Principle Types of Ready Merchant Rates - Forex Management

The foreign exchange dealing of a bank with its customers is known as merchant business and the exchange rate at which the transaction takes place is the ‘merchant rate’. The merchant business in which the contract with the customer to buy or sell foreign exchange is agreed to and executed on the same day is known as ‘ready transaction’ or ‘cash transaction’. As in the case of interbank transactions, ‘a value next day’ contract is deliverable on the next business day and ‘spot contract’ is deliverable on the second succeeding business day following the date of the contract. In this section we focus on principle types of buying as well as selling rates.

Principal Types of Buying Rates
In a purchase transaction the bank acquires foreign exchange from the customer and pays him in Indian rupees. Some of the purchase transactions result in the bank acquiring foreign exchange immediately, while some involve delay in the acquisition of foreign exchange. Depending upon the time of realization of foreign exchange by the bank, tow types of buying rates are quoted in India. They are:

  1. TT Buying Rate, and
  2. Bill Buying Rate.

TT Buying Rate (TT Stands for Telegraphic Transfer)
This is the rate applied when the transactions does not involve any delay in realization of the foreign exchange by the bank. In other words, the nostro account of the bank would already have been credited. The rate is calculated by deducting from the interbank buying rate the exchange margin as determined by the bank.
Though the name implies telegraphic transfer, it is not necessary that the proceeds of the transaction are received by telegram. Any transaction where no delay is involved in the bank acquiring the foreign exchange will be done at the TT rate. Transactions where TT rate is applied are:

  1. Payment of demand drafts, mail transfers, telegraphic transfers, etc. drawn on the bank where bank’s nostro account is already credited;
  2. Foreign bills collected. When a foreign bill is taken for collection, the bank pays the exporter only when the importer pays for the bill and the bank’s nostro account abroad is credited;
  3. Cancellation of foreign exchange sold earlier.

Bill Buying Rate
This is the rate to be applied when a foreign bill is purchased. When a bill is purchased, the rupee equivalent of the bill value is paid to the exporter immediately. However, the proceeds will be realized by the bank after the bill is presented to the drawee at the overseas centre. In the case of a usance bill, the proceeds will be realized on the due date of the bill which includes the transit period and the usance period of the bill.

Principal Types of Selling Rates
When bank sells foreign exchange it receives Indian rupees from the customer and parts with foreign currency. The sale is effected by issuing a payment instrument on the correspondent bank with which it maintains the nostro account. Immediately on sale, the bank buys the requisite foreign exchange from the market and gets its nostro account credited with the amount so that when the payment instrument issued by it is presented to the correspondent bank and it can be honoured by debit to the nostro account. Therefore, for all sales on ready/spot basis to the customer, the bank resorts to the interbank market immediately and the base rate is the interbank spot selling rate. However, depending upon the work involved, viz., whether the safe involves handling of documents by the bank or not, two types of selling rates are quoted in India. They are:

  1. TT selling rate; and
  2. Bills selling rate.

TT Selling Rate
This is the rate to be used for all transactions that do not involve handling of documents by the bank. Transactions for which this rate is quoted are:

  1. Issue of demand drafts, mail transfers, telegraphic transfers, etc., other than for retirement of an import bill; and
  2. Cancellation of foreign exchange purchased earlier.

The TT selling rate is calculated on the basis of Interbank selling rate. The rate to the customer is calculated by adding exchange margin to the interbank rate.

Bills Selling Rate
This rate is to be used for all transactions which involve handling of documents by the bank: for example, payment against import bills. The bills selling rate is calculated by adding exchange margin to the TT selling rate. That means the exchange margin enters into the bills selling rate twice, once on the interbank rate and again on the TT selling rate.

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