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Understand Foreign Exchange Rates & Protect Against their Adverse Movement

I. Exchange Rates:Export contracts are concluded either in Indian rupee or in foreign currency. Where the contracts are in Indian rupee, the related documents are also prepared in Indian rupees and no conversion is involved. However, where the bill is drawn in foreign currency, like US $, ś, DM etc., you will get Indian rupees only after the conversion of foreign currency at the appropriate exchange rate. Thus the exchange rates become very important to determine the Indian rupees payable. A favorable exchange rate will fetch you more rupees and vice-versa. It, therefore, becomes essential for you to gain some basic knowledge about exchange rate, the working out of its quotation by the banks, the factors determining the exchange rates in the market and the precautions you should take so as to avoid possible losses in future, due to adverse movement of the exchange rates. In the following paragraphs we shall endeavor to explain these issues. The rates applied by the banks for converting foreign currency into Indian rupees and vice versa are known as exchange rates. In other words, exchange rate is the rate at which one currency can be exchanged for another. There are two systems of quoting exchange rates :

Direct Quotation:Where the price of foreign currency is quoted in terms of home or local currency. In this system variable units of home currency equivalent to a fixed unit of foreign currency is quoted. For example : US $ 1 = Rs. 40.00
Indirect Quotation:Where exchange rates are quoted in terms of variable units of foreign currency as equivalent to a fixed number of units of home currency. For example : US $ 2,500 = Rs. 40.00 Till 1.8.1993 banks were required to quote all the rates on indirect basis as foreign currency equivalent to Rs. 100 except in case of sale/purchase of foreign currency notes and traveller cheques where exchange rates on direct quotation basis were quoted. From 2.8.1993 banks are quoting rates on direct basis only.There is distinction between inter-bank exchange rates and merchant rates. Merchant rates are the exchange rates applied by the bankers for transactions with their customers for various purposes, such as import, export, travel, remittances etc. These rates are calculated by the banks as per the guidelines issued by the Foreign Exchange Dealers Association of India (FEDAI). On the other hand inter-bank rates are the rates for transactions amongst the authorised dealers in foreign exchange. These rates depend on the market conditions. It is not in out of place to mention here that exchange rates are volatile and, therefore, you should make sincere efforts to choose appropriate time for tendering your export documents to the bank for purchase/negotiation. Therefore, plan your affairs in such a way that the documents are delivered to the bank when exchange rates are favorable enabling you to get more Indian rupees after conversion of foreign currency amount of the bill into Indian rupees. A distinction is also made between spot rates and forward rates. Spot rates are applicable on the day of transact đ 7 3 Štion , i.e, the same day, whereas forward rates are the rates fixed in advance for a transaction which will mature at a specified date or during a specified period in future. Quotations for spot rates only are generally available and the customers have to enter into specific contracts for forward rates. Foreign exchange rates are always quoted as two way price i.e., a rate at which the bank is willing to buy foreign currency (buying rate) and a rate at which the bank sells foreign currency (selling rate). Banks do expect some profit in exchange operations and there is always some difference in buying and selling rates. However, the maximum spread available to banks is restricted in terms of ceiling imposed by Reserve Bank of India. All exchange rates by authorised dealers are quoted in terms of their capacity as buyer or seller. Different sets of exchange rates are applied for various types of foreign exchange transactions as under :

TT Selling Rate: This rate is applied for all clean remittances outside India i.e., for selling foreign currency to its customer by the bank such as for issuance of bank drafts, mail/telegraphic transfers etc.

Bill Selling Rate: This rate is applied for all foreign remittances outside India as proceeds of import bills payable in India. This rate is a little worse than TT selling rate.

TT Buying Rate: This rate is appled for purchase of foreign currency by banks where cover is already obtained by banks in India. Thus all foreign inward remittances which are made payable in India are converted by applying this rate. A mail transfer issued by a bank in Dubai for US $ 10,000 drawn on (say) Oriental Bank of Commerce in New York.

Bills Rate:This rate is applied for purchase of sight export bills which will result in foreign remittance to India after realisation. This rate is worsen than TT buying rate and, in addition, interest will also be recovered by the bank for the period for which the bank is out of funds.

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