FEMA Dr. RAJ AGRAWAL

Foreign Exchange The market intermediaries of foreign exchange market include: – Exchange Banks dealing in Foreign Exchange – Bill Brokers –Acceptance Houses –Central Bank of the Country

Exchange Rate Determination Demand for Foreign Exchange – Import of goods and services – Investment in foreign countries –Other payments involved in International Transactions – Other types of outflow of foreign capital like going donations etc.

Supply of Foreign Exchange Country’s exports of goods and services to foreign countries Inflow of foreign capital Payments made by foreign governments to Indian government for settling their transactions Other types of inflow of foreign capital like remittances by the Non- Resident Indians, donations received etc.

Fixed and Flexible Exchange Rate Advantages –Ensure certainty and confidence –Promote long-term investments – Results in Economic Stability –Avoid foreign exchange risks to a greater extent Disadvantages – May results in large scale destabilization –Long-term foreign capital may not be attracted

Flexible Exchange Rate This system is simple to operate. –Do not result in deficit or surplus –This rate moves automatically and freely – Adjustment of exchange rate is a continuous process –Permits the existence of free trade and convertible currencies on a continuous basis Disadvantages – Market Mechanism failure –Difficult to define flexible exchange rate –Speculation adversely influences fluctuations in supply and demand for Foreign Exchange –Reduction in exchange rates lead to a vicious circle of inflation

Foreign Exchange Management Act Objectives – To facilitate external trade and payments - To promote the orderly development and -maintenance of foreign exchange market Dealing in Foreign Exchange etc. Deal in any foreign exchange will be done only by authorized person make any payment to or for the credit of any person resident outside India in any manner; Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner Enter in to any financial transaction in India as a consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person

Other Related Issues Holding of Foreign Exchange etc. Current Account Transactions: FEMA permits dealings in foreign exchange through authorized persons for current account transactions. Central Government may impose restrictions Capital Account Transactions: Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction permitted by the RBI in consultation with the Central Government Export of Goods and Services

Other Issues Realization and Repatriation of Foreign Exchange Contravention and Penalties Administration of the Act FERA and FEMA- A comparison –FEMA is a much smaller enactment-only 49 sections as against 81 of FERA –Many provisions of FERA like ones relating to blocked accounts, Indians taking up employment abroad,employment of foreign techanicians in India,contracts in evasion of the act, vexation search etc have no appearance in FEMA.