Methods of Exchange Control
Direct MethodIn direct Exchange control, immediate direct
restrictions on foreign exchange from all sidesand allocation. The
method includes those devices which are adopted by the Govt. to
have an effective control over the exchange rates. Icontrol
includes following measures:
1. Intervention- It refers to the Govt. intervention or
interference in the free working of the foreign exchange market
with a view to overvalue or undervalue the countrys currency in
terms of falso known as Pegging Exchange Rate. When Govt. fixes the
exchange rate above the normal rate it is known as Pegging Up and
on the contrary, when the Govt. fixes it below the normal market
rate, it is known as Pegging Down.
2. Exchange RestrictionsGovt. which restricts or compulsorily
reduces the flow of home currency in foreign exchange market. It
can be of 3 types:
Exchange Control
Direct Method:
In direct Exchange control, certain measures are adopted which
effectuate immediate direct restrictions on foreign exchange from
all sides-its quantum, use and allocation. The method includes
those devices which are adopted by the Govt. to have an effective
control over the exchange rates. In general, direct exchange
control includes following measures:
It refers to the Govt. intervention or interference in the free
working of the foreign exchange market with a view to overvalue or
undervalue the countrys currency in terms of foreign money. This
method is also known as Pegging Exchange Rate. When Govt. fixes the
exchange rate above the normal rate it is known as Pegging Up and
on the contrary, when the Govt. fixes it below the normal market
rate, it is known as
Exchange Restrictions- It refers to the policy or measures
adopted by the Govt. which restricts or compulsorily reduces the
flow of home currency in foreign exchange market. It can be of 3
types:-
measures are adopted which effectuate its quantum, use
and allocation. The method includes those devices which are
adopted by the Govt. n general, direct exchange
It refers to the Govt. intervention or interference in the free
working of the foreign exchange market with a view to overvalue
or
oreign money. This method is also known as Pegging Exchange
Rate. When Govt. fixes the exchange rate above the normal rate it
is known as Pegging Up and on the contrary, when the Govt. fixes it
below the normal market rate, it is known as
It refers to the policy or measures adopted by the Govt. which
restricts or compulsorily reduces the flow of home currency in
The objectives of FEMA are:
1. To facilitate external trade and payments.2. To promote the
orderly development and maintenance of foreign exchange
market.
Main Provisions of FEMA Dealing in Foreign Exchange: FEMA
empowers the Central Govt. to
impose restrictions on dealing in foreign exchange and foreign
security and payments to and receipts from any person outside
India.
Holding of Foreign Exchange: Act imposes restrictions on persons
resident in India on acquiring, holding or owing forex, foreign
security and immovable property abroad on transfer of forex or
security abroad.
Current A/c Transactions: FEMA permits dealing in forex through
authorized persons for current A/c transactions.
Capital A/c Transactions: Any person may sell or draw forex to
or from an authorized person for a capital a/c transaction.
Export of Goods and Services: For the purpose of ensuring that
export value of the goods is received without any delay, the RBI
may direct any exporter to comply with such requirements as it
deems fit.
Administration of the Act: the rules, regulations and norms
pertaining tio several sections of the Act are to be laid down by
the RBI, in consultation with the Central Govt.
Exchange Control Regulation
Exchange control is one of the important devices to control
international trade and payments. It aims at equilibrating foreign
receipts and payments. Exchange control refers to the control by
the Govt. or by the centralized agency of the transactions
involving foreign exchange. The meaning of Exchange Control could
be well understood with the help of following definitions:
Haberler: Exchange control refers to the state regulation
excluding the free play of economic forces in the foreign exchange
market.
P.T. Ellsworth: Exchange control means dealing with the balance
of payments difficulties, disregards market forces and substitutes
for them the arbitrary decisions of Govt. officials. Import and
other international payments are no longer determined by the
international price comparisons, but the considerations of national
needs.
From the above definitions, it is clear that Exchange Control
implies Govt. intervention in the matter of Foreign Exchange and
Exchange Rates.
Objectives of Exchange Control
1. Conservation of foreign exchange.
2. Prevention of capital flight.
3. Correcting disequilibrium in BOPs.
4. Stabilization of exchange rates.
5. Protecting the interest of home producers.
6. Redemption of exchange debts.
7. Effective economic planning.
8. Maintaining overvalue of home currency.
9. Generating public revenue.
10. Prevent spread of depression.
Methods of Exchange Control
Direct Method:
In direct Exchange control, certain measures are adopted which
effectuate immediate direct restrictions on foreign exchange from
all sides-its quantum, use and allocation. The method includes
those devices which are adopted by the Govt. to have an effective
control over the exchange rates. In general, direct exchange
control includes following measures:
1. Intervention- It refers to the Govt. intervention or
interference in the free working of the foreign exchange market
with a view to overvalue or undervalue the countrys currency in
terms of foreign money. This method is also known as Pegging
Exchange Rate. When Govt. fixes the exchange rate above the normal
rate it is known as Pegging Up and on the contrary, when the Govt.
fixes it below the normal market rate, it is known as Pegging
Down.
2. Exchange Restrictions- It refers to the policy or measures
adopted by the Govt. which restricts or compulsorily reduces the
flow of home currency in foreign exchange market. It can be of 3
types:-
i. Govt. may centralize all trading in foreign exchange with
itself or the centralized authority.
ii. Govt. may prevent the exchange of local currencies against
foreign currencies without its permission.
iii. Govt. may order all foreign exchange transactions to be
made through its agency.
Exchange restrictions may take various forms, the most common of
them being: a) Rationing of Foreign Exchange; b) Blocked A/c &
c) Multiple Exchange Rates.
3. Exchange Clearing Agreement- It is a system of bilateral
settlement of mutual claims on international transactions. Under
this agreement, 2 countries agree to establish an A/c in their
respective Central Bank through which all payments for exports and
imports are cleared. Therefore, exchange clearing device is helpful
to a country which has little or no foreign exchange reserves and
which is more interested in selling than buying.
4. Payment Agreements- Under this method, 2 countries establish
mutual credit facilities where payment to the exporter is made
through specially opened Non-Resident A/c for this purpose. Under
this scheme, exporter gets payment immediately as the importers
Central Bank receives the information that the importer has
discharged all his obligations.
5. Gold Policy- Through a suitable gold policy, the country can
bring the desired exchange control. For this, the country may
resort to the manipulation of the buying and selling prices of gold
which affect the exchange rate of the countrys currency.
Indirect Method:
As the name suggests, under this method, control measures do not
effectuate immediate direct restriction on foreign exchange.
Here exchange rates are controlled indirectly by regulating
international movement of goods.
1. Changes in Interest Rates: It tends to influence indirectly
the foreign exchange rate. A rise in interest rate of a country
attracts liquid capital and banking funds of foreigners. This tends
to keep their funds in their own country. All this tend to increase
the demand of local currency and consequently the exchange rate
moves in its favor.
2. Tariff Duties & Import Quotas: Import duty reduces
imports and with it rise the value of home currency relative to
foreign currency. Similarly, export duty restricts exports; as a
result, the value of home currency falls relative to foreign
currency.
3. Export Bounties: Export bounties or subsidies increase
exports, as such the external value of the currency of the subsidy
giving country rises.
Exchange Control Regulation Act
Foreign exchange control is one of the regulatory role of the
Govt. in building its economic environment. The RBI exercises
control over foreign exchange transactions in accordance with the
general policy laid down by the Union Govt.
Foreign exchange transactions were regulated in India by the
FERA, 1973. This Act also sought to regulate certain aspects of the
conduct of business outside the country by Indian Cos. and in India
by Foreign Cos.
The main objective of FERA, framed against the background of
severe foreign exchange problem and the controlled economic regime,
was conversation and proper utilization of the foreign exchange
resources of the country.
There was a lot of demand for substantial modification of FERA
in the light of the ongoing economic liberalization and improving
foreign exchange reserves position. Accordingly, a new Act, the
FEMA, 1999 replaced the FERA.
The FEMA came into effect from Jan.1, 2000, which extends to the
whole of India and also applies to all branches, office and
agencies outside India, owned or controlled by a person.
The objectives of FEMA are:
1. To facilitate external trade and payments.
2. To promote the orderly development and maintenance of foreign
exchange market.
Main Provisions of FEMA
Dealing in Foreign Exchange: FEMA empowers the Central Govt. to
impose restrictions on dealing in foreign exchange and foreign
security and payments to and receipts from any person outside
India.
Holding of Foreign Exchange: Act imposes restrictions on persons
resident in India on acquiring, holding or owing forex, foreign
security and immovable property abroad on transfer of forex or
security abroad.
Current A/c Transactions: FEMA permits dealing in forex through
authorized persons for current A/c transactions.
Capital A/c Transactions: Any person may sell or draw forex to
or from an authorized person for a capital a/c transaction.
Export of Goods and Services: For the purpose of ensuring that
export value of the goods is received without any delay, the RBI
may direct any exporter to comply with such requirements as it
deems fit.
Administration of the Act: the rules, regulations and norms
pertaining tio several sections of the Act are to be laid down by
the RBI, in consultation with the Central Govt.
