What is Exchange Rate?
Exchange rate is a rate at which one currency can be exchanged into another currency. In other words, it is the value of one currency in terms of another. Say:
USD 1 = INR 70
Type of Transaction
All foreign exchange transactions undertaken have to be either a purchase transaction or a sale transaction for the bank. The type of transaction is to be determined based on whether the Bank dealing with the foreign exchange is buying or selling the same
Purchase Transaction
In a purchase transaction, the Bank receives a foreign exchange.
Example: Export remittance received in bank’s Nostro account. Bank buys dollar from the exporter and pays INR in exporters cash credit (CC) account.
Sale Transaction
In a sale transaction, the Bank parts with foreign exchange.
Example: Importer makes payment for import bill by buying USD from the bank. Bank debits CC account for the equivalent amount.
Type of Rates
TT Buying Rates (Inward Remittance)
The TT buying rate is applicable for:
- Inward remittances
- Proceeds of export bills
- Cancellation of forward sale contract on or after due date
- Conversion of RFC, EEFC, FCNR(B) deposits and PCFC/FC Loan into Indian Rupees
OD Buying (Bill Buying Rates )
The bill buying rate is applicable for purchase/discounting of bills and other instruments. Although the Bank on purchasing/ discounting the export bill immediately parts with the Rupee equivalent, the foreign exchange will be received (delivered) on a future date after realisation of the bill. In the case of usance bill, forward rate will be applicable. However, in the case of sight bill, forward rates are not quoted even though transit period is involved, as bills are likely to be realised early.
TT Selling (Outward Remittance)
The TT Selling rate is applicable for :
- Outward remittance in foreign currency
- Cancellation of purchase
- Bill purchased/returned unpaid
- Bill purchased/transferred to collection a/c
- Refund of inward remittances
- Forward purchase contract cancellation on or after due date
- Recovery of interest on PCFC/FC Loan
BC Selling (Bill Selling Rate)
The Bill Selling rate is applied for transactions involving transfer of proceeds of import bills.
Foreign Exchange Delivery
The foreign exchange quotation will also be determined by the date of delivery i.e. the date on which the transaction is completed. The delivery under a foreign exchange contract can be made in one of the following ways:
| Type of Transaction | Explanation | Date of Deal | Value Date |
| Cash / Ready | Delivery on the same day i.e. on the deal date | 03 Dec 2018, Monday | 03 Dec 2018, Monday |
| TOM | Delivery made on the next working day after deal date | 03 Dec 2018, Monday | 04 Dec 2018, Tuesday |
| SPOT | Delivery on the second working day after deal date | 03 Dec 2018, Monday | 05 Dec 2018, Wednesday |
| Forward | Delivery subsequent to SPOT date | 03 Dec 2018, Monday | Any date after 05 Dec 2018 |
Computation of Rates
The Bank is a trader in foreign exchange. Purchases are made at a lower price and the sale at a higher price, with the differential being the exchange profit. Banks arrive at a quote based on base rate, exchange margin, spread, and forward premium.
Base Rate
Base rate is the rate derived from ongoing interbank spot rates. For merchant transaction on cash basis (i.e. value Today), the base rate will be adjusted to the extent of cash/spot differences.
Exchange Margin
Banks adds exchange margin above the base rate for quoting rates for different types of merchant transactions e.g. TT Buying/Selling, Bill Buying/Selling etc. Margin offered to the importers/exporters differs based on overall relationship value, volume in foreign exchange etc.
Spread
Spread is the difference between TT Selling rate and TT Buying rate of a given currency. FEDAI has stipulated that the spread should not exceed the following limit from the mean rate:
| USD | 1% |
| GBP, EURO, AUD, CHF, JPY | 2% |
| All other currencies | Minimum possible spread |
TT Buying Rates
| USD INR | 70 / 70.05 |
| Base Rate in TT Buying Rate | 70 |
| Cash / Spot Difference | -0.02 |
| Less: Exchange Margin | -0.05 |
| Rate for Exporter | 69.93 |
Bill Buying Rates (OD Buying)
| USD INR | 70 / 70.05 |
| Base Rate | 70 |
| Add premium/deduct discount as the case may be, for the period of delivery/realisation. Premium for 3 months say Rs.0.60 |
+0.60 |
| Less: Exchange Margin | -0.05 |
| Rate to Exporter | 70.55 |
TT Selling (Outward Remittance)
| USD INR | 70 / 70.05 |
| Base Rate in TT Buying Rate | 70.05 |
| Cash / Spot Difference | – 0.02 |
| Plus: Exchange Margin | +0.05 |
| Rate for Importer | 70.08 |
BC Selling (Bill Selling Rate)
| USD INR | 70 / 70.05 |
| Base Rate in TT Buying Rate | 70.05 |
| Cash / Spot Difference | -0.02 |
| Plus: Exchange Margin | +0.15 |
| Rate for Importer | 70.18 |
Hours of Business
The hours during which forex business will be transacted are the normal banking hours of AD branches expect on Saturdays and Sunday.
Buyer's Credit & Supplier's Credit 