Q.1. Explain various methods of Trade settlement in International Trade.

International money transactions refer to the movement of funds from one country to another. The main reason for moving funds from one country to another is the settlement of debts resulting from international trade. The methods of payment chiefly include remittance, collection and L/C. If the payment is made by remittance, it is called favorable exchange, by which the buyer makes the payment by bank of his own accord; if by collection or L/C it is adverse exchange, by which the exporter takes the initiative to gather payment from the buyer. To choose a method for the payment of the goods, you should consider the credit standing of the buyer. Different methods of payment mean different credits. Bank credit is more reliable than commercial credit. So, we should choose the right method for the safe settlement of the payment. I. Remittance : A. Definition : A. Definition Remittance is to deliver the payment of the goods to the seller by bank transfer. In remittance, there are four parties involved: the remitter, the beneficiary, the remitting bank and the paying bank. The remitter remits the money to the beneficiary as it is required by the contract concluded between them. And when the remitter comes to the remitting bank, he fills an application form for the bank to effect the payment, which upon remittance will be binding upon the remitting bank. And the paying bank pays the beneficiary because it is the branch bank or correspondent bank of the remitting bank in the country of the seller. Remittance is mainly used for payment in advance (????) , open account (??) for small quantity of goods, commission, sundry charges, etc. (a) If it is used for payment in advance or cash with order, it will place the seller in an advantageous position. (b) If for delivery first and payment afterwards, it will place the buyer in a favorable position. Note:Remittance uses commercial credit and hence in adopting this method, the parties involved need have trust in each other. B. Types of Remittance : B. Types of Remittance Money transfer can be channeled through banks by mail transfer (MT), telegraphic transfer (TT), and demand draft (DD). (a) By mail transfer, the buyer will hand over the payment of the goods to the remitting bank that will authorize its branch bank or correspondent bank in the country of the beneficiary by mail to make payment to him. (b) By telegraphic transfer, the buyer will hand over the payment of the goods to the remitting bank which will authorize its branch bank or correspondent bank in the country of the beneficiary by telegraphic means to made the payment to him. Mail transfer is cheap but time-consuming, while telegraphic transfer is more expensive but much faster. (c) By demand draft, the buyer will come to the local bank to buy a bankers bill and then deliver it to the seller or beneficiary by mail. When the seller of beneficiary receives it, he will come to the bank designated by the bankers bill for cash. II. Collection : A. Definition : A. Definition Under collection, the exporter takes the initiative to collect the payment from the buyer. Upon the delivery of the goods, the exporter draws a bill of exchange on the importer for the sum due, with or without relevant shipping documents attached, and authorizes his bank to effect the collection of the payment through its branch bank or correspondent bank in the country of importer. collection can be of either documentary collection or clean collection. Documentary collection has the relevant shipping documents attached to the draft, while in clean collection only draft is used. Documentary collection is most often used in the payment of goods in international trade while clean collection is occasionally used in the payment of balance, extra charges, etc. Collection uses a commercial credit, and the banks involved do not bear any risk if the payment of the goods is

not made by the buyer. So before adopting this method, the seller should be sure that the buyer is reliable and be able to make the payment. B. Parties Involved in Collection : (a) The Principal (exporter or seller) (b) The remitting bank (A bank at the place of the seller) (c) The collecting bank (correspondent or branch of the remitting bank) (d) Drawee (buyer or importer) (PThis is the person who draws the bill of exchange and authorizes his bank to effect the collection.) (R-This is the bank authorized by the drawer of the draft to effect collection from the buyer. It is usually the bank at the place of the seller.) (C-This is the bank authorized by the remitting bank to collect the payment from the drawee, or the buyer of the goods. Usually this is the bank in the country of the buyer.) (D-The drawee is usually the buyer of the goods who should make payments in time.) C. Documents Against Payment (D/P) : Under D/P, the buyer can receive the shipping documents only after he has duly made the payment of the goods. It can be further be of 2 types: D/P at sight and D/P at __ days after sight (date). D/P at sight. Under D/P at sight, the seller might draw a draft on the buyer. He hands over the shipping documents together with draft, and the shipping documents and the draft will be transferred to the collecting bank which present them to the buyer and ask him to make the payment at sight. The buyer, upon sight, should then make the payment and obtain the shipping documents. When the collecting bank has finished the collection, it should immediately notify the remitting bank, which will then make the payment to the seller. D/P at __ days after sight (date). Under D/P at __ days after sight (date), the buyer shall duly accept the documentary draft drawn by seller at __ days sight upon first presentation and make payment on its maturity. The shipping documents are to be delivered against payment only. Note: Under D/P, the buyer can not obtain the shipping documents if he does not make the payment, should this happen, the seller need first negotiate with the buyer, and at the same time, he may consider if he can sell the goods to others or to ship the goods back, usually at his own cost. D. Documents Against Acceptance (D/A) : Under the D/A, the buyer can get the shipping documents from the collecting bank after he has duly accepted the draft. This is only applicable to time draft. This is greatly convenience to the buyer, but it means much more risk for the seller, for once he has delivered the shipping documents, he will have lost his title over the goods. D/A means more risks for the seller, for the buyer might refuse to pay after he has accepted the draft and taken the delivery of the goods. Certainly the seller might sue the buyer, but as is often the case, the buyer claims bankruptcy and then the seller can do nothing to remedy the situation. III. Letter of Credit(L/C) : As we can see, neither remittance nor collection is a safe means for the settlement of payment in international trade as both of them rely on commercial credit. With the development of international trade, bank credit gets involved in the settlement of payment which provides it with more secure means. L/C is the major means thus developed is now most often used in the settlement of payment in international trade. A. Definition : In international trade practice, a L/C can be seen as a document by which a bank, upon the request of an importer, promises to effect the payment of the goods to the exporter. Function of L/C: The L/C solves the possible problems arising from the distrust between the seller and the buyer. Under L/C, the seller can feel assured that so long as he has made the delivery of the goods and got the required documents he can get the payment of the goods in time and the buyer can also feel at ease that he can get the shipping documents at the same time when he effects the payment of the goods. B. Parties Involved in L/C : The applicant, who is usually the importer that applies to the bank for the L/C. Issuing bank, which opens the L/C upon the request of the importer. Advising bank, or notifying bank, which is authorized by the issuing bank to transfer the L/C to the exporters bank. Beneficiary, who is usually the exporter and is entitled to use the L/C for the payment of the goods. Negotiating bank, which is willing to buy on discount the documentary draft drawn by

the beneficiary. Paying bank, which is designated by the L/C to pay the draft. Confirming bank, which is asked by the issuing bank to confirm the L/C. If a bank has confirmed the L/C, it holds itself responsible for the negotiation or payment of the L/C. C. The Main Contents of L/C : (a) The parties involved, including the applicant, the issuing bank, negotiating bank, the paying bank, etc. (b) Remarks about the L/C: such as the No. of the L/C, its type, the issuing date, etc. (c) The amount of the L/C (d) The clauses of the bill of exchange, such as the amount of the bill, drawer and drawee, the paying date, etc. (e) The clauses about the documents, what documents are required, such as the invoice, the bill of lading, the insurance policy, the packing list, the certificate of origin, and inspection certificate, etc. Also, the required member of copies of the documents, description of the goods, specifications, quantity, packing, unit price, total amount, mode of transport, place of unloading, etc. (f) Particular clauses, such as the special provisions about the deal in accordance with the particular business or political situations of the importing country. (g) Guarantee clauses of the issuing bank, which testifies that the issuing bank will hold itself responsible for the payment to the beneficiary or the holder of the draft. D. Revocable L/C & Irrevocable L/C : Revocable L/C is the one that can be withdrawn or amended by the issuing bank any time before the negotiation, or acceptance, or payment is affected. In doing so, the issuing bank does not need to have the agreement or even notify the beneficiary. This is rarely used in the settlement of payment in international trade. Irrevocable L/C is the one that cannot be withdrawn or amended by the opening bank without the agreement of the beneficiary. This hind of L/C is more secure and hence is most often used. We should note that, according to Uniform Customs and Practice of Commercial Documentary Credits 500, if a L/C is not marked as being irrevocable, it should be taken as irrevocable.

Q.2. Explain the concept of Fixed Exchange Rate & Flexible Exchange Rate. Explain the merits & demerits of fixed exchange rate.
(1) Fixed Exchange Rate A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable, and is especially useful for small economies where external trade forms a large part of their GDP. It can also be used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, according to the Mundell-Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability. There are no major economic players that use a fixed exchange rate (except the countries using the euro and the Chinese yuan). The currencies of the countries that now use the euro are still existing (e.g. for old bonds). The rates of these currencies are fixed with respect to the euro and to each other. The most recent such country to discontinue their fixed exchange rate was the People's Republic of China[citation needed], which did so in July 2005.[1] However, as of September 2010, the fixed-exchange rate of the Chinese yuan has already increased 1.5% in the last 3 months. [2] Maintenance Typically, a government wanting to maintain a fixed exchange rate does so by either buying or selling its own currency on the open market. This is one reason governments maintain reserves of foreign currencies. If the exchange rate drifts too far below the desired rate, the government buys its own currency in the market using its reserves. This places greater demand on the market and pushes up the price of the currency. If the exchange rate drifts too far above the desired rate, the government sells its own currency, thus increasing its foreign reserves. Criticisms The main criticism of a fixed exchange rate is that flexible exchange rates serve to automatically adjust the balance of trade.[5] When a trade deficit occurs, there will be increased demand for the foreign (rather than domestic) currency which will push up the price of the foreign currency in terms of the domestic currency. That in turn makes the price of foreign goods less attractive to the domestic market and thus pushes down the trade deficit. Under fixed exchange rates, this automatic rebalancing does not occur. Governments also have to invest many resources in getting the foreign reserves to pile up in order to defend the pegged exchange rate. Moreover a government, when having a fixed rather than dynamic exchange rate, cannot use monetary or fiscal policies with a free hand. For instance, by using reflationary tools to set the economy rolling (by decreasing taxes and injecting more money in the market), the government risks running into a trade deficit. This might occur as the purchasing power of a common household increases along with inflation, thus making imports relatively cheaper. Additionally, the stubbornness of a government in defending a fixed exchange rate when in a trade deficit will force it to use deflationary measures (increased taxation and reduced availability of money) which can lead to unemployment. Finally, other countries with a fixed exchange rate can also retaliate in response to a certain country using the currency of theirs in defending their exchange rate.

Fixed exchange rate regime versus capital control The belief that the fixed exchange rate regime brings with it stability is only partly true, since speculative attacks tend to target currencies with fixed exchange rate regimes, and in fact, the stability of the economic system is maintained mainly through capital control. A fixed exchange rate regime should be viewed as a tool in capital control. (2)Flexible/ Floating exchange rate

A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. There are economists who think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates. As floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of payments crisis. However, in certain situations, fixed exchange rates may be preferable for their greater stability and certainty. This may not necessarily be true, considering the results of countries that attempt to keep the prices of their currency "strong" or "high" relative to others, such as the UK or the Southeast Asia countries before the Asian currency crisis. The debate of making a choice between fixed and floating exchange rate regimes is set forth by the Mundell-Fleming model, which argues that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It can choose any two for control, and leave third to the market forces. In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. A central bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price "ceiling" and "floor". Management by the central bank may take the form of buying or selling large lots in order to provide price support or resistance, or, in the case of some national currencies, there may be legal penalties for trading outside these bounds. Flexible or free exchange rate system, on the other hand, is a system where the value of one currency in terms of another is free to fluctuate and establish its equilibrium level in the exchange market through the forces of demand and supply. Under the flexible exchange rate system, the rate of exchange is allowed to vary to suit the economic policies of the government; it is a system of changing key to the lock. The flexible exchange rates are determined by the forces of demand and supply in the exchange market. There are no restrictions on the buying and selling of the foreign currencies by the monetary authority and the exchange rates are free to change according to the changes in the demand and supply of foreign exchange. Merits of Fixed Exchange Rate: Reduced risk in international trade - By maintaining a fixed rate, buyers and sellers of goods internationally can agree a price and not be subject to the risk of later changes in the exchange rate before contracts are settled. The greater certainty should help encourage investment. Introduces discipline in economic management - As the burden or pain of adjustment to equilibrium is thrown onto the domestic economy then governments have a built-in incentive not to follow inflationary policies. If they

do, then unemployment and balance of payments problems are certain to result as the economy becomes uncompetitive. Fixed rates should eliminate destabilising speculation - Speculation flows can be very destabilising for an economy and the incentive to speculate is very small when the exchange rate is fixed Demerits of Fixed Exchange Rate:No automatic balance of payments adjustment - A floating exchange rate should deal with a disequilibrium in the balance of payments without government interference, and with no effect on the domestic economy. If there is a deficit then the currency falls making you competitive again. However, with a fixed rate, the problem would have to be solved by a reduction in the level of aggregate demand. As demand drops people consume less imports and also the price level falls making you more competitive. Large holdings of foreign exchange reserves required - Fixed exchange rates require a government to hold large scale reserves of foreign currency to maintain the fixed rate - such reserves have an opportunity cost. Loss of freedom in your internal policy - The needs of the exchange rate can dominate policy and this may not be best for the economy at that point. Interest rates and other policies may be set for the value of the exchange rate rather than the more important macro objectives of inflation and unemployment. Fixed rates are inherently unstable - Countries within a fixed rate mechanism often follow different economic policies, the result of which tends to be differing rates of inflation. What this means is that some countries will have low inflation and be very competitive and others will have high inflation and not be very competitive. The uncompetitive countries will be under severe pressure continually and may, ultimately, have to devalue. Speculators will know this and thus creates further pressure on that currency and, in turn, government. Advantages of Fixed Exchange Rate1. Promotes International Trade: Fixed or stable exchange rates ensure certainty about the foreign payments and inspire confidence among the importers and exporters. This helps to promote international trade. 2. Necessary for Small Nations: Fixed exchange rates are even more essential for the smaller nations like the U.K., Denmark, Belgium, in whose economies foreign trade plays a dominant role. Fluctuating exchange rates will seriously affect the process of economic growth in these economies. 3. Promotes International Investment: Fixed exchange rates promote international investments. If the exchange rates are fluctuating, the lenders and investors will not be prepared to lend for long-term investments. 4. Removes Speculation: Fixed exchange rates eliminate the speculative activities in the international transactions. There is no possibility of panic flight of capital from one country to another in the system of fixed exchange rates. 5. Necessary for Small Nations:

Fixed exchange rates arc even more essential for the smaller nations like the U.K., Denmark, Belgium, in whose economies foreign trade plays a dominant role. Fluctuating exchange rates will seriously disturb the process of economic growth of these economies. 6. Necessary for Developing Countries: Fixed exchanges rates are necessary and desirable for the developing countries for carrying out planned development efforts. Fluctuating rates disturb the smooth process of economic development and restrict the inflow of foreign capital. 7. Suitable for Currency Area: A fixed or stable exchange rate system is most suitable to a world of currency areas, such as the sterling area. If the exchange rates of the countries in the common currency area are flexible, the fluctuations in the leading country, like England (whose currency dominates), will also disturb the exchange rates of the whole area. 8. Economic Stabilization: Fixed foreign exchange rate ensures internal economic stabilization and checks unwarranted changes in the prices within the economy. In a system of flexible exchange rates, the liquidity preference is high because the businessmen will like to enjoy wind fall gains from the fluctuating exchange rates. This tends to Increase price and hoarding activities in country. 9. Not Permanently Fixed: Under the fixed exchange rate system, the exchange rate does not remain fixed or is permanently frozen. Rather the rate is changed at the appropriate time to correct the fundamental disequilibrium in the balance of payments. 10. Other Arguments: Besides, the fixed exchange rate system is also beneficial on account of the following reasons. (i) It ensures orderly growth of world's money and capital markets and regularises the international capital movements. (ii) It ensures smooth functioning of the international monetary system. That is why, IMF has adopted pegged or fixed exchange rate system. (iii) It encourages multilateral trade through regional cooperation of different countries. (iv) In modern times when economic transactions and relations among nations have become too vast and complex, it is more useful to follow a fixed exchange rate system. Disadvantages of Fixed Exchange Rates 1. Outmoded System: Fixed exchange rate system worked successfully under the favorable conditions of gold standard during 19th century when (a) the countries permitted the balance of payments to influence the domestic economic policy;

(b) there was coordination of monetary policies of the trading countries; (c) the central banks primarily aimed at maintaining the external value of the currency in their respective countries; and (d) the prices were more flexible. Since all these conditions are absent today, the smooth functioning of the fixed exchange rate system is not possible. 2. Discourage Foreign Investment: Fixed exchange rates are not permanently fixed or rigid. Therefore, such a system discourages long-term foreign investment which is considered available under the really fixed exchange rate system. 3. Monetary Dependence: Under the fixed exchange rate system, a country is deprived of its monetary independence. It requires a country to pursue a policy of monetary expansion or contraction in order to maintain stability in its rate of exchange. 4. Cost-Price Relationship not Reflected: The fixed exchange rate system does not reflect the true cost-price relationship between the currencies of the countries. No two countries follow the same economic policies. Therefore the cost-price relationship between them go on changing. If the exchange rate is to reflect the changing cost-price relationship between the countries, it must be flexible. 5. Not a Genuinely Fixed System: The system of fixed exchange rates provides neither the expectation of permanently stable rates as found in the gold standard system, nor the continuous and sensitive adjustment of a freely fluctuating exchange rate.

Q.3. Write a detail note on: a) Foreign Exchange & Foreign Exchange Markets:
Foreign ExchangeForeign exchange, or Forex, is the conversion of one country's currency into that of another. The exchange of currency from one country for currency from another country. In a free economy, a country's currency is valued according to factors of supply and demand. In other words, a currency's value can be pegged to another country's currency, such as the U.S. dollar, or even to a basket of currencies. A country's currency value also may be fixed by the country's government. However, most countries float their currencies freely against those of other countries, which keeps them in constant fluctuation. The value of any particular currency is determined by market forces based on trade, investment, tourism, and geopolitical risk. Every time a tourist visits a country, for example, he or she must pay for goods and services using the currency of the host country. Therefore, a tourist must exchange the currency of his or her home country for the local currency. Currency exchange of this kind is one of the demand factors for a particular currency. Another important factor of demand occurs when a foreign company seeks to do business with a company in a specific country. Usually, the foreign company will have to pay the local company in their local currency. At other times, it may be desirable for an investor from one country to invest in another, and that investment would have to be made in the local currency as well. All of these requirements produce a need for foreign exchange and are the reasons why foreign exchange markets are so large. Foreign exchange is handled globally between banks and all transactions fall under the auspice of the Bank of InternationalSettlements. Foreign Exchange MarketsIf there was only one currency in the world, there would not have been any need for foreign exchange market, foreign exchange rates or foreign exchange. But in a world of many national currencies, the foreign exchange market plays the crucial role of providing the requisite machinery for making payments across borders, transferring funds and purchasing power from one currency to another, and determining the exchange rate. The fundamental changes in foreign exchange, or FX, market began to take form in 1970s along with the increasing internationalisation of financial transactions and the change of many economies into floating exchange rate system from fixed rate system. Over years, these changes have transformed the foreign exchange market into the worlds biggest and most dynamic market. The daily turnover of global FX market currently amounts to many trillions of dollars ($1 trillion = $1000 billion). In majority of these transactions, the U.S. dollar is on the one side. Most FX market trades involve buying and selling bank deposits denominated in different currencies. The major instruments used in the FX markets are spot, outright forwards, FX swaps, currency options, currency swaps, currency futures and exchange traded options. Four key concepts are important in understanding the basics of the working of this extremely complex market. Spot exchange rate: Spot rates are the rates at which different currencies are traded for immediate exchange. Forward exchange rate: This is the rate at which foreign currency dealers are willing to commit to buying or selling a currency in the future. This gives information about the view of market participants on whether the currency appreciates or depreciates in future. Appreciation: The rise in the value of one currency relative to another is called appreciation. When the currency of your country appreciates relative to another country, your countrys goods prices rise abroad and foreign goods prices decline in your country. This will benefit domestic consumers who buy foreign goods, but makes domestic businesses less competitive. Depreciation: A decline in the value of one currency relative to another is called depreciation. When the currency of your country depreciates relative to another country, your countrys goods prices decline abroad and foreign

goods prices rise in your country. This will benefit domestic businesses, but will affect domestic consumers who buy foreign goods. The market exchange rate between two currencies is determined by the interaction of the official and private participants in the foreign exchange rate market. The official participants include the central banks and other monetary agencies of the government. The private participants include banks, other financial institutions, corporates and individuals. An important concept that drives the forces of supply and demand in the FX market is the Law of One Price. It says that the price of an identical good will be the same throughout the world, regardless of which country produces it. Based on this, we can determine the exchange rate between currencies. For example, if the price of steel produced in the U.S. is $100 per ton and steel produced in India is Rs. 5,000 per ton, the exchange rate between dollar and rupee would be Rs.50/$1. The factors affecting the exchange rates in the long run include relative price levels in each country, preferences for domestic vs. foreign goods, productivity and government controls. The buying and selling of currency by the policy makers to control the supply and demand in the FX market influence exchange rates in countries like India. FX market in India As in the rest of the world, in India too, foreign exchange market is the largest financial market in existence. The phenomenon that has dramatically changed Indias foreign exchange market was liberalization of economy started during early 90s. In 1993, central government replaced the prevailing fixed exchange rate system with a less regulated market driven arrangement. Even though this cannot be called as a fully floating exchange rate system like the U.S., in the Indian scenario it is working well. In the current system, the Reserve Bank of India and its affiliates intervene in the market whenever they decide it is necessary. The major participants in Indian FX market are the buyers, sellers, market mediators and the authorities. Besides the countrys commercial capital Mumbai, centers for foreign exchange transactions in India include Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin. The FX market in India is regulated by The Foreign Exchange Management Act, 1999 or FEMA, which replaced the old Foreign Exchange Regulation Act, 1947. Now, the regulators have introduced several innovations to promote the growth of FX market in India. The introduction of currency futures in India in 2009 was such as step. This has given the FX market participants in India a new kind of financial instrument, which is available in developed markets. Although no one expects the transformation of India to a fully market driven floating foreign exchange system any time soon, there are many possibilities for further loosening of controls. The permission for the introduction of new FX derivatives following the path of currency futures is also expected. The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1] The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) highyielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries.[2] In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually

switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of

its huge trading volume, leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit margins with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.[4] Market Size and liquidity Main foreign exchange market turnover, 19882007, measured in billions of USD. The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[3] Of this $3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and other currency derivatives. Most developed countries permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. A number of emerging countries do not permit FX derivative products on their exchanges in view of controls on the capital accounts. The use of foreign exchange derivatives is growing in many emerging economies.[6] Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some controls on the capital account.[1]; [2] Market participants Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. After that there are usually smaller banks, followed by large multinational corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX market makers. According to Galati and Melvin, Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s. (2004) In addition, he notes, Hedge funds have grown markedly over the 20012004 period in terms of both number and overall size.[9] Central banks also participate in the foreign exchange market to align currencies to their economic needs.

Banks The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago. Commercial companies An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants. Central banks National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading. Forex Fixing Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks, dealers and online foreign exchange traders use fixing rates as a trend indicator. The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[10] Several scenarios of this nature were seen in the 199293 ERM collapse, and in more recent times in Southeast Asia. Hedge funds as speculators About 70% to 90%[citation needed] of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor. Investment management firms Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For

example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades. Retail foreign exchange brokers Retail traders (individuals) constitute a growing segment of this market, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams.[11][12] To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal atthe customer has the choice whether or not to trade at that price. In assessing the suitability of an FX trading service, the customer should consider the ramifications of whether the service provider is acting as principal or agent. When the service provider acts as agent, the customer is generally assured of a known cost above the best inter-dealer FX rate. When the service provider acts as principal, no commission is paid, but the price offered may not be the best available in the marketsince the service provider is taking the other side of the transaction, a conflict of interest may occur. Non-bank foreign exchange companies Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account). It is estimated that in the UK, 14% of currency transfers/payments[13] are made via Foreign Exchange Companies.[14] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services. Money transfer/remittance companies Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange & Financial Services Ltd Determinants of FX rates The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):

(a) International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world. (b) Balance of payments model (see exchange rate): This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit. (c) Asset market model (see exchange rate): views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by peoples willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies. Economic factors These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.

b) Buyers Credit & Suppliers CreditBuyer's credit is the credit availed by an importer (buyer) from overseas lenders, i.e. banks and financial institutions for payment of his imports on due date. The overseas banks usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by the importers bank. Importer's bank or Buyers Credit Consultant or importer arranges buyer's credit from international branches of a domestic bank or international banks in foreign countries. For this service, importer's bank or buyer's credit consultant charges a fee called an arrangement fee. Buyer's credit helps local importers gain access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates. The duration of buyer's credit may vary from country to country, as per the local regulations. For example in India, buyer's credit can be availed for one year in case the import is for trade-able goods and for three years if the import is for capital goods. Every six months, the interest on buyer's credit may get reset. Benefits to importer 1. The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows 2. The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing. 3. The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer. 4. The importer can use this financing for any form of trade viz. open account, collections, or LCs. 5. The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency. Steps involved 1. The customer will import the goods either under DC, collections or open account 2. The customer requests the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financing

3. Arrange to request overseas bank branches to provide a buyer's credit offer letter in the name of the importer. Best rate of interest is quoted to the importer 4. Overseas bank to fund Importer's bank Nostro account for the required amount 5. Importer's bank to make import bill payment by utilizing the amount credited (if the borrowing currency is diff. from the curr. of Imports then a cross currency contract is utilized to effect the import payment) 6. Importer's bank will recover the required amount from the importer and remit the same to overseas bank on due date. Cost involved 1. Interest cost: This is charged by overseas bank as a financing cost 2. Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking 3. Forward Booking Cost / Hedging cost 4. Arrangement fee: Charged by person who is arranging buyer's credit for buyer. 5. Risk premium: Depending on the risk perceived on the transaction. 6. Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges. 7. WHT (Withholding tax): The customer may have to pay WHT on the interest amount remitted overseas to the local tax authorities depending on local tax regulations. In case of India, the WHT is not applicable where Indian banks arrange for buyer's credit through their offshore offices. Regulatory Framework: RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorised dealers may approve proposals received (in Form ECB) for short-term credit for financing by way of either suppliers credit or buyers credit of import of goods into India, based on uniform criteria. Suppliers CreditSuppliers Credit relates to credit for imports into India extended by the overseas suppliers or financial institutions outside India. Usance Bills under Letter of Credit (LC) issued by Indian bank branches on behalf of their importers are discounted by Indian bank overseas branches or Foreign bank. Paying your suppliers at sight against Usance bills under letter of credits. Why Required ?
Suppliers would ask for sight payment where as you want credit on the transaction. At times, in capital goods, banks would insist on using term loan instead of buyers credit. By this way you can

avail cheap LIBOR rate funds and your supplier would also not mind as he is getting funds at sight. Benefits / Advantages For Importer Availability of cheaper funds for import of raw materials and capital goods
Ease short-term fund pressure as able to get credit Ability to negotiate better price with suppliers Able to meet the Suppliers requirement of payment at sight

For Supplier Realize at-sight payment

Avoid the risk of importers credit by making settlement with LC

Process Flow of Transaction 1. With transaction details importer approaches arranger to get suppliers credit for the transaction 2. Arranger get an offer from overseas bank on the transaction 3. Importer confirms on pricing to overseas bank and gets LC issued from his bank, restricted to overseas bank counters with other required clauses 4. Suppliers ships the goods and submits documents at his bank counters 5. Suppliers Bank sends the documents to Suppliers Credit Bank. 6. Suppliers Credit Bank post checking documents for discrepancies sends the document to importers bank for acceptance 7. Importer accept documents. Importers Bank provides acceptance to Suppliers Credit Bank LC guaranteeing payment on due date. 8. Suppliers Credit Bank based on acceptance, discounts the bill and makes payment to Supplier. 9. On maturity, Importer makes the payment to his bank and Importers bank makes payment to Suppliers Credit Bank Cost Involved (may vary bank to bank)
Foreign bank interest cost Foreign Bank LC Confirmation Cost (Case to Case basis) LC advising and or Amendment cost Negotiation cost (normally in range of 0.10%) Postage and Swift Charges Reimbursement Charges Cost for the usance (credit) tenure. (Indian Bank Cost)

Requirement
Import transaction under LC Incoterms : FOB/CIF/C&F Arrangement has to be done before LC gets opened. Incase of LC already opened, relevant amendment has to

done.
LC to be restricted to suppliers credit providing bank under 41D clause of LC Under Payment Term: 90 days Usance payable at Sight (mention tenure according to tenure and offer received)

Other Factors At times foreign bank may insist on adding confirmation which would result into additional cost RBI Regulations Suppliers credit is governed by RBI Circular Master Circular on External Commercial Borrowings and Trade Credits Dated 01-07-2011

Q.5. Explain the objectives, functions & Organization of IMF.

The International Monetary Fund (IMF) is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development through the enforcement of liberalising economic policies[1][2] on other countries as a condition for loans, restructuring or aid. [3] It also offers loans with varying levels of conditionality, mainly to poorer countries. Its headquarters are in Washington, D.C., United States. The IMF's relatively high influence in world affairs and development has drawn heavy criticism.[4][5] The International Monetary Fund was conceived in July 1944 originally with 45 members and came into existence in December 1945 when 29 countries signed the agreement,[6] with a goal to stabilize exchange rates and assist the reconstruction of the world's international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances (Condon, 2007). The IMF was important when it was first created because it helped the world stabilize the economic system. The IMF works to improve the economies of its member countries.[7] The IMF describes itself as "an organization of 187 countries (as of July 2010), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". Objectives: 1. To increase international cooperation by providing consultancy services regarding international monetary issues. 2. To assist in the balanced growth of world trade, which will be helpful in raising the efficiency, employment and income of the world. 3. To Stabilize the exchange rate and discourage the tendency of competitive devaluation. 4. To abolish those restrictions which are obstacles in the way of World Trade and create a multi-lateral system of payments. 5. The countries facing deficit in their balance ofpayments can borrow from IMF to finance temporarily. 6. To reduce the volume and time period of disequilibrium (deficit) in balance of payments. Functions The IMF works to foster global growth and economic stability. It provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty[52]. The rationale for this is that private international capital markets function imperfectly and many countries have limited access to financial markets. Such market imperfections, together with balance of payments financing, provide the justiciation for official financing, without which many countires could only correct large external payment imbalances through measures with adverse affects on both national and international economic prosperity[53]. The IMF can provide other sources of financing to countries in need that would not be available in the absence of an economic stabilization program supported by the Fund. Upon initial IMF formation, its two primary functions were: to oversee the fixed exchange rate arrangements between countries[54], thus helping national governments manage theirexchange rates and allowing these governments to prioritize economic growth[55], and to provide short-term capital to aid balance-of-payments [56]. This assistance was meant to prevent the spread of international economic crises. The Fund was also intended to help mend the pieces of the international economy post the Great Depression and World War II[57] . The IMFs role was fundamentally altered after the floating exchange rates post 1971. It shifted to examining the economic policies of countries with IMF loan agreements to determine if a shortage of capital was due to economic fluctuations or economic policy. The IMF also researched what types of government policy would ensure economic recovery[58]. The new challenge is to promote and implement policy that reduces the frequency of crises among the emerging market countries, especially the middle-income countries that are open to massive

capital outflows[59]. Rather than maintaining a position of oversight of only exchange rates, their function became one of surveillance of the overall macroeconomic performance of its member countries. Their role became a lot more active because the IMF now manages economic policy instead of just exchange rates. In addition, the IMF negotiates conditions on lending and loans under their policy of conditionality[60] , which was established in the 1950s[61]. Low-income countries can borrow onconcessional terms, which means there is a period of time with no interest rates, through the Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF). Nonconcessional loans, which include interest rates, are provided mainly through Stand-By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility. The IMF provides emergency assistance via the newly-introduced Rapid Financing Instrument (RFI) to all its members facing urgent balance of payments needs[62]. Surveillance of the Global Economy The IMF is mandated to oversee the international monetary and financial system[63] and monitor the economic and financial policies of its 187 member countries. This activity is known as surveillance and facilitates international cooperation[64] . Since the demise of the Bretton Woods system of fixed exchange rates in the early 1970s, surveillance has evolved largely by way of changes in procedures rather than through the adoption of new obligations[65] . The responsibilities of the Fund changed from those of guardian to those of overseer of members policies. The Fund typically analyzes the appropriateness of each member countrys economic and financial policies for achieving orderly economic growth, and assesses the consequences of these policies for other countries and for the global economy[66] Conditionality of loans IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial resources [68]. The IMF does not require collateral from countries for loans but rather requires the government seeking assistance to correct its macroeconomic imbalances in the form of policy reform. If the conditions are not met, the funds are withheld[69]. Conditionality is perhaps the most controversial aspect of IMF policies [70] . The concept of conditionality was introduced in an Executive Board decision in 1952 and later incorporated in the Articles of Agreement. Technical Assistance To assist mainly low- and middle-income countries in effectively managing their economies, the IMF provides practical guidance and training on how to upgrade institutions, and design appropriate macroeconomic, financial, and structural policies. The IMF shares its expertise with member countries by providing technical assistance and training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. The objective is to help improve the design and implementation of members' economic policies, including by strengthening skills in institutions such as finance ministries, central banks, and statistical agencies. The IMF has also given advice to countries that have had to reestablish government institutions following severe civil unrest or war. In 2008, the IMF embarked on an ambitious reformeffort to enhance the impact of its technical assistance. The reforms emphasize better prioritization, enhanced performance measurement, more transparent costing and stronger partnerships with donors.

Other functions1. Exchange Arrangements: As a result of 2nd amendment in Articles each country can opt for any one of the following in connection with exchange rate. (1) A country can represent the value of its currencyin terms of any other currency like dollar. (2) The par value of a currency can be represented in SDRs. (3) The exchange rate can be expressed in terms of some currency composite.

(4) No country is allowed to represent its currency in terms of gold. (5) The members can make such arrangements where they can show the par value in terms of the currencies. Accordingly, in 1985, the arrangements regarding exchange rate determination, the 32 countries hadfixed exchange rate in terms of dollar, there are 14 countries whose value is fixed in terms of Franc. There 12 countries who show their value in terms of SDRs where as the large number of countries are on Managed Floating exchange rate system. 2. Surveillance: It is the responsibility of the Fund to see whether the members are serious regarding their functions, whether they get guidance from Fund regarding exchange rate policies. In respect of conduct of exchange rate policies fund has approved three principles (1) A member in order to get undue benefit will not prefer any other member (2) For the sake of abolition of destabilizing forces in exchange rate govt. should interfere in foreign exchange market (3) Regarding such intervention is should be kept in view that the interests of the other countries be not affected. Thus under this function there is regular dialogue and policy advice which IMF offers to each member. Hence IMF makes an appraisal of each members economy. 3. Exchange Restrictions: In the light of Article VIII of the Fund, no country can put any type of restrictions on the payments regarding Current Account. However a country can impose restrictions on the movement regarding capital amount. Again no country can impose restrictions that the transactions will be made in certain currencies. 4. Consultation and Technical Assistance: For the sake of effective performance of its functions fund must be having the information regarding the economic policies and economic conditions of its member countries. This will be possible if the fund and the members are linked to each other. In 1984, 118 countries completed their talks with fund under Article IV. Again the Fund provides technical assistance to its members regarding strengthening their capacity to design and implement effective policies. Fund assists in the areas of fiscal policy, monetary policy, exchange rate, banking and financial system etc. 5. Lending For BOP Difficulties: Basically Fund is aimed to provide financial assistance to those member countries which suffer from BOP difficulties. But to the poor countries, it also assists in the attainment of growth and alleviation of poverty. Resources of the IMF: The main source of the Fund is those subscriptions which are paid by the members in form of quotas. We also know that each country has to pay 75% of its quotas in terms of the domestic currency and 25% in terms of SDRs. In 8th General Review which was promulgated in November, 1983, it was decided that 25% of quota can be paid in those currencies which are allowed by the Fund instead of SDRs. The New Arrangement to Borrow (NAB) introduced in 1997 with 25 participating countries and institutions. Under the GAB and NAB the IMF has upto SDRs 34 billion or $46 billion available to borrow. In order to enhance its resources, the Fund can borrow from the official as well as unofficial sources. Fund obtained its first loan in 1962 under General Arrangements to Borrow (GAB). In 1983 the GAB has been extended Accordingly under GAB Fund has borrowed from US Deutsche Bunds Bank, Japan,Saudi Arabia, France, Belgium, Holland, Italy, Canada and Swiss National Bank. Against such loans the Fund pays as much interest as it gets against the use of SDRs. OrganisationThe Board of Governors is the supreme body of IMF, which is headed by a Governor and an alternate Governor who are appointed by the members of the Fund. The board of Governors deals with the entry of new members, determination of quotas and distribution of SDRs. Board of Governors consists of one Governor from each of its 184 members. 24 of the Governors sit on International Monetary and financial committee and meet twice a year. There is an annual meeting of the Fund which is held once in a year all members participate in it. The other big authority in the IMF is Executive Board. It has a Managing Director who is the Chairman of the executive board and controls day-to-day matters of the Fund. IMF has two committees: (1) Interim Committee now replaced by IM FC, (2) Development Committee. The Interim Committee deals with international liquidity and world monetary arrangements. Moreover this committee analyses theamendments of the Articles of the Agreement. Where as the development committee suggests those measures where by the real resources could be transferred to the developing countries.

The IMF has a management team and 17 departments that carry out its country, policy, analytical, and technical work. One department is charged with managing the IMF's resources. ManagementThe IMF is led by a Managing Director, who is head of the staff and Chairman of the Executive Board. The Managing Director is assisted by a First Deputy Managing Director and three other Deputy Managing Directors. The Management team oversees the work of the staff and maintains high-level contacts with member governments, the media, non-governmental organizations, think tanks, and other institutions. Staff of international civil servants- The IMF currently employs about 2,400 staff, half of whom are economists. Most of them work at the IMF's Washington, D.C., headquarters but a few serve in member countries around the world in small IMF overseas offices or as resident representatives. With its nearly universal membership, the IMF strives to employ a staff that is as diverse and broadly based geographically as possible. The IMF has nine functional departments that carry out its policy, analytical, and technical work and manage its financial resources. External Relations Department: Works to promote public understanding of and support for the IMF and its policies. Finance Department: Mobilizes, manages, and safeguards the IMF's financial resources. Fiscal Affairs Department: Provides policy and technical advice on public finance issues to member countries. Prepares the Fiscal Monitor. Read bio of the Director, Carlo Cottarelli IMF Institute: Provides training in macroeconomic analysis and policy for officials of member countries and IMF staff. Legal Department: Advises management, the Executive Board, and the staff on the applicable rules of law. Prepares decisions and other legal instruments and provides technical assistance to member countries. Read bio of the Director, Sean Hagan Monetary and Capital Markets Department: Monitors financial sectors and capital markets, and monetary and foreign exchange systems, arrangements, and operations. Prepares the Global Financial Stability Report. Read bio of the Director, Jos Vials Research Department: Monitors the global economy and the economies and policies of member countries and undertakes research on issues relevant to the IMF. Prepares theWorld Economic Outlook. Read bio of the Director, Olivier Blanchard Statistics Department: Develops internationally accepted methodologies and standards. Provides technical assistance and training to promote best practices in the dissemination of economic and financial statistics. Read bio of the Director, Adelheid Burgi-Schmelz Strategy, Policy, and Review Department: Designs, implements, and evaluates IMF policies on surveillance and the use of its financial resources. Read bio of the Director, Siddharth Tiwari The IMF's five area, or regional, departments are responsible for advising member countries on macroeconomic policies and the financial sector, and for putting together, when needed, financial arrangements to support economic reform programs.

Q.7. What do you mean by Non Resident Accounts? Explain its significance & different types.
Non-Resident Accounts Non-Resident bank accounts are those, which are maintained by Indian nationals and Persons of Indian origin resident abroad, foreign nationals and foreign companies in India. Bank branches can open ordinary non-resident

accounts in the names of private individuals provided initial deposits for opening the accounts are received from abroad in an approved manner or the initial amount is tendered in foreign currency while on a visit to India or transfer of funds from the existing non-resident account of the same person. Who is a non-resident Indian ( NRI ) An Indian Citizen who stays abroad for employment/ carrying on business or vacation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad is a non-resident. ( persons posted in U.N. organisations and officials deputed abroad by Central/ State Government and Public Sector Undertakings on temporary assignments are also treated as non-resident) Non-resident foreign citizens of Indian Origin are treated on par with non-resident indian citizens. Non-Resident External (NRE) & Non-Resident Ordinary (NRO) Accounts for NRIs We often hear about the two types of Non-Resident bank accounts NRE and NRO. We also keep hearing about the restrictions each has, like restriction on repatriation. This article clarifies the difference between NRE and NRO accounts, and explains their characteristics.

Non-Resident External (NRE) Account An NRE account is a Rupee denominated account. That is, funds in an NRE account are maintained in Indian Rupees. It can be a savings, current or a fixed / term deposit account. NRE accounts can be opened by NRIs. Funds can be repatriated from an NRE account. This means that the funds can be freely sent to any other country. An NRE account can contain funds remitted from abroad, or obtained from another NRE / FCNR account maintained in India. Funds can be transferred from an NRE account to an NRO account without any restriction. An NRE account can be held jointly, provided the other person is also an NRI. The interest earned on deposits in an NRE account is exempt from tax in the hands of the NRI. A resident power of attorney holder can not open an NRE account on behalf of an NRI. But the resident power of attorney holder can make local, rupee payments on behalf of the NRI. Nomination is allowed for NRE accounts. If the NRI holding the NRE account returns to India and becomes a resident of India, the NRE account is converted into a regular resident account. Non-Resident Ordinary (NRO) Account An NRO account is a Rupees denominated account. That is, funds in an NRE account are maintained in Indian Rupees. It can be a savings, current or a fixed / term deposit account. NRO accounts can be opened by NRIs. Regular bank accounts of a person, who becomes an NRI, also get converted into NRO accounts.

Funds can not be repatriated from an NRO account. These funds have to be used only for local (within India) payments in Indian Rupees. An NRO account can only contain funds received from within India. Funds can not be transferred from an NRO account to an NRE account. An NRO account can be held jointly with another NRI or with a resident Indian. The interest earned on deposits in an NRO account is taxable in the hands of the NRI as per the applicable income tax slab rates. A resident power of attorney holder can not open an NRO account on behalf of an NRI. But the resident power of attorney holder can make local, rupee payments on behalf of the NRI. Nomination is allowed for NRO accounts. If the NRI holding the NRO account returns to India and becomes a resident of India, the NRO account is converted into a regular resident account. Non-Resident External (NRE) Non-Resident Account (NRO) Account Currency Type Who can open? Is repatriation allowed? Rupee denominated Rupee denominated Ordinary

Savings, Current or a Fixed / Savings, Current or a Fixed / Term Deposit Term Deposit NRI Yes NRI, Resident before becoming an NRI Usually no

Funds remitted from abroad, Funds received from within What can be the source of Funds from another NRE / FCNR India funds? account Funds can be transferred from an Funds can be transferred from Can funds be transferred to NRE account to an NRO / NRE / an NRO account to an NRO / another account? Resident account Resident account Can it be opened jointly with Yes an NRI? Can it be opened jointly with No a resident? What is the income tax treatment of the interest Tax free earned? Can power of attorney holder No open the account? Can power of attorney holder Yes, can payments operate the account? Is nomination allowed? Yes make local Yes Yes Taxed as per applicable slab rate No rupee Yes, can make local rupee payments Yes Converted to resident account

What is the status of the account when NRI returns to Converted to resident account India for good?