E- Commerce

5. What are the role the following agencies play in Indian Foreign exchange market?

(a) Dealers

(b) Exchange brokers/Bankers

(d) Central Banks

(e) Speculators

In the Indian foreign exchange market, key agencies execute specialized functions to maintain liquidity, manage risk, and stabilize the economy. [1, 2, 3, 4]

Roles of the Agencies:

(a) Dealers: Commercial banks and authorized dealers are the core "market makers." They buy and sell foreign currencies directly to customers (importers, exporters) and other banks. They quote two-way prices—a lower bid price to buy and a higher ask price to sell—earning a profit on the spread.
(b) Exchange brokers/bankers: Brokers act as middlemen who connect buyers and sellers to facilitate large transactions. They do not trade using their own money; instead, they match trades for a commission. They keep the identities of buyers and sellers hidden until the trade is confirmed.
(c) Arbitrageurs: These are risk-free profit seekers who exploit temporary price or interest rate differences for the same currency across different markets. By simultaneously buying a currency in a cheaper market and selling it in a more expensive one, they help equalize rates and make the overall market highly efficient.
(d) Central Banks: In India, this is the Reserve Bank of India (RBI). It acts as the custodian of foreign exchange reserves and regulates the market under the Foreign Exchange Management Act (FEMA) . The RBI steps in to prevent extreme volatility in the Rupee and ensures the market functions smoothly.
(e) Speculators: Speculators intentionally take on currency risks in hopes of making a profit from future price changes. Unlike arbitrageurs, their trades carry high risk. They provide extra liquidity to the market and take on the risks that hedgers (like commercial businesses) want to avoid. [3, 9, 12