Spend Smart. Now, you can buy forex at spot rate

If you are a frequent overseas traveller, you would have noticed how you invariably get a raw deal while buying foreign exchange for your travel needs. The exchange rate quoted by the dealer you buy from, is always higher than the spot market rate. Similarly, while exchanging foreign currency for rupees, the rate you get is much lower than the traded spot price in the inter-bank OTC market.

This is because the inter-bank foreign exchange market is constructed mainly for the big boys — the corporate customers — who deal in millions of dollars. The retail customer, who generally wants to exchange a few thousands of rupees, is not the focus of this market. The exchange traded currency futures market is also not apt for retail customers, as it is cash settled and delivery of foreign exchange is not possible here.

The RBI is trying to fill the gap by creating a platform through which smaller clients — SME importers and exporters and individuals — can buy and sell foreign exchange at the prevailing spot rate in the inter-bank forex market.

Better deal

If you needed to buy foreign exchange, you could do so from the authorised branches of your bank or from one of the non-bank forex dealers such as Thomas Cook, that are authorised to facilitate purchase or sale of forex.

But the price quoted to retail has so far been very non-transparent. Currently, authorised dealers are free to fix the charges on different forex transactions. Therefore, these can vary across banks and other dealers. Many banks fix “card rates” for each forex pair in the morning, at which retail clients have to buy/sell the currencies through the day, regardless of the price at which they may be quoting in the spot market. Often, the mark-up charged by banks has been found unreasonable.

The RBI has now authorised the Clearing Corporation of India (CCIL) to develop a new trading platform for retail, which will be a carve-out of the inter-bank foreign exchange market. The difference being that only the buying and selling by smaller customers will be transacted here. Retail investors can access the trading screen through the internet and place their orders directly.

CCIL’s platform is undergoing tests and mock trading. It is expected to go live by August 2019.

How will it work?

The circular on operational guidelines for the platform shall be issued by the end of June 2019. But indications are that in the initial stage, retail customers of the member banks of FX-CLEAR will be able to buy or sell foreign currency on this platform. The customers would be able to see the prices offered by all banks on the trading screen and place their bid/ask quotes at the most competitive rates.

There could be a mark-up on the traded price, as specified by the RBI, to account for the banks’ servicing cost. The required amount in rupees can be deducted from the saving account in the bank. The transaction could be between the client and his bank or other banks as well. The method in which the foreign exchange will be given to clients in the physical form needs to be spelled out by the RBI. The client could be asked to collect it from a designated branch/branches in each city, or it could be loaded in a forex card or given in any other form.

AD Category-I that includes 85 Indian and foreign banks will be able to provide this service to their customers. The transaction limit is to be set by each bank, but the minimum transaction quantity is expected to be $1,000 and in multiples of $500 thereafter, according to the RBI discussion paper on forex trading platform for retail. The trades can be settled the same day, next day or on T+2 basis.

If you own a small or medium enterprise, this platform could turn out to be a god-sent for meeting all your foreign exchange needs.

As of now, the smaller businesses are handicapped as they need to transact in the rather opaque inter-bank market for their external commitments.

The banks tend to give such smaller companies a raw deal compared to the larger clients with more bargaining power. Now they can ensure that they transact close to the spot rate, through this platform.

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