Retail customers can save big on forex costs soon, thanks to the RBI

Need $1,000 for that long-dreamt US trip next week? Happy with the exchange rate getting flashed on the television screen? Supporting documents ready? Then, all you need to do is head to the nearest bank branch and pick up the greenbacks. 

But wait, if not known already, you are likely heading for a shock when you see that the card rate at the branch is nowhere close to what you have seen on your screen. 

Welcome to the world of fat margins enjoyed by banks offering currency notes. When the customer tries to buy dollars, it is usually at a 2 per cent premium, and when selling, it is usually at a 2 per cent discount. 

If the customer is using a credit card to buy the dollars, another 3 per cent is almost assured to get added up. 

Starting August, however, that is going to change forever. Now, a retail customer can expect to get near-market rates through an online platform, where all banks are vying to buy/sell dollars. The rates offered will be much finer than what they are now, and the trading will be completely anonymous. 
 

The initiative was undertaken by the Reserve Bank of India (RBI) through a discussion paper in October 2017. Concerned about rising customer complaints on fat margins of banks, the Reserve Bank of India (RBI)-entrusted Clearing Corporation of India (CCIL) will develop a platform for retail investors. 

The initial plan was to onboard customers with a minimum $1,000 and in multiples of $500 thereafter, but sources say the RBI is now open to accepting any amount, as customer needs are not in round figures and $1,000 is on the higher side. The maximum cap though would be $500,000. 

For now, the facility will be available only for dollars, but more currencies will be introduced later. The platform will be an extension of CCIL’s FX-Clear, which is used for large-volume interbank trading. The marketable lot in these markets is $500,000 and above. 

The idea for the retail trading platform is to aggregate enough orders to aggregate them into several marketable lots and trade in the interbank market, which then enables customers to benefit from the fine interbank rates enjoyed so far by banks and large customers.

According to a letter sent by the Foreign Exchange Dealers’ Association of India, customer registration will start on July 1 

and trading will start on August 5. 

Several sources confirmed the development. 

“The RBI and CCIL want to ensure there is enough customer onboarding for effective trading and so, registration will start a month in advance. The amount can be anything the RBI decides. The CCIL can settle transaction of even one rupee,” said a source. 

How to buy currencies on new platform

• Retail customers pay hefty costs on buying and selling forex 
• CCIL’s new online platform will allow trades at near interbank rates 
• System aggregates small retail orders into marketable lots
• Marketable lots ($500,000 or above) get traded in interbank market
• Customers to save substantially on forex costs even after banks’ fee 
• Facility not for speculation, customer must have need to transact

This is how the system will work: The customer can access the online trading platform (an app is still some time away). Before getting access, she will have to undergo a registration process on a separate portal. There, the customer will have to provide basic information — permanent account number and bank account details. The user’s bank will set up a limit for trading, and once approved, CCIL will send login credentials to the user. The user can then execute orders, cancel orders, or even take part in other orders available in the system. The system will simultaneously show the interbank rates prevailing at that moment, but the customer won’t have direct access to the interbank market for want of size. 

However, the system itself will try to aggregate the orders, so that the amount is enough to qualify for a marketable lot in the interbank market. In that case, the rates offered will automatically become wafer-thin, and almost on a par with interbank rates.  Banks will charge a small fee, which will also show up in the system. Once the trade is done, the ticket generated will reflect the interbank rate, mark-up, and the net rate. 

Trades can be done for same-day delivery (cash), next-day delivery (tomorrow), or spot delivery (T+2), and interbank rates will reflect accordingly. The trades will be anonymous, but the customer can walk down to her bank branch and get delivery of dollars, or deposit the dollars available with her. 

It is important to note that the facility is not for speculative purpose and the customer will have to have underlying needs to transact.  The bank, in turn, will settle with the CCIL, which will, in turn, settle with the bank with which the customer traded. Since the orders would be clubbed, it would be on a net basis to be settled by the CCIL.