International Financial System and Foreign Exchange Market

Foreign Exchange as a subject deals with the means and methods by which rights to income and wealth in one country’s currency are converted into similar rights in terms of another country’s currency. It involves the investigation of the methods by which the currency of one country is exchanged for that of another, the causes which render such exchange necessary, the forms in which exchange may take place and the ratios or equivalent values at which such exchanges are affected.

Such exchange may be in the form of one currency to another or of conversion of credit instruments denominated in different exchange involving conversion of currencies taking place in the same centre or as between centres in the same country (inter-bank market) or as between countries involving the correspondent or agent banks abroad or branches of the domestic banks abroad.

RBI has, however, responded to emerging situation in the foreign exchange market quickly and promptly. Since rupee convertibility was launched in March 1992, RBI is publishing a reference rate around which it operates in the market to stabilise the rate of exchange of rupee in terms of US dollar.

One of the important components of the international financial system is the foreign exchange market. The various commercial and financial transactions as between countries result in receipts and payments as between them. The items of balance of payments leading to receipts and payments are trade, travel, transportation, royalties, fees, investment income, unilateral transfers, short-term and long- term capital receipts and payments etc. Such receipts and payment involve exchange of one currency for another.

Each economy has a foreign sector representing that economy’s external transactions. All such external transactions are either economic and commercial or financial transactions. These result in receipts into and payments out of the domestic economy. Such receipts and payments involve exchange of domestic currency as against all foreign currencies of countries with which domestic economy has dealings. Such exchange transactions are put through in the exchange market for that currency. For each nation, therefore, there is an exchange market for that country’s currency vis-a vis other currencies. These national foreign exchange markets are components of the international financial system

There are three major components of this market, depending upon the level at which transactions are put through:

• Transactions between the public and the market at the base level involve receipts from any payments to the public or purchases from and sales to public.
• Transactions as between the banks dealing in foreign exchange involving conversion of currencies taking place in the same centre or as between centres in the same country (inter-bank market) or as between countries involving the correspondent or agent banks abroad or branches of the domestic banks abroad.
• Transactions between banks and central bank involving purchase and sale of foreign currencies for cover or final disposal of excess foreign balances The rate of exchange is determined at any moment by the forces of demand for and supply of a currency, which in turn depends on the demand for and supply of commodities and services as between India and the USA.

The global financial system (GFS) is the financial system consisting of institutions and regulators that act on the international level, as opposed to those that act on a national or regional level. The main players are the global institutions, such as International Monetary Fund and Bank for International Settlements, national agencies and government departments, e.g., central banks and finance ministries, private institutions acting on the global scale, e.g., banks and hedge funds, and regional institutions, e.g., the Euro zone.

The International Financial System constitutes the full range of interest-and return- bearing assets, bank and nonbank financial markets that trade and determine the prices of these assets, and the nonmarket activities through which the exchange of financial assets can take place.

The Foreign Exchange Market is the market in which individuals, firms, and banks buy and sell foreign currencies or foreign exchange. Or the framework for the exchange of one national currency for another.

The foreign exchange market for any currency is comprised of all the locations where bought and sold for other currencies. These different monetary centers are connected electronically and are in constant contact with one another, thus forming a single international foreign exchange market. This platform is a global market in the sense that currency transactions now require only a few seconds to execute and can take place 24 hours per day.