Foreign exchange market in India started three decades ago when in 1978 the government
allowed banks to trade foreign exchange with one another. Today over 70% of the
trading in foreign exchange continues to take place in the inter-bank market. The market
consists of over 90 Authorized Dealers (mostly banks) who transact currency among
themselves and come out “square” or without exposure at the end of the trading day.
Trading is regulated by the Foreign Exchange Dealers Association of India (FEDAI), a
self-regulatory association of dealers. Since 2001, clearing and settlement functions in
the foreign exchange market are largely carried out by the Clearing Corporation of India
Limited (CCIL) that handles transactions of approximately 3.5 billion US dollars a day,
about 80% of the total transactions. This paper is divided in to four sections section one
deals with the introduction of the study along with the exchange rate systems, section
two tries to explain the trends in the Indian foreign exchange market whereas section
three explains the features of the different components of the foreign exchange markets,
section four assess and analyse the regulations and the role played by the forward
market commission in Indi till its merger. The Financial Sector Legislative Reforms
Commission (FSLRC) had earlier stressed on the need to move away from sector-wise
regulation. It proposed a system in which RBI would regulate the banking and payments
system, and a Unified Financial Agency (UFA) would subsume all other financial sector
regulators such as SEBI, IRDA, PFRDA and FMC, to regulate the rest of the financial
markets, which results in the merger of the FMC with SEBI. Hence section four focuses
on the recent merger of this organisation with SEBI.