NISM Series XIII Study Guide: Chapter 1 – Introduction to Indian Currency Markets

Chapter 1: Introduction to Indian Currency Market

The evolution of money has moved from the Barter System (exchanging goods for goods) to modern Foreign Exchange (FX). Barter had limitations like non-divisibility and high transport costs. Today, the exchange of two currencies is called Forex (FX), driven by cross-border trade and global investment.

1. Historical Evolution of Currency Systems

  • 1870s: Countries valued currencies using Gold as a benchmark.

  • 1944-1971 (Bretton Woods System): Currencies were pegged to the USD, and the USD was pegged to gold. This made the US Dollar the world's dominant reserve currency.

  • Post-1971: The system shifted to Free Floating or Managed Float methods where market forces determine exchange rates.

2. The "Majors": Global Currency Pairs

The most traded currencies in the world are known as the Majors. These follow a free-floating valuation:

  • USD (US Dollar): The king of currencies. It serves as an investment, reserve, transaction (commodities), and invoice currency.

  • EUR (Euro): The second premier international currency.

  • JPY (Japanese Yen): Highly liquid around the clock; third most traded.

  • GBP (Pound Sterling): Often called "Cable" (from the Atlantic telegraph cables).

  • CHF (Swiss Franc): Known as one of the most stable "safe haven" currencies.

3. Basics of Currency Trading in India

Key Terminology:

  • Currency Pair: You always buy one currency and sell another simultaneously.

  • Base Currency (BC): The first currency in a pair (the one being priced). Its amount is fixed at 1 unit.

  • Quotation Currency (QC): The second currency which prices the BC.

  • Two-Way Quote:

    • Bid Price: The price at which the dealer buys.

    • Ask/Offer Price: The price at which the dealer sells (always higher than the Bid).

  • Appreciation vs. Depreciation: If the Base Currency buys more of the Quotation Currency, the BC has Appreciated.

Market Peculiarities in India:

  • Timing: The OTC market is open from 9:00 AM to 5:00 PM. However, merchants can only trade until 4:30 PM.

  • Interbank vs. Merchant Market: Banks are "price givers" and merchants are "price takers."

  • RBI Reference Rate: A daily spot rate published by the RBI used as a benchmark for large transactions.

4. Settlement and Forward Markets

Value Date (Settlement Date):

In the OTC spot market, "Spot" settlement happens after two business days (T+2).

  • Gross Settlement: Actual delivery of currency.

  • Net Settlement: Only the difference in value is settled (common in derivatives).

OTC Forward Market:

Used for booking contracts for future dates. While liquidity is high for tenures under one year, it requires a valid underlying trade contract to execute in the OTC market.

Cross Rates:

When a direct price for a pair (like EUR/INR) isn't available, it is derived by crossing underlying pairs (EUR/USD and USD/INR).

  • Calculation: This involves the multiplication or division of available exchange rates.

5. Impact of Economic Factors on Currency Prices

Currency values are a function of both local and global factors. For India, the INR is impacted by:

IndicatorImpact on Currency
GDP GrowthHigher than expected growth usually strengthens the currency.
Retail SalesStronger consumer spending usually strengthens the currency.
CPI (Inflation)Measures the cost of living; high inflation can lead to depreciation.
Non-Farm PayrollsUS data that significantly impacts the global value of the USD.
Current Account DeficitWidening deficits usually weaken the INR.
Central Bank MeetingsDecisions on Interest Rates and CRR are the primary drivers of short-term volatility.

Conclusion: Why NISM 13 Matters

As we prepare for the NISM Series XIII, understanding these fundamentals is the first step toward mastering Specialized Investment Funds (SIFs). The currency market is a 24-hour integrated global market—understanding its logic allows you to hedge risk for your clients effectively.

Stay tuned for Part 2 of Chapter 1, where we dive deeper into Currency Arithmetic!

Dhaval Visariya

AMFI Registered Distributor (ARN-327925) | Software Developer & Finance Enthusiast

Connect with me:
LinkedIn | Telegram | YouTube | GitHub | Medium

Disclaimer: I am an AMFI Registered Mutual Fund Distributor. Views expressed here are for educational purposes. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
📧 Contact: info.apollofinancialservices@gmail.com

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