Interbank segment
The part of India's spot foreign exchange market where banks quote two-way buy-sell rates to each other, as against the merchant segment, where businesses and retail customers take the price banks offer.
In plain language
India's foreign exchange spot market is not one single, undivided marketplace. It splits into two segments, and they work quite differently.
In the interbank segment, banks trade currency with each other. Each bank gives a two-way quote, a price to buy and a price to sell, and other banks can deal on either side of it.
The merchant segment is different. Here, businesses, the government and retail customers are price takers, they buy or sell currency at whatever price a bank is offering, rather than quoting prices themselves.
How it works
The rate a bank offers a merchant-segment customer is itself built on the interbank rate the bank can get for that currency, the merchant price is not set independently, it flows from what is happening in the interbank market at that moment.
Financial Benchmark India Pvt. Ltd. (FBIL) publishes daily reference rates for the 4 major currency pairs — USD/INR, EUR/INR, GBP/INR and JPY/INR — on Mumbai business days, giving the market a common, published benchmark that both segments can refer back to.
A worked example
Bank A quotes another bank a two-way rate of Rs 83.20 / Rs 83.22 per US dollar in the interbank segment, willing to buy at 83.20 and sell at 83.22, a spread of just 2 paise.
An exporter in the merchant segment approaching the same bank for a US$ 1,00,000 conversion does not get to negotiate that tight spread. She is quoted a rate built off the interbank price but wider, say Rs 83.10 to sell her dollars, because she is a price taker, not a market maker, in this segment.
Why NISM asks about it
Chapter 5 (Introduction to Indian Financial Markets), section 5.3.5 (Foreign Exchange Market), splits the spot market into the interbank and merchant segments, right after introducing currency pairs and the base/quoting currency convention. Expect a question naming who quotes two-way prices, banks, interbank, against who takes them, merchants, merchant segment.
Common exam traps
- Banks quote two-way prices to each other in the interbank segment; everyone else is a price taker in the merchant segment. This is the core distinction the exam tests.
- Merchant-segment rates are derived from the interbank rate, not set independently, a change in the interbank rate flows through to what a business or retail customer is quoted.
- FBIL's reference rates cover only four currency pairs against the rupee — USD, EUR, GBP and JPY — the same four named for currency derivatives elsewhere in the workbook.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- FBILFinancial Benchmarks India Pvt. Ltd., one of the agencies a Category III AIF uses to obtain the security-level prices it needs to mark its money market and debt holdings to market.
- Base and quoting currencyIn a currency pair like USD/INR, the first currency is the base currency and the second is the quoting currency — the rate shows units of the quoting currency per one unit of the base currency.
- Currency pairEvery trade in the foreign exchange market, expressed as one currency bought against another currency sold — the unit in which all currency derivatives are quoted and traded.