India is following the direct rate in Forex markets, i.e. foreign currency is fixed and home currency is varying. When we go to a shop and ask for the price of a product he tells us only one rate for the product, because the trader is only selling the product to consumers. He is not buying from consumers. Whatever rate the seller tells is implied as his selling price for the product. Even though the consumer is buying a product, what he pays to the trader is the selling price of the trader. Foreign Exchange market is different from this market in the sense that the authorized dealer buys as well as sells the foreign currency. Banks and financial institutes authorized by RBI to sell the foreign currency are called as Authorized Dealers. When you ask the rate of a foreign currency from an authorized dealer, he quotes two- way rates. It means that he quotes the rate for buying as well as selling the foreign currency.
Example US$ 1=Rs.45.2200,45.2300
In this rate, the authorized dealer will buy US$ at the rate of US$ 1=45.2200 and he will sell the US$ at the rate of US$ 1=Rs.45.2300. The difference between the buying and selling price is his profit margin. Here, the dealer will make a profit of Rs.0.0100 by buying and selling one US dollar. Even though, the word “Buying rate” and “Selling rate” is not mentioned in the quotations, it is implied that the lesser rate is the buying rate and that the higher rate is the selling rate.… Read the rest