Forex Conversion: Banks Told to Curb Unauthorised Rupee Swaps

Conversion requires an explicit instruction

Indian exporters and individuals receiving money from abroad are set to get greater control over where their foreign currency is converted into rupees. Intermediary banks have been told not to make that conversion merely to pass the proceeds to a beneficiary whose account is held at another bank, unless the sender or recipient specifically instructs them to do so.

The Economic Times reported that the Foreign Exchange Dealers’ Association of India (FEDAI) issued the guidance to member banks on Thursday, October 15, after the Reserve Bank of India raised the issue of conversions by authorised dealer banks.

The direction is not a blanket prohibition on intermediary banks converting currency. It makes the instruction from the remitter or beneficiary decisive. Without that instruction, the funds should remain in their original currency and be routed onward. Where permission is given, conversion can proceed at the prevailing exchange rate under the converting bank’s policies and prescribed norms.

How an intermediary changes the payment route

The payment route described in the report starts with an overseas sender’s bank transferring dollars to the recipient bank’s nostro account. In this context, a nostro account is a foreign-currency account that an Indian bank maintains with a partner bank overseas. The recipient’s bank would then handle the currency conversion.

In some transactions, however, a third bank received the dollars because of its relationship with the sender’s bank. Rather than forwarding the foreign currency, it converted the money into rupees and sent those rupees to the beneficiary’s bank.

That distinction matters because the bank handling the conversion determines the rate applied under its rules. A recipient expecting the foreign currency to reach their own bank could instead receive money that had already been converted elsewhere. The guidance directly addresses this intermediary conversion, rather than barring banks from participating in the transfer itself.

Why exporters and individuals raised concerns

The report identifies small exporters, Indian shareholders receiving dividends from overseas companies, and individuals receiving gifts from non-resident Indian relatives as recipients affected by this practice. Small exporters with limited bargaining power and individuals unfamiliar with banking procedures reportedly sometimes received fewer rupees than expected.

It illustrates the problem with a hypothetical conversion at ₹90 to the dollar rather than ₹93. Those figures are examples, not current market quotations or a documented rate applied in a named transaction. The report alleges that intermediaries could retain the benefit of an unfavourable conversion, but does not identify a bank or provide transaction-level findings establishing that allegation.

An unnamed senior banker cited in the report said some large Indian private banks with longstanding offshore banking relationships had acted as intermediaries. According to that account, exporters had complained about lower receipts but often accepted the outcome. The report does not supply a count of affected customers or an estimate of the total money involved.

Exporters with forward contracts faced another complication. Such contracts allow them to sell dollars expected later at a pre-agreed rate. The banker said that when an intermediary converted those dollars first, the forward contracts had to be cancelled, adding a further cost to the loss from the conversion rate.

What banks and recipients need to do

Member banks have been told to comply strictly with the guidance when processing inward foreign-currency remittances and to communicate it to their branches and operating units. The operational distinction is clear: forward the original currency when no conversion instruction exists; apply the bank’s prescribed conversion framework when a specific instruction has been received.

Another unnamed banker suggested that recipients ask overseas senders to state expressly that intermediary banks must not convert the funds. That is practical advice reported alongside the guidance, not a separate requirement placed on every beneficiary.

For Indian businesses, the immediate relevance is predictability in receiving export proceeds. For individuals, it is clarity over who converts an incoming payment. The report does not establish how quickly the guidance will change processing practices or whether earlier disputed conversions will be reviewed.

Charges and exchange rates face greater disclosure

A separate email to banks also addressed foreign-exchange service charges. It said those charges should reflect the nature and complexity of the service and the effort required to provide it.

Beginning in October, banks are also required to publish their currency-conversion card rates on their websites, with a hyperlink enabling customers to compare banks’ buying and selling rates. This disclosure requirement sits alongside the instruction-based conversion guidance; it does not prescribe a single exchange rate for all banks.