Telugu Vallaku Boothu Kathalu

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.

An analysis of the complexities, challenges and vulnerabilities faced by EMEs in the conduct of exchange rate policy and managing volatilities in foreign exchange market reveal that the choice of a particular exchange rate regime alone cannot meet all the requirements. The emerging consensus is that for successful conduct of exchange rate policy, it is essential for countries to pursue sound and credible macroeconomic policies so as to avoid the build-up of major macro imbalances in the economy. Second, it is essential for EMEs to improve the flexibility of their product and factor markets in order to cope and adjust to shocks arising from the volatility of currency markets and swings in the terms of trade in world product markets. Third, it is crucial for EMEs to develop and strengthen their financial systems in order to enhance their resilience to shocks. In addition, a sound and efficient banking system together with deep and liquid capital market contributes to the efficient intermediation of financial flows. This could help prevent the emergence of vulnerabilities in the financial system by minimising unsound lending practices that lead to the build-up of excessive leveraging in the corporate sector and exposure to foreign currency borrowings. Fourth, countries would need to build regulatory and supervisory capabilities to keep pace with financial innovations and the emergence of new financial institutions’ activities, and new products and services, which have complicated the conduct of exchange rate policy. Fifth, policy makers need to promote greater disclosures and transparency.

The evolution of India’s foreign exchange market may be viewed in line with the shifts in India’s exchange rate policies over the last few decades from a par value system to a basket-peg and further to a managed float exchange rate system. During the period from 1947 to 1971, India followed the par value system of exchange rate. Initially the rupee’s external par value was fixed at 4.15 grains of fine gold. The Reserve Bank maintained the par value of the rupee within the permitted margin of ±1 per cent using pound sterling as the intervention currency. Since the sterling-dollar exchange rate was kept stable by the US monetary authority, the exchange rates of rupee in terms of gold as well as the dollar and other currencies were indirectly kept stable. The devaluation of rupee in September 1949 and June 1966 in terms of gold resulted in the reduction of the par value of rupee in terms of gold to 2.88 and 1.83grains of fine gold, respectively. The exchange rate of the rupee remained unchanged between 1966 and 1971.

This book was written in very basic form to cater to the maximum number of potential forex investors. Forex investing is very risky and investors can lose money. Therefore it is prudent to fully understand the markets before investing your hard earned money. There are many ways for potential investors to practice forex trading without actually opening an account. I believe that it is very sensible to use a practice account first just in case forex trading is not right for you. This book in no way should be considered a guarantee of profits in the forex markets. Forex trading is very risky. Only risk capital should be used for this type of speculative investment.The forex markets are a true electronic or over-the-counter exchange. There is no physical or central forex exchange location. The forex market is comprised of a global network of banks, corporations and individuals who are buying and selling currencies 24 hours a day, except on weekends. Forex trading follows the sun around the globe. The most active exchange centers are in Tokyo, Singapore, London and New York. When Asian trading session ends the European session begins and when the European session ends the North American session begins and so on.

The substantial movement between soft pegs and floating regimes suggests that floating is not necessarily a durable state, particularly for lower and middle-income countries, whereas there appears to be a greater state of flux between managed floating and pegged arrangements in high-income economies. The frequency with which countries fall back to pegs after a relatively short spell in floating suggests that many countries face institutional and operational constraints to floating. The preference for tighter management seems to have intensified recently as a number of countries have enjoyed strong external demand and capital inflows. Other notable trends included a shift away from currency baskets, with the US dollar remaining the currency of choice for countries with hard pegs as well as soft pegs. One third of the dollar pegs are hard pegs and the remaining are soft pegs. The choice of the US dollar for countries with soft pegs reflects its continued importance as an invoicing currency and a high share of trade with the US or other countries that peg to the US dollar. The euro is the second most important currency and serves as an exchange rate anchor for countries in Europe and the CFA franc zone in Africa.

Against the above background, this chapter attempts to analyse the role of the central bank in developing the foreign exchange market. Section I provides a brief review of different exchange rate regimes being followed in emerging market economies (EMEs). Section II traces the evolution of India’s foreign exchange market in line with the shifts in India’s exchange rate policies in the postindependence period from the pegged to the market determined regime. Various regulatory and policy initiatives taken by the Reserve Bank and the Government of India for developing the foreign exchange market in the market determined set up have also been highlighted. Section III presents a detailed overview of the current foreign exchange market structure in India. It also analyses the available market infrastructure in terms of market players, trading platform, instruments and settlement mechanisms. Section IV assesses the performance of the Indian foreign exchange market in terms of liquidity and efficiency. The increase in turnover both onshore and offshore markets is highlighted in this section. Empirical exercises have also been attempted to assess the behaviour of forward premia, bid-ask spreads and market turnover. Having delineated the market profile, Section V then discusses the journey of the Indian foreign exchange market since the early 1990s, especially through periods of volatility and its management by theauthorities. As central bank intervention has been animportant element of managing volatility in the foreign exchange market, its need and effectiveness in amarket determined exchange rate and open capital regime has been examined in Section VI. Section VII makes certain suggestions with a view to further deepening the foreign exchange market o that it can meet the challenges of an integrated world. Section VIII sums up the discussions.