INTRODUCTION:FOREIGN EXCHANGE MARKET AN OVERVIEW:In todays world no economy is self sufficient, so there is need for exchange of goods and services amongst the different countries. So in this global village, unlike in the ancient age the exchange of goods and services is no longer carried out on barter basis. Every sovereign country in the world has a currency that is legal tender in its territory and this currency does not act as money outside its boundaries. So whenever a country buys or sells goods and services from or to another country, the residents of two countries have to exchange currencies. So we can imagine that if all countries have the same currency then there is no need for foreign exchange.The Foreign Trading Market is regarded as the biggest financial market. It is this market that is responsible for the trading of currencies. Very large amounts of currency are traded by large organizations such as financial institutions, multinational corporations, currency speculators, central banks and government. The foreign exchange market is regarded as the most suitable market for this trade and superior to the New York Stock Exchange (NYSE). US $ 2 trillion is handled each day by the foreign exchange market. The New York Stock Exchange handles US $ 50 billion each day. As soon as one kind of currency is traded for another kind then it regarded as foreign exchange market. This market allows for the trading of any kind of currency.There are currencies as different from one another as the US dollar and the Swiss franc and the Japanese yen. The foreign exchange market does not cater only to the needs of the biggest institutions as was the case in previous years. Nowadays, smaller enterprises also take advantage of the foreign exchange market. In fact there are many people who use this market because it has the potential to yield good profits. This has become apparent to thousands of individuals who are taking part in the buying and selling of currencies. But it is always a good idea to have as much background information as possible in order to make informed decisions. Everybody wants to be successful.The foreign exchange market one that is unique. This is a market that has an enormous diversity of traders situated around the globe.The foreign exchange market is unique because of following: trading volume results in market liquidity geographical dispersion continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 UTC on Sunday until 22:00 UTC Friday the variety of factors that affect exchange rate the low margins of relative profit compared with other markets of fixed income the use of leverage to enhance profit margins with respect to account size

NEED FOR FOREIGN EXCHANGE:In todays world no country is self sufficient, consequently there is a need for exchange of goods & services amongst different countries. Every sovereign country in the world has a currency which is a legal tender in its territory & this currency does not act as money outside its boundaries. Therefore whenever a country buys or sells goods and services from one country to another, the residents of two countries have to exchange currencies. Hence, Forex markets acts as a facilitating mechanism through which one countrys currency can be exchanged i.e. bought or sold for the currency of another company.

Features of the market

Liquidity:The market operates the enormous money supply and gives absolute freedom in opening or closing a position in the current market quotation. High liquidity is a powerful magnet for any investor, because it gives him or her freedom to open or to close a position of any size whatever.

Promptness:With a 24-hour work schedule, participants in the FOREX market need not wait to respond to any given event, as is the case in many markets.

Availability:A possibility to trade round-the-clock; a market participant need not wait to respond to any given event.

Flexible regulation of the trade arrangement system:A position may be opened for a predetermined period of time in theFOREX market, at the investors discretion, which enables to plan the timing of ones future activity in advance.

Value:The Forex market has traditionally incurred no service charges, except for the natural bid/ask market spread between the supply and the demand price.

One-valued quotations:With high market liquidity, most sales may be carried out at the uniform market price, thus enabling to avoid the instability problem existing with futures and other forex investments where limited quantities of currency only can be sold concurrently and at a specified price.

Market trend:Currency moves in a quite specific direction that can be tracked for rather a long period of time. Each particular currency demonstrates its own typical temporary changes, which presents investment managers with the opportunities to manipulate in the FOREX market.

Margin:The credit leverage (margin) in the FOREX market is only determined by an agreement between a customer and the bank or the brokerage house that pushes it to the market and is normally equal to 1:100. That means that, upon making a $1,000 pledge, a customer can enter into transactions for an amount equivalent to $100,000. It is such extensive credit leverages, in conjunction with highly variable currency quotations, which makes this market highly profitable but also highly risky.

Let us consider a case:Where Indian company exports cotton fabrics to USA and invoices the goods in US dollar. The American importer will pay the amount in US dollar, as the same is his home currency.

Exports CottonFabrics

Exporter Importer

IndianCo. USA

US $

However the Indian exporter requires rupees means his home currency for procuring raw materials and for payment to the labor charges etc. Thus he would need exchanging US dollar for rupee.

If the Indian exporters invoice their goods in rupees, then importer in USA will get his dollar converted in rupee and pay the exporter.

Rs.$ convertExportsUSA

Indian Co.

Exporter is paid in Rs.

From the above example we can infer that in case goods are bought or sold outside the country, exchange of currency is necessary. Sometimes it also happens that the transactions between two countries will be settled in the currency of third country. In that case both the countries that are transacting will require converting their respective currencies in the currency of third country. For that also the foreign exchange is required.

OVER-THE-COUNTER TRADING:Foreign exchange market there is no for market place called the foreign exchange market. It is mechanism through which one countrys currency can be exchange i.e. bought or sold for the currency of another country. The foreign exchange market does not have any geographic location.Foreign exchange market is described as an OTC (over the counter) market as there is no physical place where the participants meet to execute the deals, as we see in the case of stock exchange. The largest foreign exchange market is in London, followed by the New York, Tokyo, Zurich and Frankfurt. The market is situated throughout the different time zone of the globe in such a way that one market is closing the other is beginning its operation. Therefore it is stated that foreign exchange market is functioning throughout 24 hours a day. In most market US dollar is the vehicle currency, viz., the currency sued to dominate international transaction. OTCDERIVATIVESINTERESTRATE DERIVATIVESFOREIGNCURRENCYDERIVATIVESFORWARD RATE AGREEMENTINTEREST RATE SWAPSFOREIGN EXCHANGE FORWARDSCROSS CURRENCY FORWARDSFOREIGN CURRENCYRUPEESWAPSCROSSCURRENCYOPTIONSFOREIGNCURRENCY RUPEEOPTIONSOTC PRODUCT PERMITTED IN INDIA

Why Hold Forex Reserves?

Technically, it is possible to consider three motives i.e., transaction, speculative and precautionary motives for holding reserves. International trade gives rise to currency flows, which are assumed to be handled by private banks driven by the transaction motive. Similarly, speculative motive is left to individual or corporate. Central bank reserves, however, are characterized primarily as a last resort stock of foreign currency for unpredictable flows, which is consistent with precautionary motive for holding foreign assets. Precautionary motive for holding foreign currency, like the demand for money, can be positively related to wealth and the cost of covering unplanned deficit, and negatively related to the return from alternative assets.

From a policy perspective, it is clear that the country benefits through economies of scale by pooling the transaction reserves, while sub serving the precautionary motive of keeping official reserves as a war chest. Furthermore, forex reserves are instruments to maintain or manage the exchange rate, while enabling orderly absorption of international money and capital flows. In brief, official reserves are held for precautionary and transaction motives keeping in view the aggregate of national interests, to achieve balance between demand for and supply of foreign currencies, for intervention, and to preserve confidence in the countrys ability to carry out external transactions.

Reserve assets could be defined with respect to assets of monetary authority as the custodian, or of sovereign Government as the principal. For the monetary authority, the motives for holding reserves may not deviate from the monetary policy objectives, while for Government; the objectives of holding reserves may go beyond that of the monetary authorities. In other words, the final expression of the objective of holding reserve assets would be influenced by the reconciliation of objectives of the monetary authority as the custodian and the Government as principal. There are cases, however, when reserves are used as a convenient mechanism for Government purchases of goods and services, servicing foreign currency debt of Government, insurance against emergencies, and in respect of a few, as a source of income.

The Products of the Foreign Exchange Market 1. The Spot Market:The spot market is the exchange market for payment and delivery today. In practice, "today" means today only in the retailer tier. Currencies traded in the wholesale tier spot market have customary settlement in two business days. I.8 In the interbank market, dealers quote the bid and the ask, willing to either buy or sell up to USD 10 million at the quoted prices. These spot quotations are good for a few seconds. If a trade is not done immediately over the phone or the computer, the quotes are likely to change over the next seconds. Traders use a particular system when quoting exchange rates. For example, the USD/JPY bid-ask quotes: .009002-.009063. The ".0090" is called the big figure, and it is assumed that all traders know it. The last two digits are referred as the small figure. Thus, it is clear for traders the meaning of a telephone quote of "02-63." In 2013, the BIS estimated that the daily volume of spot contracts was USD 1.759 trillion (38% of total turnover). Again, the majority of the spot trading is done between financial institutions. Only 19 percent of the daily spot transactions involved non-financial customers. The high volume of interbank trading is partially explained by the geographically dispersed nature of the market. Dealers trade with one another to take and lay off risks, and to discover transaction prices. Discovering other dealers' prices help dealers to determine the position of the market and then establish their prices. 2.B.1.i Direct and Indirect Quotations An exchange of currencies involves two currencies, either of which may arbitrarily be thought as the currency being bought. That is, either currency may be placed in the denominator of an exchange rate quotation. When exchange rates are quoted in terms of the number of units of domestic currency per unit of foreign currency, the quote is referred to as direct quotation. On the other hand, when exchange rates are quoted in terms of the number of foreign currency units per unit of domestic currency, the quote is referred to as indirect quotation. The indirect quotation is the reciprocal of the corresponding direct quotation. Most currencies are quoted in terms of units of currency that one USD will buy. This quote is called "European" quote. Exceptions are the "Anglo Saxon" currencies (British Pound (GBP), Irish punt (IEP), Australian dollar (AUD), the New Zealand dollar (NZD)), and the EUR. This second type of quote is also called "American quote." Example I.2: Quotations. (A) Indirect quotation: JPY/USD (European quote). Suppose a U.S. tourist wishes to buy JPY at Los Angeles International Airport. A quote of JPY 110.34- 111.09 means the dealer is willing to buy one USD for JPY 110.34 (bid) and sell one USD for JPY 111.09 (ask). For each USD that the dealer buys and sells, she makes a profit of JPY .75. (B) Direct quotation: USD/JPY (American quote). If the dealer at Los Angeles International Airport uses direct quotations, the bid-ask quote will be USD .009002-.009063 per one JPY. It is easy to generate indirect quotes from direct quotes. And viceversa. As Example I.2 illustrates: S(direct)bid = 1/S(indirect)ask, S(direct)ask = 1/S(indirect)bid. I.9 The discussion about exchange rate movements sometimes is confusing because some comments refer to direct quotations while other comments refer to indirect quotations. Direct quotations are the usual way prices are quoted in an economy. For example, a gallon of milk is quoted in terms of units of the domestic currency. Thus, unless stated otherwise, we will use direct quotations. That is, the domestic currency will always be in the numerator while the foreign currency will always be in the denominator. In the foreign exchange market, banks act as market makers. They realize their profits from the bid-ask spread. Market makers will try to pass the exposure from one transaction to another client. For example, a bank that buys JPY from a client will try to cover its exposure by selling JPY to another client. Sometimes, a bank that expects the JPY to appreciate over the next hours may decide to speculate, that is, wait before selling JPY to another client. During the day, bank dealers manage their exposure in a way that is consistent with their short-term view on each currency. Toward the end of the day, bank dealers will try to square the banks' position. A dealer who accumulates too large an inventory of JPY could induce clients to buy them by slightly lowering the price. Thus, because quoted prices reflect inventory positions, it is advisable to check with several banks before deciding to enter into a transaction. 2.B.1.ii Cross-rates The direct/indirect quote system is related to the domestic currency. The European/American quote system involves the USD. But if a Malayan trader calls a Hong Kong bank and asks for the JPY/CHF quote, the Hong Kong bank will quote a rate that does not fit under either quote system. The Hong Kong bank will quote a cross rate. Most currencies are quoted against the USD, so that cross-rates are calculated from USD quotations. For example, the JPY/GBP is calculated using the USD/JPY and USD/GBP rates. This usually implies a larger bid-ask spread on cross exchange rates. The cross-rates are calculated in such a way that arbitrageurs cannot take advantage of the quoted prices. Otherwise, triangular arbitrage strategies would be possible and banks would soon notice imbalances in their buy/sell orders. Example I.3: Suppose Housemann Bank gives the following quotes: St = .0104-.0108 USD/JPY, and St= 1.5670-1.5675 USD/GBP. Housemann Bank wants to calculate the JPY/GBP cross-rates. The JPY/GBP bid rate is the price at which Housemann Bank is willing to buy GBP against JPY, i.e., the number of JPY units it is willing to pay for one GBP. This transaction (buy GBP-sell JPY) is equivalent to selling JPY to buy one USD -at Housemann's bid rate of (1/.0108) JPY/USD- and then reselling that USD to buy GBP -at Housemann's bid rate of 1.5670 USD/GBP. Formally, the transaction is as follows: Sbid,JPY/GBP= Sbid,JPY/USD x Sbid,USD/GBP= [(1/.0108) JPY/USD]x[(1.5670) USD/GBP] = 145.0926 JPY/GBP. That is, Housemann Bank will never set the JPY/GBP bid rate below 145.0926 JPY/GBP. Using a similar argument, Housemann Bank will set the ask JPY/GBP rate (sell GBP-buy JPY) using the following formula: Sask,JPY/GBP = Sask,JPY/USDxSask,USD/GBP= [(1/.0104) JPY/USD]x[(1.5675) USD/GBP] = 150.7211 JPY/GBP. I.10 Example I.4: A Triangular Arbitrage Opportunity Consider, again, Example I.3. Suppose, now, that a Housemann Bank trader observes the following exchange rate quote: Sask,JPY/GBP = 143.00 JPY/GBP. We can see that the JPY is overvalued in terms of GBP, since it is below the arbitrage-free bid rate of 145.0926 JPY/GBP. The trader automatically starts a triangular arbitrage strategy: (1) Sell USD 1,000,000 at the rate .0108 USD/JPY. Then, the trader buys JPY 92,592,592.59. (2) Sell JPY 92,592,592.59 at the rate of 143.00 JPY/GBP. The trader buys GBP 647,500.65. (3) Sell GBP 647,500.65 at the rate 1.5670 USD/GBP. The trader buys USD 1,014,633.51. This operation makes a profit of USD 14,633.51. The Housemann trader will try to repeat this operation as many times as possible. After several operations, the bank offering Sask,JPY/GBP = 143.00 JPY/GBP will adjust the quote upwards. 2. The Forward Market Forward: currency markets have a very old history. In the medieval European fairs, traders routinely wrote forward currency contracts. A forward transaction is simple. It is similar to a spot transaction, but the settlement date is deferred much further into the future. No cash moves on either side until that settlement date. That is, the forward currency market involves contracting today for the future purchase or sale of foreign currency. Forward currency transactions are indicated on dealing room screens for intervals of one, two, three and twelve month settlements. Most bankers today quote rates up to ten years forward for the most traded currencies. Forward contracts are tailor-made to meet the needs of bank customers. Therefore, if one customer wants a 63-day forward contract a bank will offer it. Nonstandard contracts, however, can be more expensive. Forward quotes are given by "forward points." The points corresponding to a 180-day forward GBP might be quoted as .0100-.0108. These points can also be quoted as 8-100. The first number represents the points to be added to the second number to form the ask small figure, while the second number represents the small figure to be added to the bid's big figure. These points are added from the spot bid-ask spread to obtain the forward price if the first number in the forward point "pair" is smaller than the second number. The forward points are subtracted from the spot bid-ask spread to obtain the forward price, if the first number is higher than the second number. The combination of the forward points and the spot bid-ask rate is called the "outright price." Example I.5: Suppose St=1.5670-1.5677 USD/GBP. We want to calculate the outright price. (A) Addition The 180-days forward points are .0100-.0108 (8-100), then Ft,180 = 1.5770-1.5785 USD/GBP. (B) Subtraction The 180-days forward points are .0072-.0068 (68-4), then Ft,180 = 1.5602-1.5605 USD/GBP. Forward contracts allow firms and investors to transfer the risk inherent in every international transaction. Suppose a U.S. investor holds British bonds worth GBP 1,000,000. This investor believes the GBP will depreciate against the USD, in the next 90 days. This U.S. investor can buy a 90-day GBP forward contract to transfer the currency risk of her British bond position. I.11 A forward transaction can be classified into two classes: outright and swap. An outright forward transaction is an uncovered speculative position in a currency, even though it might be part of a currency hedge to the other side of the transaction. A foreign exchange swap transaction helps to reduce the exposure in a forward trade. A swap transaction is the simultaneous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of approximately an equal amount of the foreign currency. In 2013, the daily volume of outright forward contracts amounted to USD 680 billion, or 13% of the total volume of the foreign exchange market. Unlike the spot market, 35% of transactions involved a non-financial customer. These non-financial customers typically use forward contracts to manage currency risk. Forward contracts tend to have very short maturities: 40% of the contracts had a maturity of up to 7 days. Less than 5% of the forward contracts had a maturity of over one year. 2.B.2.i Forward Premium and Forward Discount A foreign currency is said to be a premium currency if its interest rate is lower than the domestic currency. On the other hand, a foreign currency is said to be a discount currency if its interest rate is higher than the domestic currency. Forwards will exceed the spot for a premium currency and will be less than the spot for a discount currency. For example, on November 9, 1994 (see Example I.6 below), the (forward) British pound was a discount currency. That is, the British pound is cheaper in the forward market. It is common to express the premium and discount of a forward rate as an annualized percentage deviation from the spot rate. When annualized, the forward premium is compared to the interest rate differential between two currencies. The forward premium, p, is calculated as follows: p = [(Ft,T - St)/St] x (360/T). Note that p could be a premium (if p > 0), or a discount (if p < 0). Example I.6: Using the information from Example I.7 below, we obtain the 180-day USD/GBP forward rate and the spot rate. The 180-day forward rate is 1.6167 USD/GBP, while the spot rate is 1.62 USD/GBP. The forward premium is: p = [(1.6167 - 1.62)/1.62] x (360/180) = -.0041. The 180-day forward premium is -.41%. That is, the GBP is trading at a .41% discount for delivery in 180 days. 2.B.3 The Foreign Exchange Swap Market As mentioned above, in a foreign exchange swap transaction, a trader can simultaneously sell currency for spot delivery and buy that currency for forward delivery. A foreign exchange swap I.12 involves two transactions. For example, a sale of GBP is a purchase of USD and a purchase of GBP is a sale of USD. A foreign exchange swap can be described as a simultaneous borrowing of one currency and lending of another currency. Swaps are typically used to reduce exposure to the short-term risk of currency rate changes. For example, a U.S. trader wants to invest in 7-day GBP certificates of deposit (CDs). Then, the U.S. trader buys GBP spot, uses the funds to purchase the short-term GBP CDs, and sells GBP forward. The sale of GBP forward protects the U.S. trader from an appreciation of the USD against the GBP, during the life of the GBP CD. Traders also use foreign exchange swaps to change the maturity structure of their overall currency position. The foreign exchange swap market is the segment of the foreign exchange rate market with the highest daily volume. In 2013, the BIS reported that currency swap transactions accounted for USD 2.23 billion out of the USD 5.3 trillion daily foreign exchange market turnover (42%). Foreign exchange swaps are usually very short-term contracts. The majority of them (70%) have a maturity of less than one week.

Factors affecting Forex Rates

There are various factors with affect the forex market and its exchange rate. Right from the government intervention to demand and supply to investors appetite, attitude and analysis all these factors plays an important role in deciding forex market operation and particularly on exchange rate determination.

Price determination:The law of supply and demand essentially governs the Forex market like any other market. The law of supply states, as prices rises for a given commodity or currency, the quantity of the item that is supplied will increase; conversely, as the price falls, the quantity provided will fall. The law of demand states that as the price for an item rises, the quantity demanded will fall. As the price for an item falls, the quantity demanded will rise.

In the case of currency, it is the demand and supply of both domestic and foreign currency that is considered for price determination. It is the interaction of these basic forces that results in the movement of currency prices in the Forex market.Broadly we can divide these factors in two categories:[A] FUNDAMENTAL FACTORS[B] TECHNICAL FACTORS

A. Fundamental Factor:Fundamental factor shows future price movements of a financial instrument based on economic, political, environmental and other relevant factors, as well as data that will affect the basic supply and demand of forex market. Some of the major fundamental factors are:

Factors responsible for exchange rate determination:

Balance of payment: If the exports to other countries are more than import then the exchange rate will be stronger as there will be inflow of foreign currency. More relies on imports, weaker will be the exchange rate because there will be outflow of domestic currency. A favorable balance of payment on current account indicates greater demand of goods & services of that country abroad. As due to export the supply of foreign currency is greater than the demand of foreign currency at home, so the home currency is likely to appreciate with respect to foreign currency.

Exchange rate policy and regime: Fixing an exchange rate is policy matter but in India it is largely dismantled as market force determines the exchange rates with certain exchange control regulations (in capital account).

Monetary policy & fiscal policy: If a government runs into deficit, it has toBorrow money (by selling bonds). If it can't borrow from its own citizens, it must borrow from foreign investors. That means selling more of its currency, increasing the supply and thus driving the prices down.

Domestic Financial Market: Strong domestic financial markets will also lead to the strengthening of domestic currency, as investors will be less worried about their investments and foreign investor will also be attracted.

Central bank intervention in Forex market: By open market operation or by increasing / decreasing key rates or by purchasing and selling the forex, central bank directly or indirectly affects the forex market operation.

Capital account liberalization: Till now convertibility of capital account is not fully permitted by government. Convertibility of capital account means freedom to convert local financial assets to foreign financial assets and vice versa. We can foresee the situation that if market becomes fully open on capital account issue then lots of inflow and outflow will take place on account of capital assets, which may have great impact of exchange rate determination.

Interest rate differentials: If there are higher interest rates in home country then it will attract investments from abroad in the form of FII, FDI and increased borrowings. This will lead to increased supply of foreign currency. On the other hand, if the interest rates are higher in the other country, investments will flow out leading to decreased supply of foreign currency.

Inflation differentials: If inflation rates are high in one country then the other then the country which is having low inflation rate will be in position to maintain the price level of commodity in such a manner that will lead to improve the demand of its goods and hence its currency. So, due to higher inflation rate countrys currency depreciates (as it purchasing power decreases) till the differential of the other base currency.

Stock Market: Stock market has direct relationship with forex market. In the surging market the foreign investor wants to invest in the stock and get the benefit. In this case they bring more foreign currency (Dollar) in Indian market and sell for investing in equity. So, the price of dollar comes down and ultimately rupee appreciates.

Prices of non-tradable goods relative to tradable goods : Price of non-tradable good are having indirect impact in exchange rate determination as many of the tradable good are directly dependent on such non-tradable good and prices of that tradable good are having direct impact on the forex. As the price of the non-tradable goods goes up the inflation increase which have adverse impact on exchange rate and it continues to depreciates.

Productivity differentials: Demand of goods produced in a country explains the demand of the particular currency. So, economic data such as labor reports (payrolls, unemployment rate and average hourly earnings), Consumer Price Indices (CPI),Gross Domestic Product (GDP), International Trade, Productivity, Industrial Production, Consumer Confidence etc, also affect fluctuations in currency exchange rates.

Business Environment: Positive indications (in terms of government policy, competitive advantages, market size, etc.) increase the demand for currency, as more and more enterprises want to invest there. Any positive indications abroad will lead to strengthening of foreign currency.

GDP growth and phases of business cycle: If the domestic economy is strong then there will be lots of investments from abroad which will lead to increased supply of foreign currency, ultimately leading to strengthening of domestic currency. And if there were weaker domestic economy it would lead to outflow of funds from a country. Also the phase of business cycle plays an important role as different phase of business have different feature. For maximum in flow of foreign fund the countrys business cycle should be in growth phase, which ultimately results in appreciating the home currency.

Global economic situation and financial crisis: Global scenario of the world acts an indicator of the forex market. If there is no financial crisis and economy is doing well then forex market is also suppose to do well as its revealed from the forex triennial survey done by Bank of International settlement. In situation of crisis the interest rates may go down which results in devaluation of that particular currency. As we have seen during2007-2008 financial crisis that due to economic slowdown, subprime loan default and lowering interest rate USD keep dwindling (depreciating) against all the major currencies the market became so volatile that no market maker was ready to give competitive quotes.USD was all time low for the EURO and GBP. Indian forex market was under pressure because of the reversal of the capital flow as part of global de-leveraging process. Also corporate were converting the Rupee liability into Foreign currency liability to meet external obligations, which ultimately put pressure on the rupee.

Political factors: All exchange rates are susceptible to political instability and anticipations about the new government. All the market players get worried about the policies and may start unwinding their positions thereby affecting the demand and supply.

Sovereign risk rating: Sovereign is the country health indicator on various parameter. It tells the risk involved in a particular country based on the parameter like political and financial indicator. If a country has got high rating that means the country is politically sound and is able to meets its foreign obligation with any difficulty. Higher the rating of county more likely to appreciate the host country currency.

Rumors: Any rumor in the markets also leads to fluctuation in the values. AnyFavorable news will lead to strengthening of domestic currency and any negative rumor will lead to weakening of the currency.

B. Technical Factors:Technical factors predicts price movements and future market trends by studying what has occurred in the past using various charts. Technical factor is built on three essential principles:

1. Market (price) action discounts everything: This means that the actual price is a reflection of everything that is known to the market that could affect it.

2. Prices move in trends: used to identify patterns of market behavior,

3. History repeats itself: Forex chart patterns have been recognized and categorized for over 100 years, and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time. Since patterns have worked well in the past, it is assumed that they will continue to work well into the future.

FOREIGN EXCHANGE MARKET IN INDIA, INDIAN ECONOMY:Foreign Exchange Market in India is controlled by the Foreign Exchange Management Act, 1999 and is rapidly improving. Foreign Exchange Market in India works under the central government in India and executes wide powers to control transactions in Foreign Exchange. The Foreign Exchange Management Act, 1999 or FEMA regulates the whole Foreign Exchange Market in India. Before this act was introduced, the Foreign Exchange was regulated by the reserve bank of India through the Exchange Control Department, by the FERA or Foreign Exchange Regulation Act, 1947. After independence, FERA was introduced as a temporary measure to regulate the inflow of the foreign capital. But with the economic and industrial development, the need for conservation of foreign currency was urgently felt and on the recommendation of the Public Accounts Committee, the Indian government passed the Foreign Exchange Regulation Act, 1973 and gradually, this act became famous as FEMA.

Foreign Exchange Market in India, Indian Economy Until 1992 all foreign investments in India and the repatriation of foreign capital required previous approval of the government. The Foreign Exchange Regulation Act rarely allowed foreign majority holdings for foreign in India. However, a new foreign investment policy announced in July 1991, declared automatic approval for foreign exchange in India for thirty-four industries. These industries were designated with high priority, up to an equivalent limit of 51 percent. The Foreign Exchange Market in India is regulated by the reserve bank of India through the exchange Control Department.

Initially the government required that a companys routine approval must rely on identical exports and dividend repatriation, but in May 1992 this requirement of Foreign Exchange in India was lifted, with an exception to low-priority sectors. In 1994 a foreign d nonresident Indian investors were permitted to repatriate not only their profits but also their capital for Foreign Exchange in India. Indian exporters are enjoying the freedom to use their export earnings as they find it suitable. However, transfer of capital abroad by Indian nationals is only allowed in particular circumstances, such as emigration. Foreign Exchange in India is automatically made accessible for imports for which import licenses are widely issued. The Foreign Exchange Market in India is growing very rapidly, since the annual turnover of the Market is more than $400 billion. This foreign exchange transaction in India does not include the inter-bank transactions. According to the record of Foreign Exchange in India, RBI released these transactions. The average monthly turnover in the merchant segment was $40.5 billion in 2003-04 and the inter-bank transaction was $134.2 for the same period. The average total monthly turnover in the sector of Foreign Exchange in India was about $174.7 billion for the same period. The transactions are made on spot and also on forward basis, which include currency swaps and interest rate swaps. The Indian Foreign Exchange Market is made up of the buyers, sellers, Market mediators and the monetary authority of India. The main center of Foreign Exchange in India is Mumbai, the commercial capital of the country. There are several other centers for Foreign Exchange transactions in India including the major cities of Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin. With the development of technologies, all the Foreign Exchange markets of India work collectively and in much easier process.

Foreign exchange Dealers Association is a voluntary association that also provides some help in regulating the Market. The Authorized Dealers and the attributed brokers are qualified to participate in the foreign exchange markets of India. When the foreign exchange trade is going on between Authorized Dealers and RBI or between the Authorized Dealers and the overseas banks, the brokers usually do not have any role to play. Besides the Authorized Dealers and brokers, there are some others who are provided with the limited rights to accept the foreign currency or travelers` cheques; they are the authorized moneychangers, travel agents, certain hotels and government shops. The IDBI and Exim bank are also permitted at specific times to hold foreign currency. Participants in foreign exchange Market the main players in foreign exchange Market are as follows:1.CUSTOMERS: The customers who are engaged in foreign trade participate in v foreign exchange Market by availing of the services of banks. Exporters require converting the dollars in to rupee and importers require converting rupee in to the dollars, as they have to pay in dollars for the goods/services they have imported.2. COMMERCIAL BANK: They are most active players in the forex Market. Commercial bank dealing with international transaction offer services for conversion of one currency in to another. They have wide network of branches. Typically banks buy foreign exchange from exporters and sells foreign exchange to the importers of goods. As every time the foreign exchange bought or oversold position. The balance amount is sold or bought from the Market.Top 10 currency traders of overall volume, May 2011 Rank Name Market Share

Germany Deutsche Bank18.06%

Switzerland UBS AG11.30%

United Kingdom Barclays Capital11.08%

United States Citi7.69%

United Kingdom Royal Bank of Scotland6.50%

United States JPMorgan6.35%

United Kingdom HSBC4.55%

Switzerland Credit Suisse4.44%

United States Goldman Sachs4.28%

United States Morgan Stanley 2.91%

3.CENTRAL BANK: In all countries Central bank have been charged with the responsibility of maintaining the external value of the domestic currency. Generally this is achieved by the intervention of the bank.4. EXCHANGE BROKERS:Forex brokers play very important role in the foreign exchange Market. However the extent to which services of foreign brokers are utilized depends on the tradition and practice prevailing at a particular forex Market center. In India as per FEDAI guideline the Ads are free to deal directly among themselves without going through brokers. The brokers are not among to allowed to deal in their own account allover the world and also in India.

5.OVERSEAS FOREX MARKET: Today the daily global turnover is estimated to be more than US $ 1.5 trillion a day. The international trade however constitutes hardly 5 to 7 % of this total turnover. The rest of trading in world forex Market is constituted of financial transaction and speculation.6.TIMINGS:As we know that the forex Market is 24-hour Market, the day begins with Tokyo and thereafter Singapore opens, thereafter India, followed by Bahrain, Frankfurt, Paris, London, New York, Sydney, and back to Tokyo.7.SPECULATORS: The speculators are the major players in the forex Market Bank dealing are the major speculators in the forex. Market with a view to make profit on account of favorable movement in exchange rate, take position i.e. if they feel that rate of particular currency is likely to go up in short term. They buy that currency and sell it as Corporations particularlysoon as they are able to make quick profit. Multinational Corporation and transnational corporation having business operation beyond their national frontiers and on account of their cash flows being large and in multi currencies get in to foreign exchange exposures. With a view to make advantage of exchange rate movement in their favor they either delay covering exposures or do Individual like share dealingnot cover until cash flow materialize. Also undertake the activity of buying and selling of foreign exchange for booking short term profits. They also buy currency foreign stocks, bonds and other assets without covering the foreign exchange exposure risk. These also result in speculations.Retail foreign exchange brokers:Retail traders (individuals) constitute a growing segment of this Market, both in size and importance. Currently, they participate indirectly through broker or banks. Retail brokers, while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams. To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone.There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or Market makers. Brokers serve as an agent of the customer in the broader FX Market, by seeking the best price in the Market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the Market Dealers or Market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal atthe customer has the choice whether or not to trade at that price.Investment management firms:Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange Market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.Market psychology Market psychology and trader perceptions influence the foreign exchange Market in a variety of ways: Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven" There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty. Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. "Buy the rumor, sell the fact": This Market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a Market being "oversold" or "overbought. To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices. Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to Market psychology and may have an immediate impact on short-term Market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.

EVOLUTION OF RESERVE MANAGEMENT POLICY IN INDIA:

Indias approach to reserve management, until the balance of payments crisis of 1991 was essentially based on the traditional approach, i.e., to maintain an appropriate level of import cover defined in terms of number of months of imports equivalent to reserves. For example, the Reserve Banks Annual Report 1990-91 stated that the import cover of reserves shrank to 3 weeks of imports by the end of December 1990, and the emphasis on import cover constituted the primary concern say, till 1993-94. The approach to reserve management, as part of exchange rate management, and indeed external sector policy underwent a paradigm shift with the adoption of the recommendations of the High Level Committee on Balance of Payments (Chairman: Dr. C. Rangarajan). The Report, of which I had the privilege of being Member-Secretary, articulated an integrated view of the issues and made specific recommendations on foreign currency reserves. The relevant extracts are:

It has traditionally been the practice to view the level of desirable reserves as a percentage of the annual imports - say reserves to meet three months imports or four months imports. However, this approach would be inadequate when a large number of transactions and payment liabilities arise in areas other than import of commodities. Thus, liabilities may arise either for discharging short-term debt obligations or servicing of medium-term debt, both interest and principal. The Committee recommends that while determining the target level of reserve, due attention should be paid to the payment obligations in addition to the level of imports. The Committee, recommends that the foreign exchange reserves targets be fixed in such a way that they are generally in a position to accommodate imports of three months.

In the view of the Committee, the factors that are to be taken into consideration in determining the desirable level of reserves are: the need to ensure a reasonable level of confidence in the international financial and trading communities about the capacity of the country to honor its obligations and maintain trade and financial flows; the need to take care of the seasonal factors in any balance of payments transaction with reference to the possible uncertainties in the monsoon conditions of India; the amount of foreign currency reserves required to counter speculative tendencies or anticipatory actions amongst players in the foreign exchange Market; and the capacity to maintain the reserves so that the cost of carrying liquidity is minimal.

With the introduction of Market determined exchange rate as mentioned in the Reserve Banks Annual Report, 1995-96 a change in the approach to reserve management was warranted and the emphasis on import cover had to be supplemented with the objective of smoothening out the volatility in the exchange rate, which has been reflective of the underlying Market condition.

As a part of prudent management of external liabilities, the Reserve Banks policy is to keep forward liabilities at a relatively low level as a proportion of gross reserves and the emphasis on prudent reserve management i.e., keeping forward liabilities within manageable limits, was highlighted in the Reserve Banks Annual Report, 1998-99.

The Reserve Banks Annual Report, 1999-2000 stated that the overall approach to management of Indias foreign exchange reserves reflects the changing composition of balance of payments and liquidity risks associated with different types of flows and other requirements and the introduction of the concept of liquidity risks is noteworthy.

The policy for reserve management is built upon a host of identifiable factors and other contingencies, including, inter alias, the size of the current account deficit and short term liabilities (including current repayment obligations on long term loans), the possible variability in portfolio investment, and other types of capital flows, the unanticipated pressures on the balance of payments arising out of external shocks and movements in repatriable foreign currency deposits of nonresident Indians.

Governor Jalans latest statement on Monetary and Credit Policy provides, an up-to-date and comprehensive view on the approach to reserve management and of special significance is the statement: a sufficiently high level of reserves is necessary to ensure that even if there is prolonged uncertainty, reserves can cover the liquidity at risk on all accounts over a fairly long period. Taking these considerations into account, Indias foreign exchange reserves are now very comfortable. The prevalent national security environment further underscores the need for strong reserves. We must continue to ensure that, leaving aside short-term variations in reserves level, the quantum of reserves in the long-run is in line with the growth of the economy, the size of risk-adjusted capital flows and national security requirements. This will provide us with greater security against unfavorable or unanticipated developments, which can occur quite suddenly.

The above discussion points to evolving considerations and indeed a paradigm shift in Indias approach to reserve management. The shift has occurred from a single indicator to a menu or multiple indicators approach. Furthermore, the policy of reserve management is built upon a host of factors, some of them are not quantifiable, and in any case, weights attached to each of them do change from time to time.

What is the Appropriate Level of Forex Reserves?

Basic motives for holding reserves do result in alternative frameworks for determining appropriate level of foreign reserves. Efforts have been made by economists to present an optimizing framework for maintaining appropriate level of foreign reserves and one viewpoint suggests that optimal reserves pertain to the level at which marginal social cost equals marginal social benefit. Optimal level of reserves has also been indicated as the level where marginal productivity of reserves plus interest earned on reserve assets equals the marginal productivity of real resources and this framework encompasses exchange rate stability as the predominant objective of reserve management. Since the underlying costs and benefits of reserves can be measured in several ways, these approaches to optimal level provide ample scope for developing a host of indicators of appropriate level of reserves.

It is possible to identify four sets of indicators to assess adequacy of reserves, and each of them do provide an insight into adequacy though none of them may by itself fully explain adequacy. First, the money based indicators including reserve to broad money or reserves to base money which provide a measure of potential for resident based capital flight from currency. An unstable demand for money or the presence of a weak banking system may indicate greater probability of such capital flights. Money based indicators, however, suffer from several drawbacks. In countries, where money demands is stable and confidence in domestic currency high, domestic money demand tends to be larger and reserves over money ratios, relatively small. Therefore, while a sizable money stock in relation to reserves, prima facie, suggests a large potential for capital flight out of money, it is not necessarily a good predictor of actual capital flight. Money based indicators also do not capture comprehensively the potential for domestic capital flight. Moreover, empirical studies find a weak relationship between money based indicator and occurrence and depth of international crises.

Secondly, trade based indicators; usually the import-based indicators defined in terms of reserves in months of imports provide a simple way of scaling the level of reserves by the size and openness of the economy. It has a straightforward interpretation- a number of months a country can continue to support its current level of imports if all other inflows and outflows cease. As the measure focuses on current account, it is relevant for small economies, which have limited access and vulnerabilities to capital markets. For substantially open economies with a sizable capital account, the import cover measure may not be appropriate.

Thirdly, debt based indicators are of recent origin; they appeared with episodes of international crises, as several studies confirmed that reserves to short term debt by remaining maturity is a better indicator of identifying financial crises. Debt-based indicators are useful for gauging risks associated with adverse developments in international capital markets. Since short-term debt by remaining maturity provides a measure of all debt repayments to nonresidents over the coming year, it constitutes a useful measure of how quickly a country would be forced to adjust in the face of capital Market distortion. Studies have shown that it could be the single most important indicator of reserve adequacy in countries with significant but uncertain access to capital markets.

Fourthly, more recent approaches to reserve adequacy have suggested a combination of current-capital accounts as the meaningful measure of liquidity risks. Of particular interest, which has received wide appreciation from many central bankers including Alan Greenspan, postulates that the ratio of short term debt augmented with a projected current account deficit (or another measure of expected borrowing) could serve useful an indicator of how long a country can sustain external imbalance without resorting to foreign borrowing. As a matter of practice, the Guidotti Rule suggests that the countries should hold external assets sufficient to ensure that they could live without access to new foreign borrowings for up to twelve months. This implies that the usable foreign exchange reserves should exceed scheduled amortization of foreign currency debts (assuming no rollover during the following year).

MANAGEMENT OF FOREX RESERVE IN INDIA:

In India, legal provisions governing management of forex reserves are set out in the RBI Act and foreign exchange Management Act, 1999 and they also govern the open Market operations for ensuring orderly conditions in the forex markets, the exercise of powers as a monetary authority and the custodian in regard to management of foreign exchange assets.

In practice, holdings of gold have been virtually unchanged other than occasional sales of gold by the Government to the Reserve Bank. The gold reserves are managed passively. Currently, accretion to foreign currency reserves arises mainly out of purchases by the Reserve Bank from the Authorized Dealers (i.e. open Market operations), and to some extent income from deployment of forex assets held in the portfolio of the Reserve Bank (i.e. reserves, which are invested in appropriate instruments of select 0currencies). The RBI Act stipulates the investment categories in which the Reserve Bank is permitted to deploy its reserves. The aid receipts on Government account also flow into reserves. The outflow arises mainly on account of sale of foreign currency to Authorized Dealers (i.e. for open Market operations). There are occasions when forex is made available from reserves for identified users, as part of strategy of meeting lumpy demands on forex markets, particularly during periods of uncertainty. The net effect of purchases and sale of foreign currency is the most determining one for the level of forex reserves, and these include such sale or purchase in forward markets (which incidentally is very small in magnitude).

The essence of portfolio management of reserves by the Reserve Bank is to ensure safety, liquidity and optimization of returns. The reserve management strategies are continuously reviewed by the Reserve Bank in consultation with Government. In deploying reserves, attention is paid to the currency composition, duration and instruments. All of the foreign currency assets are invested in assets of top quality while a good proportion should be convertible into cash at short notice. The counterparties with whom deals are conducted are also subject to a rigorous selection process. In assessing the returns from deployment, the total return (both interest and capital gains) is taken into consideration. Circumstances such as lumpy demand and supply in reserve accretion are countered through appropriate immunization strategies in deployment. One crucial area in the process of investment of the foreign currency assets in the overseas markets, relates to the risk involved in the process viz. credit risk, Market risk and operational risk. While there is no set formula to meet all situations, the Reserve Bank utilizes the accepted portfolio management principles for risk management.

FOREX V/S OTHER MARKETS

Relationship between Forex Market and other markets:

Forex versus Other Financial MarketsThe Forex (or currency) market is one of four financial markets. These markets include the stock, bond, commodity, and currency markets. Each market has its own special characteristics that attract banks and financial institutions to trade its products. Individuals have only recently been permitted to trade in the currency markets. Previously, the Forex market was traded primarily by banks, large financial institutions, and governments. ndividuals have been trading in the other financial markets for many years.

Lets take a look at a few basic characteristics of the other markets and their major differences with the Forex market.

The Stock MarketThe stock market is a system that permits the buying and selling (or trading) of a companys shares and derivatives. There are stock markets around the world. The worldwide stock market is valued at $51 trillion.

Key differences from the Forex MarketThe stock market has lower liquidity.The stock market has lower leverage and risk (2:1 vs 100:1 in Forex).The stock market has more regulation, control, and remedies.

The Bond MarketThe bond market is a loosely connected system in which buyers and sellers trade fixed income assets and securities. Bond and other fixed income assets are traded informally in the over-the-counter market. The worldwide bond market is valued at $45 trillion.

Key differences from Forex Market

The bond market has the worlds largest investment sector.The bond market has lower volatility and risk.The bond market has limited trading hours.The bond market is a decentralized market without a common exchange.

The Commodities MarketThe commodities market is an exchange where raw goods or products are traded. Like the stock market, there are commodities markets around the world. Commodities from apples to zinc are sold in commodities exchanges.

Key differences from Commodities Market

The commodities market has lower leverage (10:1 vs. 100:1 in Forex).

The commodities market has lower liquidity.

The commodities market tends to have longer trends.

The commodities market has limited trading hours.

The commodities market has more errors and slippage (misquoted prices).

These four markets are operating simultaneously. Each has its own advantages and challenges. Many Forex traders will study how these markets work together, which is called Intermarket Analysis.Other markets Forex markets Available trading hours are dictated by the trading schedule of the exchange floor and the local time-zone. This limits market open times. The forex market is open 24 hours a day,5.5 days a week. Because of the decentralized clearing of trades and overlap of major financial markets throughout the world, the forex market remains open, thus creating trading volume throughout the day and overnight. Liquidity can be greatly diminished after market hours, or when many market participants limit their trading or move to markets that are more popular.Forex is the most liquid market in the world, eclipsing all others in comparison.Because currency is the basis of all world commerce, exchange activities are constant. Liquidity particularly in the majors often does not dry up during "slow times." Traders are charged multiple fees, such as commissions, clearing fees, exchange fees and government fees as well as platform and charting fees.

All you pay is the spread, which is built into the buy and sell prices althoughmarket makers like GFT are compensated by revenues from their activities as acurrency dealer. Trading restricted by large minimum capital requirements sometimes as One consistent margin rate 24 hours a day allows forex traders to leverage their high as $50,000 and high margin rates. Capital, as much as 100:1. In fact, GFT green accounts allow traders to begin with as little as $200 and 100:1 leverage. It is important to know that without appropriate use of risk management, a high degree of leverage can lead to large losses as well as gains.

Margin requirements can be as much as 50 percent of your capital in order to take a position. No restrictions on short-selling (placing a sell order when you think the market will trend down), because you are simultaneously buying one currency while NM selling another. Restrictions on short selling and stop orders. GFT offers multiple order types, including stop orders and trailing stop orders to help you manage your trading equity, which you can use even when short selling.

THE IMPORTANCE OF FOREX IN INTERNATIONAL TRADE

Trade has since ages, man has used this means of communication to improve their living and development of all humanity through out the world. Forex or foreign currency, the main role is to support investment and international trade, helping entrepreneurs to change one currency to another.Financial centres all over the world play an important role as trade with anchors, so that different types of sell and buy transaction should take place. In forex helps to determine the value of the currency of a nation. It also provides support in trade, which means that investors borrow currencies with a low value and invest in high value currencies.Particular forex transaction involves any party who purchases a considerable amount of one currency and pay as usual via a different currency. Forex market is unique because it has a large trade in volume, to different parts of the world.It is one of the major causes of increased currency value of a country and it boosts the economy of a country.Forex market is experiencing an increase since the introduction of a number of reasons that growing the value of foreign currency which turns it into an asset, trading activity among retailers has increased enormously and private investors have begun to play an important role in the financial market.With the new technology and its implementation on the market, has lowered transaction costs that have led to an increase in liquidity in the market. Online trading has made it easier for retailers to carry out their transactions in other currencies on the Forex market.Forex is the largest and liquid based financial markets throughout the world. Commercial transactions involving corporate houses, large bank, institutional investors, Governments, non-professional investors and other financial institutions. There are no fixed prices in forex trade as it could be exploited by companies or financial institutions.The main reason that determine exchange rates, demand and availability of a particular currency. The whole world can be seen if observed closely to the constantly changing mixture of events around the world to keep moving and to a change of price in one currency to another.The most important factors that play an important role in this change are economic factors, market psychology and political conditions for a nation.

REVIEW OF ARTICLES ON FOREIGN EXCHANGE MARKET:Indian Forex - Where does India stand in Global Forex Market?India Saturday 10 April 2010 - The daily turnover of the Global Forex market is presently estimated at US$ 3 trillion. Presently the Indian Forex market is the 16th largest Forex market in the world in terms of daily turnover as the BIS Triennial Survey report. As per this report the daily turnover of the Indian Forex market is US$ 34 billion in the year 2007. Besides the OTC derivative segment of the Indian Forex market has also increased significantly since its commencement in the year 2007. During the year 2007-08 the daily turnover of the derivative segment in the Indian Forex market stands at US$ 48 billion.The growth of the Indian Forex market owes to the tremendous growth of the Indian economy in the last few years. Today India holds a significant position in the Global economic scenario and it is considered to be one of the emerging economies in the World. The steady growth of the Indian economy and diversification of the industrial sectors in India has contributed significantly to the rapid growth of the Indian Forex market. Let us take a watch on the Indian Forex trading scenario since the early days.The Forex trading history of India dates back to 1978, when Reserve Bank of India took a step towards allowing the banks to undertake intra-day trading in Foreign exchange. It is during the period of 1975-1992 when Reserve Bank of India, officially determined the exchange rate of rupee according to the weighed basket of currencies with the significant business partners of India. But it needs to be mentioned that there are too many restrictions on these banks during this period for trading in the Forex market.The introduction of the open market policy in the year 1991 and implementation of the new economic policy by the Govt. of India brought a comprehensive change in the Forex market of India. It is during the month of July 1991, that the rupee undergone a two fold downward adjustment and this was in line with inflation differential to ensure competitiveness in exports. Then as per the recommendation of a high level committee set up to review the Balance of Payment position, the Liberalized Exchange Rate Management System or the LERMS was introduced in 1992. The method of dual exchange rate mechanism that was part of the LERMS also came into effect 1993. It is during this time that uniform exchange rate came into effect and that started demand and supply controlled exchange rate regime in Indian. This ultimately progressed towards the current account convertibility that was a part of the Articles of Agreement with the International Monetary Fund.It was the report and recommendations of the Expert Group on Foreign Exchange, formed to judge the Forex market in India that actually helped to widen the Forex trading practices in the country. As per the recommendations of the expert committee, Reserve bank of India and the Government took so many significant steps that ultimately gave freedom to the banks in many ways. Apart from the banks corporate bodies were also given certain relaxation that also played an instrumental role in spread of Forex trading in India.It is during the year 2008 that Indian Forex market has seen a great advancement that took the Indian Forex trading at par with the global Forex markets. It is the introduction of future derivative segment in Forex trading through the largest stock exchange in country National Stock Exchange or NSE. This step not only increased the Indian Forex market volume too many folds also gave the individual and retail investor a chance to trade at the Forex market, that was till this time remained a forte of the banks and large corporate.Indian Forex market got yet another boost recently when the SEBI and Reserve Bank of India permitted the trade of derivative contract at the leading stock exchanges NSE and MCX for three new currency pairs. In its recent circulars Reserve Bank of India accepting the proposal of SEBI, permitted the trade of INRGBP (Indian Rupee and Great Britain Pound), INREUR (Indian Rupee and Euro) and INRYEN (Indian Rupee and Japanese Yen). This was in addition with the existing pair of currencies that is US$ and INR. From inclusion of these three currency pairs in the Indian Forex circuit the Indian Forex scene is expected to boost even further as these are some of the most widely traded currency pairs in the world.

The Future of the Foreign Exchange Markets

It provides a comprehensive study of the key issues affecting the market including the dramatic developments taking place in trading technology, the impact of the EMU and the opportunities and threats posed by emerging markets.

The Future of the Foreign Exchange Markets discusses the new foreign exchange clearing bank, the CLSS and considers its implications for the futurestructure of the global foreign exchange market, specifically the reduction of settlement risk. It reviews the emergence of Contracts for Differences (CFDs) which avoid the need for any settlement. The expected effects of EMU on the size and structure of the market are analysed, with issues such as the likely size and distribution of activity in the euro being specifically addressed.

Structure and Scope

The Future of the Foreign Exchange Markets addresses the critical issues including:

Developments in the foreign exchange markets including the spot market, the forwards market and foreign exchange options and derivatives market.

Trading Technology - in particular the development of electronic matching systems and their new dominance of trading in the market.

Netting and Settlement systems, with particular reference to the new foreign exchange clearing bank, CLSS. The rise of CFDs will also be considered.

EMU - a discussion on the size and structure of the market, both during the first year of its implementation and once stage three of monetary union is completed.

Emerging Markets - considering the growing proportion of forex trading devoted to emerging market currencies and whether this growth and development will continue in the face of the turmoil in Asia and Russia.

CONCLUSION:In conclusion,we can say that the foreign market is,thus,a very impotant aspect of the measurement of the financial situation of a particular country in the global market place.Looking at future research, it appears that there will continue to be researchers looking for anomalies in both the domestic and foreign exchange markets. As stated earlier, this is a $550 trillion a year market and growing continuously. To put it in proper perspective the US GDP is about $14.2 trillion in 2009. Consequently, if this market was not efficient, we would have a difficult time finding one that is. All financial markets, including the foreign exchange market have no entry barriers and competition is unfettered, driving down prices. The sheer size of the market is such that it is almost impossible to influence prices. Certainly, from time to time, there is Central Bank intervention in the major currencies. The process is called leaning against the wind. In other words, there may be short-term success in disciplining an unruly market, but long-term effects are almost non-existent. The underlying macroeconomic fundamentals will always assert itself in the long run. It is important to look at financial markets, particularly foreign exchange market from a different perspective. If markets are always efficient some adjustment from inefficiency must occur. Perhaps the more relevant issue is does the market push the price in the right direction rather than is the price always the efficient one? From the point of view of Stiglitz and Grossman (1980) the Efficient Markets Hypothesis is an Idealization that isunattainable and should be used as a benchmark to measure relative efficiency.The next point to be thought about is how does one measure this relative efficiency? This could be the direction of future research. Another school assumes that the markets have long memory and that shocks to the system go away over a long period of time. Consequently, a longer period of data, preferably fifty years or more is necessary to adequately test the efficient market theory. This could be another direction of research. Intangibles, such as investor preferences, and financial technology, etc. have not been incorporated in models. We could start thinking in this direction, too. Many have suggested that the Efficient Markets Hypothesis controversy should be settled in the markets itself. Here, Roll (1994) comes through with a spirited defense and agrees with Stieglitz and Grossman (1980) that the Efficient Markets Hypothesis in its present form is nothing but an idealized version. All prices cannot include all available information known to everyone. Any abnormal profits accruing to an investor could be looked at as fair rewards for competitive advantage and/or superior financial technology, not necessarily market inefficiency. As for markets determining the outcome, points out that with funds invested to take advantage of market anomalies, it was no better than a buy and hold strategy. The expected super profits never materialized.