Management of Foreign Exchange Transactions

Several measures were undertaken by the Reserve Bank to liberalise foreign exchange transactions by residents during 2004-05. The condition that shares should be offered at a concessional price for the acquisition of foreign securities by residents under the Employees Stock Option Plan (ESOP) was dispensed with. Shares acquired under the ESOP were allowed to be sold without obtaining prior permission of the Reserve Bank, provided the proceeds thereof are repatriated to India.

With a view to promoting Indian Investments overseas, the ceiling of overseas investment by Indian entities was raised from 100 percent to 200 percent of their net worth under the automatic route. Corporates were granted general permission for conversion of the ECBs into equity with the exception of import payable deemed as ECBs and subject to prescribed reporting requirements. General permission was also granted for transfer of shares and convertible debentures (excluding financial services sector) subject to compliance with the terms and conditions and reporting requirements for transfer by a person resident in India to a person resident outside India and vice versa.

The foreign exchange market remained generally stable during 2004-05. In response to the switches in capital flows during the year, the rupee moved in a relatively wide range of Rs. 43.36 to Rs.46.46 per US dollar during the year. The rupee appreciated by 2.2 percent against the US dollar on an annual average basis while it weakened against the euro, the pound sterling and Japanese yen by 4.5 percent, 6.3 percent and 2.6 percent, respectively, during 2004-05. Reflecting these cross currency movements, the nominal effective exchange rate (NEER) depreciated by 1.9 percent during 2004-05.

The turnover in both the merchant and inter bank segments of the foreign exchange market increased sharply, reflecting the strong growth in merchandise trade, services and capital flow. While the merchant turnover increased from US $ 54.0 billion in April 2004 to US $ 88.6 billion in March 2005, the interbank turnover increased from US$ 195.7 billion to US $ 237.0 billion during the same period. The ratio of inter-bank to merchant turnover hovered in the range of 2.7 - 3.6 during the year, indicative of orderly market conditions.

According to the BIS Triennial Survey, the average daily turnover in the International markets rose to US $ 2.4 trillion in 2004 from US $ 1.6 trillion in 2001. India's share in global foreign exchange turnover has been increasing, although it still remains quite low...