The Foreign Exchange Market

The Indian Rupee has been convertible on the trade account since August 1994. Capital inflows on one side and the Reserve Bank of India on the other have kept it sandwiched at 31.37 INR to the US dollar since around August 1992. The spot market is incredibly liquid, but this is largely a consequence of there being a last resort buyer (the Reserve Bank of India) and supply generally exceeding demand. However, even on exceptional days, it is fairly easy to buy USD 100 million or so during the day. Selling is not a problem at all, as the Reserve Bank has been the last resort buyer.

There is an active forward market which is fairly liquid in the first month and quotes are easily available upto six months. Since July 1993, a lot of one-year deals have also been taking place. The Reserve Bank permits banks to deal in the USD depo market within India, but access to the international market is very restricted. This, and the fact that there is really no properly developed term market in INR depos, means that the connection between FX swaps and interest rates is tenuous at best. However, this is also steadily improving, and most dealers foresee a very active market upto one year soon.

Both these markets exist only within India. The Reserve Bank prohibits any international speculative access to the Rupee. However, there is practically complete freedom to hedge any existing exposure arising out of commercial activity.

Foreign Exchange Transactions

The foreign exchange market in India is growing in both volume and depth. Various kinds of transactions are facilitated by the banks both on a spot and on a forward basis. These include hedging transactions such as currency swaps and interest rate swaps.

Foreign and Indian banks also assist in offshore loan syndication. Other services provided include, financing of foreign trade, arranging the most economical source of supplier credit, etc. Banks also assist in foreign exchange management such as currency management strategies and designing, assessing of liability structures vis-a-vis swaps, interest rates, income, etc.