Merchant Rates in Forex: TT, Bill and Cash Rates for Banks (CAIIB BFM)

Every foreign exchange transaction a bank does with a customer starts with a question: what rate do we quote? That question is answered by merchant rates in forex — the rates an authorised dealer (AD) bank charges its customers, built on top of the interbank rate it can actually deal at. Get the mechanics wrong in the exam and you will mix up TT buying with bill buying, or forget why currency notes carry a wider margin. This article walks through the build-up step by step, with FEDAI conventions and two worked examples for your CAIIB BFM revision.

Before you go further, it helps to have the base concepts from Exchange rates and Forex Business fresh in mind, since merchant rate construction sits directly on top of that foundation.

💱 What Is a Merchant Rate and Why Banks Need One

An AD bank does not deal with its retail and corporate customers at the rate it gets in the interbank market. The interbank rate — the rate at which banks trade currency among themselves through brokers or electronic platforms — is a wholesale rate available only for large, standard-sized deals. When a customer walks in to buy or sell foreign currency, the bank has to load its own cost and profit onto that wholesale rate before quoting. This loaded rate is the merchant rate.

The adjustment applied is called the exchange margin. It covers the bank's operating cost, the risk of holding an open position even briefly, and a reasonable profit. The margin is added when the bank sells foreign currency to the customer (so the customer pays more rupees per unit of foreign currency) and subtracted when the bank buys foreign currency from the customer (so the customer receives fewer rupees). Each bank decides its own margin within FEDAI (Foreign Exchange Dealers' Association of India) guidance, and margins vary by product — a large corporate remittance attracts a thinner margin than a small currency-note encashment.

Because forex rates move continuously through the day, banks work off a base rate that is refreshed periodically and then apply standard margins to generate the full set of merchant rates — TT buying, TT selling, bill buying, bill selling, and currency-note rates — without recalculating each one from scratch every time the market moves.

📈 TT Buying and Selling Rates Explained

TT, or telegraphic transfer, rates are the cleanest merchant rates because no document handling or collection period is involved — the funds move (or are deemed to move) electronically and immediately. TT rates therefore form the base rate from which the bank derives its other merchant rates by adding or deducting further margin for the extra cost of documents or physical cash.

TT buying rate applies when the bank buys foreign currency from a customer where the corresponding foreign currency has already been credited to the bank's nostro account, or is being credited without any further collection effort by the bank — for example, a clean inward remittance already realised abroad. The bank converts the interbank buying rate into the merchant TT buying rate by deducting its exchange margin, since the bank is buying and wants to pay the customer less.

TT selling rate applies when the bank sells foreign currency by issuing a demand draft, mail transfer, or SWIFT remittance abroad, where the bank's nostro account will be debited without any float period. Here the bank adds its margin to the interbank selling rate, since it is selling and wants to charge the customer more.

💡 Exam Tip: Remember the direction rule — buying rates are always lower and selling rates always higher than the interbank mid-rate, because the bank protects itself on both sides of every deal.

📄 Bill Buying, Bill Selling and Currency Notes Rates

Bill rates apply where a document — typically an export bill under a letter of credit or on collection — is involved, and the bank will not get its foreign currency credited immediately. Bill buying rate is used when the bank purchases or discounts an export bill from an exporter before the proceeds are actually realised abroad. Because the bank is funding the exporter upfront and will only recover the foreign currency after a transit and collection period, the bill buying rate is derived from the TT buying rate less an additional margin that compensates the bank for that notional interest cost and collection risk.

Bill selling rate is used for import bills, where the bank makes a payment abroad against documents received under a letter of credit or collection. Since there is usually little or no float involved on the selling side, the bill selling rate is generally close to the TT selling rate, with only a small additional margin, if any, over and above the standard TT selling rate.

Currency notes buying and selling rates apply to physical foreign currency, such as over-the-counter cash purchases from an inbound traveller or cash sales to an outbound traveller. Physical notes carry extra costs for the bank — insurance, safe custody, transportation to the currency chest, and the risk of soiled or mutilated notes — so the margin loaded on currency-note rates is the widest among all merchant rate categories.

⚠️ Common Mistake: Do not assume bill buying and TT buying use the same margin. The bill rate must additionally price in the transit period, which is exactly what trips up candidates in the exam.

🔄 Cover Deals, FEDAI Rounding and Card Rates

Once a bank quotes and concludes a merchant deal, it is left with an open foreign exchange position — it has bought or sold currency to the customer but has not yet matched that with an equal and opposite deal in the market. To eliminate this exposure, the bank enters a cover deal: an offsetting transaction in the interbank market that squares the position, usually within the same day. Cover deals are what let a bank quote a firm merchant rate to a customer with confidence, because the bank knows it can immediately lay off the risk in the wholesale market rather than carry an open position overnight.

FEDAI, working within the broader regulatory framework laid down by the Reserve Bank of India, prescribes uniform rounding conventions so that merchant rates displayed to customers are standardised across banks rather than left to arbitrary decimal precision. In practice, a bank calculates the raw merchant rate from the interbank rate and margin, then rounds it off to a fixed number of decimal places using a consistent rounding-up or rounding-down convention, rather than displaying the unrounded figure to the customer. You can read the RBI's overarching directions on authorised dealer conduct in forex business at the Reserve Bank of India website.

Card rates are the merchant rates a bank publishes and displays — traditionally on a rate card, now typically on its treasury screen or website — for small-value, walk-in transactions where negotiating a bespoke rate is not practical. Card rates are not a separate rate category: they are simply the standard TT, bill, and currency-note rates refreshed through the day off the base rate, applied uniformly to retail-sized deals, while large corporate deals are individually priced with finer margins.

🧮 Worked Examples: Export Bill Purchase and Import Payment

Assume, purely for illustration, that the interbank US dollar rate quoted to the bank's dealer is around 83.00 for buying and 83.02 for selling, and the bank applies a standard exchange margin on merchant deals plus a further collection margin on bill transactions.

Export bill purchase: an exporter presents a USD 10,000 export bill for purchase. The bank starts from the interbank buying rate of 83.00, deducts its normal TT margin to arrive at the TT buying rate, and then deducts a further transit-period margin to arrive at the bill buying rate, since the bank is funding the exporter before it actually realises the dollars abroad. The exporter is credited in rupees at this lower bill buying rate, and the difference between the bill buying rate and the eventual realisation rate, if any, is adjusted once the bill is actually paid by the overseas buyer.

Import payment: an importer needs to remit USD 10,000 against a bill of exchange received under a letter of credit. The bank starts from the interbank selling rate of 83.02, adds its normal TT margin to arrive at the TT selling rate, and applies that same rate (or a marginally adjusted bill selling rate) to debit the importer's account, since there is little or no float on the payment side. In both cases, the bank immediately covers its resulting position with an offsetting interbank deal, so its own exposure is closed out the moment the merchant transaction is booked.

For a deeper hands-on treatment of these mechanics with more scenarios, work through Case Study Forex and the companion chapter on Facilities for Importers and Exporters, which extend this rate-building logic into full import and export finance situations.

Conclusion: Lock In Merchant Rate Building Before Exam Day

Merchant rates in forex are ultimately a layering exercise: start from the interbank rate, apply the correct direction of exchange margin, then load further margin only where transit, collection, or physical handling genuinely adds cost. Once you can rebuild TT, bill, and currency-note rates from the base rate on your own, the CAIIB BFM numericals on this topic stop being a memory test and become simple arithmetic. If your BFM revision also needs a refresher on related treasury topics, look at HTM category and AT1 bonds and Tier 2 capital instruments, and for how banks price customer-facing services more broadly, see marketing of banking services from the CAIIB ABM syllabus. Browse more forex chapters under the Bank Financial Management tag hub, and when you're ready to test yourself, attempt a full chapter-wise mock.

🧠 Practice MCQs: Merchant Rates in Forex

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