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RBI_functions_2 (FOREIGN EXCHANGE MANAGEMENT (Developments in external…

- - - - Foreign Exchange Regulation Act (FERA) of 1947
      - comprehensive Foreign Exchange Regulation Act, 1973
        
        empowered the Reserve Bank, and in certain cases the Central Government
        
        control and regulate
        
        dealings in foreign exchange payments outside India
        
        export and import of currency notes and bullion
        
        transfer of securities between residents and non-residents
        
        acquisition of foreign securities
        
        acquisition of immovable property in and outside India etc
  - - - conducting business
      - attending international conferences
      - undertaking technical study tours
      - setting up joint ventures abroad
      - negotiating foreign collaboration
      - pursuing higher studies and training
      - medical treatment
  - - - all equity securities traded in the primary and secondary markets
      - GOI treasury bills and dated securities
      - corporate debt instruments
      - mutual funds
    - - Can make investment in oversesas JV/wholly-owned subsidiary abroad
      - Up to a certain limit
  - - - commercial-bank loans
      - buyers’ credit
      - suppliers’ credit
      - securitised instruments
      - Foreign Currency Convertible Bonds (FCCBs)
      - Foreign Currency Exchangeable Bonds (FCEBs)
  - - - National Stock Exchange
      - Bombay Stock Exchange
      - MCX-Stock Exchange
    - - Jointly by RBI and SEBI
  - - - fixed exchange rate regime
      - in line with the Bretton Woods system
      - Indian Rupee was pegged to the Pound Sterling - historic links
    - - Early 70s
      - flexible/managed exchange rates
      - Why delinked from Pound Sterling in September 1975
        
        decline in the share of Britain in India’s trade
        
        increased diversification of India’s international transactions
        
        weaknesses of pegging to a single currency
      - Basket linked management
        
        daily exchange rate movements of currencies of India’s major trading partners
        
        but did not capture
        
        market dynamics
        
        exchange rates of competing countries fully
      - After limitation of basket linked management
        
        BOP crisis 1990s
        
        so value determined by market forces in a phased manner following
    - - two-step downward adjustment in the exchange rate of the Rupe
      - March 1992 - Liberalised Exchange Rate Management System (LERMS)
      - dual exchange rate
      - March 1, 1993 - unified single market-determined exchange rate system - replaced LERMS effective
    - - orderly conditions in the foreign exchange market
      - monitor the developments in the financial markets at home and abroad
      - If necessary intervenes in the market by buying or selling foreign currencies
      - market operations directly or through public sector banks
  - - - forward contracts
      - swap contracts
    - - Rupee-foreign currency swaps
      - foreign currency-Rupee options
      - cross-currency options
      - interest rate swaps
      - currency swaps
      - forward rate agreements
      - currency futures
  - - - From RBI Act 1934
      - Custodian of reserves
      - managing their investment
      - RBI
    - - Share of foreign currency assets in the balance sheet of RBI - substantially increased
      - increased volatility in exchange and interest rates in the global market - preseve value of reserves with reasonable return
    - - Twin pillars
        
        Safety and liquidity
      - Basic params
        
        Safety
        
        Liquidity
        
        Returns
      - Where can RBI invest?
        
        1) Deposits with Bank for International Settlements and other central banks
        
        2) Deposits with foreign commercial banks
        
        3) Debt instruments representing sovereign or sovereign-guaranteed liability of not more than 10 years of residual maturity
        
        4) Other instruments and institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act
        
        5) Certain types of derivatives
      - Guidelines - stipulate stringent eligibility criteria for issuers, counterparties, and investments to be made with them
      - in consultation with the Government, continuously reviews the reserves management strategies
- - - - Issuing authority of coins and supplies to RBI on demand
    - - Puts coins to circulation on behalf of government
      - Sole authority on notes
  - - - Department of Currency Management at Central Office, Mumbai
      - Mumbai office coordinates with Issue Departments of the Reserve Bank’s Regional Offices
    - - Currency chests
        
        4000 - commercial banks
        
        extended arms of the Reserve Bank Issue Departments
        
        responsible for meeting the currency requirements of their respective regions
  - - - Security Printing and Minting Corporation of India (SPMCIL)- owned by GOI
        
        Dewas in Madhya Pradesh
        
        Nasik in Maharashtra
      - Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) - owned by RBI
        
        Mysore in Karnataka
        
        Salboni in West Bengal
    - - by GOI
      - 4 Mints
        
        Mumbai in Maharashtra
        
        Noida in Uttar Pradesh
        
        Kolkata
        
        Hyderabad
- - - - RBI Act 1934
    - - Government securities
      - money market
      - interest rate derivatives
    - - Trades securities issued by Central and State Governments
      - Significant growth in the last two decades
      - sizeable primary and an active secondary segments
      - Negotiated Dealing System-Order Matching (NDS-OM)
        
        Trading of Gsecs
        
        anonymous order-matching trading platform
        
        Average daily trading volume
        
        Rs.32.15 billion in 2005-06 to Rs.433.12 billion in 2014-15
        
        Central counterparty mechanism
        
        For settlement of secondary market transactions
        
        under Delivery Versus Payment mode
        
        Multilateral netting
        
        Achieved with a single funds settlement obligation for each member for a particular settlement date
        
        The settlement is achieved in the RTGS Settlement/Current Account maintained by the member in RBI
    - - Uncollaterised call money market
        
        restricted to banks and Primary Dealers subject to prudential limits
      - Collaterised segments
        
        Collaterised Borrowing and Lending Facility (CBLO)
        
        market repo transactions between banks and financial institutions
      - Commercial Paper (CP)
        
        issuances by corporates
        
        PDs
        
        financial institutions and Certificates of Deposit (CD) issued by banks to institutional investors
      - Guidelines with Master Circulars for financial markets on RBI website
    - - Statutory framework
        
        FEMA, 1999
        
        regulation of Foreign Exchange derivatives contracts
      - How can residents hedge foreign exchange exposures
        
        forward contracts
        
        options involving rupee and foreign currencies
        
        currency swaps and cost reduction option structures in the OTC market.
      - How can Foreign investors hedge?
        
        forwards and options
      - Trading within specified position limits
        
        permitted on exchange traded currency futures in four currency pairs and in USD for currency options
      - Can residents hedge commodity price risk in overseas OTC markets and regulations
        
        YEs, as per their guidelines
      - Average daily forex market turnover
        
        Approximately USD 16 billion in 2005-06 to nearly US$ 55 billion in 2014-15
    - - OTC interest rate derivative market (IRD)
        
        Instruments
        
        interest rate swaps (IRS)
        
        Volume
        
        daily inter-bank trading volume (notional principal) in Rupee IRS at Rs. 90 billion - FY15
        
        forward rate agreements (FRA)
        
        interest rate futures (IRF)
        
        open to Foreign Portfolio Investors (FPI)
        
        Volume
        
        Daily - 20 billion FY 15
        
        Permitted for hedging and trading
        
        banks
        
        primary dealers (PD)
        
        Permitted for hedging
        
        insurance companies
        
        mutual funds
        
        Non-Banking Finance Companies
  - - - India committed
      - formal framework for regulation of OTC markets even before post-crisis
      - improving transparency and reducing counterparty risk in the OTC derivatives markets
      - fostering development of robust market infrastructure for trading, settlement and reporting of transactions
    - - trade reporting arrangement for various OTC interest rate, foreign exchange and credit derivatives
        
        covers the Rupee IRS/FRA, FX Forwards, Options and Swaps, Currency Swaps, IRS/FRA in foreign currencies and CDS
      - India is fully compliant under the G-20 commitment of reporting OTC derivative transactions
      - Central Counterparty (CCP) mechanism
        
        for IRS, forex forward and swaps
      - Anonymous trading platform with CCP facility for IRS trades
        
        In principle approval has been given to Clearing Corporation of India Limited (CCIL)
  - - - Develop safe and stable market
      - Market should provide appropriate products for trading and risk management
    - - Remove structural rigidities for better price discovery
      - Increase depth and width of financial markets
      - Develop and strengthen inter-linkages between market segments
      - fostering competition
      - increasing menu of choices through innovations in products and market practices
      - Strengten Regulatory, legal, institutional and technological infrastructure
      - Improving liquidity
        
        Looking at Possible ways to revitalise market-making by PDs
        
        broad base the participation in IRS and reduce settlement risk
        
        anonymous electronic trading platform
        
        introduce new cash settled IRFs on underlying securities with residual maturity between tenor 5-7 year and 13-15 year
      - rationalisation of operational procedureto allow hedging easily and cheaply
      - Options market expansion
    - - FPI access to domestic exchange traded derivative markets