The Reserve Bank of India (RBI) sets India's exchange-control policy and administers foreign exchange regulations in consultation with the GOI. The basis of this policy was laid down in 1973 with the Foreign Exchange Regulation Act (FERA), which was completely replaced by the Foreign Exchange Management Act (FEMA) in December 1999. As its name indicates, FEMA was designed to focus on the management of foreign exchange and not the control of it. The Act seeks to promote orderly development and maintenance of the foreign exchange market in India, particularly on current account. FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by any person to whom this Act applies.

The Act also re-defines the term 'resident Indian'. Under the new definition, any person who has lived in the country for more than 182 days during the previous financial year is considered to be a resident, but persons who have traveled to and from India for the purpose of vacation, business or employment are excluded from this definition. Foreign companies operating in India fall under the purview of FEMA. Since 1992, all foreign companies have been on par with Indian companies.

Firms may make advance payments in foreign currency without prior RBI approval for importing certain products such as machinery and capital goods when foreign manufacturers require down payments. Where the amount of advance remittance exceeds USD 15,000, such payments are permitted only if the importer obtains a bank guarantee from an international bank covering the advance remittance amount. The physical import of goods should then normally be completed within three months of advance payment to the foreign exporter.

The RBI permits short-term credits up to 180 days only. Longer periods are allowed for deferred-payment credits, especially for capital goods, but permission must be obtained and a deferred import license is required from the Director General of Foreign Trade.

Since April 1997, companies have been able to forward cover from authorized dealers in foreign exchange for periods exceeding six months. Documentation requirements of banks for arranging such cover have also been drastically reduced and replaced with business projections and past performance criteria to gauge the level of exposure that is prudent. As a result of these measures, the RBI has enabled banks to arrange swaps between two borrowers without obtaining prior RBI approval.

In March 1993, India abolished its two-tiered exchange rate regime, moving to a single, market-determined exchange rate for trade transactions and inward remittances. The Rupee is convertible on current account transactions, with limits remaining on foreign exchange for travel and tourism. Capital account transactions carried out by foreign investors, both portfolio and direct, are fully convertible. However, Indian firms and individuals remain subject to capital account restrictions.

Measures initiated by the Reserve Bank to integrate the Indian foreign exchange market with the global financial system include: permitting banks to fix their own position limit and aggregate gap limits; to borrow from and invest abroad up to 15 percent of capital; and to arrange hedge risks for corporate clients through derivative instruments.

Indian companies are allowed to employ foreign nationals and make payments in foreign currency. Indian companies are also allowed to bid in foreign currencies for major projects such as oil exploration contracts and multilateral funded projects.