Difference Between Locked-In or Indicative Exchange Rates

Foreign Exchange rate is the rate at which one currency can be exchanged for another. It is the value of one nation's currency in terms of another's. For example, the exchange rate for USD to INR may be based on a multitude of factors. The two types of exchange rates are

• Locked-In Exchange Rates, also known as Fixed Exchange Rates
• Indicative Exchange Rates, also known Floating Exchange Rates

Locked-In Rates:

With Locked-In exchange rates, the value of a nation's currency is fixed against the value of another single currency. The government or the central bank sets this exchange rate in order to maintain the official currency value within a narrow band and keep interest rates down. This also ensures appropriate exchange rates which the government can adjust whenever necessary.

Locked-In Rates

• Ensures stability in the exchange rates.
• Remains nominal, as is set by the government.
• Reduces transaction costs.
• Prevents risk and uncertainty in transactions.
• Has no automatic mechanism to adjust the change in supply and demand of currency.
• May devalue the domestic currency for massive amount.
• Is excluded from free market benefit.

While making an international money transfer, with locked-in rates, the exchange rate is fixed and this exchange rate is applied at the time of converting the money to overseas currencies.  It also means that the sender would know the exact amount of money that will be received by the recipient. This is a useful option if you have a fixed commitment overseas like a loan EMI, property purchase or mortgage, etc.

Indicative Rates:

Unlike locked-in rates, which are fixed, indicative exchange rates fluctuate according to free market forces of supply and demand. The changing market conditions cause the exchange rates to fluctuate constantly. Neither the government nor central bank interferes in determining the price of currency. However, in some conditions, the central bank participates to reduce day-to-day fluctuations in the exchange rates. Indicative exchange rates are also known as floating exchange rates, which include two types: Free Float and Managed Float.

• Free Float: The free float exchange rate is also known as a clean float. In this case, the exchange rate is determined by the currency's force of supply and demand, with no intervention from the government. However, there is a high risk of the currency becoming volatile under a free float exchange rate.
• Managed Float: The managed float exchange rate is also known as a dirty float. In this case, the government and central bank contribute in setting the exchange rate. It is a variation of free float that reduces the risk of currency volatility.

Indicative Rates:

• Automatically adjusts the change in supply and demand.
• Gives flexibility to determine interest rates.
• Fluctuates rapidly.
• Sometime leads to inflation, which has to be controlled by the government.

Indicative exchange rates, are floating exchange rates that not locked/fixed at the time of making of the transfer/transaction. In this type of transactions, the exchange rate applied is the foreign exchange rate at the time of making the transfer or conversion to overseas currencies. Since the rate fluctuates, the amount received by the recipient may vary depending on the market.

For example: If the current exchange rate for USD to INR is 1USD for 55INR, and you are transferring USD100 to India, then the recipient will receive 5500INR if you use locked-in exchange rates. If you choose indicative exchange rates, you will not know the exact amount of money that will be received because the exchange rate may vary on the day the money is transferred. If the exchange rate has fallen to 1USD = 54INR, the amount receivable would be 5400INR, or if the rate has increased to 55.5INR, the amount receivable would be 5550INR. If you don't like surprises, locked-in exchange rates are your best option.

Whether you select to send money with locked-in exchange rate or floating exchange rates, there are various ways to send money overseas and various factors to consider while sending money overseas. It is very important that you compare these factors in order to find the best way to send money overseas. Here are some important money transfer tips that will help you make a informed decision.