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Sudhanshu Ranade

Chennai, Sept. 12 You can decide to deal, off the record, with the fellow next in queue. Or you can fork out eight, ten, twelve, fourteen per cent more to buy dollars from your 5 Star hotel, bank, travel agency or upmarket Authorised Dealer. The choice is yours.

The main thing about this business is that foreign currencies are commodities, not currencies. Authorised Dealers are commodity traders, not ‘money changers.’

There are no guarantees that you can buy (or sell) a hundred euros for a hundred euros. The ‘promise to pay the bearer the sum of one hundred rupees’ holds good only in rupee-currency areas. ‘Buy low-sell high’ is the name of the game everywhere else.

You might still get a good price if you do some serious shopping, but often not even then.

For travellers cheques, institutions such as American Express receive money upfront, and therefore hold trillions of interest-free foreign currencies in perpetuity. So they and their dealers are able to operate on relatively slender margins.

As a consequence buy/sell differentials for travellers cheques, at about 3.5%, are less than half the differentials on trade in currency notes. Competitive pressures do not allow the market to get away with higher margins.

Currency risk on the corpus raised through travellers cheques is not a problem. It is taken care of by people who are paid to do so. So buy/sell differentials on cheques denominated in all major currencies are pretty much the same.

Buying or selling foreign currency notes, on the other hand, is a risky business. With both trends and volatility coming into play, buy/sell margins vary from currency to currency even at any one point of time.

Risk also necessitates higher differentials for foreign currency notes than for travellers cheques. But does risk alone really require differentials to be 2.5 times as high?

Folklore says yes, because of the mismatch between inflows and outflows causes a stock management problem.

Dealers will tell you over a cup of coffee that they incur costs for consolidating ‘odd lots,’ for disposing ‘dead’ stock, and for preventing stock outs. They need to track and consolidate the position of various branches. If they find themselves sitting on euro surpluses in Chennai, they have to search for someone in Chennai who is euro deficit. The latter in turn would make the equivalent available, perhaps in dirhams, to the dealer’s branch in Cochin. That sort of thing.

But an officer of the Foreign Exchange Dealers Association of India (FEDAI) had a tidier story to tell.

To begin with, he said, foreign currency notes are FMCGs for closely networked banks, hotels, large travel agents and upmarket dealers. With the exception of relatively low turnover currencies (like the rupee in Washington or the yuan in Chennai), stocks move out fast, and get replenished rapidly, pretty much of their own accord.

To keep the wheels of commerce well-greased, much finer rates are quoted for (large and recurring) transactions among big players, than for transactions between them and retail customers.

Second, losses for individuals on individual transactions are small. Travellers can get Rs 5,600 from a Burmah Bazaar ‘penny capitalist’ for € 100, as compared to Rs 5,200 from his hotel or a dealer in Spencer Plaza. But few of them care. So in the end, the reason why foreign currency costs retail customers so much, and fetches them so little, is that most of them are not willing to spend time and money shopping around.

As for banks, hotels, large travel agents and upmarket dealers, they simply couldn’t be bothered. You can take it or leave it, so far as they are concerned. Like it or lump it.

For them it is just chicken feed.

Figuratively speaking. Trading € 100 hundred times a day 365 days a year nets Rs 2 crore.

More Stories on : Forex | Financial Services

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