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Structure of the Indian Rupee Market

Strict Regulation

Though the value of the Rupee is fixed by market forces, the market itself is strictly regulated and overseen, under the Foreign Exchange Regulations Act (FERA), by the Reserve Bank of India (RBI), the central bank of the country (referred to as "Bhagwan" or "God" in the market). The RBI is known to intervene in both the Spot and Forward markets and in fact a number of banks are in favour of this activist stance of the RBI.

Speculation is frowned upon. Pure speculative positions can be taken only by banks and they too are largely discouraged in this pursuit. Till as recently as 1st of January, 1996, each bank's overnight position limit was fixed by the RBI at INR 15 crores (approximately $ 5 million). This stipulation has now been slightly relaxed, as a result of the recommendations of the Sodhani Committee on forex market reforms, and banks are now allowed to set their own position limits in line with their Net Worth, but still in consultation with the RBI.

Corporates are allowed to enter into Forward Contracts only to "Hedge" their underlying transactions such as imports/ exports or capital receivables/ payables. It is another matter that in the absence of any hedging instrument apart from the Forward Contract, which itself is liquid only upto a six month tenor, hedging Rupee - Dollar risk is very risky. Corporates are allowed, however, to break up their exposures to currencies other than the Dollar into a Rupee - Dollar leg and a Dollar - Other Currency leg and to use almost all derivatives available to cover their risk on the latter leg.

In the absence of capital account convertibility, Indian nationals are not permitted to hold foreign currency accounts and individuals rarely have anything to do with the forex market.

Rules regarding investment by foreigners and NRIs into India, are however fairly relaxed now. Also, as already mentioned above, over 1996, the Indian debt market has been largely thrown open to foreigners and Indian corporates have been granted much greater leeway in accessing foreign currency debt.

Explore the following sites for comprehensive rules and regulations regarding the types of Bank accounts that can be held by NRIs in India:
The Reserve Bank Of India

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