NOTES

Foreign exchange market needs dealers to facilitate foreign exchange transactions bulk of foreign exchange transactions are dealt by commercial banks and financial institutions. Other than commercial banks and financial institutions, RBI has allowed private authorized dealers to deal with foreign exchange transactions, i.e. buying and selling of foreign currency the following are the main participants in the foreign exchange market:

1.      Retail Clients / Customers: These comprise people, international investors, multinational corporations and other who need foreign exchange.  Retail clients deal through commercial banks and authorized agents. The customers who participate in the foreign exchange market mainly comprise of the importers and exporters. they participate in the foreign exchange market by availing of the bank services. The importer has to make payments to the exporting countries in the exporting country’s currency hence he utilizes the services of the bank to convert its local currency into exporting country’s currency. The Exporter also would like to avail of these services of bank to convert the receipt of foreign currency into local or domestic currency.

2.      Commercial Banks : Commercial Banks facilitate the conversion of one country’s currency into another country’s currency. The commercial banks are supposed to be the most active players in the foreign exchange market. These banks have a wide network of branches or the correspondent branch all over the world because of which they can transact the foreign exchange business smoothly, fastly and efficiently. The importers and Exporters belong to different countries, They carry out buy and sell orders from their retail clients and of their own account. They deal with other commercial banks and also through foreign exchange brokers.

3.      Foreign Exchange Brokers : Each foreign exchange market centre has some authorized brokers.  Brokers act as intermediaries between buyers and sellers, mainly the banks.  Commercial banks prefer the brokers as banks could obtain the most favourable quotations from them. Bill brokers are the intermediaries who act as liaison between the buyers and sellers of the foreign exchange. Their function is to bring both the parties together to settle the foreign exchange transactions. For performing this function they get their commission known as brokerage.

4.      Central Banks : Under the floating exchange rate the central bank of a country normally does not interfere in the exchange market.  Since 1973 however most of the central banks frequently intervened to buy and sell their currencies in an attempt to influence the rate at which their currencies are traded.

5.      Discount Houses: The disocutn houses are the specialized houses in the business of discounting the foreign bills of exchange. The discount houses discount the foreign bills of exchange put forwarded by an exporter and finances him before the maturity of the foreign bills of exchange at a discount they retain the foreign bill of exchange till maturity and recover the full value of foreign bill of exchange. the London discount houses are the Glaring example of specialized discount houses in the London international money market.

The above groups are the sources from where demand and supply forces generate which in turn help determine the foreign exchange rate.

The foreign exchange market is broadly divided into i) retail and  ii)  wholesale market.

 In the retail market travelers, tourist and people who are in need of foreign exchange for permitted small transactions, exchange one currency for another. The retail market is a secondary price maker.

The wholesale market is also called the interbank market. Commercial banks, business corporations and central banks are the main participants in this segment of the market. The size of transaction in the market is very large. The dealers here are highly profession and are the primary price makers. Big players like multinational banks exert a lot of influence in the market and are mainly responsible for determining the exchange rate.

 Brokers act as middlemen between the price makers. They provide information to the banks about the prices at which there are buyers and sellers for currencies. Most of the banks (except the major ones) deal through brokers who purchase and sell foreign currencies on behalf of others. Brokers possess more information and better knowledge of market.

The price takes in the foreign exchange market are those who buy the foreign exchange which they require, and sell at a price determined by the primary price makers

Indian foreign exchange market is made of three tiers in the first tiers the dealing tae place between RBI and authorized dealers(ADS) comprising mainly commercial banks in the second tier the ADS deals with each other, in the third tier the ADS deals with their corporate customers