What is Foreign Currency?

It can be defined as, the legal tender applicable in a country outside the domestic area.
Thus a foreign currency represents ‘money’ only in the country of issue. At all other
locations it should be viewed as a commodity having time value.
The Foreign Exchange Management Act, 1999, defines :
“Foreign Exchange means foreign currency and includes –
(a) Deposits, credits and balance payable in any foreign currency;
(b) Drafts, traveller’s cheques, letters of credit or bills of exchange, expressed or drawn
in Indian currency but payable in any foreign currency; and
(c) Drafts, traveller’s cheques, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India, but payable in India currency.”
The term ‘foreign currency’ and ‘foreign exchange’ are thus interchangeable, but ‘foreign
currency’ should be viewed as the commodity being bought or sold e.g. US dollar, pound
sterling etc. whereas ‘foreign exchange’ should be viewed as the process of purchasing /
selling currencies, that is, the mechanism by which one currency gets converted into
another. Foreign currency would include NOSTRO balances and instruments.