Exchange margin of Merchant Rates - Forex Management

When the bank buys foreign exchange for the customer, it sells the same in the inter bank market at better rates and thus makes a profit out of the deal. In the inter bank market, the bank will accept the rate as dictated by the market. It can therefore sell foreign exchange in the market at the market buying rate for the currency concerned. Thus the inter bank buying rate forms the basis for quotation of buying rate by the bank to its customer. In the same manner, when the bank sells foreign exchange to the customer, it meets the commitment by purchasing the required foreign exchange from the inter bank market. It can acquire foreign exchange from the market at the market selling rate. Therefore, the inter bank selling rate forms the basis for quotation of selling rate to the customer by the bank. The inter bank rate on the basis of which the bank quotes its merchant rate is known as base rate.

Exchange Margin:

When a merchant customer approaches his banker for foreign exchange and if the bank quotes the base rate to the customer, it makes no profit. On the other hand, there are administrative costs involved in the transaction. Moreover, the deal with the customer takes place first and only after acquiring or selling the foreign exchange from/to the customer, the bank goes to the inter bank market to sell or acquire the foreign exchange required to cover the deal with the customer. Between these transactions there will be time gap of say an hour or two and the exchange rates are fluctuating constantly and by the time the deal with the market is concluded, the exchange rate might have turned adverse to the bank. Under such circumstances, to cover the administrative cost, to overcome the exchange fluctuation and gain some profit on the transaction to the bank sufficient margin need to be built into the rate. This is done by loading exchange margin to the base rate. The quantum of margin that is built into the rate is determined by the bank concerned, keeping with the market trend.
FEDAI has standardized the exchange margin to be charged by the banks and the banks are free to load margins within the range. The FEDAI fixed margins are:

  1. TT Purchase rate 0.025% to 0.080%
  2. Bills Purchase rate 0.125% to 0.150%
  3. TT Selling rate 0.125% to 0.150%
  4. Bills selling rate 0.175% to 0.200%
    (Over TT selling rate)

Fineness of Quotation:

The exchange rate is quoted upto 4 decimals in multiples of 0.0025. The quotation is for one unit of foreign currency except in the case of Japanese Yen, Belgian Franc, Italian Lira, Indonesian Rupiah, Kenyan Shilling, Spanish Peseta and currencies of Asian Clearing Union countries (Bangladesh Taka, Myanmar Kyat, Iranian Riyal, Pakistani Rupee and Sri Lankan Rupee) where the quotation is per 100 units of the foreign currency concerned. Examples of valid quotations are:
USD 1 = Rs. 43.2350
GBP 1 = Rs. 63.3525
EUR 1 = Rs. 43.5000
JPY 100 = Rs. 35.6075

While computing the merchant rates, the calculations can be made upto five places of decimal and finally rounded off to the nearest multiple of 0.0025. For example, if rate for US dollar works out to Rs. 43.12446 per dollar, it can be rounded off to Rs. 43.1250. The rupee amount paid to or received from a customer on account of exchange transaction should be rounded off to the nearest rupee, i.e., up to 49 paise should be ignored and 50 to 99 paise should be rounded off to higher rupee (Rule 7 of FEDAI).

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