT100, MT101, MT202…
Series
Category
MT100
MT200
MT300
MT400
MT500
MT600
MT700
MT900
Customer Transfer
Financial Transfer
Treasury Transactions
Documentary Collections Transactions
Securities Transaction/ Depository Services
Precious Metals/ Syndicate Transactions
Documentary Credits and Gurantee Transactions
Statement reports, such as Daily statements, debit & credit
Quoting Conventions
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Direct Quote is expressed in a manner that reflects the exchange of a
specified number of domestic currencies vis-à-vis one unit of foreign
currency. Rs 48= US $1 ,Rs 76.80 =£ 1
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Indirect Quote is expressed in a manner that reflects the exchange of a
specified number of foreign currencies vis-à-vis one unit of local currency.
US $ 0.02083= Re1, 0.01302= Re 1.
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Direct quotations are known as European quotations ; Indirect quotations
as American quotations
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Inter Bank markets generally use quotation conventions adopted by ACI
(Association Cambiste Internationale)
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A currency quote is denoted by a three letter code for two currencies
separated by an oblique or a hyphen. Eg: USD/INR
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The first currency in the pair is the ‘base’ currency and the second the
‘quoted’ currency.
Quoting Conventions
• A two-way quote is a kind of quote that provides the bid price and
ask price of a foreign exchange, giving the trader the indication of
what rate the instrument was purchased at, and the rate at which
they intend to move it on.
• Eg.£ 1= Rs 78.1000 –Rs. 78.1500
• First two digit before decimal pt is know as figure, two digit after
decimal pt is know as Point and rest two know as PIPS
• Spread is difference between the ask price and the bid price.
Spread
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For example, this quotation shows participants in
a market are willing to pay 1.2635 for the
EURUSD, and are conversely willing to sell the
same pair at 1.2638. This creates a 1.2635/38
spread, which is 3 basis points wide.
Cross Rate is the rate of exchange of two currencies on the basis of exchange
quotes of other pairs of currencies.
Eg. New Zealand $/US S 1.7908-1.8510
Rupee/US $ 48.0465-48.211111
Rupee/ New Zealand $ 25.9571-26.9215
Spot & Forward
• Spot Rate is the rate of exchange of the day on which
transaction has taken place and of the day the
transaction is executed.
• Forward exchange rate is the rate of exchange
applicable for delivery of foreign exhange at future date.
Settlement conventions
• A Spot exchange rate applies to a FX transaction with a
settlement date that is 2 business days after the trade
date(T+2).
• Value tomorrow exchange rate applies to FX
transaction with settlement date that is 1 business day
after trade date (T+1).
• A forward Exchange rate applies to FX transaction with
settlement date that is more than 2 business days and
upto 2 years after the trade date.
Exchange Rate Arrangements
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Price of one country's money in relation to another's.
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The most famous fixed exchange-rate system was the gold standard; in the
late 1850s, one ounce of gold was defined as being worth 20 U.S dollars
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For example an exchange rate of 91 Japanese yen (JPY, ¥) to the United States
dollar (USD, $) means that JPY 91 is worth the same as USD 1.
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Domestic currency will be issued only against foreign exchange and that it
remains fully backed by foreign assets, eliminating traditional central bank
functions, such as monetary control and lender-of-last-resort, and leaving little
scope for discretionary monetary policy.
Types of Exchange Rate
systems
Exchange Rate Systems
Fixed
Floating
Managed
Crawling Pegs
Pegged Exchange Rates
within Horizontal Bands
Other Conventional Fixed
Peg Arrangements
Currency Board
Arrangements
Exchange Arrangements
with No Separate Legal
Tender
Independently Floating
Exchange Rates
Within Crawling
Bands:
Managed floating with
no preannounced path
for exchange rate:
Managed Floating with No
Predetermined Path for the
Exchange Rate
Fixed Exchange Rate system
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Prior to the 1970’s most countries operated under a fixed exchange rate system known as the
Bretton-Woods system
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The exchange rates of the member countries were fixed against the U.S. dollar, with the dollar
in turn worth a fixed amount of gold.
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In a fixed exchange rate system, the Central Bank stands ready to exchange local currency
and foreign currency at a pre-announced rate.
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The central bank announces a fixed exchange rate for the currency and then agrees to buy
and sell the domestic currency at this value
The basic motivation for keeping exchange rates fixed is the belief that a stable exchange ratE
will help facilitate trade and investment flows between countries by reducing fluctuations in
relative prices and by reducing uncertainty.
Fixed Exchange Rate system
• Advantages:
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fixed exchange rates offer much greater stability for the enterprisers and stimulate international
trade;
the importers and exporters can plan their policy without begin afraid of depreciation or
appreciation of the currency.
fixed exchange rates make the producers more disciplined, i.e. they are forced to keep up with the
quality of their production and to control the costs of the production to stay competitive compared
to international enterprisers.
This advantage of fixed exchange rates allows the government to decrease inflation level and
stimulate international trade and economical growth in the long period.
• Disadvantages:
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The high vulnerability of the economical system to speculative attacks
The government artificially supports the exchange rate, which is not adjusted to changed
economical condition.
Interest rates, which directly depend on the exchange rate, can stop possible economical growth in
case of their disparity to market needs
Types of Fixed Exchange Rate
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Exchange Arrangements with No separate Legal Tender:
The currency of another country circulates as the sole legal tender or the member belongs to
a monetary or currency union in which the same legal tender is shared by the members of the
union
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Currency Board Arrangements:
A monetary regime based on an explicit legislative commitment to exchange domestic
currency for a specified foreign currency at a fixed exchange rate, combined with restrictions
on the issuing authority to ensure the fulfillment of its legal obligation.
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Currency board:
A currency board is a fixed exchange rate regime where there are enough foreign currency
reserves to convert all domestic money into foreign currency.
Example In Argentina’s currency board,which was 1 peso to 1 dollar, the Argentinean
Central Bank could only issue as many pesosas it had dollar reserves. I
In Hong Kong’s currency board which was 7.28 HK dollars to the U.S. dollar the monetary
authority in Hong Kong could only issue 7.28 times as many HK dollars as they have U.S.
dollars in reserve.
Conventional Fixed Peg Arrangements:
The country pegs its currency (formally or de facto) at a fixed rate to a major currency or a
basket of currencies where the exchange rate fluctuates within a narrow margin of at most ±1
percent around a central rate.
Types of Pegged Exchange
Rates
Conventional Fixed Peg Arrangements:
The country pegs its currency (formally or de facto) at a fixed rate to a major
currency or a basket of currencies where the exchange rate fluctuates within a
narrow margin of at most ±1 percent around a central rate.
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Pegged Exchange Rates Within Horizontal Bands:The value of the
currency is maintained within margins of fluctuation around a formal or de facto
fixed peg that are wider than ±1 percent around a central rate. This is just a fixed
exchange rate system like the one described above except that the fixed rate
changes in a pre-determined manner instead of in an arbitrary way.
Example: The Brazilian government would announce a fixed exchange rate of
10,000 cruzeiros to the dollar and also state that the rate would devalue by 10%
each year
Crawling Pegs:The Currency is adjusted periodically in small amounts at a
fixed, preannounced rate or in response to changes in selective quantitative
indicators.
Floating/Flexible Exchange Rate
system
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The value of the currency is determined by the market, i.e.by the interactions of thousands of banks,
firms and other institutions seeking to buy and sell currency for purposes of transactions clearing,
hedging, arbitrage and speculation.
A currency that uses a floating exchange rate is known as a floating currency.
Higher Demand/Decrease in Money supply = Currency Appreciation
Lower Demand/Increased in supply = Currency Depreciation.
Most OECD countries have flexible exchange rate systems: the U.S., Canada, Australia, Britain, and the
European Monetary Union.
Advantages:
As floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks
and foreign business cycles, and to preempt the possibility of having a balance of payments crisis.
It automatically determines interest rates within the country and therefore allows controlling the
economical balance more effectively
Disadvantages:
A free floating exchange rate increases foreign exchange volatility
These economies have a financial sector with one or more of following conditions:
high liability dollarization
financial fragility
strong balance sheet effects
When liabilities are denominated in foreign currencies while assets are in the local currency,
unexpected depreciations of the exchange rate deteriorate bank and corporate balance sheets and
Types of Floating Exchange
Rate
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Exchange Rates Within Crawling Bands:
The Currency is maintained within certain fluctuation margins around a central rate that is adjusted
periodically at a fixed preanounced rate or in response to changes in selective quantitative indicators.
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Managed floating with no preannounced path for exchange rate:
The monetary authority influences the movements of the exchange rate through active intervention in
the foreign exchange market without specifying, or precommitting to, a preannounced path for the
exchange rate.
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Independent Floating:
The exchange rate is market determined, with any foreign exchange intervention aimed at moderating
the rate of change and preventing undue fluctuations in the exchange rate, rather than at establishing a
level for it.
Managed floating rate systems
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A managed floating rate systems = fixed exchange rate + flexible exchange rate system.
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In a managed floating exchange rate system, the central bank becomes a key participant in the
foreign exchange market
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The central bank has either an implicit target value or an explicit range of target values for
their currency: it intervenes in the foreign exchange market by buying and selling domestic
and foreign currency to keep the exchange rate close to this desired implicit value or within
the desired target values.
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Example: Suppose that Thailand had a managed floating rate system and that the Thai central bank
wants to keep the value of the Baht close to 25 Baht/$. In a managed floating regime, the Thai
central bank is willing to tolerate small fluctuations in the exchange rate (say from 24.75 to 25.25)
without getting involved in the market.
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IF Demand for Baht
= Appreciation of Baht below 24.75
then the Central Bank increases the supply of Baht by selling Baht for dollars
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If Supply of Baht
= Depreciation above the 25.25 level
the Central Bank increases the demand for Baht by exchanging dollars for Baht and running down
its holdings of U.S dollars.
As of 2007, 111 countries adopted fixed exchange rates. Specifically, 41
countries have no separate legal tender, 7 countries have currency boards,
52 countries have fixed pegs, 6 horizontal bands, and 5 crawing pegs.
76 countries adopted floating. (source: IMF).
Dollarisation
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Dollarization occurs when the inhabitants of a country use foreign currency in parallel
to or instead of the domestic currency. The term is not only applied to usage of the
United States dollar, but generally to the use of any foreign currency as the national
currency.
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The major advantage of dollarization is promoting fiscal discipline and thus greater
financial stability and lower inflation.
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The biggest economies to have officially dollarized as of June 2002 are Panama (since
1904), Ecuador (since 2000), and El Salvador (since 2001).
The United States dollar, the euro, the New Zealand dollar, the Swiss franc, the Indian
rupee, and the Australian dollar were the only currencies used by other countries for
official dollarization.
Exchange Rate Mechanism II
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The European Exchange Rate Mechanism, ERM, was a system introduced by the
European Community in March 1979, as part of the European Monetary System (EMS), to
reduce exchange rate variability and achieve monetary stability in Europe, in preparation
for Economic and Monetary Union and the introduction of a single currency, the euro,
which took place on 1 January 1999.
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The adoption of the euro, policy changed to linking currencies of countries outside the
Eurozone to the euro (having the common currency as a central point).
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The goal was to improve stability of those currencies, as well as to gain an evaluation
mechanism for potential Eurozone members. This mechanism is known as ERM2.
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The ERM is based on the concept of fixed currency exchange rate margins, but with
exchange rates variable within those margins. This is also known as a semi-pegged system.
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On 31 December 1998, the European Currency Unit (ECU) exchange rates of the Eurozone
countries were frozen and the value of the euro, which then superseded the ECU at par, was
thus established.
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In 1999, ERM II replaced the original ERM.
FOREX PRODUCTS IN INDIA
The forex derivative products that are available in Indian financial markets can be
sectored into three broad segments viz. forwards, options, currency swaps.
•Forwards Contract - A Hedging Instrument
entered into to hedge oneself against exchange risk.
customer locks-in the exchange rate at which he will buy or sell
Discount and Premium
currency at premium if more expensive in the forward market than in the spot market.
Let us assume the following USD/INR quotes
USD/INR Spot :: 40.50/51
USD/INR 3 Months :: 40.76/78
So the dollar is expected to be more expensive in the future and hence is at a
premium
against the rupee
•Forward Buying Rate
Dollar/ Rupee Market Spot Buying Rate :: 40.50
Add : Forward Premium
OR
Less : Forward Discount
Thus give the Forward Buying Rate for USD/INR
FOREIGN EXCHANGE OPTION
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foreign exchange option is a derivative financial instrument where the owner has the right
but not the obligation to exchange money denominated in one currency into another
currency at a pre-agreed exchange rate on a specified date
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example : GBPUSD FX option-owner has the right but not the obligation to sell £1,000,000
and buy $2,000,000 on December 31.
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when rate < 2.0000 ie dollar is stronger and the pound is weaker, then the option will be
exercised, allowing the owner to sell GBP at 2.0000 and immediately buy it back in the spot
market at 1.9000,
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profit = (2.0000 GBPUSD - 1.9000 GBPUSD)*1,000,000 GBP = 100,000 USD
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in GBP this amounts to 100,000/1.9000 = 52,631.58 GBP.
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Also used as hedge against exchange rate risk.
CURRENCY SWAPS
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Involve an exchange of cash flows in two different currencies used to raise
funds in a market where the corporate has a comparative advantage, at a cost
lower than if he accessed the market of the second currency directly an
exchange rate.
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Generally the prevailing spot rate is used to calculate the amount of cash flows,
apart from interest rates relevant to these two currencies.
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These instruments are used for hedging risk arising out of interest rates and
exchange rates contract which commits two counter parties to an exchange,
over an agreed period, two streams of payments in different currencies.
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Each calculated using a different interest rate, and an exchange, at the end of
the period, of the corresponding principal amounts, at an exchange rate agreed
at the start of the contract.
CURRENCY SWAPS
CONSIDER A SWAP IN WHICH:
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Bank UK commits to pay Bank US, over a period of 2 years, a stream of interest
on USD 14 million, the interest rate is agreed when the swap is negotiated.
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in exchange, Bank US commits to pay Bank UK, over the same period, a counter
stream of sterling interest on GBP 10 million; this interest rate is also agreed
when the swap is negotiated.
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Bank UK and Bank US also commit to exchange, at the end of the two year
period, the principals of USD 14 million and GBP 10 million on which interest
payments are being made; the exchange rate of 1.4000 is agreed at the start of
the swap.
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We can now see from the above that currency swaps differ from interest rate
swaps in that currency swaps involve:
An exchange of payments in two currencies.
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Not only exchange of interest, but also an exchange of principal amounts.
Unlike interest rate swaps, currency swaps are not off balance sheet
instruments since they involve exchange of principal at the end of the period.
CURRENCY SWAPS
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The idea of entering into the currency swap is that, Bank US is probably
expecting an amount of GBP 10 million at the end of the period, while Bank UK
is expecting an amount of USD 14 million, which they agreed to exchange at the
end of the period at a mutually agreed exchange rate.
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The interest payments at various intervals are calculated either at a fixed
interest rate or a floating rate index as agreed between the parties.
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Currency swaps can also use two fixed interest rates for the two different
currencies – different from the interest rate swaps.
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The agreed exchange rate need not be related to the market.
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The principal amounts can be exchanged even at the start of the swap
Currency Futures, Forex Futures
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Are legally binding contracts between buyers and sellers to buy or sell a
specific sum of currency in exchange for another at a specified exchange rate.
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Delivery of the same is meant to take place on a specific future date. Currency
futures are traded in specialized futures exchanges.
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Main participants of this organized market comprise bankers, importers,
exporters, multinational corporations and private speculators.
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Only the exchange rate can be negotiated by the buyers and sellers. The
remaining specifications, such as defining the underlying currency, trading unit
and delivery month, are set by the futures exchange.
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Companies hedge by either purchasing currency futures for their future
payables, or sell the futures on currencies for their future receipts.
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Speculators may also buy or sell futures on a foreign currency as a protection
against the strengthening or weakening of the US dollar.
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So, speculators may be able to earn profit from the rise or fall of these
exchange rates.
FOREIGN EXCHANGE TURNOVER
Capital Inflow : The way forward for
India
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Emerging economies grappling with Foreign Investments
IMF – change of view on the capital controls for developing &
developed countries
Developed countries : high Fiscal Deficit & rising debts levels
Emerging Economies high speed growth recovery
Resulting in prices of goods & services increasing and the Impact on
the exchange rates
Policy Responses
recommended - IMF
• A flexible exchange rate allowing appreciation of currency
• Reserve accumulation through currency intervention
• Reduction in domestic Interest Rates
• Tightening of fiscal policy to allow for lower interest rates
• Strengthening prudent regulation
• Liberalization of Capital out flow controls
The fact – Indian
scenario
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Flexible exchange rate currency appreciation
Rupee to appreciate , this is not possible with Fiscal Deficit 4% of the
GDP & any further increase will erode India’s external
Competitiveness
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Reserve Accumulation through currency buying excess dollar would
mean that injecting further liquidity in system, Given the high
inflation rate, this is a flawed response
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Reduction in the Domestic Interest Rates
India is in the mode of monetary tightening to contain inflation,
which is exceptionally high and rising, so interest rates must rise
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Tightening of fiscal policy – lower Rates
This has already begun but, since monetary tightening will continue
for some time it is unlikely to reduce interest rates enough to
dissuade capital inflows
Cont..
• Strengthening prudent regulation
India has a prudent, well-recognised regulatory regime, which helped it
weather the global financial crisis. There is little room to further
strengthen prudential regulations that could help deal with capital
inflow surges and their attendant financial risks
• Liberalization of Capital out flow
The last option from the IMF report is to relax capital outflow controls.
India has been liberalising its capital outflows and has gradually lifted
the cap on capital outflows from both resident individuals and
corporate entities
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The IMF states in its GFSR(Global Financial Stability Report) that if its
policy options appear insufficient to meet with the sudden or large
increase in capital inflows “capital controls may be a useful element in
the policy toolkit”
Capital Controls Method
• Administrative Capital control
• Price or Market Based Control
• Administrative Capital control
India already maintains administrative controls on capital account
which are either prohibitive in nature or prescribe quantitative limits.
During times of excess or scanty capital inflows, India had resorted to
tightening or loosening of administrative controls, largely on debt
flows
• Market Based Control
Discourages Capital transactions by increasing their cost. This is done
in two ways unremunerated reserve requirements (URR) Followed by
countries like Colombia (2007-08) and Thailand (2006-08)
The other way is taxes on capital inflows Brazil in 2008 and again
from October 2009
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India has relied largely on administrative controls to tackle a surge in
capital inflows
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In both debt and equity inflows
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Debt inflows are subject to limits
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In the case of equity inflows, while there is no overall limit imposed on
the amount, a cap in terms of their proportion to a company’s share
capital is imposed
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However, if FII equity inflows continue to be excessive, the authorities
may need to seriously consider a move to price-based controls
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Imposing an unremunerated reserve requirement or a tax on FIIs may
be the only viable way forward
Bibliography
• www.imf.org
• www.moneycontrol.com
• www.fxstreet.com
• www.voxeu.org
• www.eastasiaforum.org
Thank You