RBI Reference Rate

What is RBI Reference Rate?

The Reserve Bank of India compiles on a daily basis and publishes reference rates for Spot USD/INR, EUR/INR, GBP/INR & JPY/INR. The rates are arrived at by averaging the mean of the bid / offer rates polled from a few select banks around 12 noon every business day. The other three rates, viz. EUR/INR, GBP/INR and JPY/INR would be computed by crossing the USD/INR Reference Rate with the ruling EUR/USD, GBP/USD and USD/JPY rates. The contributing banks are selected on the basis of their standing, market-share in the domestic foreign exchange market and representative character. The Reserve Bank periodically reviews the procedure for selecting the banks and the methodology of polling so as to ensure that the reference rate is a true reflection of the market activity. It is also called as ‘RBI fixing rate’ or just ‘RBI Fix’.

How is it useful?

The most important use of the RBI Reference rate is its use in computing the settlement price for cash settled derivatives on rupee. It is used for the official closing price on the NSE currency derivatives market on the day of the settlement of contract and all outstanding contracts are settled at the RBI reference rate.

Secondly, since USDINR is an OTC market, information is not available at a glance. Prices are not known to people as is the case in an electronic order book. Thus, RBI reference rate acts as a benchmark rate for all the stakeholders in the foreign exchange market including corporate, brokers and dealers. The dissemination of reference rate by RBI acts as a benchmark exchange rate for the day.

Growing Importance

The importance of RBI reference rate has grown over the years. There are several reasons behind it. Firstly as currency markets evolved over the years, volatility has increased manifold. With focus shifting on risk management policies & compliances, many corporates have started covering their exposure at the RBI Fix rate.

Also, with the OTC USDINR markets being shallow, corporate clients with huge exposures are flocking to trade at RBI Fix to lower their market impact cost. This has led to a huge surge in volumes traded at RBI Fix.

How it actually works

Most of the trades done at RBI fix are carried out through brokers. The brokers, on behalf of their clients, look out for appropriate counterparty to conclude the trade. Millions of dollars are bought & sold at the RBI Fix & it is this volume that determines the price action of USD INR in the second half of the day.

As a result, RBI Fixing rate has been a big source of volumes & earnings for the brokers nowadays. Now a ready market is available with the brokers where RBI fixing orders are taken. Depending on the net buy and sell order, brokers have also started to quote premium or discount for RBI fixing.

This premium or discounts quoted by brokers also offer some insight into the demand & supply of dollars available in the market. This is one of the factors, which drives the price action in the OTC market.

For eg: Suppose brokers are quoting a rate of ‘Fix + 2 paisa’ for a buyer of US dollar at RBI Fix. This indicates that buying interest is large. This in turn would drive the OTC market up in anticipation of large buy orders.

Vice versa, if the brokers are quoting a rate of ‘Fix – 2 paisa’ for a seller of US dollars at RBI Fix, it indicates that selling interest is large. This in turn would drive the OTC market down in anticipation of large sell orders.

Generally, the premium or discount quoted on RBI Fix is 25pips to 50pips.

Moreover, RBI Fix also gives banks the added advantage. Since RBI polls the rate from banks, they can approximate the time & thus the rate at which RBI Fix is likely to come. This in turn provides them with leverage to initiate proprietary trading positions and earn on behalf of their corporate clients.