Forex

Initially the Forex market in India was stagnant and running slowly. In this business, as an investor, you must know the past in order to fully understand the present. A very interesting fact in the history of India is the reform made by the Narasimham Committee in 1991 which totally changed the banking system of country. As a result of those reforms, the financial sector was opened for international competition, ending the economical isolation of the country. Local banks had to start competing with international competitors with greater financial strength and meet new standards. Banks started to merge as smaller banks with low income became targets of larger and better managed ones.

The measures taken by the Narasimham Committee in 1991 were very influential in terms of their effect on the foreign exchange market, but it was the actions proposed by the Sodhani Committee that made a greater impact on foreign exchange markets.

Some very important numbers regarding India’s Forex market are posted on the official website of the Forex Association of India, http://www.forexindia.org – “the average monthly turn over in the merchant segment of the forex market increased from USD 20 billion in 1999-2000 to USD 23 billion during 2000-01. The average monthly turn over in the inter bank foreign exchange market has also increased to USD 90 billion in 2000 -2201.” Those stats show that the Indian FX market is on high, despite the fact that forex turnover has declined in 43 countries around the world. The Forex Association of India plays a big role. It's self-financed and designed to ensure that the markets are transparent and Foreign Exchange transactions are conducted in as professional a manner as possible.

Nevertheless, there problems surrounding Forex India. There are not enough players active in the market with enhanced volumes of business. The forward dollar-rupee market is not as liquid as it should be. There is a lot of room for improvement. Another concern is the retail nature of the Indian banking system making it hard for investors to get a hold of real time information. There isn't a well developed local money market and the larger public sector banks are making the major import-export transactions. Basically the banks in India still haven't realized the potential in the FX market, when the necessary risk management systems are involved. Another problem was caused by the fact that rupee-foreign currency swaps were not allowed until 1997.

All of these problems didn't go unnoticed by the local government and currently the India's Forex market is the 6th largest in the world with reservers of over $140 Billion. This is mostly due to foreign capital inflows as foreigners are basically flooding the economy with money, buying Indian stocks and bonds. As a result, the value of Indian Rupee (the national currency) has reached new highs. The export sector is the main source of money for India's economic growth. Hence, as an investor you must know that the Reserve Bank of India is taking measures all the time to insure that the exchange rate of the Rupee doesn't get too high, as that will make the products being exported, too expensive on the international markets. The Resever Bank is trying to balance between high money supply and increased inflation, by buying the right amount of bonds from the public.