IBPS Test 13

Foreign exchange management occupies a critical position at the intersection of monetary policy, trade policy, and capital account management, and the regulatory framework governing cross-border financial flows in India has evolved significantly since the landmark shift from the Foreign Exchange Regulation Act to the Foreign Exchange Management Act in 1999. FEMA replaced the earlier FERA regime that treated all violations of foreign exchange regulations as criminal offences. Under FEMA, the emphasis shifted to treating foreign exchange violations primarily as civil offences with monetary penalties, except in cases involving money laundering and national security considerations. This transition was a significant liberalisation signal that aligned India's foreign exchange framework with international norms and improved the business environment for foreign investors. The Reserve Bank of India is the principal regulatory authority under FEMA, responsible for managing foreign exchange reserves, regulating capital account transactions, and prescribing the framework for current account transactions. India's current account encompasses trade in goods and services, primary income flows such as dividends and interest, and secondary income flows such as remittances. India has maintained current account convertibility, meaning that transactions on the current account such as import payments, export proceeds, and travel expenditure can be conducted freely without RBI approval beyond reporting requirements. Remittances from the Indian diaspora constitute one of India's largest sources of foreign exchange, and India has consistently ranked among the top recipients of remittances globally. The Liberalised Remittance Scheme allows resident individuals to freely remit up to a specified annual limit for permissible current account and capital account transactions including education, medical treatment, and investment abroad. India's capital account has been progressively liberalised over the years, with restrictions reduced for foreign direct investment, foreign portfolio investment, external commercial borrowings, and non-resident deposits. Foreign Direct Investment is permitted in most sectors either through the automatic route, which does not require government approval, or through the government route for sensitive sectors. The FDI policy is reviewed and updated regularly to attract investment in priority sectors while maintaining appropriate restrictions in strategic areas. Foreign Portfolio Investment allows overseas investors to purchase Indian equities, corporate bonds, and government securities within prescribed limits. The Qualified Foreign Investor and Foreign Portfolio Investor registration regimes have been streamlined to facilitate easier access for global institutional investors. External commercial borrowings allow Indian companies to raise debt from international markets, subject to interest rate ceilings and end-use restrictions designed to prevent excessive short-term borrowing. India's foreign exchange reserves, which include foreign currency assets, gold, Special Drawing Rights, and the Reserve Tranche position with the International Monetary Fund, provide a buffer against external shocks and contribute to maintaining exchange rate stability. The management of these reserves by the Reserve Bank seeks to balance the objectives of safety, liquidity, and returns.