Types of Buying Rates in Foreign Exchange Markets

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. For instance, if the bank pays a demand drawn on it by its correspondent bank, there is no delay because the foreign corresponded bank would already have credited the nostro account of the paying bank while issuing the demand draft. On the other hand, if the bank purchases on “On demand” bill from the customer, it has first to be sent to the draws place for collection. The bill will be sent to the correspondent bank for collection. The correspondent bank will present the bill to the drawee.

Depending upon the tine of realization of foreign exchange by the bank, two types of buying rates are quoted in India. They are

1. TT Buying Rate (TT stands for Telegraphic Transfer)

This is the rate applied when the transaction 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.

Transaction where TT rate is applied is;

  • Payment of demand drafts, mail transfers, telegraphic transfers, etc drawn on the bank where banks nostro account is already credited
  • 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 banks nostro account abroad is credited
  • Cancellation of foreign exchange sold earlier. For instance, the purchaser of a bank draft drawn on New York may later request the bank to cancel the draft and refund the money to him. In such case, the bank will apply the TT buying rate to determine the rupee amount payable to the customer.

2. 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 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.

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