By Sudarshan Motwani
Ever wondered why purchasing Saudi Riyal costs you more in Delhi than in Calicut? Or ever thought why are Canadian Dollars cheaper in Jalandhar than in Hyderabad?
As foreign exchange rates are determined by the underlying inter-bank rates, one common logical deduction is that the exchange rates should be the same everywhere. However, that is not the case as the currency exchange rates vary from city to city. Foreign exchange rates tend to be on the higher side in Tier II and Tier III cities as compared to metropolitan areas.
Also, the foreign currency of a particular country may be cheaper in a particular region/state or city due to very large people to people movement resulting in high currency-influx. Further, there can be significant variations in the foreign exchange rate in the same city across various currency exchange platforms such as banks, local money changers or an online marketplace. This is all because, apart from the foreign exchange rates in the international market, there are a host of local factors which get added to the price equation.
Reasons for Inter-City Variations in Foreign Exchange Rates:
Lower Demand-Lower Supply Issue
Though as per the recent trend, foreign exchange demand is picking up from Tier-II cities, still the net demand is very less as compared to metropolitan cities. The low transactional volume makes the local money changers or even banks charge higher mark-up fee making foreign exchange rate quite expensive in these cities. Also, lower demand increases transportation and maintenance cost per transaction which further push the exchange price.
Lack of Competition
The currency exchange business is demand-driven. As the net demand is quite low in Tier-II and III cities, no wonder there are lesser and lesser places for foreign currency exchange. Let alone the RBI authorized money changers, it is quite possible that only selective local bank branches providing currency exchange facility in these cities. Lack of competition means monopolistic prices is anybody's guess.
Lack of Transparency
The currency exchange market lacks transparency. Especially in Tier II and III cities, because of the lack of transparency by money changers and lack of awareness among customers, exchange rates are high. The customers do not get to know about the inter-bank rate, mark-up fee charged and currency conversion charges levied by the money changer.
Region Specific Variations
Though in general, one can expect the foreign exchange rate to be higher in Tier-II cities as compared to Tier I because of multiple factors as explained above but at the same time, you can easily find certain currencies to be significantly cheaper in certain Tier II and Tier III pockets or regions as compared to metropolitans even!
This trend is largely attributed to region-specific movement of people to a particular country. Such pockets are characterized by moderate demand but a very high supply of foreign currency.
For example, you must be knowing that a big chunk of the Indian population has either permanently migrated to Canada or living there on a work visa. About 50% of Indian-Canadian population is of Punjab origin! Naturally, there is a higher influx of Canadian Dollars in Punjab as compared to the rest of India and therefore, you would certainly find CAD to be cheaper in Jalandhar than in Kolkata!
Similarly, a lot of people from Kerala or Southern India are living and working in the Middle-Eastern region. Most of the people are employed there on various skilled and semi-skilled jobs. Such people are more likely to bring in foreign currency while coming back to their homes in India. And that is why in all probability you may find Saudi Riyal or Qatari Riyal to be cheaper in Kochi than even in Mumbai!
Why does an Online Marketplace Fare Better?
Suppose you want to purchase US Dollars (USD) in Delhi. Though you can purchase USD in Delhi from various places such as a bank or an authorized money changer nearby you or at the airport itself but that would involve making multiple in-person visits to the bank, haggling to get better rates and going through a complex documentation process. Still, the best exchange rate is not guaranteed to you!
Let's understand why an online currency exchange marketplace can provide best US dollar rates in your city!
Fixed vs Live Rates
Unlike banks which provide foreign exchange at a fixed rate in the name of "Today's US Dollar Rates", an online currency exchange marketplace allows its customers to convert INR to USD at the live rates.
Fixing the US Dollar exchange rate for the whole day compels banks to keep the higher-margin to tread against any adverse volatility during the day. On the other hand, the marketplace passes the benefit of live rates to its customers in the form of lower margin and therefore, better exchange rate.
Individual vs Aggregator
Being digitally enabled, a currency exchange marketplace first compares the exchange rate among the quotes provided by 100s of currency changers near to your location and then provides you with the best exchange rates. The principle of competition ensures you get the best exchange rate.
Digital vs Physical
Most of the money changers in India have an institutional setup at the physical level which involves various kinds of fixed costs such as rent, salaries and other operating costs. The simple rule of economics tells us that all these costs are ultimately borne by the customer in the form of higher fees and purchase price.
Being a digitally enabled platform, an online currency exchange marketplace saves that cost and pass that benefit to the customers in the form of the best foreign currency exchange rates in the market.
Tips to Save Money on Foreign Currency Exchange
1. Go for a trusted online currency exchange marketplace, if available in your city.
2. If not, check interbank rates online and take a breakup of charges levied by your bank or the local money changer
3. Haggle for better rates if the money changer has levied a hefty mark-up fee or conversion charges
(The author is Founder & CEO, BookMyForex.com)