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Getting a forex card or foreign currency? Keep an eye on the interbank rate

When you buy a forex card from a bank or an online portal, or even foreign currency notes, you do not get them at the interbank rate. The rate at which you buy and sell foreign exchange is at a mark-up over the interbank rate. The closer your rate is to the interbank rate, the better it is.

October 14, 2022 / 08:42 AM IST
Representative image

Representative image

Have you recently bought foreign currency, or do you have any immediate plan to do so? You are likely to be perplexed by the exchange rates quoted to you when you attempt to buy foreign currency. Banks and money changers will quote different rates, whether you buy currency notes, get a forex card or send money abroad.

Fixed forex card rates

If you visit a bank branch or a money changer, you will find a rate list with the headings We Buy Rates and We Sell Rates displayed. And practically every other bank or money changer you may go to would have different rates for the currency it buys or sells.

The same happens when you look for forex rates online. The rates lack uniformity; forex rates do not change even when exchange rates change by the second. If you choose to use your INR debit or credit cards abroad, you'll be utterly oblivious to the rates at which your bank will convert your money. That's the elephant in the room now.

Forex rates, however, can be completely transparent, just like stock market rates. Banks, for instance, deal with each other for all their forex transactions at live interbank rates and not on fixed card rates.

Interbank rates are real-time rates, just like stock market rates. In fact, all rates are derived from interbank rates. The only significant difference is that most banks and money changers choose to display fixed forex rates that are heavily loaded over interbank rates. These are static and usually do not change through the day, even when inter-bank rates change every second.

Why interbank rate matters

The interbank rate depends on various factors such as supply of and demand for currencies, domestic and foreign trade deficit or surplus, inflation and interest rates in a particular country, economic and political stability, and so on.

Banks and exchange companies generally mark up this base (interbank) rate to calculate the final exchange rate. No exchange company displays or clearly informs you about the margin on the base rate. Therefore, you should always check out the interbank rate on Google or search engines that provides reasonably accurate interbank rates and check the margin the exchange firm applies.

Also read: This is the best way to carry forex while travelling abroad

Zero markup vs interbank rates

Some companies also promote zero markup exchange rates, which may logically sound like the best rates, but there is a catch here. Zero markups usually mean zero markups on bank/visa rates and not on the interbank rates that are live and real-time rates.

Zero markup rates on INR debit or credit cards are always static, unlike the interbank that the Reserve Bank of India (RBI) and banks use for interbank dealings. Hence, zero markup rates on all INR cards may be much higher than interbank rates. Zero markups do not guarantee the best forex rates; therefore, keep an eye on the interbank rate if you are dealing with INR credit or debit cards.

How to know exact markups?

Most Indian customers end up bargaining hard to obtain favourable or better than the rates quoted by banks or money changers.

However, these highly negotiated rates may be very far from a reasonable or a good rate since the bargaining is around card or quoted rates and not interbank rates. The card or quoted rates can be heavily loaded.

Usually, banks and money changers charge a markup of 2% to 6% over the interbank rate and international credit/debit cards a surcharge of 3% to 6%.

The worst places to go are airports, where rates can be marked up by over 4% or even 15% for various foreign currencies.

Online marketplaces are often the best place to buy a forex card or currency or book an overseas money transfer. You should, however, check if the selected website shows Live Rates that would normally be linked to inter-bank rates and are therefore completely transparent. Usually, good retail forex marketplaces charge a minimal or almost negligible markup.

Different products, different markups

Now that you have understood the interbank rate and various markups loaded by banks and money changers, you need to know that markups are different for different forex products.

The worst product to purchase is currency notes because it is entirely dependent on demand and supply; hence the markup and the spread (difference between buy and sell rates) on currency notes are the highest.

The best product to purchase is a forex card is available at nearly exactly the interbank rate. The markup on money transfers ranges between 0.4 and 0.8% for online retail forex websites with a zero commission. At banks and money changers the markup could be as high as 2-4%. The commission is an additional charge.

It is most likely that the most crucial interbank rate won't appear in your transaction details or credit or debit card statement. However, if you want to get the best deal on currency exchange or money transfers abroad, do not forget to check the interbank rate, which is readily available on search engines.

Sudarshan Motwani is founder & CEO,
first published: Oct 14, 2022 08:42 am