Foreign Exchange Controls

Foreign Exchange Controls

Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by non-residents. According to Indian exchange control regulations, "foreign exchange" means foreign currency and includes all deposits, credits and balances payable in any foreign currency,  any drafts, travelers cheques, letter of credit, bill of exchange and promissory notes.

Every deal in export trade is a two way transactions, i.e., the buyer pays the consideration money and the seller receive the value of merchandise sold. Thus, the importer has to arrange for foreign currency (by converting his home currency) through his bank, which asks its foreign branch or correspondent at the exporter's place of domicile for ultimate payment to the exporter. The purchase and sale of foreign currencies take place in two different countries. Therefore, to bridge the gap, there is the need for a foreign exchange market, which plays the part of a clearing house, through which the twin purposes of purchases and sales of foreign exchanges are offset against each other.

Transactions in foreign exchange are effected broadly at four different levels:

1. between the banks (which are authorised to deal in foreign exchange, i.e., authorised dealers) and their customers,

2. Between the banks themselves in the same market (i.e., interbank) at times supplemented by the central banks;

3. Between the banks and their branches in different foreign centers; and

4. between the central banks.

The activities in the first two levels are, in fact, confined to the local or domestic markets while the dealings at the other two levels are an international plan. Under the Foreign Exchange Regulation Act (FERA) all receipts from exports and other sources have to be surrendered to the RBI.