This is primarily because the exchange companies, while not always charging a commission, charge a margin so that they make money.Īs a result, the interbank and open market are two different rates. There is usually a differential or spread between the two rates. Foreign exchange companies deposit or surrender their net inflows to the interbank at the end of trading days. Why is the rate different for both exchange rates?Īt first glance, you’re probably thinking that these two markets are vastly independent and do not rely on each other. This is because customers have an option to decide which channel to send their remittance from. You may be confused about remittances being an inflow in both the interbank and open market. The open market, however, gets its inflows through remittances, travelers exchanging notes, and sometimes savers exchanging the currency they’ve held on to. Depending on the need of the market, the SBP can inject liquidity by selling foreign currency in the interbank. Similarly, outflows are also made through this category. Any money that comes into the country through these official channels comes in through commercial banks for their clients. The interbank is fed by inflows such as imports, remittances, grants, aid, donations, foreign direct investment, and repatriation of profits. Where does the money in the interbank and open market come from? The open market in Pakistan, or kerb market, primarily consists of Foreign currency exchanges where individuals can go buy and sell currency. Instead, you go to the open market for all your foreign currency needs. While the SBP does not provide forward cover for exports, these dealers may choose to do so by providing forward cover for exports, imports, and other permitted transactions.Īs a retail buyer, you do not have access to the interbank rates. Because they are authorized dealers they do not need to approach the SBP to release foreign exchange for any purpose, nor do they have to surrender the foreign exchange to the SBP.Īll authorized dealers in the domestic interbank are allowed and free to fix their own buying and selling rates. They are met by authorized dealers that form the interbank market. This means that all foreign exchange requirements, basically demand, consist of imports, services, and debt repayments. The exchange rate depends on the demands and supply conditions in the domestic interbank. This is for the private and public sectors. As a result, the interbank rate is applicable to all foreign exchange receipts and payments. Since May 1999, Pakistan has been following a market-based flexible exchange rate system. They were replaced by computerized systems such as Reuters and Bloomberg. Voice brokers over telephones used to match buyers and sellers of forex back in those days. The Bretton Woods Agreement stated that gold was the basis for the US Dollar and other currencies were pegged to the US dollar value.įollowing that currencies around the world were allowed to float freely. The interbank market developed after the Bretton Woods Agreement fell through following US President Richard Nixon’s decision to take the USA off the gold standard in 1971. To put this in simple terms, the interbank can also be seen as a wholesale market on which currency transactions take place. These transactions can be on behalf of third parties done through banks however, they are primarily done for the banks themselves.īanks can choose to deal with each other directly on the interbank, which is the most important segment of the foreign exchange market. On an international level, it is a network used by financial institutions to trade currency and currency derivatives with each other. Profit explains.Īs the name suggests, the interbank market is a market between banks. What is this ‘official’ interbank rate and why do money changers charge a little on top - what is known as the ‘open market rate.’ And more importantly, what in the world is going on in Pakistan which has caused its interbank and open market rate of exchange for the dollar to rise by as much as Rs 10 in places?īefore we understand the reasons for the spread, it is important to understand the functioning of these two markets. Of course, this gives rise to a few questions. That means if the dollar is officially being sold for Rs 223.42 in what is known as the official ‘interbank’ market, a person can walk into a currency exchange and buy a dollar for anywhere between Rs 224-25. Usually, if the rate at which the money changer sells the currence is a couple of rupees more than the official exchange rate. If a person wants to buy dollars, they will go to a currency exchange and purchase whatever currency they need. It is a common enough experience, enough so that one expects it.
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