You must know these things about Foreign Exchange Rates and International Money Transfer

Whether you work abroad or send money abroad to support your child’s education, you must be aware of certain foreign exchange rate facts to get the most out of your overseas money transfers.

While it is much easier to let banks or other international money transfer providers handle your money, you may end up losing large sums of money due to hidden costs or FX spreads that these institutions charge you without your knowledge. Therefore, it is critical to have a basic understanding of FX rates and how the market influences them.

And if you thought learning about foreign exchange rates wasn’t your cup of tea, we’ve got you covered with this layman’s guide to FX rates. Get going, fellas!

What is Foreign Exchange Rates?

A foreign exchange rate is the price of one currency expressed in terms of another. In other words, a foreign exchange rate compares the relative values of two currencies. Because standardized currencies around the world fluctuate in value in response to supply, demand, and consumer confidence, their relative values change over time.

For example – if the USD to AUD exchange rate is 1.30, then it will cost a person 1.30 AUD to buy 1 USD. Here, the exchange rate is 1.30.

What is the Real-Time Foreign Exchange Rate?

The rates that an international money transfer provider receives from their rate provider are referred to as real-time foreign exchange rates. This rate does not include any profit margin mark-up.

What are the benefits of Sending Money Abroad with Real-Time FX Rates?

When an international money transfer provider sends your money abroad using Real-Time FX Rates, they do it without adding any profit margin. This may save you some bucks depending on the 

You may be wondering why banks and other international remittance providers add profit margins to FX Rates, and if they ever provide customers with Real-Time FX rates. Continue reading to learn more.

What/Who decides FX Rates?

In India, no single institution or authority determines foreign exchange rates. India has a floating exchange rate system, which means that the rupee’s exchange rate with other currencies is determined by market factors such as demand and supply.

For example, if the demand for US dollars rises, the value of the dollar rises. This is currently the case, as India imports more goods from the US than India exports to the US. The imported goods must be paid for in US dollars by local Indian traders. As a result, they purchase US dollars by exchanging them for rupees, increasing demand for USD and assisting it to appreciate in relation to the rupee.

Aside from demand and supply, the following five factors are widely accepted as being the driving force determining a currency’s exchange rate:

1. Inflation in the country

The price of goods or services will rise if they become scarce or if money is in short supply in the economy. This is referred to as inflation. Inflation reduces the purchasing power of the currency and thus its value.

2. The interest rate or repo rate

The RBI determines India’s interest rate, which is currently set at 6.5%. It is the interest rate at which the Reserve Bank of India lends money to Indian banks. Investors would rush to buy government bonds if interest rates rose because the returns would be higher. The rupee will be in higher demand, and its value will rise as a result.

The disadvantage of a higher interest rate is that when banks lend money to people, they will charge an even higher interest rate than what the RBI charges in order to make a profit on their loans. This may deter people from starting a business or taking out a loan to buy a house, car, or further their education. Without the flow of capital in the form of loans, a country’s economic activity may be stifled and slowed.

3. Level of current account deficit

A country’s foreign transactions are represented by its current account. A current account deficit indicates that a country spends more money importing goods and services from other countries than it earns through exports. Because imports must be paid in foreign currency, the demand for that currency rises, and its value rises in relation to the rupee. If, on the other hand, exports outnumber imports, the rupee’s value will rise in relation to the foreign currency.

4. Import and export of gold

Above, we discussed the impact of the current account deficit on the exchange rate. When a country imports more goods than it exports, the value of its currency falls.

The direct impact of this can be seen in India in the case of gold imports.

Did you know that India is the world’s largest importer and holder of gold?  It is estimated that the locals own up to 25,000 tonnes of gold.

Countries that excel at manufacturing a wide range of gold-based products but lack large gold reserves end up importing large quantities of gold. These countries’ currencies will be generally weaker. Therefore, When the price of gold rises in the international market, the strength of the Indian rupee falls.

5. Amount of public debt

If a country has a high level of budget deficits and borrows to cover these costs, its currency’s value falls. How does this happen? Inflation is extremely likely in a country with a large amount of public debt. To pay off its debts, it must either print new currency (which raises inflation) or increase the sale of securities to foreign investors, which lowers their prices. If the debt is too large, and investors aren’t confident in the country’s ability to repay its debts, they won’t buy securities denominated in that currency. As a result, inflation will rise while currency valuations will fall.

Also read: The Ins And Outs Of The Impactful USD To INR Forecast

6. Stability and economic growth

Foreign investors want to make money from their investments. As a result, in order to attract investments, a country must have a stable government and sound economic policies.

More foreign investments imply increased demand for the rupee, and thus its value will rise.

Where is the Foreign Exchange Market?

Unlike stock markets, which have a centralized physical exchange, the foreign exchange market is an over-the-counter (OTC) market, meaning that trading takes place directly between two parties without the involvement of an exchange. There is no such thing as a centralized foreign exchange market!

Participants in an OTC market trade with one another via various communication channels such as the phone, email, or proprietary electronic messaging/trading systems. In terms of trading volume, the foreign exchange market is by far the largest in the world, with participants including banks, hedge funds, central banks, investment management firms, international corporations, retail forex brokers, and investors.

What are foreign exchange rates used for?

Foreign exchange rates are used for sending money abroad, trading in the foreign exchange market, and so on. They act as a point of reference for two parties interested in conducting a foreign exchange transaction.

Do International Money Transfer service providers give their customers Real-Time Rates?

When you go to a bank or most other international remittance providers to convert currencies, you are unlikely to get the market price that traders do. The bank or international money transfer service providers will markup the price to make a profit.

If the USD/AUD exchange rate is 1.30, the market is indicating that it costs 1.30 Australian dollars to purchase a US dollar. However, it may cost 1.40 Australian dollars at the bank. The difference between the market exchange rate and the exchange rate charged by banks is where banks make their money.

To calculate the percentage difference, divide the difference between the two exchange rates by the market exchange rate: 

1.40–1.30 = 0.10

0.10/1.30 = 0.076. 

To calculate the percentage markup, multiply the result (0.076) by 100: 

0.076 x 100 = 7.6 %

However, because it is an OTC market, you cannot see the exact price at which your currency is converted by the bank.

HOPRemit is an RBI-regulated international remittance platform that enables users to send money abroad at near 0% markup. With HOPRemit, the entire process of international remittance is paperless and economical. The most amazing part, you can complete the international money transfer from wherever you are! 

Are international remittance providers allowed to add a markup and charge fees?

Yes, international money transfer providers are allowed to add markups. It is an authorized business practice. However, it is unjust from the perspective of the client because they end up losing a significant portion of their money to the international money transfer service provider.

How to verify if the exchange rates offered are real-time?

Live conversion prices can be found on websites such as HOPRemit, Google, xe.com, Reuters, Google, and others. These are some of the most trustworthy sources for real-time currency exchange rates. There will invariably be a difference between the rate offered by your international money transfer service provider and the rate displayed on these websites.

Therefore, you should opt for trustworthy and economical international remittance providers like HOPRemit, XE, and others.

Can International Remittance providers be sued for adding markup to their FX rates?

That is not an option because it is a valid business model. Central banks, which regulate banks, do not instruct them on the foreign exchange conversion rates they charge their customers.

But guess what? You can completely avoid unfair FX rates by using a remittance platform like HOPRemit, which provides real-time foreign exchange rates on your international money transfers.

Conclusion:

If you send or receive money on a regular basis, staying current about these things will allow you to better evaluate the best time for international money transfers. To avoid potential drops in currency exchange rates, use a locked-in exchange rate service, which ensures that your currency is exchanged at the same rate regardless of any factors that influence an unfavorable fluctuation.