Market Efficiency With the exchange rate primarily getting determined by the forces of demand and supply, the issue of foreign exchange market efficiency has assumed importance in India in recent years. Markets are perceived as efficient when market prices reflect all available information, so that it is not possible for any trader to earn excess profits in a systematic manner. The efficiency/liquidity of the foreign exchange market is often gauged in terms of bid-ask spread. The bid-ask spread reflects the transaction and operating costs involved in the transaction of the currency. These costs include phone bills, cable charges, book-keeping expenses and trader salaries, among others. In the spot segment, it may also include the risks involved in holding the foreign exchange. These costs/bid-ask spread are expected to decline with the increase in the volume of transactions in the currency. The finance theory identifies three basic sources of bid-ask spreads: (a) order processing costs, (b) inventory holding costs, and (c) information costs of market making, and each one is influenced by trading volume in a particular manner (Hartmann, 1999). The low and stable bid-ask spread in the foreign exchange market, therefore, indicates that market is efficient with underlying low volatility, high liquidity and less of information asymmetry.