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