Understanding interbank rates: A guide to optimizing cross-border payments

The global foreign exchange (FX) market handles daily trading volumes exceeding $7.5 trillion1, of which the top-tier interbank market accounts for 51% of all transactions2. These transactions impact currency valuations, the margins on international payments, and the timing of transferring money.

The efficacy of these transactions mainly depends on interbank rates, which form the basis of worldwide forex markets. A 20-paise movement in rates could mean lakhs lost or saved on large transactions. Yet, many companies struggle with rate unpredictability, hidden conversion costs, and opaque bank spreads.

Whether you're managing treasury operations, planning an international expansion, or optimising payment cycles, understanding interbank rates helps you cut costs, seize better conversion opportunities, and maintain competitive pricing in global markets.

The interbank exchange rate is the wholesale exchange rate at which major banks trade currencies with each other on the global foreign exchange market. You see this mid-market rate when you search "1 USD to INR" on Google or currency sites like XE.

But here's the important point: This rate is not accessible for actual transactions—it’s indicative only and not available for buying or selling.

The forex market is massive, with daily trading volumes exceeding $7.5 trillion globally. The interbank market accounts for 51% of all transactions. Within this ecosystem, even a small 5-paise movement in rates could mean lakhs lost or saved on large transactions. 

Whether you're a freelancer receiving international payments, a business expanding globally, or managing treasury operations, understanding interbank rates directly impacts your bottom line.

The pricing structure of interbank rates is based on the following core components that determine how rates are quoted and traded in the wholesale currency market:

• Base vs. quote currency

In a currency pair like USD/INR, the USD is the base currency, and the INR is the quote currency. The rate tells you how much of the quoted currency (INR) you need to buy one unit of the base currency (USD). So if USD/INR is 85.71, that means ₹85.71 gets you $1.

• Bid vs. ask spread

Banks and financial institutions don't use one fixed rate. Instead, they have two prices:

The bid price (what they'll pay to buy a currency)

The ask price (what they'll charge for selling that currency)

The difference between these two is the spread, a built-in margin that helps institutions profit.

For example:

A bank might buy USD at ₹85.65 (bid)

And sell USD at ₹85.77 (ask)

₹85.71 is the mid-market rate—the midpoint between the interbank bid and ask.

• Real-time fluctuations

Interbank rates are not static. They shift in real time during trading hours, reacting instantly to supply and demand, global news, interest rate changes, and other economic factors.

The interbank rate is not decided by a single bank or government. It is shaped by a global network of powerful financial institutions that trade with each other 24/7.

This happens in the interbank market, a decentralized system where major banks buy and sell currencies in large volumes. In India, this market operates under the supervision of the Reserve Bank of India (RBI), with licensed banks called Category-I authorized dealers acting as the main players.

Some of the major institutions involved include:

• Citigroup and JP Morgan Chase (USA)
• HSBC (Asia)
• Deutsche Bank (Germany)
• SBI, HDFC, and ICICI (India)

These banks use advanced platforms like Reuters Dealing and Bloomberg FXGO to quote prices, make trades, and track real-time market movements.

To give you a sense of scale:

It's not unusual for two banks to exchange $50–$100 million in seconds, all behind the scenes. These trades help shape the exchange rates you eventually see when you make or receive international payments.

A real-world trading example

Let's peek inside how banks actually execute these trades:

Imagine an Indian bank needs to execute a USD 10 million/INR transaction. Their traders receive real-time quotes from multiple counterparties:

• Bank A: 85.70/85.75
• Bank B: 85.72/85.78
• Bank C: 85.69/85.74

After analyzing counterparty risk and settlement efficiency, they execute with Bank B at ₹85.72—the most competitive bid, making the total conversion amount $10 million × ₹85.72 = ₹857,200,000.

Through the Clearing Corporation of India Ltd (CCIL) guaranteed settlement system, this entire process from quote to settlement typically completes within two business days.

Interbank exchange rates respond to a web of economic forces, market behavior, and geopolitical shifts. 

1. Market supply and demand

Like any marketplace, the foreign exchange (forex) market runs on supply and demand. When more people or businesses want to buy a currency, its price goes up, and when supply outweighs demand, prices fall.

Let's say Indian importers are buying goods from the US. To settle these payments, they need dollars fast. Let’s say Indian importers are buying goods from the US. As demand for USD spikes, the USD/INR rate rises—importers now need to spend more rupees to buy the same amount of dollars, which hurts their bottom line. On the flip side, Indian exporters receiving payments in USD benefit, as they get more INR per dollar.. 

When global investors pour money into Indian equity markets, they convert dollars into rupees, increasing the USD supply. This puts downward pressure on the USD/INR rate, strengthening the rupee. Banks respond by adjusting interbank quotes to reflect the stronger INR.

2. Macroeconomic indicators

Economic data releases—like GDP growth, inflation, or interest rates—immediately impact interbank rates. That's because they influence investor confidence, capital flows, and, ultimately, the demand for a country's currency.

For example, if India reports stronger-than-expected GDP growth while the US economy slows down, foreign investors are more likely to invest in Indian assets. This increases the supply of incoming dollars, prompting banks to revise their USD/INR quotes downward, giving you fewer rupees for every incoming dollar.

Interest rate changes matter, too. When the Reserve Bank of India raises rates, it makes Indian investments more attractive to global investors seeking better returns. This again leads to higher USD inflows and a stronger rupee in the interbank market.

3. Geopolitical events

Currency markets are extremely sensitive to uncertainty. Political instability, wars, or major policy changes can cause rates to swing dramatically.

Take the Russia–Ukraine conflict, for example. The outbreak led to immediate market turbulence across the globe. Banks grew more cautious, reduced their trading positions, and widened their spreads on many currency pairs, including USD/INR, to hedge against sudden price movements. That meant freelancers or businesses receiving payments during that period might have seen lower conversion rates or higher fees due to risk-adjusted pricing.

4. Central bank policies

Central banks don't just influence rates through monetary policy—they can step directly into currency markets to stabilize exchange rates. These interventions have a direct effect on interbank pricing.

For instance, when the rupee comes under pressure, the RBI may start selling US dollars from its foreign reserves. This artificial injection of dollar supply into the system helps steady the rupee. Banks, recognizing that the central bank is actively managing volatility, often quote tighter spreads and more favorable rates, especially during times of heavy payment activity like tax season or festive import surges.

5. Global trade patterns

A country's trade balance, whether it imports more than it exports, shapes long-term currency demand.

India, for example, runs a significant trade deficit, especially due to energy imports. This keeps constant upward pressure on USD demand. When oil prices rise, Indian importers buy more dollars to pay overseas suppliers, which affects interbank rates by making USD more expensive.

However, companies like Infosys or TCS receive large payments from global clients in peak IT services seasons. These export-driven inflows flood banks with dollars, creating a temporary surplus. As a result, interbank rates adjust, making the rupee slightly stronger and payments more rewarding for Indian recipients.

Consider this cascade effect with USD/INR:

• Mid-market rate: 85.71
• Interbank rate: 85.65/85.77 (bid/ask)
• Retail customer rate: 85.20/86.20

This layered markup structure means businesses typically pay a premium over the interbank rate, making it essential to understand these differences when planning international transactions.

If you're earning $2,000 monthly as a freelancer using PayPal, which might give you ₹83.80 per dollar (versus ₹85.71 interbank), you're losing:

• ₹1.91 × 2,000 = ₹3,820 per month
• ₹3,820 × 12 = ₹45,840 annually

That's almost a month's rent or a significant business investment—gone due to hidden FX 

markup.

For medium and large enterprises, the stakes get higher with volume. For a business handling $100,000 in monthly international transactions, even a 1% hidden markup translates to ₹10 lakhs annually in unnecessary costs.

1. Benchmark rate for revenue realization: When an Indian IT services company prices its contracts in USD, the interbank rate helps establish competitive rates while maintaining profit margins.
2. Cost optimization: Understanding the relationship between interbank rates and final conversion rates reveals the true cost of international transactions. If the USD/INR interbank rate is 85.71 and a bank quotes 86.20, you can identify the 49-paise spread being charged.
3. Transfer pricing efficiency: For Indian subsidiaries of global companies, interbank rates influence transfer pricing calculations, determining the actual cost of cross-border fund transfers between parent companies and their Indian entities.
4. Working capital management: Interbank rates directly affect how exporters manage working capital cycles. Rate movements can significantly impact realized value when dealing with international payments spanning 30–90 days.

Here's how to protect your earnings and make the most of every cross-border payment.

1. Use platforms that show a transparent FX breakdown

Always choose platforms that clearly display the mid-market rate and list their fees separately.

• If the INR amount you receive is calculated without showing the underlying rate or fee, you're likely being charged a hidden markup.
• Platforms designed for international freelancers and businesses, like Xflow, offer better visibility and near-interbank rates.
• Check if the INR amount reflects the live interbank rate minus a visible fee.
• Avoid tools that only show a single, all-inclusive rate without a breakdown.

2. Invoice in INR when possible

If your clients are willing to pay in their own currency while you receive INR, you can avoid unnecessary FX markups and bank charges.

• Tools like Xflow allow clients to pay in USD or EUR while you receive INR directly at a competitive rate.
• This also helps eliminate international wire fees and delays.

3. Compare before you withdraw

Before moving money, take a minute to compare:

• The current interbank rate (check Google, XE, or any live feed)
• The rate your platform is offering
• The final INR amount you'll receive

Even small differences add up. Losing ₹200 per withdrawal could mean over ₹2,400 lost annually if you're paid monthly.

4. Time your transfers cautiously

You don't need to track forex markets like a trader, but basic timing can help:

• If the USD is strengthening against the INR, waiting might make sense.
• If the INR gains value, converting sooner could preserve your earnings.

This matters most when you're holding funds in foreign currency and have flexibility on when to convert.

5. Set rate alerts and monitor trends

• Use FX tracking tools that let you set alerts for specific currency thresholds. This is especially helpful if you're holding USD or EUR and want to convert when the rate is favorable.
• Alerts can help you act at the right time without constantly monitoring rates.

From setting competitive prices to handling currency conversions, interbank rates influence multiple aspects of financial decision-making. Yet most businesses struggle with rate volatility, hidden margins, and timing their transactions effectively. Here's how interbank rates impact key business decisions:

• Benchmark rate for revenue realization: As a benchmark for international transactions, interbank rates serve as the foundation for determining fair exchange rates. For instance, when an Indian IT services company prices its contracts in USD, the interbank rate helps them establish competitive rates while maintaining profit margins.

• Cost optimization: While businesses don't access these rates directly, understanding the relationship between interbank rates and final conversion rates helps in cost optimization. If the USD/INR interbank rate is 83.20, and a bank quotes 83.50, the business can identify the 30-paise spread being charged. This transparency enables better negotiation of forex fees and more accurate cost projections.

• Transfer pricing efficiency: For Indian subsidiaries of global companies, interbank rates influence transfer pricing calculations. These rates determine the actual cost of cross-border fund transfers between the parent company and their Indian entities. By tracking interbank rates, businesses can optimize their transfer pricing markups and ensure better tax efficiency while maintaining compliance.

• Working capital management: Interbank rates directly affect how exporters manage their working capital cycles. When dealing with international payments spanning 30-90 days, rate movements can impact realized value. Understanding interbank trends helps exporters time their conversions - they might hold USD collections when INR shows weakening trends or accelerate conversions during favorable rates. Knowing how to manage this becomes especially critical when managing large payments.

While we've focused on exchange rates, it's worth noting that the interbank market serves additional crucial functions in the global financial ecosystem:

Short-term liquidity management

Banks also use the interbank market to lend and borrow from each other to ensure they have sufficient liquidity for immediate needs. In the US, this creates the federal funds rate (another "interbank rate"), influencing all other economic interest rates.

When the Federal Reserve adjusts this target range, as it did by cutting to near-zero during the 2020 crisis and subsequently raising it to 5.5% by mid-2024, it impacts global markets, including exchange rates.

Risk management and hedging

Major corporations use the interbank market indirectly through their banking relationships to manage currency risk. For example, an Indian IT company expecting $1 million in payments three months from now might use forward contracts based on interbank rates to lock in current rates, protecting against unfavorable movements.

When you understand how interbank rates work and start making smarter choices with your payment platforms, you can:

• Hold on to more of what you earn.
• Cut down on unnecessary fees.
• Make better money decisions.
• Put those savings back into growing your business.

A good place to start? Just compare what you received in INR with what the interbank rate says you should have received. Do this a few times, and you'll quickly see which platforms are costing you more than they should.

If you're a freelancer or business owner, it simplifies the process. It offers transparent, near-interbank rates and INR payouts for all the hidden markups.

Use Xflow to protect your business's financial health and maximize your earnings from cross-border transactions.