The Foreign Exchange Regulation Act (FERA), 1973 was replaced by the market friendly Foreign Exchange Management Act (FEMA), 1999. The Reserve Bank delegated powers to authorized dealers (ADs) to release foreign exchange for a variety of purposes. In pursuance of the Sodhani Committee‘s recommendations, the Clearing Corporation of India Limited (CCIL) was set up in 2001. To further the participatory process in a more holistic manner by taking into account all segments of the financial markets, the ambit of the Technical Advisory Committee (TAC) on Money and Securities Markets set up by the Reserve Bank in 1999 was expanded in 2004 to include foreign exchange markets and the Committee was rechristened as TAC on Money, Government Securities and Foreign Exchange Markets. Increase in Instruments in the Foreign Exchange Market. The rupee-foreign currency swap market was allowed.

Additional hedging instruments such as foreign currency-rupee options, cross-currency options, interest rate swaps (IRS) and currency swaps, caps/ collars and forward rate agreements (FRAs) were introduced.

Liberalization Measures

Authorized dealers were permitted to initiate trading positions, borrow and invest in overseas market, subject to certain specifications and ratification by respective banks‘ Boards. Banks were also permitted to (i) fix net overnight position limits and gap limits (with the Reserve Bank formally approving the limits); (ii) determine the interest rates (subject to a ceiling) and maturity period of FCNR(B) deposits with exemption of inter-bank borrowings from statutory preemptions; and (iii) use derivative products for asset liability management.

Participants in the foreign exchange market, including exporters, Indians investing abroad, and FIIs were permitted to avail forward cover and enter into swap transactions without any limit, subject to genuine underlying exposure. FIIs and NRIs were permitted to trade in exchange traded derivative contracts, subject to certain conditions.

The Reserve Bank has been taking initiatives in putting in public domain all data relating to foreign exchange market transactions and operations. The Reserve Bank disseminates:

  • daily reference rate which is an indicative rate for market observers through its website,
  • data on exchange rates of rupee against some major currencies and foreign exchange reserves on a weekly basis in the Weekly Statistical Supplement (WSS), and
  • data on purchases and sales of foreign currency by the Reserve Bank in its Monthly Bulletin. The Reserve Bank has already achieved full disclosure of information pertaining to international reserves and foreign currency liquidity position under the Special Data Dissemination Standards (SDDS) of the IMF.