Structure of Indian Forex Market

Players in forex market

The major players in India’s Forex market are:

  1. Reserve Bank of India
  2. Authorised Dealers/Banks
  3. Foreign exchange brokers who act as intermediaries
  4. Customers who may be individuals, Corporates who need foreign exchange.

Authorised Dealers

RBI delegates power to entities to deal with foreign exchange and foreign securities. Section 2(c) of Foreign Exchange Management Act or FEMA states that ‘authorised person’ means an authorised dealer, money changer, off-shore banking unit or any other person authorised under section 10 (1) to deal in foreign exchange and foreign securities. These are authorised by RBI under section 10 of FEMA to deal in foreign exchange.

The dealers have been categorised based on their permitted activities into four divisions.

  • Generally, all nationalised banks, leading non-nationalised banks and foreign banks are ‘Authorised Dealers Category I’ to deal in foreign exchange. They can deal in all other transactions in foreign exchange like bill of exchange, cheques, letter of credit, deposits etc. They can freely purchase from public in India TTs, MTs, drafts, bills etc. drawn in any foreign currency against rupees.
  • Authorised Dealers – Category II can undertake the following transactions – Private visits and business visits, Remittances of tour operators, Participation in international events, global conferences and specialised training, Medical treatment abroad.
  • Full-fledged money changers, are those who are authorized to undertake both purchase and sale transactions with the public. This was done to facilitate exchange of foreign currency. Reserve Bank has granted licenses to certain established firms, hotels and other organizations permitting them to deal in foreign currency notes, coins and travellers cheques subject to directions issued to them from time to time.

Broker

Forex Brokers are important for trading in forex derivatives on stock exchanges. The SEBI has the power and responsibility of providing licenses to forex brokers, or to revoke licenses in cases they fail to comply with the guidelines laid out by them similar to power of RBI with regard to authorised dealers.

One of the most important guidelines they impose on forex trading is the requirement for currency pairs to involve the Indian Rupee (INR). The only currency pairs along with the INR to be traded under SEBI and RBI regulation are USD, EUR, GBP, and JPY.