Exchange Rates and Forex Business · One-liners

1 Define Foreign Exchange under FEMA 1999 Section 2.

Foreign currency deposits, credits, balances payable in foreign currency, and instruments (drafts, LC, bills) expressed in any currency.

2 Why is spot the most liquid settlement convention in forex?

Largest market participation with highest volume, depth and volatility across all participants.

3 When is a currency at premium in forward markets?

When forward value is higher (costlier) than spot rate; opposite currency is at discount.

4 What is the dominant driver of forward premium/discount?

Interest-rate differential between the two currencies in frictionless markets.

5 Which quote system has India followed since August 1993?

Direct quote system (e.g. USD/INR = 83.10/11); replaced earlier indirect system.

6 Explain cross-rate mechanism in forex.

Computing unavailable currency-pair rate using common intermediate currency (USD) via two available pairs.

7 Define bid rate in a dealer quote.

Rate at which quoting bank buys the base currency; lower side of two-leg quote.

8 Distinguish per cent (%) from per mille (‰).

Per cent is per 100; per mille is per 1,000. Per mille used for very small margins in FEDAI rules.

9 What is value date in forex settlement?

Date funds transfer becomes effective and starts earning/costing interest in respective accounts.

10 Define triangular arbitrage in forex.

Simultaneous buy-sell across three+ currencies (USD→EUR→GBP→USD) to capture riskless price differences.

11 Name the two distinct positions dealers maintain.

Funds position (net inflow/outflow) and currency position (long/short) in each currency.

12 What is the role of mid-office in forex dealing rooms?

Risk management, compliance monitoring, VaR/stress testing, and independent check on dealer activity.

13 When is TT Buying Rate applied?

When bank receives foreign currency in Nostro and pays customer INR (inward TT, realised DD, conversions).

14 How is Bills Buying Rate calculated?

Spot adjusted by forward margin for transit/usance period, then exchange margin deducted; discount subtracted.

15 What risks does forex dealing-room policy address?

Exchange-rate, interest-rate, counterparty (settlement), country/sovereign, operational and liquidity risks.

16 List three key market participants in Indian forex market.

RBI (central bank), AD Category-I banks, investment funds, corporations, forex brokers, individuals.

17 How does balance of payments affect exchange rates?

BoP surplus strengthens currency; deficit weakens it; structural shifts from economic/monetary policy.

18 What is Bills Selling Rate and when is it applied?

Rate applied when bank handles import bill; pays foreign exporter via correspondent. Highest of four merchant quotes (TT selling margin + bills margin).

19 Name the three Authorised Dealer categories under FEMA 1999 framework.

Full Fledged Money Changers (FFMCs), Restricted Money Changers (RMCs), and AD banks under revised 2026 regulations.

20 What is FEDAI and when was it formed?

Non-profit association of authorised dealers, formed 1958 with RBI approval. Prescribes mandatory guidelines for forex market operations.

21 What aggregate borrowing limit applies to AD-I banks?

USD 10 million or 100% of unimpaired Tier-1 capital, whichever is higher. Breaches reported within 15 days of month-end.

22 What is the forward contract limit for resident individuals?

USD 100,000 notional cap, tenor up to one year, deliverable basis only (current framework).

23 What is AD-Cat-II eligibility criteria under 2026 regulations?

Banks, NBFCs, FFMCs, Forex Correspondents with ≥2 years operation, ≥₹50 crore avg annual forex turnover, ₹25 lakh per-transaction cap.

24 What is the current LRS limit for resident individuals?

USD 2,50,000 per resident individual per financial year (unchanged as of May 2026).

25 What is the LRS TCS exemption limit effective April 2025?

Raised from ₹7 lakh to ₹10 lakh per financial year per individual under Finance Act 2025.

26 What is AD-Cat-III licence and its minimum net-worth requirement?

New category for travel-platforms and fintechs offering forex incidental to business. Minimum net worth ₹2 crore.

27 What is FBIL Overnight MIBOR used for in forex operations?

Benchmark for FEDAI Rule 13: interest on delayed INR settlements = MIBOR + 2%. Approximately 5.28% as of February 2026.

28 What was the MIBOR methodology change regarding polling window?

Expanded from first 1 hour to first 3 hours (09:00–12:00) of call-money trades; improves liquidity coverage of benchmark.

29 Can AD-I banks invest in overseas instruments without RBI approval?

Yes, in sovereign-issuer money-market/debt with residual maturity <1 year, rated per RBI norms; no prior approval needed.

30 What is the procedure for early delivery of forward contracts?

Bank honours contracted forward rate but may recover swap loss/early-delivery charges per FEDAI/RBI guidelines to offset funding mismatch.

31 Who must verify genuineness of underlying documentary evidence for forward contracts?

Banks verify whether underlying is current or capital-account in nature; applies to all residents except SMEs (document exemption).

32 Can SMEs book forward contracts without producing documents?

Yes, SMEs may book forwards without documents to hedge direct/indirect exposures effectively; accelerates hedging process.

33 What conditions apply to AD-I banks entering cross-currency options with customers?

Must be back-to-back basis with specific conditions; provides hedging flexibility without outright directional risk.

34 What is the regulatory framework document issued 30 April 2026?

Foreign Exchange Management (Authorised Persons) Regulations 2026 via RBI Notification FEMA 401/2026-RB; comprehensively restructures AD framework.

35 When bank buys USD from exporter, which spot rate side is used?

BID side of spot rate is used when bank buys USD.

36 When bank sells USD forward, which premium side applies?

ASK-side premium is added when bank sells USD forward.

37 FEDAI penalty interest for FC delays beyond 15 days is?

2% above currency-specific benchmark rate (not MIBOR).

38 FEDAI penalty interest for INR settlement delays is?

MIBOR + 2% for delayed INR inter-bank settlements.

39 RBI aggregate borrowing limit for banks includes what?

ECB and unadjusted Nostro overdrafts beyond 5 days.

40 RBI borrowing limit: USD 10 million or % of Tier-1 capital?

Whichever is HIGHER of USD 10 million or 100% Tier-1.

41 India's exchange rate regime since 1993 is?

Managed Float with no publicly disclosed peg or basket.

42 RBI intervenes in forex to?

Smooth volatility only, not defend a specific level.

43 Missed MT-300 confirmation is responsibility of which office?

Back Office handles settlement function; operational control failure.

44 FEDAI NTP for FC sight bills NOT under LC is?

25 days (20 days for INR bills not under LC).

45 Forward bid > ask in differential means?

USD at premium; EUR at discount; subtract from EUR spot.

46 FCNR(B) to NRE-RA conversion uses which rate?

TT Selling Rate (FC already with bank, INR remitted).

47 AD Cat-III minimum net worth requirement is?

₹2 crore per RBI FEMA 401/2026-RB notification.

48 Simple arbitrage: two centres, one pair, simultaneous buy/sell is?

Direct Arbitrage (triangular uses three currencies).

49 JPY, IDR, KES quoted per 100 units because?

Their unit values are very small relative to INR.

50 On forward cancellation, which rate applies per FEDAI?

Opposite TT rate used; TT Selling cancels forward purchase.

51 Current primary governing instrument for forex licensing is?

RBI Notification FEMA 401/2026-RB dated 30 April 2026.

52 Forward premium/discount formula uses IRD and tenor how?

Forward Points = (Spot × IRD × Days) / (Year × 100).

53 What is a direct quote in forex?

Home currency variable, foreign currency fixed (1 unit FC). Example: 1 USD = ₹83.40

54 What is an indirect quote in forex?

Home currency fixed (100 units HC), foreign currency variable. Example: ₹100 = USD 1.1990

55 How to compute cross-currency rate EUR/INR from USD/INR and EUR/USD?

Multiply: EUR/INR = (USD/INR selling) × (EUR/USD ask rate)

56 Define forward points and calculate example: 792 / 36,000.

Forward points = premium/discount basis points. 792/36,000 = 0.0220 (220 pips)

57 What exchange regime does India operate today?

Managed float since 1993 liberalisation. INR market-determined; RBI intervenes to smooth volatility only

58 What does spread (Ask − Bid) represent in forex?

Dealer profit margin and liquidity cost. Widens in volatility; narrows in deep, liquid pairs

59 State formula for TT Buying Rate.

TT Buying Rate = Spot Bid Rate − Exchange Margin

60 State formula for TT Selling Rate.

TT Selling Rate = Spot Ask Rate + Exchange Margin

61 State formula for Bills Buying Rate.

Bills Buying Rate = Spot Bid + Forward Premium − Margin

62 State formula for Bills Selling Rate.

Bills Selling Rate = Spot Ask + TT-margin + Bills-margin

63 When forward bid > forward ask (e.g., 45/35), is currency at premium or discount?

At discount. Foreign currency cheaper forward. Subtract lower number (0.35) from ask

64 How to compute cross-rate (EUR/INR bid) from two currency pairs?

Multiply bid sides: EUR/INR bid = (EUR/USD bid) × (USD/INR bid)

65 Which RBI entities can engage in any current/capital account forex transaction?

AD Category-I: Banks licensed by RBI only

66 What is AD Category-II scope post-2026 FEMA consolidation?

Non-trade current account (except gifts) and foreign trade up to ₹25 lakh per transaction

67 What is Normal Transit Period (NTP) for FC D/P or Sight bills not under LC?

25 days for FC bills; 20 days for INR bills per FEDAI Rule 3

68 What is maximum finance period for export bills beyond NTP?

90 days from date of shipment per FEDAI Rule 4

69 When matured forward contract unpicked, maximum cancellation period?

Within 3 working days after maturity per FEDAI Rule 10

70 Delayed inter-bank FC settlement (>15 days): interest payable at what rate?

2% above benchmark rate of currency, paid by seller bank per FEDAI Rule 12

71 What replaced FERA 1973 and when did it come into force?

FEMA 1999 replaced FERA 1973 on 1 June 2000.

72 In a direct quote USD/INR = 83.20, which currency is fixed?

Foreign currency (USD) is fixed at 1 unit; INR is variable.

73 What is the spot settlement period in India?

Spot settlement is T + 2 working days.

74 State the fundamental forward-rate identity.

Forward Rate = Spot Rate + Premium (or − Discount).

75 Define per mille (‰).

Per mille means one part per thousand (not hundred).

76 If GBP is at premium against USD, what about USD vs GBP?

USD is at discount against GBP (premiums/discounts are reciprocal).

77 Which of four merchant rates is highest: TT-sell or bills-sell?

Bills-sell rate is highest; both margins added to spot ask.

78 When must overdue export bills be crystallised?

RBI relaxed 30-day rule; banks decide based on commodity/country.

79 What is FEDAI and when was it formed?

Non-profit association of authorised dealers formed in 1958 with RBI approval.

80 What is the LRS annual remittance limit per individual?

USD 2,50,000 per financial year for current + capital transactions.

81 What is the TCS exemption threshold effective 1 April 2025?

₹10 lakh (raised from ₹7 lakh per Finance Act 2025).

82 Define current account under FEMA Section 2(j).

All transactions not classified as capital account; includes trade, travel, services.

83 Define capital account transactions.

Include borrowing, FDI, overseas investment, real-estate purchase abroad.

84 What is Bills Buy Rate formula?

Spot Bid + Forward Premium − Margin.

85 What is TT Sell Rate formula?

Spot Ask + Margin.

86 What is Bills Sell Rate formula?

Spot Ask + TT-Sell Margin + Bills-Sell Margin.

87 How do you calculate A/B cross rate?

(A/USD) × (USD/B).

88 What is the penal interest formula?

Benchmark + 2% per annum.

One-linersExchange Rates and Forex Business