Ensure fair charges on forex transactions, RBI tells banks

Banks need to pay due attention to the issue of fair pricing for their foreign exchange customers, especially from small and medium enterprises and retail segments, before calls for regulation of forex rates become more vocal, according to G Padmanabhan, Executive Director, Reserve Bank of India.

His observation comes in the backdrop of forex customers approaching the RBI on several occasions highlighting “high” charges levied by authorised dealer banks on their forex transactions.

“Not only there appears to be a wide variation amongst the banks in the charges levied on the smaller customers, there appears to be a complete lack of transparency regarding the information on charges levied for such customers.

“I am aware that FEDAI has issued a special circular in this regard but I once again urge all banks assembled here to pay due attention to this aspect before calls for regulation of forex rates become more vocal,” said Padmanabhan in his address at the Foreign Exchange Dealers Association of India (FEDAI) Conference at Brussels.

Referring to the sharp criticism on the two occasions — 1966 and 1991 — when the rupee was devalued, Padmanabhan said statistics shows that on both occasions, the impact of the devaluation on trade deficit was phenomenal.

“The point that I wish you (FEDAI members) to ponder over is that devaluation, or depreciation in a flexible exchange rate regime, may be bad politics but often is good economics.

“The reason I ascribe great importance to this is that our approach to greater capital account openness in large measure will be tempered by our tolerance of exchange rate volatility and particularly, weakening of the rupee.”

India had two devaluations — by a massive 57.4 per cent in 1966 and then again in 1991 when within a year the rupee had dropped by 59 per cent.

“On both occasions, the devaluations were sharply criticised.

“The arguments spanned the entire spectrum: from surrendering Indian sovereignty to external pressure to textured cynicism as to why devaluation will not be effective in narrowing the trade deficit because of the structural inflexibilities of the Indian exports and imports,” said the RBI ED in his speech entitled ‘Musings of a Departing Forex Market Regulator’.

India is relatively more affected by external turbulence nowadays as compared to the past, which is quite intuitive in view of the increasing openness of our external sector in trade as well as financial channels.

“The future course of market development has to recognise this fact and develop an immune system, as it were, to deal with the onslaught and the fortitude not to fall off the cliff every time there is heightened volatility in the exchange rate,” explained Padmanabhan.