ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Method of Quoting Exchange Rates for Merchant Transactions- Implications of the Recent Changes

Method of Quoting Exchange Rates for Merchant Transactions Implications of the Recent Changes S K Verghese RECENTLY the Reserve Bank of India (RBI) has introduced certain changes in the method of quoting exchange rates of the rupee for merchant transactions. These changes are effective from January 1, 1984, The two main features of the new method are; (a) the separation of exchange rates from interest rate applicable for buying foreign currency instruments, and (b) the abolition of the anachronistic fixed rate schedule in pound sterling issued by the Foreign Exchange Dealers Association of India (FEDAI). At the instance of the RBI, the FEDAI has new issued a detailed guideline regarding merchant rates quotation in various currencies, including the pound sterling. Though the basic changes incorporated in the new method of quoting merchant rates are welcome and long overdue, the detailed guideline covering the base rate, fixed minimum and maximum profit margins and maximum spread between the buying and selling rates of Authorised Dealers (ADs) has introduced irksome and unnecessary complexity in the foreign exchange business of the banks. It has also imposed unnecessary and doubtful tasks on the inspectors of the RBI, the fulfilment of which they will not be able to ensure in a highly volatile foreign exchange market. To appreciate the importance and implications of the new method, it is necessary to compare some of the basic elements of the new method with the hitherto prevalent method of quoting merchant rates.

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