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Corporate Legal Framework

Notes is likely to depend on the specific circumstances – studies of effectiveness on average do

not answer the question of when intervention is likely to be successful.
Disyatat and Galati’s paper surveys the available empirical evidence, and presents
new evidence for the Czech koruna (the methodology requires detailed daily data on
intervention and option prices, which were only available for the Czech Republic). The
authors’ new estimates tentatively suggest the existence of a cumulative effect from
repeated intervention (although the mechanism is not clear). In the group of countries
surveyed, there are several examples of repeated interventions over lengthy periods.
In this connection, the paper from Venezuela makes the interesting point that intervention
might have diminishing power with repetition.

It remains possible that greater apparent effectiveness of intervention in emerging market

cases simply reflects different structural characteristics. Emerging market economies
tend to have less substitutability of assets across currency boundaries, and the authorities

tend to have greater financial – and certainly regulatory – weight relative to their private
markets. Mihaljek’s paper shows clearly that emerging market economies typically hold
very large reserves compared with market turnover, even if interventions are not in general
large relative to turnover. And several of the country papers describe the application of
regulatory measures to obtain influence over the exchange rate.

Questions
1. What do you think intervention is effective for emerging market? (Hint: Interventions
slow down the change in exchange rate and supply liquidity to the forex market
which is crucial for the emerging markets.)
2. What is the effect of intervention on global economy? (Hint: It provides more
opportunities for controlling exchange rates and substituting assets across currency
boundaries.)

Source: BIS paper no 24

3.8 Summary

‘The exchange control in India was introduced on September 3, 1939 as a war time measure
in the early period of Second World War under the powers conferred by the Defence of
India Rules.
The emergency powers were subsequently replaced by the Foreign Exchange Regulations
Act, 1947 which came into operation on March 25, 1947.

This Act witnessed comprehensive revision in the wake of the changed needs of the
economy during the post-independence period and was replaced by the Foreign Exchange
Regulations Act, 1973 known as FERA.
The onset of the era of liberalization of the external sector of the economy and the industrial
licensing followed by Partial Convertibility of Rupee and full convertibility on current
account necessitated the need for further extensive amendments in the FERA which were
brought about by the Foreign Exchange Regulations (Amendment) Act, 1993.
FERA has been replaced by Foreign Exchange Management Act (FEMA), 1999.
FEMA has been brought to consolidate and amend the law relating to foreign exchange.
The basic objective of this act is to facilitate external trade and payments and to promote
the orderly development and maintenance of foreign exchange market in India.
The role of authorized person, the provisions of contravention and penalties and the
procedures of adjudication and appeal and the power of directorate of enforcement dealt
at great length in this act.

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