Foreign Exchange Glossary

Nostro Accounts A foreign currency account which is maintained by a bank in India with branch of its correspondents at a foreign centre, is called Nostro Account i.e our account with you.

Vostro Accounts Rupee accounts of foreign banks would be designated by banks as Vostro Accounts i.e your accounts with us.

Loro Accounts A foreign bank or one of its branches is maintaining an account with some other bank in 3rd country, which is called Loro Account or their account with you.

Buying Rate Buying rate is the rate at which the bank acquires foreign currency and pays the customer in Indian Rupees.

Selling Rate Selling rate is the rate at which the bank parts with foreign currency and receives from the customer in Indian Rupees.

Direct Rates The direct rate is method of quoting the rates when the value of foreign currency is quoted in terms of varying units of Indian Rupees say Pound 1 = Rs. 49.00. With effect from August 2, 1993, RBI has directed banks to follow direct quotation system in inter-bank dealings in all currencies. With the new system coming into force, dealers expected market activity to pick up.

Indirect Rates The indirect rate is method of quoting rates of foreign exchanges when the value of Indian rupee is kept constant and price is quoted in terms of varying units of foreign currency say Rs. 100 = Pound 1.99.

Spot rates Spot rate is the rate applicable for transaction in which exchange of currencies take place immediately (48 hours).

Forward rate It is the rate applicable for contracts entered into now but the exchange of currencies will take place on a pre-determined future date. Forward rates are quoted at a discount or premium over spot rate. Discount is added and premium is deducted from the spot rate to arrive at the forward rate.

Arbitrage The purchase and sale of a foreign currency in different centres to take advantage of the difference in the rates of exchange.

Swap Simultaneous sale of forward and purchase of spot or vice-versa is known as swap.

Canalisation of exports and imports means exports and imports only through agencies designated by the Central Govt.

DEEC stands for Duty Exemption Entitlement Certificate issued under the Duty Exemption Scheme.

Drawback in relation to any goods manufactured in India and exported, means the rebate of duty chargeable on any imported material or excisable material used in the manufacture of such goods in India. The goods include imported spares, if supplied, with capital goods manufactured in India.

Special import license or SIL, means freely transferable special import licenses issued under the policy. It allows exporters to import goods, which are otherwise restricted, subject to payment of normal customs duty.

Negative list consists of goods, the import or export of which is prohibited, restricted through licensing or otherwise or canalised.

Duty free licenses include advance licenses, advance intermediate license and special import licenses, import f raw materials, intermediates, components, consumables, parts, accessories, mandatory spare and packing material may be permitted against a duty free license.

Restricted goods refer to any goods the import or export of which is restricted through licensing, may be exported or imported only in accordance with a license issued in this behalf.

Private bonded warehouses are the warehouses set up in domestic tariff are. Any person may import goods which are freely importable or which may be imported against special import licenses and warehouse them in such private bonded warehouses. Such goods are cleared for home consumption as per the provisions of the policy and against special import license, wherever needed. The customs duty is paid at the time of clearance of such goods.

Export Declaration forms All exports are to be declared by the exporters in the appropriate form and these forms are submitted alongwith other shipping documents. For different type of transactions following types of forms are submitted:

• Exports made other than by post - GR form
• Exports by post parcel other than on value payable or cash on delivery basis - PP form
• Export by post on value payable or cash on delivery basis- VP/COD
  While GR and PP forms are in set of two copies, the VP/COD forms is in single copy.
  First copy of GR form is sent through Customs direct to RBI and second copy is returned by Customs to the exporters which should be submitted to the bank through which the export bill is collected, within 21 days of shipment.
  The bank which takes the bill on collection or purchase or negotiation includes the details of the bill in the fortnightly statement ENC to RBI.
  The duplicate GR form is sent to RBI by the bank on full receipt of export proceeds.
  
  Project exports The export of engineering goods on deferred payment terms and execution of turnkey projects and civil construction contracts abroad are collectively called project export. These are to get clearance of Working Group constituted of RBI, EXIM Bank, ECGC and the financing bank and in case of high value of contract, representative of Finance and Commerce Ministries of Govt. of India, also.
  
  Free Trade Zones FTZ or Export Processing Zones are those industrial estates cordoned off from domestic tariff areas, where trade barriers applicable to the rest of the economy do not apply and where export-oriented units can operate free of import duties or quantitative restrictions and are given other advantages including tax exemption.
  
  Fixed Exchange rates These refer to the system under the gold standard where the rate of exchange tends to stablise around the mint par value. Any large variation of the rate of exchange from the mint par value would entail flow of gold into or from the country. This would have the effect of bringing the exchange rate back to the mint par value.
  
  Floating/flexible exchange rates Free or floating rates refer to the system where the exchange rate are determined by the conditions of demand and supply of foreign exchange in the market. The rates are free to fluctuate according to the changes in demand and supply forces with no restriction on buying and selling of foreign currencies in the exchange market. Flexible rate of exchange refers to the system where exchange rate is fixed but is subject to frequent adjustments depending upon the market conditions. Thus it is not a free or floating rate with cent percent flexibility but is a system providing for adjustments as and when required.
  
  Pegging Pegging a currency means having a parity between the domestic currency and the currency to which it is pegged. Then any change in the external value of the link currency would have sympathetic change in the value of domestic currency.
  
  Intervention currency It means a currency in terms of which the value of the domestic currency of a country is expressed in relation to all other currencies.
  
  Basket of currencies The intervention currency is only an index of the value of the domestic currency. The value of the domestic currency may be determined by another unit like SDR or a basket of currencies. Indian rupee is valued on the basis of basket of currencies. The value of the constituents of the basket are first determined in terms of US dollars which is the intervention currency.
  
  Convertibility The rupee has been made fully convertible on the current account of the balance of payment wef 1.3.93 by which India has attained Clause VIII status of the IMF. Convertibility indicates non-intervention of the Govt. in the foreign exchange transactions emanating in the current account. When imports are higher than exports, the country has general deficit in the current account which is made good by the inflow of economic assistance in the capital account. The rate of converting the foreign currencies into Indian rupees, is fixed by the market forces of demand and supply. This system is beneficial to exporters and for inward remittances of the NRIs. The rupee is not yet fully convertible on the capital account. This would mean full repatriation of all investments, both principal and interest, at the will of the investors, in the capital account of India’s balance of payment.The situation warrants a healthy BOP position, comfortable foreign exchange reserves and a stable price level. In the long run, the convertibility affects a country positively, full globalisation, incentive to route remittances through official channels, increase in foreign directed investments, stabilisation of interest rate at international levels, free flow of foreign capital and India as a business enterprise would need to be more efficient and profitable. In the short run, however, if the economic fundamentals are not set right in a phased manner, the going may be traumatic, flight of capital to more secure economies, increase in fiscal deficits, high inflation, depreciation of home currency, slipping into a debt trap etc.
  
  Foreign Direct Investment Long term financial investments brought into the country from abroad through subscribing to the stocks and debentures of companies in India. This helps to relieve pressure on the Govt. budget to finance the vital development projects in India.
  
  Foreign Institutional Investors FII are the investor who make investment in Indian Capital market such as mutual funds, pension funds, investment trusts, asset management companies etc. Since Sept 92, the FIIs were allowed to invest in India capital market under a concessional tax regulation. FIIs need to be registered with SEBI and approval from RBI is also required.
  
  External commercial borrowing represents cross boarder financing wherein overseas loan syndication market provides loans to India corporates. ECB are defined to include commercial bank loans, buyer credit, supplier’s credit, scrutinised instruments such as floating rate notes and fixed rate bonds etc. credit from multilateral financial institutions such as International Finance Corporation, ADB etc. The Deptt. of Economic Affairs in the Ministry of Finance monitors the applications for ECBs. These are permitted as a source of finance for expansion for existing as well as for fresh investment.
  
  DEPB SCHEME DEPB, the duty exemption pass book scheme, is a modified version of the advance licence under which the exporters used to ship their goods and obtain a licence to import raw materials necessary for manufacturing the shipped goods. The volume of imports is controlled through input-output norms that specify the import entitlement on the basis of the quantum of exports. The DEPB scheme permits accumulation of entitlement points each time an export shipment is made. The difference with advance licensing is that the exporter can utilise the entitlement to pay customs duty not only on the inputs used but also for other items. The entitlements can also be sold.
  
  EPCG SCHEME The export promotion capital goods scheme permits the exporters to import machinery duty free or at a concessional duty if the importer agrees to achieve a fixed export target within a specified period of time. Presently under the scheme import of capital goods carry 10% customs duty though duty free imports are also permitted, subject to a minimum import volume. Exemptions are available for certain sectors like agriculture and garments even if the minimum floor limit is not met.
  
  COUNTER TRADE It is a general term used to describe a variety of commercial transactions for mutual international trade between companies or organisations in two or more countries. The common characteristic of counter-trade arrangement is that export sales to a particular market is made conditional upon undertaking to accept import from the market. The main growth in counter-trade has been among the less developed and developing countries of Asia, Africa and South America.
  
  LIBOR It is the London Inter-Bank offered rate and represents the rate at which the banks in London will lend a currency to other banks for a given period of time.
  
  SIBOR It is Singapore Inter-Bank Offered rate similar to Libor at which principal banks in Singapore offer to lend Asian Dollars and other currencies to other banks. It forms the basis for interest rate on Asian dollar syndicated loans.
  
  Prime Rate It is the rate of interest charged by the first class banks in United State on advances to their first class borrowers.
  
  GLOBALISATION Globalisation means adoption of a global outlook for the business and business strategy aimed at enhancing global competitiveness. A truly global corporation views the entire world as a single market and does not differentiate between domestic and foreign markets. Planning of manufacturing facilities, logistical systems, financial flows, marketing policies and quality controls are done considering a borderless world.
  
  FOREX RESERVES These are the reserves with the country which are used to finance imports/make payments to countries abroad in settlement of transactions. The movement in forex reserves is the net result of all external transactions. In India the forex reserves include special drawing rights (SDRs), gold and foreign currency assets.
  
  SUPPLIER CREDITs Under supplier credit contracts the exporter supplier extends a credit to the buyer importer of capital goods. The terms can be down payment with the balance payable in instalments. The interest on such deferred payments will have to be paid on the rates determined at the time of entering into such arrangement. The deferred payments are supported by the promissory notes or bills of exchange often carrying the guarantee of importer’s bank. To finance the credit given to the importer under such arrangement, the exporter raises a loan from his banker under the export credit schemes in force. In general, the export credit insurance will be an inherent part of the mechanism.
  
  BUYER CREDITs In a buyer credit transaction, the buyer importer raises a loan from a bank in the exporter’s country under the export credit scheme in force on the terms conforming to the OECD consensus. The loan is drawn to pay the exporter in full and thus for the exporter, the transaction is a cash sale. The buyers credit are also generally subject to export credit insurance requirements. A variation of the buyer credit arrangement is for a bank in the exporter’s country to establish a line of credit in favour of a bank or financial institutions in the importing country. The later makes available loans under the line of credit to its importer clients for the purchase of capital goods from the credit giving country. In India EXIM Bank makes available supplier/buyer credits and also extends line of credit to foreign financial institutions to promote exports of capital goods from India.
  
  EURO-CURRENCY MARKETs This is also known as Euro-dollar market and is international capital market which specialises in borrowing and lending of currencies outside the country of issue. Thus the deposits in dollars with a bank in London are Euro-dollars. Similarly French Francs held by banks in London are Euro-Franc and Pound Sterling held by banks in Germany are Euro-Sterling. These are all Euro-currencies. Pre-dominantly the dealing in the market are in dollars.
  
  EURO CREDITs Euro credit are medium and long term loans provided by international group of Banks in currencies which need not be those of the lenders or borrowers. Euro-credit belongs to wholesale sector of the international capital market and normally involves large amounts. Each Euro-credit runs into a huge amount of a few hundred million dollars. It is not safe or possible for a single bank to undertake the entire amount. Thus few banks form a syndicate (similar to consortium lending) to provide funds to the borrowers.
  
  EURO BONDs A major source of borrowing at Euro markets is through the issue of international bonds known as Euro Bonds. These are sold for international borrowers( multinational corporations, international agencies and Govt.) in several markets simultaneously by international group of banks. These are of following categories: a: Straight or fixed rate bonds, which are fixed interest bearing securities payable normally at yearly intervals. b: Convertible bonds are also fixed interest bearing securities and investors have option to convert them into equity share. c: Currency option bonds are similar to straight bonds with the difference that these are issued in one currency with the option to take payment of interest and principal in a second currency. Normally option bonds are issued in Sterling and provide option of payment in Dollar or Deutsche Mark. d: Floating rate notes (FRNs) are those on which interest is paid on varying rates according to market conditions unlike to fixed rate payable on a straight bond.
  
  EURO CURRENCY BONDs While Euro bonds represent the funds amassed by the banks on behalf of international borrowers, the Euro currency deposits represent the funds accepted by the banks themselves. It consists of all deposits of currencies placed with banks outside their home currency. The deposits are accepted in Euro currencies or in currency cocktails (representing a basket of currencies) like SDR and ECU.
  
  OFF-SHORE BANKING It refers to the international banking business involving non-resident foreign currency denoted assets and liabilities. An off-shore banking centre is a place where deliberate attempt is made to attract international banking by offering many concessions in the form of taxes and levies being imposed at lower rates or not being charged. A more important relaxation is the exemption of the off-shore banks from the restrictions on operations. Off-shore banking is carried out in about 20 centres throughout the world.
  
  DEEMED EXPORTs As against the physical exports where the goods actually move out of the country, certain types of trading activity and supplies made within India are also considered exports for the purpose of providing incentives and other facilities as are available in case of actual exports. These are called deemed exports. In these, the FOR value instead of FOB value, is taken into account and date of supply is taken as date of export. These are also covered by banks under Whole Turnover Packing Credit Guarantee and Whole Turnover Post-shipment Guarantee scheme of ECGC. The following are some examples of transactions falling under the category of deemed exports: a: Sales to foreign tourists of items in India. b: Sales to foreigners against surrender of free foreign exchange at trade fairs and exhibitions arranged for special visiting delegations. c: Supplies made to IBRD/IDA aided projects in India under the procedure of International Competitive Bidding. d: Supplies to foreign shipping companies. e: Supplies made in India to Free Trade Zones or 100% export-oriented units. f: Other supplies made in India against International Competitive Biddings where the payment is received in free foreign exchange.
  
  INVISIBLE IMPORTS & EXPORTS Invisible is a generic term that covers transactions such as remittances, payment of interest, dividend, charges for transport by shipping and insurance payments. The nomenclature is justified on the ostensible ground that it does not involve physical commodities, though it is often derived from their movements. Invisibles have played an important role in sustaining our balance of payments. The net surplus in the invisible account bridges a substantial part of the trade deficit. (Most of the invisibles are not subject to reporting requirements) One of the important segments of invisibles is the private transfers from abroad. These represented nearly 50% of the total inflow of $ 23 billions in 1996-97 compared with 30% in 1989-90, thus growing 6 times, whereas the total invisibles have grown only three fold. Tourism is another area where the invisibles have been substantial, though it is lower than other countries. However, there is lot of potential to improve the invisibles in this segment. Outgo under investment income is on account of dividends and interest. With the increase in FDI and FII, FCNR investment, this is bound to increase further. There is lot of scope to improve the invisibles but only a stable macro-economic and political environment and focussed policies can help the country exploit the potential.

  
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