To verify the very balance held abroad, the term foreign exchange is used. The word foreign exchange refers to the stock of foreign currencies and other foreign assets. According to Foreign Exchange Management Act (FEMA), 1999, defines:
“Foreign Exchange means foreign currency and it includes –
1 Deposits, credits and balances payable in any foreign currency,
2 Letters of credits or bills of exchange, traveler’s cheques, drafts, expressed or drawn in Indian currency but payable in any foreign currency.
3 Letters of credits or bills of exchange, traveler’s cheques drawn by banks, institutions or person’s outside India, but payable in India currency.”
Therefore, the term foreign exchange includes foreign currency, balances kept abroad, instruments payable in foreign currency and instruments drawn abroad but payable in Indian currency.
The earnings for a country through foreign exchange is by transactions that inflow of purchasing power into the country. Here, the purchasing power may be export of goods and services, foreign investment in the country, borrowings from abroad, etc. foreign exchange is spent on payment for import of goods and services, investment and lending abroad, etc. Therefore, every country with their efforts should balance the foreign exchange earnings and spending. The problems faced by many countries is shortage of foreign exchange, where spending is easier than earning. Therefore, the need arises for regulating or controlling the foreign exchange.