The foreign exchange market of India is a huge market with a very large turnover much more than the Stock markets of India even more than ten times the turnover of the Bombay stock exchange. Hence this is the biggest market of the country. The Forex market of India was formed in 1978 and presently we have around ninety authorized dealers who square up their deals by the end of the day. Trading is regulated by the FEDAI (Foreign Exchange Dealers Association of India). Since 2001, CEDAI does the clearing and settlement functions of the Forex market. There has been lot of efforts to free the banks and let them fix the daily trading limit and interest rates on FCNR deposits and the use of derivative products. This has led to a momentous growth in the foreign exchange market of the country. Trading volumes have tripled and is growing at a compounded rate of 25% every year.

Types of deals in Forex market in India

India moved from a fixed exchange rate system to a more market determined exchange rate system in 1993. A dealer can do spot, forward and swap transactions in the Indian stock market. Indian market gives freedom of cross-border capital flows. Since liberalization, India is having a de facto peg to dollar from the year 2003. Reserve Bank of India intervenes in the market in two ways. First are called indirect methods or ‘open- mouth- operations’ or press statements and the second is direct operations, interventions through buying and selling of currencies using swaps, spot and forwards. These are done with the help of State Bank of India, the bank that aids the operations of the government. After liberalization, the foreign exchange policy of the Government has been forwardlooking with limited but improved convertibility. This policy is laudable as the country escaped the ill-effects of the Asian contagion because of this whereas the countries that were practicing convertibility were severely affected by it.

Forex Reserves of India

Liberalization has radically changed the foreign exchange position of the country as liberalization itself was sparked by the balance of payments and foreign exchange crisis. In fact liberalization was a breather to the economy suffering under severe stress in the 1990’s. Over the years, the Forex market has also been liberalized with a ‘market-driven’ approach from a severe controlled system with black marketing and connected evils. Period after the liberalization was an important phase of the economy as it led the government into a number of policy changes in the forex policies. The country has moved away from being scared of imports to a huge foreign exchange reserve.