Study on Forex

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1 ARMY INSTITUTE OF MANAGEMENT

WEST BENGAL UNIVERSITY OF TECHNOLOGY

SUMMER PROJECT REPORT

STUDY ON FOREX OPERATION

AT

BY

ROHIT YADAV

WBUT Regn No.:101360710076

WBUT Roll No.:13600910013

ARMY INSTITUTE OF MANAGEMENT

KOLKATA


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Content:

1. Acknowledgements2. Executive Summary3. Chapter 1.

Industry Profile

Company Profile

South Indian Bank Profile4. Chapter 2.

Project

Research objective Introduction to foreign exchange

5. Chapter 3. Data Collection and AnalysisFundamental Analysis

Major theories in forex exchange Factor affecting the exchange rate model

Technical Analysis

Working of foreign exchange

Exchange rate Mechanism

Case Study6. Chapter 4.

Conclusion:

Findings and recommendations. Constraints and Limitations.

7. Appendices and Annexure.8. Bibliography


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Executive summary

The Indian government formulated the Foreign Exchange Management Act (FEMA) in 1999,

which is applicable to the entire country. Agencies, offices and branches, outside India, which

are owned by Indian residents, also fall under the jurisdiction of this act. Foreign Exchange

Management Act (FEMA) was formulated in order to be compatible with the policies of pro-

liberalization of the Indian government.

The main purpose of the whole internship was to understand the functioning of an organizationthat caters to the banking needs of the customers. The learning process involved the detailedstudy of the Foreign Exchange operation in South Indian Bank.

The South Indian Bank caters to the foreign exchange needs of its clientele engaged in export

and import trade and the SIB provides rates for conversion of all major world currencies like U S

Dollar, Sterling Pounds, Euro, Swiss Francs, Japanese Yen and other exotic currencies. The

services to the customers of the Bank include hedging of foreign currency risks by providingforward covers and various derivatives product.

The following are the main objectives of the project:-

To understand the working of a branch and its foreign exchange operations. To understand the customer needs and identify appropriate means to cater to them. To identify the investment need in foreign currency of the customers. To identify the most sought after benefits by the investors.


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CHAPTER-1

INDUSTRY PROFILE

AND

COMPANY PROFILE


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INDUSTRY PROFILE

The major participants of the Indian financial system are the commercial banks, the financial

institutions (FIs), encompassing term-lending institutions, investment institutions, specialized

financial institutions and the state-level development banks, Non-Bank Financial Companies

(NBFCs) and other market intermediaries such as the stock brokers and money-lenders.

The Indian banking sector has been an integral part of the overall economy growing with andsupporting the growth of other sectors. The Indian banking industry, which is governed by theBanking Regulation Act of India, 1949 can be categorized into non-scheduled banks andscheduled banks. Scheduled banks constitute of commercial banks and co-operative banks.There are about 67,000 branches of Scheduled banks spread across India.

For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization of14 major banks was announced that each had a minimum of Rs 500 million and above ofaggregate deposits. In 1980, eight more banks were nationalized. Since then the number of

scheduled commercial banks increased four-fold and the number of bank branches increase toeight-fold. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closerto the average growth rate of the Indian economy.

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalizationand gave licenses to a small number of private banks, which came to be known as NewGeneration tech-savvy banks, which included banks such as UTI Bank (now re-named as AxisBank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank.

The private player however cannot match the public sector great reach, great size and access tolow cost. Private Banks have pioneered internet banking, anywhere banking, mobile banking,

debit card, automatic teller machines (ATMs) and combined various other services andintegrated them into the mainstream banking arena. Currently, India has 88 scheduledcommercial banks (SCBs) - 28 public sector banks (that is with the Government of India holdinga stake), 29 private banks (these do not have government stake; they may be publicly listed andtraded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the publicsector banks hold over 75 percent of total assets of the banking industry, with the private andforeign banks holding 18.2% and 6.5% respectively.

As far as the present scenario is concerned the Banking Industry in India is going through atransitional phase. The Public Sector Banks (PSBs), which are the base of the Banking sector in

India account for more than 78 per cent of the total banking industry assets. Unfortunately theyare burdened with excessive Non Performing assets (NPAs), massive manpower and lack ofmodern technology. On the other hand the Private Sector Banks are making tremendousprogress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far asforeign banks are concerned they are likely to succeed in the Indian Banking Industry.


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Financial Result for the year 2009-10:

Total Business: 39125 Revenue: 2144.18 Cr Profit after Tax: Rs. 233.76 Cr (20% growth) Market Capitalization (Million): Rs. 26,895.54 Annual Dividend: 0.50 Yield (%): 2.10Board of directors:

Amitabh Guha- Chairperson Dr. V.A Joseph- Managing Director & CEO Abraham Thariyan- Executive Director C J Jose- Director Paul Chalissery- Director N J Kurian-Director Davy K Manavalan- Director Jose Alapatt- Director Mathew L Chakola- Director


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Research Objectives

1. To study the basic functioning of the forex market2. To study the impact of various macro-economic factors on rupee fluctuations.

Fundamental analysis:

To find out the correlation of various macro-economic factors with USD-INR exchangerate.

To develop a regression model for predicting USD-INR exchange rate based on macro-economic factors.

3. To forecast the future trend in rupee fluctuations based on the past trends-Technical analysis:

To study the basic charts and patterns used for trend analysis. To apply various technical indicator to predict the fluctuation in different currencies. To prepare models based on technical analysis to predict the support and resistance

level.


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INTRODUCTION TO FOREIGN EXCHANGE

Foreign Exchange is an international financial market place where money is sold and boughtfreely. Forex operates through a global network of banks, corporations and individuals tradingone currency for another but has no physical location and no central exchange not just like other

financial markets. In a typical foreign exchange transaction, a party purchases a quantity of onecurrency by paying a quantity of another currency.

The FEMA is the law which regulates the forex market. The regulatory authority for the Indianforex market is the RBI. The RBI issues Guidelines/ Regulations/ Instructions from time to timewhich govern the functioning of the market.

ROLE OF BANK IN FOREIGN TRADE:Bank plays vital role in foreign trade. They perform many functions but the mostimportant one is that they are the intermediaries through whom documents areexchanged for money between exporter and importer.

The following services are provided by banks to settle international transactions:a) Collection of cheques, drafts, bills, etc.b) Issue of demand drafts, mail transfers, travelerscheques etc.c) Arrangements for reimbursement on letters of credit.d) Advising, confirming, and amending letters of credit.e) Sale and purchase of foreign currencies.f) Issue and confirming guarantees.g) Granting and guaranteeing loans & overdrafts.h) Furnishing of credit information.

Foreign exchange operation can be regulated and controlled by following guidelines:

1. Trade Management--Managed by ministry of Finance- through DGFT Import & Export

- Foreign trade policy (2004- 09)

2. Exchange management-

-Managed by ministry of Finance- through Reserve Bank of India

3.

UCPDC-Managed by International chamber of Commerce4. ECGC

-Managed by Ministry of Commerce- through Board of directorsrepresenting Govt., Banking, trade & industry.

5. Bank Policies-Several charged-International Documentation


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-Finance-Security

CORRESPONDENT RELATIONSHIP:

To facilitate dealing in foreign exchange, a bank in India maintains accounts with banks

in abroad. Similarly some foreign banks maintain account with banks in India. In

banking terminology known as follows:

a) Nostro Account:An account that a bank holds with a foreign bank. Nostro accounts are usually in the

currency of the foreign country.

b) Vostro Account:The account a correspondent bank, usually U.S. or UK, holds on behalf of a foreign bank.

c) Loro Account:Loro account means their account with you.

E.g. South Indian Bank has an account in US dollar with HSBC bank. When SBI wishes

to refer the account of South Indian Bank With HSBC Bank it would refer to it as Loro

Account.

FEMA GUIDELINES FOR EXPORT AND IMPORT

Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for the

free flow of foreign exchange in India. FEMA is applicable in all over India and even branches,

offices and agencies located outside India, if it belongs to a person who is a resident of India.

Some Highlights of FEMA

It prohibits foreign exchange dealing undertaken other than an authorized person; It also makes it clear that if any person residing in India, received any Forex payment

(without there being a corresponding inward remittance from abroad) the concernedperson shall be deemed to have received they payment from a non-authorized person.

There are 7 types of current account transactions, which are totally prohibited, andtherefore no transaction can be undertaken relating to them.

FEMA and the related rules give full freedom to Resident of India (ROI) to hold or ownor transfer any foreign security or immovable property situated outside India.

An ROI is permitted to hold shares, securities and properties acquired by him while hewas a Resident or inherited such properties from a Resident.

The exchange drawn can also be used for purpose other than for which it is drawnprovided drawl of exchange is otherwise permitted for such purpose.

GENRAL GUIDELINE FOR IMPORT:


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Indication of Importer-Exporter Code Number:The importer-exporter code number allotted by the DGFT under Section 7 of the ForeignTrade Act, 1992 (22 of 1992) shall be indicated on all copies of the declaration formssubmitted by the exporter to the specified authority and in all correspondence of theexporter with the authorized dealer or the Reserve Bank.

3)

Declaration to be furnished:Declaration in form of GR/SDF:

The declaration in form GR/SDF shall be submitted in duplicate to theCommissioner of Customs.

After duly verifying and authenticating the declaration form, the Commissioner ofCustoms shall forward the original declaration form/data to the nearest office ofthe Reserve Bank and hand over the duplicate form to the exporter for beingsubmitted to the authorized dealer.

Declaration in Form PP:

The declaration in form PP shall be submitted in duplicate to the authorized dealernamed in the form.

The authorized dealer shall, after countersigning the declaration form, hand overthe original form to the exporter who shall submit it to the postal authoritiesthrough which the goods are being dispatched.

Declaration in form SOFTEX:

The declaration in Form SOFTEX in respect of export of computer software andaudio/video/ television software shall be submitted in triplicate to the designatedofficial of Ministry of Information Technology.

After certifying all three copies of the SOFTEX form, the said designated officialshall forward the original directly to the nearest office of the Reserve Bank andreturn the duplicate to the exporter.

Duplicate Declaration form to be retained Authorized dealer:On the realization of the export proceeds, the duplicate copies of export declaration formsviz. GR, PP and SOFTEX and Exchange Control copies of the shipping bills togetherwith related Statutory Declaration Forms shall be retained by the Authorized Dealers.

4) Payment of Export value of Goods:The amount representing the full export value of the goods exported shall be paid throughan authorized dealer in the manner specified in the Foreign Exchange Management(Manner and Receipt and Payment) Regulations, 2000.

Through an AD From NRE/FCNR account By a DD/ Cheque/FTC/ICC/FC notes GOLD/ SILVER/ PLATINUM Gems and Jewelry units in SEZ and EOUs can receive payment in precious

metals.


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5) Period within which Export Value Goods/Software to be realized: The amount representing the full export value of goods or software exported shall

be realized and repatriated to India within six months from the date of export;

Large value exporter of certain selected products which are internally competitiveand have high value addition. With contracts of Rs. 100 crores and above in 1year.

Status holder 12 months SEZ units: no time limit Export to Indian owned warehouse abroad set up with permission of RBI: 15

months Extension of time limit;

The Exporter should apply in form ETX to RBI through AD.6) Overdue Bills:

Change in buyer is permitted without RBI approval; Write off by the exporter is permitted if amount is not for realized for 1 year or

more if each writes off does not exceed 10% of the total exporter during theprevious year;

In case of status holder 5% of their average annual realization during thepreceding 3 financial year or 10% of export proceeds due during the financialyear whichever is higher can be written off CAs certificate is required;

All such write off to be reported to RBI In EBW form; The incentives to be funded against such export;


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EXPORT AND IMPORT FINANCE

EXPORT FINANCE:Export finance is short-term working capital finance allowed to an exporter.Finance and credit are available not only to help export production but also to

sell to overseas customers on credit.2.3

OBIECTIVES OF EXPORT FINANCE

To cover commercial & Non-commercial or political risks attendant on grantingcredit to a foreign buyer. To cover natural risks like an earthquake, floods etc.

Guidelines for bank dealing in Export Finance:

When a commercial bank deals in export finance it is bound by the ensuing guidelines:-

a) Exchange control regulations.b) Trade cont rol regul at ions .c) Reserve Banks directives issued through IECD.d) Export Credit Guarantee Corporation guidelines.e) Guidelines of Foreign Exchange Dealers Association of India.

TYPES OF EXPORT FINANCE:The export finance can be classified into two types:

Pre-Shipment Finance Post-Shipment Finance

PRE-SHIPMENT FINANCE

Financial assistance extended to the exporter from the date of receipt of the export

o r de r t i l l t he da t e o f s h i pmen t i s known as p r e - s h i pmen t c r ed i t . P r e -

s h i pmen t i s a l s o r e f e r r ed a s Packing credit. I t i s wor k i ng cap i t a l f i nance

provided by commercial banks to the exporter prior to shipment of goods.

FORMS OR METHODS OF PRE-SHIPMENT FINANCE:

Cash Packing Credit Loan Advance against Hypothecation Advance against Pledge Advance against Back-To-Back L/C Advance against Exports through Export Houses Advance against Duty Draw Back (DBK) Special Pre-Shipment Finance Schemes


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VARIOUS SCHEMES AND FACILITIES BY BANK

FOREX Facilities for Residents (Individuals):

All cross border transactions undertaken in foreign exchange need to be compliant with FEMA

1999 and/ or other relevant extant regulations.

Overseas remitter needs to clearly specify the 'purpose of payment' in the remittance applicationform used by them for making these payments. The purpose of the payment should be capturedby the remitting bank in field 70 / 72 in the bank payment instruction (SWIFT MT103) sent tothe bank. The payment purpose has to be clear and should not be in an abbreviated form.

Business trip

Release of foreign exchange exceeding USD 25,000 for a travel abroad (other than Nepal andBhutan) for business purposes, irrespective of period of stay, requires prior permission from

Reserve Bank.

Medical treatment outside India

A person visiting abroad for medical treatment can obtain foreign exchange exceeding the aboveUSD 100,000, provided the request is supported by an estimate from a hospital/doctor inIndia/abroad.

Studies outside India

Students going abroad for studies are treated as Non-Resident Indians (NRIs) and are eligible for

all the facilities available to NRIs under FEMA. In addition, they can receive remittances up toUSD 100,000 from close relatives (as defined in Section 6 of the Companies Act, 1956) fromIndia on self-declaration, towards maintenance, which could include remittances towards theirstudies also.

Traveling abroad on private visits to a country outside India

In connection with private visits abroad, viz., for tourism purposes, etc., foreign exchange up toUSD10, 000, in any one calendar year may be obtained from an authorized dealer on a self-declaration basis. (Except Nepal & Bhutan)

Employment abroad

Person going abroad for employment can draw foreign exchange up-to USD 100,000 from anyauthorized dealer in India on the basis of self-declaration.

Emigration


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FUNDAMENTAL ANALYSIS

Fundamental Analysis refers to the study of the core underlying elements that influence theeconomy of a particular entity. It is a method of study that attempts to predict price action andmarket trends by analyzing economic indicators, government policy and societal factors

within a business cycle framework. . It involves examining the intrinsic value of a nationscurrency based on economic news releases that reflect the strength, or weakness, of acountrys economy.

Some of the major factors responsible for the movement of Indian Rupee are:

Fundamental analysis includes a number of macroeconomic factors like economic growth rates,interest rates, inflation, unemployment level and others. The market supply and demand balanceforms the currencies prices. The interest rates and the overall economy strength are the two keyfactors that influence the supply-demand balance.

The basis of fundamental analysis is mainly on the political and economic changes as these canfrequently affect currency prices. Thus, traders are most likely to gather information from newssources to determine unemployment forecasts, political ideologies, economic policies, inflation,and growth rates. Traders keep an eye on the figures and statements given in speeches byimportant politicians and economists, as well as announcements related to United States

economy and politics.

THEORIES IN FOREX

The main economic theories found in the foreign exchange deal with parity conditions. AParity condition is an economic explanation of the price at which two currencies should beexchanged, based on factors such as inflation and interest rates. The economic theories suggestthat when the parity condition does not hold, an arbitrage opportunity exists for marketparticipants. However, arbitrage opportunities, as in many other markets, are quickly discoveredand eliminated before even giving the individual investor an opportunity to capitalize onthem. We will consider some of the theories below.

Purchasing Power Parity

Purchasing Power Parity (PPP) is the economic theory which says that the price levelsbetween two countries should be equivalent to one another after exchange-rate adjustment.


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The basis of this theory is the law of one price, where the cost of an identical good should be thesame around the world. Based on the theory, if there is a large difference in price between twocountries for the same product after exchange rate adjustment, an arbitrage opportunity iscreated, because the product can be obtained from the country that sells it for the lowestprice.

The relative version of PPP is as follows:

e = (1 2)/(1 + 2)

Where 'e' represents the rate of change in the exchange rate and '1' and '2'represent the rates o finflation for country 1 and country 2, respectively. For example, if the inflation rate for countryXYZ is 10% and the inflation for country ABC is 5%, then ABC's currency should appreciate4.76% against that of XYZ.

Expected Currency Appreciation = (XYZ-ABC)/ (1+ABC)

Putting the values it comes to be 4.76%

Interest Rate Parity

The concept of Interest Rate Parity (IRP) suggests that there should be no arbitrageopportunities; two assets in two different countries should have similar interest rates, as long asthe risk for each is the same. The basis for this parity is also the law of one price, in that thepurchase of one investment asset in one country should yield the same return as the exact sameasset in another country; otherwise exchange rates would have to adjust to make up for thedifference.

The formula for determining IRP can be found by:

i1i2 = (F-S) (1- i2) SWhere 'F' represents the forward exchange rate; 'S' represents the spot exchange rate; 'i1'represents the interest rate in country 1; and 'i2' represents the interest rate in country 2.

Balance of Payment Theory

A country's balance of payments is comprised of two segments - the current account and thecapital account - which measure the inflows and outflows of goods and capital for a country.The balance of payments theory looks at the current account, which is the account dealing withtrade of tangible goods, to get an idea of exchange-rate directions.If a country is running a large current account surplus or deficit, it is a sign that a country'sexchange rate is out of equilibrium. To bring the current account back into equilibrium, theexchange rate will need to adjust over time. If a country is running a large deficit (more importsthan exports), the domestic currency will depreciate. On the other hand, a surplus would lead tocurrency appreciation.

The balance of payments identity is found by:


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BCA + BKA + BRA =0Where BCA represents the current account balance; BKA represents the capital accountbalance; and BRA represents the reserves account balance.Real Interest Rate Differentiation Model

The Real Interest Rate Differential Model simply suggests that countries with higher real interestrates will see their currencies appreciate against countries with lower interest rates. The reasonfor this is that investors around the world will move their money to countries with higher realrates to earn higher returns, which bids up the price of the higher real rate currency.

Asset Market Model

The Asset Market Model looks at the inflow of money into a country by foreign investors for thepurpose of purchasing assets such as stocks, bonds and other financial instruments. If a countryis seeing large inflows by foreign investors, the price of its currency is expected to increase, asthe domestic currency needs to be purchased by these foreign investors. This theory

considers the capital account of the balance of payment compared to the current accountin the prior theory. This model has gained more acceptance as the capital accounts of countriesare starting to greatly outpace the current account as international money flow increases.

Monetary Model

The Monetary Model focuses on a country's monetary policy to help determine the exchangerate. A country's monetary policy deals with the money supply of that country, which isdetermined by both the interest rate set by central banks and the amount of money printed by thetreasury. Countries that adopt a monetary policy that rapidly grows its monetary supply will seeinflationary pressure due to the increased amount of money in circulation. This leads to adevaluation of the currency.

These economic theories, which are based on assumptions and perfect situations, help toillustrate the basic fundamentals of currencies and how they are impacted by economicfactors. However, the fact that there are so many conflicting theories indicates the difficulty inany one of them being 100% accurate in predicting currency fluctuations. So we will try to makeour model combining the effects of all these theories.


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Defining and Collecting Data

The data for all these variables mentioned above was collected from various websites,including websites of RBI, SEBI etc. The values for some of these variables are published daily;some weekly and some are available at end of each quarter only. Here is the list of data that we

collected and the way we defined them:

1. USD-INR exchange rateUSD-INR

2. Crude Oil in $/bbl - Oil

3. Gold in $/10gms - Gold

4. NSE Daily Returns - NIFTY

1. InflationWPI (Wholesale Price Index) - inflation

2. Interest Rates India (Treasury Bills)

3. Interest Rates US

Difference of interest rates between India and USInt-Diff4. FII flow into our country - FII

Data was collected for

1. Balance of Payment (Total of both Capital and Current Account) - BOP

2. GDP of India

3. GDP of USDifference between GDP of India and USGDP-Diff


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The variables that we took for short term are:

s We took the interest rate difference between US and India as that

would be factors which drive the direction of flow of money between the two

countries and affect the USD-INR exchange rate.

es

All these variables keep on fluctuating a lot on weekly basis and affect the exchange rate in

shorter run whereas the variables like GDP and BOP data is published quarterly and these

variables affect the exchange in much longer course, specifically in medium term, i.e.

quarterly.

Regression Model with FII and other factors (and excluding NIFTY(NSE))

Model Summary

Model R R Square Adjusted RSquare

Std. Error ofthe Estimate

1 .836a .699 .691 1.64228

a. Predictors: (Constant), fii, Inflation, oil , Int_Diff, gold

-square value is 0.691 which means that the 69.1% of the changes in the USD-INR Exchange on weekly is basis can be explained by these factors we have considered above.


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Regression Model

Now the data available to us was in different time frames so we prepared models for different

time frames:

1. Short Term (Weekly)The data that was available daily was converted into weekly data by

taking weekly average.

2. Mid Term (Quarterly) The data that was published quarterly like GDP and BOP was

taken into this along with the quarterly averages of all the other variables.

Short Term Model

The variables that we took for short term are:

We took the interest rate difference between US and India as that

would be factors which drive the direction of flow of money between the two countries

and affect the USD-INR exchange rate.

All these variables keep on fluctuating a lot on weekly basis and affect the exchange rate in

shorter run whereas the variables like GDP and BOP data is published quarterly and these

variables affect the exchange in much longer course, specifically in medium term, i.e.

quarterly.

Regression Model with FII and other factors (and excluding NIFTY(NSE))

Model Summary



1 .836a .699 .691 1.64228

a. Predictors: (Constant), fii, Inflation, oil , Int_Diff, gold

-square value is 0.691 which means that the 69.1% of the changes in the USD-

INR Exchange on weekly is basis can be explained by these factors we have considered above.


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Coefficients

Model Unstandardized StandardizedCoefficients

T Sig.

B Std.

Error

Beta

1 (Constant)GoldOilInflationInt_diffFII

50.320.202.094.342.372. 031

.714

.019

.008

.079

.113

.003

70.4501.121.731.269.2561.158

10.87311.9694.3223.29110.929

.000

.000

.000

.000

.001

.000

Here we can see that:

-INR = 50.320 + 0.202*(gold) -0.094*(oil) + 0.342 *(inflation) + 0.372*(Int_Diff) -

0.031*(FII)

Model Summary



1 .837a .762 .756 1.46105

The adjusted R-square value is 0.756 which means that the 75.6% of the changes in the USD-

INR Exchange on weekly is basis can be explained by these factors we have considered

above.


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TECHNICAL ANALYSIS

Technical Analysis is the forecasting of future financial price movements based on an

examination of past price movements. Like weather forecasting, technical analysis does not

result in absolute predictions about the future. Instead, technical analysis can help investors

anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide

variety of charts that show price over time.

Technical analysis is applicable to stocks, exchange rates, indices, commodities, futures or

any tradable instrument where the price is influenced by the forces of supply and demand.

Price refers to any combination of the open, high, low, or close values for a given security over a

specific time frame. The time frame can be based on intraday (1-minute, 5-minutes,

10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data and last a

few hours or many years. In addition, some technical analysts include volume or open interest

figures with their study of price action.

The Basis of Technical Analysis

At the turn of the century, the Dow Theory laid the foundations for what was later to become

modern technical analysis. Of the many theorems put forth by Dow, three stand out:

Price Discounts Everything

This theorem is similar to the strong and semi-strong forms of market efficiency. Technical

analysts believe that the current price fully reflects all information. Because all information is

already reflected in the price, it represents the fair value, and should form the basis for analysis.

After all, the market price reflects the sum knowledge of all participants, including traders,

investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technicalanalysts, fundamental analysts and many others. It would be folly to disagree with the price set

by such an impressive array of people with impeccable credentials. Technical analysis utilizes

the information captured by the price to interpret what the market is saying with the purpose of

forming a view on the future.

Prices Movements are not totally random


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to time. Earlier the EXIM policy used to be announced annually. However, with effect from

1.4.1992, the Govt. of India comes out with EXIM Policy valid for 5 years period to afford

continuity and stability.

The NON-FUNDED based Credit facility is in the form of Letter of Credit. It contains an

undertaking by bank to pay against presentation of prescribed documents conforming to the

terms and condition stipulated in the letter of Credit.

The FUNDED based Credit facility is in form of import finance generally takes the form of a

backup limit to the letter of credit limit sanctioned to the customer. Such limits are considered

where import of good is made in Economic Order Quantity (EOQ) for use in production over a

period of time. However, in the normal course, whenever an import letter of credit is considered,

it should be ensured that the importer will have sufficient cash flow available to retire the bills

presented under letter of credit promptly.

DGFT India - Director General of Foreign Trade:

DGFT India - Director General of Foreign Trade provides a set of guidelines and framework for

importers and exporters wanting to trade in India. DGFT IEC stands forImporter Exporter

Code issued by DGFT. Any bona fide person/ company starting a venture for International trade

require DGFT IEC. The guidelines are set by Director General of Foreign Trade.

Importer- Exporter Code:

IEC Code is unique 10 digit code issued by DGFT Director General of Foreign Trade ,Ministry of Commerce, and Government of India to Indian Companies. To import or export in

India, IEC Code is mandatory. No person or entity shall make any Import or Export without IEC

Code Number.

The following categories of organization are exempted from holding IEC no.:

Ministries/ departments of central and state Government Import/ Export for personal use not connected with trade/ manufacturing. CIF value of single consignment not exceeding Rs.25, 000/-. Indo-Myanmar border trades for CIF value of single consignment under barter trade

agreement not exceeding USD 1000.

Categories of Importer:

For the purpose of licensing, importers are divided into the following broad category:
http://www.eximguru.com/exim/dgft/default.aspxhttp://www.eximguru.com/exim/dgft/default.aspxhttp://www.eximguru.com/exim/dgft/default.aspxhttp://www.eximguru.com/exim/dgft/default.aspx


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EXCHANGE RATE MECHANIAM

Exchange Rate is a rate at which one currency can be exchanged into another currency. In other

words it is value one currency in terms of other.

Say: US $ 1 = Rs.45.18

This rate is the conversion rate of every US $ 1 to Rs. 45.18

FACTORS DETERMINING EXCHANGE RATE:

(a) Fundamental Reasons:

- Balance of Paymentsurplus leads to stronger currency.

- Economic Growth RatesHigh/Low growth rate.

- Fiscal / Monetary Policy- deficit financing leads to depreciation of currency

- Interest Ratescurrency with higher interest will appreciate in the short term.

- Political IssuesPolitical stability leads to stable rates

(b) Technical Reasons:

- Government Control can lead to unrealistic value.

- Free flow of Capital from lower interest rate to higher interest rates.

(c) Speculationhigher the speculation higher the volatility in rates.

There are two method of quoting the exchange rate:

Direct Method Indirect Method

A given number of units of local currency for a unit of foreign currency is the Direct Method for

quoting exchange rate e.g. US $ 1 = Rs.45.18, EUR 1 = Rs 57.92. in the direct currency home

currency is variable. In Indirect Method of quotation, the variable is the foreign currency

expressed in a fixed unit of home currency e.g. Rs 100 = USD 2.2133, Rs 100 = GBP 1.1629, Rs

100 = EUR 1.7265.

NOTE: With Effect from 02.08.1993, all exchanges are quoted in Direct Method

TWO WAY EXCHANGE QUOTE:In Forex markets, there are two way quotes i.e. both buying and selling rates are given.

1 USD = INR 45.16/ 18


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FOREX OPERATION


The advance is repayable from export proceeds or receivable and carries interest rate inconformity with RBI guidelines.

ForImporter:Funded working capital finance by way of cash credit facility and non-funded working capital

finance by way of importer Letter of credit facility is provided to corporate who are importers.

Foreign currency lending rate:The bank also extends short term foreign currency loan to importers/ resident constituents. Thisenables accessing of finance at internationally competitive interest rate linked to LIBOR.

BPLR (Benchmark Prime Lending Rate): 17.5% w.e.f 12/1/11

Base rate: 8.80%

FACILITIES AVAILABLE TO NRIs PIO for investment in India

A)Non-Resident (external) rupee (NRE) accounts (Principal/ interest Repatriable)o

Saving- The interest rate on NRE saving deposits shall be at the rate applicable todomestic savings deposits. Currently the interest rate is 3.5%

o Term deposits- Interest on NRE term deposits are fixed as per the RBI directions-Presently LIBOR/SWAP rate for USD +175 basis points based on rates provided

by FEDAI on the last day of the month. So all the banks are having same rates.

B) FCNR (B) Principal/ Interest repatriableo Designated currencies: USD,GBP,EURO, AUD,YEN, and CAD

The bank is accepting only in four currencies, viz; USD, GBP, EURO, and AUD.

o Deposit are accepted as term deposit from 1 to 5 yearso Rates of interest: As per RBI guidelineo Maturity of deposit:1-5 years

C)NRO accounts (Non-Repatriable)o Saving- Interest rate is 3.5%o Term deposits- Interest applicable to domestic depositso IT will be deducted at source

D) Repatriation from NRO balanceAuthorized dealers are allowed repatriation by remittance up to USD 1 million per

financial year for bona fide purposes, from balances in NRO a/c in subject to payment of

applicable taxes and on production of CA certificate and PAN number.

The limit of USD 1 million per financial year includes sale proceeds of immovable

properties held by NRIs/PIO.

OTHER INVESTMENT ON REPATRIATION BASIS:

Government dated securities/ treasury bills Units of domestic mutual funds Bonds issued by a public sector undertaking in India


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Share and convertible debenture of Indian companies under FDI scheme (incl. automaticroute &FIPB)

Share and convertible debenture on Indian companies through stock exchange underportfolio investment Scheme.

Perpetual debt instruments and debt capital instrument issued by banksINVESTMENT IN IMMOVEABLE PROPERTIES:

May acquire immovable property in India other than agriculture land/ plantation propertyor a farm house out of repatriable and non-repatriable lands.

Sales proceeds of immovable property acquired in India to the extent of repatriable fundsused for acquiring the property, up to two residential properties. The balance will be

repatriable through NRO account subject to condition in item 1 (d)

Refund of (a) application /earnest money/ purchase consideration made by house-building agencies/ seller on account of non-allotment of flats /plots and (b) cancellation

of booking deals for purchase of residential /commercial properties, together with

interest, net of taxes, provided original payment is made out of NRE/ FCNR (B) account/

inward remittances.

Housing loan in rupee availed of by NRIs from Ads/ Housing Financial institutions canbe repaid by the close relatives in India of the borrower.

FACILITIES TO RETURNING NRIs/PIO (Returning NRIs/PIO):

May continue to hold, own, transfer or invest in foreign currency, foreign security or anyimmovable property situated outside India, If such currency, security, property was

acquired, held over owned when resident outside India. May open, hold and maintain with an authorized dealer in India a Resident foreign

currency a/c to transfer balances held in NRE/ FCNR (B) Accounts. Proceeds of assets

held outside India at the time of return, can be credited to RFC a/c. the funds in RFC a/cs

are free from all restrictions regarding utilization of foreign currency balances including

any restriction on investment in any form outside India.


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CASE STUDY

When advance payment made by the importer and No L/C is opened:

IMPORTER NAME: DATTA BROS AND CO.

EXPORTER NAME: ROCKWELL COLLINS, USA

CONTRACT DETAILS:

Importer purchases Machinery worth USD 7458 and by considering long term relation, the

importer decides to pay full payment in advance before the goods are received.

Document submitted by importer to the bank:

Purchase Order/Invoice A-1 form Declaration Form

BANK PROCEDURE:

The bank procedure for advance payment by the importer, as stated in the contract that

importer decides to make full payment in advance to exporter.

Bank receives all documents and information from the XYZ Ltd., Who is the old customer of the

bank, just the purchase order is necessary document needed by the bank here. Bank receives

money from the importer beforehand and on due date they remit the money to the exporter and

the transaction take place.


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Case: 3 Bank procedure in case of buyers credit

IMPORTER NAME: ABC AND CO.

EXPORTER NAME: XYZ LTD

CONTRACT DETAILS:

Importer purchases a good from exporter worth USD 7456. Both of these companies entered into

contract, so importer makes an application to the bank for issue of letter of credit (Documentary

credit) and after receiving the L/C exporter can deliver goods as per L/C terms & condition.

Goods Receiving date to importer 13-08-11 and exporter allowed credit period of 90 days, i.e.

maturity date.

Document Submitted to the Bank:

Purchase order / Invoice Packing List A-1 Form Declaration Form Bill of lading Certificate of origin Bill of Entry

Advising Bank: HSBC, NY

Mode of Payment: Irrevocable L/C

Condition: Importer before few days of payment feels that he is unable to pay export amount on

time. So he decided to take loan (Buyers Credit) in international market. He approaches an

overseas bank with the proposal and bank is ready to give loan for180 days, if importers Bank

give letter of comfort to them. Now Importer applies for letter of comfort to bank.

Bank Procedure: As bank has issued letter of credit and aware about all the transaction givesGuarantee and intimates the same to the Overseas bank.


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FOREX OPERATION


ABBREVIATIONS

1. B/L Bill of Lading

2. CS Export Bill Collection at Sight3. CU Export Bill Collection at Usance

4. DA Basis Deliverable against Acceptance

5. DGFT Director General of Foreign Trade

6. DP Basis Deliverable against Payment

7. DP Note Demand Promissory Note

8. DPG Deferred Payment Guarantees

9. Duty Draw Back Refund of excise and custom duty to the exporter by the Government

10. ECB External Commercial Borrowings

11. ECGC Export Credit and Guarantee Corporation

12. EEFC Exchange Earners Foreign Currency

13. EHTP Electronic Hardware Technology Parks14. EOH Export Order Holder

15. EPCG Export Promotion Capital Goods

16. EPZ Export Processing Zone

17. ESTP Electronic Software Technology Parks

18. ETX Extension of Time limit

19. FPB Foreign Bill Purchased

20. FCNR(B) Foreign Currency Non-Resident(Bank)

21. FEDAI Foreign Exchange Dealers Association of India

22. FEMA, 1999 Foreign Exchange Management Act

23. FERA Foreign Exchange Regulation Act

24. FET-ERS Foreign Exchange Transaction Electronic Reporting system

25. FTT Foreign Telegraphic Transfer

26. FTZ Free Trade Zone

27. FUBD Foreign Usance Bill discounted

28. IBD International Banking Division

29. ICC International Chamber Of Commerce

30. ICES/E Indian Custom EDI System- Export

31. IEC Importer-Exporter Code Number

32. ISB International Service Branch

33. LC Letter of Credit

34. LG Letter of Guarantee35. LIBOR London Inter-Bank Offer Rate

36. NS Export Bill Negotiation at Sight

37. NTP Normal Transit Period

38. NU Export Bill Negotiation at Usance

39. P0101 Value of Export Bill Negotiation/ Discount/ Purchase

40. P0107 Realization of NPD Export Bill

41. P0802 Receipt of Consultant/ Implementation not SOFTEX


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42. P1019 Receipts for other services not included

43. PAD Payment Against Document (Letter of Credit)

44. PC Packing Credit

45. PCFC Packing Credit in Foreign Currency

46. PS Export Bill Purchase at Sight

47. PU Export Bill Purchase at Usance48. RFC A/C Resident Foreign Currency a/c

49. RTGS Real time Gross Settlement

50. S0102 Payment Towards Import Settlement

51. S0701 Financial Intermediation, Bank Charges, Commission etc.

52. S0802 Payment of Software Consultancy/ Implementation

53. S1019 Remit Toward Other Services

54. SWIFT Society of Worldwide Inter-Bank Financial Transaction

55. T.T Rate Telegraphic Transfer Rate

56. UCPDC Uniform Custom & Practice for Documentary Credits

57. WTPCG Whole Turnover Packing Credit Guarantee

58. WTPSG Whole Turnover Post-Shipment Guarantee


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Study on Forex

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