Foreign Exchange

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Foreign exchange means foreign currency and includes:

  1. all deposits, credit, and balances payable in foreign currency,
  2. any drafts, traveler’s cheques, letters of credit and bills of exchange expressed or drawn in Indian currency but payable in any foreign currency and;
  3. any instrument payable at the option of the drawee or holder thereof or any other party to it, either in Indian currency or foreign currency or partly in one and partly in the other.

Foreign exchange accrues out of foreign currency transactions. The regulation and control of foreign exchange imply, therefore, regulation and monitoring of foreign currency transactions.

Foreign Exchange Transactions

A foreign exchange transaction is ultimately the purchase or sale of one national currency against another arising out of import or export of goods and services, foreign remittances and foreign travel both inward and outward, etc. The goods refer to raw materials, intermediary or finished products, capital goods, etc., comprising the visible items of a country’s foreign trade. Services refer to shipping, transportation, insurance, banking, supply of technical know-how, consultancy, transfer of capital by way of lending and or investment, interest on such capital and dividends on such investment, tourists income and expenses, cost of Indian students abroad and of foreign students in India, gifts and donations, remittances, etc., which taken together comprise invisible items of a country’s international trade.

A foreign exchange transaction is a thus transfer of purchasing power, i.e. acquisition or parting with the right to wealth in a foreign country. As you must be knowing that the foreign exchange is precious for any developing country. Hence, government regulates and control the currency transactions. Let us learn what exchange control is?

Exchange Control: Exchange control means official intervention with the foreign exchange of a country. Exchange control is a system of rationing foreign exchange among competing demands for it, effected by controlling the receipts and payments thereof. The control of receipts aims at centralizing the country’s means of external payments in a common pool in the hands of its monetary authorities. Reserve Bank of India is the monetary authority in India. It facilitates judicious use of foreign exchange. The control of payments aims at restraining the demand for foreign exchange broadly in consonance with the national interests within the limits of available resources.