Before the 1991 reforms, the foreign exchange market was virtually absent. Exchange earners were required to buy and sell foreign currencies through Authorised Dealers at the Reserve Bank reference rate. In this highly regulated system, very few transactions used to take place among the authorised dealers, and trades were required to be squared off by the close of the day. The 1991 reforms represented one of the biggest factors that played a major role in bringing about the economic reforms was the fact that India’s Balance Of Payments or BOPs were unsustainable. The rupee was devalued against foreign currencies which led to an increase in the inflow of foreign exchange. The measures of reform included inter alia, the adoption of managed floating exchange rate arrangement, rationalization of the very structure of the market, introduction of a variety of activities, such as options and swaps, etc., gradual move towards the capital account convertibility, and infusion of stability in the foreign exchange market. From beginning from January 1996, wide-ranging reforms have been undertaken in the Indian Foreign Exchange Markets. Also, the market has been allowed to determine the foreign exchange rates. Post liberalization, the Government of India, felt the necessity to liberalize the foreign exchange policy. Hence, the Foreign Exchange Management Act (FEMA) 2000 was introduced. FEMA expanded the list of activities in which a person/company can undertake forex transactions. Under the Foreign Exchange Management Act (FEMA), the government liberalized the export-import policy, Limits of FDI (Foreign Direct Investment) and FII (Foreign Institutional Investors) investments and repatriations, cross-border M and A and fundraising activities. Introduction of market-based exchange rate regime, adoption of current account convertibility and relaxation on capital account, inter alia, in terms of permission to run open positions, to hold investments abroad, and to retain foreign exchange along with the introduction of hedging tools (derivatives) led to the emergence of active and vibrant foreign exchange market. Now exchange rate is flexible and market-determined, and the capital account is also effectively convertible for non-residents. Due to the effects of the above reforms, the volatility in the foreign exchange market become lower than most of the emerging economies. Reform measures enhanced depth and liquidity in the market reflected in rising turnover and moderation in bid-ask spread over the years. Reform measures enhanced depth and liquidity in the market reflected in rising turnover and moderation in bid-ask spread over the years. The daily average turnover on the spot FX market reached $25.81 billion last year, up 11.6 percent from a year earlier. The figure for FX derivatives also expanded 2.3 percent to $40.15 billion, the data showed.
The transformations of the following financial markets have created a robust ecosystem for financial transformation in India.
Transformation of the banking sector in India
Transformation of the Money market in India
Transformation of Government securities market
Transformation of the Foreign exchange market in India
Transformation of the Capital market in India
Transformation of the Credit market in India
Transformation of Payment Systems in India
