Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by non-residents. The various forms that exchange control has taken are briefly discussed below: 1. Exchange Pegging This device is usually adopted during war in order to minimize exchange fluctuations. The internal value of a currency may depreciate due to inflation but the government may seek to keep its external value at a higher level than warranted by the purchasing power parity in order to facilitate international transactions. England during First World War and again in the Second World War adopted the method. Between 1916 and 1919, the Sterling was kept artificially pegged at 4.765 dollars — a value which was higher than the real value of the Sterling. This was done by raising loans in America and through these funds, purchasing Continue reading
Indian Financial System
Institutional Framework of Derivatives Market
1. Exchange Exchange provides buyers and sellers of futures and option contract necessary infrastructure to trade. In outcry system, exchange has trading pit where members and their representatives assemble during a fixed trading period and execute transactions. In online trading system, exchange provide access to members and make available real time information online and also allow them to execute their orders. For derivative market to be successful exchange plays a very important role, there may be separate exchange for financial instruments and commodities or common exchange for both commodities and financial assets. 2. Clearing House A clearing house performs clearing of transactions executed in futures and option exchanges. Clearing house may be a separate company or it can be a division of exchange. It guarantees the performance of the contracts and for this purpose clearing house becomes counter party to each contract. Transactions are between members and clearing house. Clearing Continue reading
Scenario of Indian Banking Sector in Pre and Post Reform Period
Scenario of Indian Banking Sector in Pre Reform Period Banking is an ancient business in India. Initially, the growth of Indian banks was very slow and also experienced periodic failures between 1913 and 1948. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965). During those days, public had lesser confidence in the banks. As an aftermath deposit mobilization was slow. Government took major steps in Indian banking sector reform after independence. On 19th July 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. Fourteen major commercial banks were nationalized. Second phase of nationalization of Indian banking sector reform was carried out in 1980 with seven Continue reading
National Securities Clearing Corporation Ltd. (NSCCL)
National Securities Clearing Corporation Ltd. (NSCCL) is a wholly owned subsidiary of NSE and was incorporated in August 1995. It was the first clearing corporation to be established in the country and also the first clearing corporation in the country to introduce settlement guarantee. It was set up with the following objectives: to bring and sustain confidence in clearing and settlement of securities; to promote and maintain, short and consistent settlement cycles; to provide counter-party risk guarantee, and to operate a tight risk containment system. Clearing and Settlement by National Securities Clearing Corporation Ltd. (NSCCL) National Securities Clearing Corporation Ltd. carries out the clearing and settlement of the trades executed in the equities and derivatives segments of the NSE, It operates a well-defined settlement cycle and there are no deviations or deferments from this cycle. It aggregates trades over a trading period, nets the positions to determine the liabilities Continue reading
Types of Investors in the Stock Market
There is a wide diversity among investors, depending on their investment styles, mandates, horizons, and assets under management. Primarily, investors are either individuals, in that they invest for themselves or institutions, where they invest on behalf of others. Risk appetites and return requirements greatly vary across investor classes and are key determinants of the investing styles and strategies followed as also the constraints faced. Primarily investors can be categorized into two groups: Individual Investors: While in terms of numbers, individuals comprise the single largest group in most markets, the size of the portfolio of each investor is usually quite small. Individuals differ across their risk appetite and return requirements. Those averse to risk in their portfolios would be inclined towards safe investments like government securities and bank deposits, while others may be risk takers who would like to invest and/or speculate in the equity markets. Requirements of individuals also evolve Continue reading
Possible Courses of Exchange Control
Exchange control is one of the important means of achieving certain national objectives like an improvement in the balance of payments position, restriction of inessential imports and conspicuous consumption, facilitation of import of priority items, control of outflow of capital and maintenance of the external value of the currency. Under the exchange control, the whole foreign exchange resources of the nation, including those currently occurring to it, are usually brought directly under the control of the exchange control authority (the Central Bank, treasury or a specially constituted agency). Dealings and transactions in foreign exchange are regulated by the exchange control authority. Exporters have to surrender the foreign exchange earnings in exchange for home currency and the permission of the exchange control authority have to be obtained for making payments in foreign exchange. It is generally necessary to implement the overall regulations with a host of detailed provisions designed to eliminate Continue reading