Basic Foreign Currency Financial

The foreign exchange market is the largest financial market in the world. The daily turnover in this market in mid 2002 was estimated to be $ 1200 billion. The important features of this market are as follows:

The foreign exchange market is primarily an over the counter market. This means that transactions take place trough telephones, telexes, or the Reuter monitor, and not on the trading floor of an exchange.

The principal market makers in the foreign exchange market are the major international banks. In recent years, large multinational companies have also become important players in the foreign exchange market.

Speculative transactions account offer more than 95 per cent of the turnover on the foreign exchange market. Irrespective of how one looks at speculation, it cannot be gainsaid that if the turnover is not large, the foreign exchange market would be patchy and discontinuous.

Extending from Tokyo and Sydney in the East to New York and San Francisco in the west, the international foreign exchange market spans almost all the time zones. It is virtually a 24-hour market.

Foreign Exchange Market in India:

The foreign exchange market in India is very small. Its important features are as follows:

1. The key participants in this market are the Reserve Bank of India, banks, and business undertakings.
2. The Indian Foreign Exchange market is a controlled market in which the Reserve Bank of India plays a key role in setting the day-to-day rates.
3. Business undertaking in India can participate in the foreign exchange market in India only to the extent that they need cover for exchange exposure arising from a merchant transaction or a foreign currency borrowing. This means that they cannot resort to speculative transactions.
4. The present exchange control regulations permit banks to have a net overbought or oversold position in a foreign currency subject to limits notified by the RBI from time to time in its Exchange Control Circulars.

Raising Foreign Currency Finance:

The major sources available to an Indian firm for raising foreign currency finance are:

(1) Foreign currency term loans from financial institutions
(2) Export credit schemes
(3) External commercial borrowing
(4) Euro issues
(5) issues in foreign domestic markets

Foreign Currency Term loans Financial Institutions:

Financial institutions provide foreign currency term loans for meeting the foreign currency expenditures towards import of plant, machinery, and equipment and also towards payment of foreign technical know how fees. The periodical liability for interest and principal remains in the currency/currencies of the loans and is translated into rupees at the then prevailing rate of exchange for making payments to the financial institution.

Export Credit Schemes:

Export credit agencies have been established by the governments of major industrialized countries for financing exports of capital goods and related technical services. These agencies follow certain consensus guidelines for supporting exports under a convention known as the Berne Union. As per these guidelines, the interest ate applicable for export credits to Indian companies for various maturities are regulated. Two kinds of export credit are provided: buyer’s credit and supplier’s credit.

Buyer’s credit: Under this arrangement, credit is provided directly to the Indian buyer for purchase of capital goods and/or technical services from the overseas exporter. The buyer’s credit facility operates as follows:

(1) The overseas exporter and the Indian buyer negotiate a contract.
(2) An application of the buyer’s credit facility is made to the export agency of the exporter’s country along with relevant details like the types of goods/services to be exported approximate value of the contract, terms of payments schedule of protected shipment of goods or provision of services, percentage of financing required etc.
(3) The buyer’s credit facility is approved by the export credit agency of the exporter’s country.
(4) A loan agreement delineating the terms and conditions of the buyer’s credit is negotiated between the overseas exporter’s bank, the Indian borrowers, and where applicable, the Indian guarantor.

Supplier’s Credit: This is a credit provided to the overseas exporters so that they can make available medium-term finance to Indian importers. The supplier’s credit facility operates as follows:

(1) The overseas exporter notifies his bank and the export credit agency of a potential export order of an Indian buyer who requires medium-term finance.
(2) The export credit agency communicates to the bank its willingness to provide the facility.
(3) The terms of the facility are incorporated in the contract between the overseas exporter and the Indian buyer.

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