Role of Foreign Exchange Market in India

Role of Foreign Exchange Market in India

The foreign exchange market is a financial entity that allows one country's currency to be exchanged for another's. Foreign exchange markets are the most conventional and oldest financial marketplaces. 

A global over-the-counter (OTC) market determines currency exchange rates worldwide. The foreign currency markets consist of banks, dealers, commercial enterprises, investment management firms, and hedge funds. All the main currencies are traded in all major financial locations. The currency market is open 24 hours a day, five days a week. 

Currency trading in the FX market comprises the simultaneous purchase and sale of two currencies. The value of one currency (the "base currency") is established by comparing it to another currency in this manner (the "counter currency"). 

The foreign exchange rate is the price to convert one currency into another. There is no such thing as a currency market or the value of one currency in terms of another economic zone or currency.

The foreign exchange market is only a subset of the money market in financial hubs. It is a place where foreign currencies are bought and sold. Buyers and sellers of foreign currency claims and intermediaries make up the foreign exchange market. There are several sorts of traders in the foreign exchange market.

Banks are the most important of these. Foreign exchange banks have branches in various countries with considerable balances. The services of such organizations, known colloquially as "exchange banks," are available worldwide via their branches and correspondents. These financial entities discount and sell foreign bills of exchange, issue bank drafts, execute telegraphic transfers and other credit operations, and discount and collect payments based on such documents.

The Foreign Currency Dealers Association of India (FEDAI) was founded in 1958 and is an association of banks that deal in Indian foreign exchange markets. It is formed under Section 25 of the Companies Act of 1956.

The Foreign Exchange Market's Primary Functions:

The Transfer function

The basic goal of the foreign exchange market is to make it simpler to convert one currency into another or to move purchasing power across countries. Various credit instruments, such as telegraphic transfers, bank draughts, and foreign bills, are employed to send purchasing power. The foreign currency market, like domestic clearings, provides the transfer function by making international payments by clearing debts in both directions simultaneously.

For instance, if an Indian exporter imports items from the United States and the payment is to be made in dollars, FOREX will make the rupee-to-dollar conversion easier. The transfer function is carried out through credit instruments such as bank draughts, foreign exchange bills, and telephone transfers.

Credit Function:

The foreign exchange market also plays a vital role in facilitating international trade by providing local and international loans. When using foreign bills of exchange in international payments, a three-month credit is required before they mature. The FOREX offers short-term loans to importers to stimulate the movement of products and services between countries. The importer can use his credit to fund overseas purchases.

The function of hedging

A third role of the foreign exchange market is to hedge foreign exchange risks. Hedging is the process of hedging against currency risk. In a free exchange market, when the exchange rate, or the price of one currency in terms of another currency, fluctuates, the person involved may profit or lose money. A person or corporation assumes high exchange risk when there are huge amounts of net claims or net liabilities that must be met in foreign currency.
Exchange risk should be avoided or general. The exchange market provides forward contracts in exchange for this purpose, allowing you to hedge possible or current claims or liabilities. A three-month forward contract is an agreement to buy or sell a foreign currency against another currency at a predetermined price today for a certain time. There is no money exchanged at the time of the transaction. However, the contract permits you to disregard any prospective currency rate fluctuations. An exchange position can be hedged due to the availability of the futures market.

Some of the advantages of the foreign exchange market include the following:


The forex market provides traders with a tremendous amount of flexibility. This is because the amount of money that may be traded is limitless. Furthermore, market regulation is virtually nonexistent.


The forex market is massive and covers several time zones. Despite this, forex market information is widely available. Furthermore, neither the government nor the central bank has the right to corner the market or fix prices indefinitely. Some entities may gain in the near term due to the temporary lag in information flow. The forex market's size makes it fair and efficient!

Trading Options:

On the forex markets, traders have a wide variety of trading options. Traders can choose from a wide range of currency pairings. Investors can also select between trading on the spot market and signing a long-term contract. As a result, the Forex market provides a solution for any budgetary or investor risk appetite.

Come up with solutions -

Many dealers exist in the foreign currency markets, with banks being the most influential. Exchange Banks, which have branches in various countries, enable foreign exchange. The foreign exchange market is a global market in which currencies from various countries are traded. 

It is decentralization because a single authority, such as an international organization or a government, does not govern it. The primary actors in this sector are governments (usually through their central banks) and commercial banks. 

Foreign exchange is the act of converting one currency into another. The exchange rate is the rate agreed upon by the transaction's two parties, which may fluctuate significantly, likely to result in a risky purchase of foreign currency.

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