What Is a Foreign Exchange Market?
The foreign exchange market in India is where the exchange of different currencies happens. Investors can sell or purchase different currencies. It further helps determine the exchange rates.
- The foreign exchange market is referred to as the global currency marketplace. The exchange rates change with the supply and demand forces.
- The role of the foreign exchange market in India is the availability of foreign currency. It helps determine the value of the Indian rupee. It allows the people to exchange the nation's currency with others.
- The foreign exchange market definition covers its exchange mechanism. It helps exchange, sell, or buy one currency for another. A foreign exchange market example can be to exchange the Indian Rupee for U.S. Dollars.
- The rates for most currencies are changing or floating. It depends on the market demand or supply.
- The participants in this foreign exchange market can range from normal tourists to large financial banks and institutions.
Thus, to explain, a foreign exchange market is a place where individuals or organizations sell, buy, or trade currencies.
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Factors Influencing the Foreign Exchange Market
There can be several foreign exchange market components that influence the marketplace. Read about them below.
- Economic factors: A nation's financial performance is necessary. It can strengthen or reduce the currency value. Inflation, GDP, and trade balances are essential factors.
- Political factors: Political stability is a positive measure of the currency. Instability gives rise to bad economic performance as well.
- Psychological factors: The citizen's outlook on growth or inflation can affect the forex market. It affects demand and supply.
- Development factors: A nation's development performance is a positive indicator. It strengthens the economy and the currency.
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Nature of Foreign Exchange Market
To define the foreign exchange market, one must understand its nature.
- The foreign exchange market is the foreign currency global marketplace. It deals in the currencies of all the participant nations.
- This market is decentralized. All nations donate to the market with their currencies.
- The market runs on demand and supply forces. The rates vary as per the trades.
- The market is over-the-counter. This system also determines the final exchange rates.
- It involves buying, speculating, and selling currencies.
- Forex is among the largest marketplaces.
Structure of Foreign Exchange Market
The foreign exchange market has a pyramid structure with four participants. They are the users or dealers of the currencies. Read below the structure.
- Tourists, immigrants, importers, investors, and exporters: These parties are at the bottom. They are the actual users of the currencies. These parties have to buy the currency. They go to commercial banks for this.
- Commercial banks: These banks buy forex from brokers. They further sell to the users. These banks are also clearing houses for forex. Thus, they handle the supply and demand in the nation. Also, these banks quote the daily prices for forex.
- Foreign Exchange Brokers: These brokers are middlemen. They complete the forex deals between buyers and sellers. Commercial banks approach these brokers to buy forex from the central bank. They work on commissions.
- Central bank: Every nation has its apex bank. They're the custodian of the Forex reserve. Also, this bank is instrumental in the forex market. It may directly intervene to prevent significant market changes.
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History of Foreign Exchange Market
The foreign exchange market began a long time ago with just the barter system. But, the exchange was systemized. It ensured the correct value for currencies.
- Floating exchange systems globally began around 1971. The forex market saw big changes in this period.
- Indian banks were first allowed intra-day forex trading. This was back in 1978 and the first instance in India.
- 1990 brought India ahead in the global market. It was because of the economic policy changes.
- The Indian Rupee pegged rate became floating in March 1992. This was a partial change. It became a fully floating currency in March 1993.
- Thus, it led to a demand-supply-based forex exchange. January 1996 saw several reforms in the Indian forex market.
This was the basic foreign exchange market history in India. These changes led to the free market we see today.
