EXCHANGE RATE

MECHANISM
Jignesh Chandra Mishra
Senior Manager(Forex Dealer)
Bank Of India, Treasury Branch

EXCHANGE RATE

Exchange rate is the rate at which one

currency is converted into another currency.
The price of one currency in the system , is
quoted in terms of another currency.
In exchange rate system , the currencies are
just like commodities having varying prices.

VARIOUS CURRENCY RATES

Fixed Rate
Floating Rate
Flexible Rate
Selling Rate and Buying Rate
Inter-bank Rates
Bid and Offer Rate
Card Rate

FIXED RATES

The rates fixed by central banking authority

i.e. RBI in India.
It is a system under the gold standard where
the rate of exchange tends to stablise around
the mint par value.
Now a days , the gold standard does not exist
and due to this the fixed rates refer to
maintenance of external value at a
predetermined level.
It prevents speculation.

FLOATING RATES

It is a system where the exchange rates are

determined by the conditions of demand and
supply of the foreign exchange in the
market.
The rates fluctuates freely in the line with
the demand and supply without any
restrictions on buying and selling.

FLEXIBLE RATE

In this case , the exchange rate is fixed rate

but is adjusted in the line with the market
conditions.
Fixed by central banking authority changed
by time to time according to market.

SELLING RATES AND BUYING

RATES

When bank aquires foreign currency it uses

buying rate and when it parts with foreign
currency , it makes use to selling rate.

The bank quote two different rates i.e.

selling rate( at which bank sells foreign
currency) and buying rate ( at which foreign
currency is purchased).

INTERBANK RATES

In the inter-bank market , the rates are

quoted both for buying and selling like this,
USD/INR = 62.20/22
The quoting bank indicates that it is ready to
buy USD at Rs 62.20, and sell at Rs 62.22.
This indicates the said bank would pay lesser
amount of rupees when USD are purchased
and takes more rupees, while sell USD.

BID AND OFFER RATES

The quoting bank in the previous example is

ready to buy one USD at Rs 62.20 , which is
called bidding for USD.

The bank is ready to sell a USD for Rs 62.22,

which is called the offered rate.

CARD RATES

Card rates are calculated at the beginning of

each day, based on the current inter-bank
rates and cross rates in the international
market.
The bank calculate the card rates after
deducting exchange margin and conveyed to
their branches for various types of
transactions( buying and selling rates).

CROSS RATES
If the price of one currency is not available
against the other currency, the rate between
them is obtained by using an intermediary
currency.
The rate thus obtained is called cross rate and
the principle applied for obtaining the cross
rate is called the chain rule.
Ex. 1 USD/INR= 62.20 and 1 EUR/USD= 1.3610
Then EUR/INR(Cross Rate)= 62.20x1.3610
=Rs 84.6542

TYPES OF INTERBANK
QUOTATION

DIRECT QUOTATION
In a direct quotation
there is a variable
unit of home
currency and fixed
unit of foreign
currency.
Ex. 1USD= Rs 62.20
In India direct quotes
are used wef 1
August 1993.

INDIRECTQUOTATIO
N
In an indirect
quote there is
fixed unit of home
currency and a
variable unit of
foreign currency.
Example
100 INR= USD 1.61

VALUE DATE TRANSACTIONS

While quoting the rates, the banks take into

account the time factor i.e. how much time
is going to take the purchased or sold
currency to credited or debited to the
NOSTRO account abroad.

The settlement date is known as value date.

TYPES OF VALUE DATE TRANSACTIONS

Cash value (same day settlement)

Tom value ( value tomorrow settlement)

Spot value ( value next to tom settlement)

Forward rate (settled after spot value)

TYPES OF EXCHANGE RATE

Buying Rates
TT Buying Rate
Bill Buying Rate
Currency/TC Buying Rate
Selling Rates
TT Selling Rate
Bill Selling Rate
Currency/TC Selling Rates

TT BUYING RATES

When no delay is involved in realisation of

the foreign exchange by the bank or Nostro
account is already credited.
TTB rate is applied for,
Clean Inward remittances(TT,DD,MT).
Conversion of proceeds of instruments that
are sent for collection( collection of
cheques, Export Bills etc.) where cover
already received abroad.
Cancellation of outward TT,MT etc.
Cancellation of forward sale contract.

BILL BUYING RATE

When some delay in realisation of foreign

exchange by the bank is involved, bill buying
rate is applied. Such rates are calculated by
adding the forward premium/discount for
transit and usance period .

Bill buying rate is applied for purchase,

discount and negotiation of export bills.

TT SELLING RATE

When handling of documents by the bank is

not involved (issue of demand drafts, mail
transfer etc.) TT selling rate is applied which
is calculated on the basis of inter-bank
selling rate by adding the exchange margin.
TTS is applied for,
All clean outward remittances
Cancellation of export bill purchased i.e.
crystallization of export bills.
Cancellation of forward purchase contract.

BILL SELLING RATE

When transactions involve handling of

documents, such as payment for import
documents, bill selling rate is applied, it is
calculated by adding exchange margin to the
TT selling rate.
BLS is applied for,
Retirement of import bills.
Crystallisation of import documentary bills

RATE CALCULATIONS

Interbank Rates
Spot 1 USD/INR = 61.40/42
Cash/Spot = 4/6 paisa
Cash/Tom = 2/3 paisa
Tom/Spot = 2/3 paisa
Exchange margin = 2 Paisa
To Calculate rate for inward remittance of
USD 100000 (val cash, val tom, val spot)
To Calculate rate for outward remittance of
USD 200000 (val cash, val tom, val spot)

FACTORS INFLUENCING
EXCHANAGE RATES

Exchange control regulations

Balance of payment
Relative Price(Inflation)
Interest rates
Other factors