Why the remittance rate is never the rate in the news

The dollar rate on the news, on this site and in a currency app is a reference rate. The rate on a remittance receipt is a dealing rate. They are different things, measured at different moments for different purposes, and the gap between them is what a transfer costs. Once you know what each is, you can read any quote.

What a reference rate is

A reference rate is a single mid-point exchange rate published once a business day, for use as a benchmark: in contracts, accounts, customs valuations and tables like the ones here. In India, Financial Benchmarks India Limited publishes the rupee’s reference rates against the US dollar, the euro, the pound and the yen around midday on every business day, from quotes polled from banks; the Reserve Bank published them before FBIL took the job over, and keeps the archive. In Europe, the European Central Bank publishes euro reference rates for some thirty currencies, the rupee among them, each business day in the afternoon, Central European Time.

This site’s currency pages use the ECB’s rates, crossing each currency against the rupee through the euro; the Gulf currencies, which their central banks hold at a fixed rate to the dollar, follow the dollar’s rupee rate through that peg. The methodology page sets out the arithmetic and the time each figure belongs to.

Nobody is offered a reference rate. It is a mid-point: the middle of what banks were buying and selling at, at one moment, between themselves, in large amounts. It is the ruler, not the price.

What a dealing rate is

A bank or a transfer service quotes two rates: one at which it buys foreign currency from you and one at which it sells. The reference rate sits between them. The gap on your side of the mid-point — the difference between the rate you get and the reference — is the margin, and it is how the service earns on the exchange, over and above any fee it names.

So a remittance into India converts at the dealing rate the service offers for that moment, which moves all day; the reference rate is one fixed figure for the day. A quote taken in the morning and a transfer executed in the evening can differ even before any margin, because the market moved.

Where the cost sits

A transfer’s cost has up to four parts, and the margin is usually the largest:

1. The exchange margin — the gap between the dealing rate and the reference rate, hidden inside the rate itself.
2. The transfer fee — the explicit charge the service names, fixed or a percentage.
3. Correspondent and receiving-bank charges — deductions on the way, especially on a bank-to-bank wire, and a conversion by the receiving bank if the money arrives in foreign currency rather than in rupees.
4. Taxes — in India, the goods and services tax on the conversion service, charged on a value fixed by the tax rules and shown on the receipt; and, on money sent out of India under the liberalised remittance scheme, tax collected at source above the threshold then in force, which is set against the sender’s tax.

A service that advertises “zero fees” has moved its earnings into the margin; a service that quotes close to the reference rate charges a fee instead. Neither is dishonest, but only the total tells you anything.

How to compare quotes

Take the rupees that will actually be received and divide by the foreign currency sent, after every fee. That is the effective rate. Compare it with the reference rate for the same day; the difference, as a percentage of the reference rate, is the all-in cost of the transfer. Two quotes compared this way are comparable; two quotes compared by their advertised rate or their advertised fee are not.

The currency pages here show each pair’s reference rate with its date, and the reverse rate beside it, so the effective rate from a receipt can be checked against the benchmark for that day. Weekends and holidays have no reference rate — the pages say which day’s figure is shown — while dealing rates are quoted every day; a transfer made on a Saturday will be compared against Friday’s reference.

The pegged currencies

The dirham, the riyal and the other Gulf currencies are held at fixed rates to the US dollar by their central banks, which is why their rupee rates rise and fall together with the dollar’s. A remittance from the Gulf therefore carries two margins to look for: the dealing rate against the dollar, which is nearly constant, and the dollar–rupee rate, which is where the market and the margin both live.