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During the early 1990s, India embarked on a series of structural reforms in the
foreign exchange market. The exchange rate regime that was pegged earlier was
floated partially in March 1992 and fully in March 1993. The unification of the
exchange rate was instrumental in developing a market-determined exchange rate
of the rupee and an important step in the progress towards current account
convertibility, which was achieved in August 1994. Banks are now permitted to
approve proposals for commodity hedging in international exchanges from their
corporate customers. Cancellation and rebooking of all eligible forward
contracts booked by residents, irrespective of tenor, has been allowed. The
closing time for inter-bank foreign exchange market in India has been extended
by one hour up to 5.00 p.m.
The foreign exchange market in India has acquired a distinct vibrancy as evident
from the range of products, participation, liquidity and turnover. From 2001 to
2007, forex trading in India has been growing at a Compounded Annual Growth Rate
(CAGR) of approx. 37%. This was in line with the increase in foreign exchange
transactions. According to BIS survey, the average daily turnover in the Indian
foreign exchange market in 2007 stood at around US $34.085 billion. The same was
around US$23.07 billion in 2006 and US$14 billion in 2005. In India, spot market
transactions hold the majority 42% share of the total forex turnover, followed
by 39% share in foreign exchange swaps, while the rest is contributed by
outright forward transactions.
 
The Reserve Bank of India (RBI) has the overall responsibility of managing the
affairs relating to foreign exchange and exchange rate, and also the mandate of
maintaining monetary and financial stability. The preamble to the RBI Act
provides the objective for the establishment of the Bank to regulate the issue
of Bank notes and keeping reserves with a view to securing monetary stability in
India and generally to operate the currency and credit system of the country to
its advantage. The preamble makes it clear that operation of the currency and
credit system falls within the regulatory ambit of the Bank. Furthermore,
promoting orderly development and maintenance of forex markets is one of the
main functions of the RBI.
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