Two different rates, and only one is on your screen
There is a rate at which banks and large institutions exchange currency with each other. It sits between what buyers are bidding and what sellers are asking, which is why it is usually called the mid-market rate. It is the rate you see when you look up a currency pair out of curiosity, and it is the one that gets quoted in the news.
It is not the rate you are given. When a foreign payment is converted into rupees for you, the rate applied sits a little below the mid-market rate. The difference between the two is the spread, and it is kept by whoever did the converting. Nothing about it appears as a line item, because technically it is not a charge at all — it is simply a worse price.
That distinction matters more than it sounds. A fee you can see gets compared against other fees. A fee buried in a price does not get compared, because there is nothing to compare it to. Someone who reads the flat charge on their statement and concludes the transfer was cheap has looked carefully at the smaller of the two numbers.
The chain a payment travels down
A payment from a client abroad does not usually move in one hop. It typically goes from their bank to a correspondent bank that holds balances in both currencies, and from there to your bank in India. Each institution in that chain can deduct its own charge as the money passes through, and none of them is obliged to tell you in advance.
Whether those deductions come out of the payment or are billed to the sender depends on which arrangement the sender chose when they sent it. Both arrangements are ordinary banking practice. The sender usually picks whichever is cheaper for them, without any intention of shortchanging you and generally without thinking about it at all.
The receiving side has its own layer. Foreign exchange transactions in India sit under the Foreign Exchange Management Act and the rules the Reserve Bank of India makes under it, so an inward remittance carries documentation as well as charges. Your bank may ask what the payment was for, and a clear answer supported by an invoice is the whole of what is being asked.
A worked example, with invented numbers
Suppose a client owes you $1,000. Every figure in this example is made up for the arithmetic — none of it is a quote from any market on any day, and the point is the shape of the calculation rather than the answer.
Suppose the mid-market rate that morning is ₹80.00 to the dollar, so the invoice is notionally worth ₹80,000. Suppose the rate you are actually given is ₹78.40. That is 2% below mid-market and it costs ₹1,600. Suppose an intermediary bank in the chain took $15 on the way, and your own bank charges a flat ₹500 plus tax on that charge. What lands in your account is roughly ₹76,700.
The ₹500 is the number on your statement. The ₹1,600 is more than three times larger and appears nowhere. Change the spread assumption to 0.5% and the same transfer costs ₹1,200 less, which is why the spread is the number worth knowing and the flat charge mostly is not.
| Component | Illustrative amount | Visible to you? |
|---|---|---|
| Invoice at mid-market rate | ₹80,000 | Only if you look it up |
| Exchange-rate spread | ₹1,600 | No |
| Intermediary bank deduction | About ₹1,200 | Sometimes, after the fact |
| Your bank's flat charge | ₹500 plus tax | Yes, on the statement |
The rupee figure is what the rest of the year is built on
Once the conversion has happened, the rupee amount credited is the number your records carry. If you invoice in dollars and think about your income in dollars, your mental accounts and your bank statement disagree by the entire cost of conversion, every single month, in the same direction.
The tax rulebook also has its own method for converting a foreign-currency receipt — which date and which published rate to use — and it need not match whatever your bank applied that morning. In the first year you have foreign clients, that is a good thing to ask a Chartered Accountant about once, rather than discovering it at filing time.
None of this argues for or against any particular route for receiving money from abroad. It argues for reading a quoted rate as a price that someone set, rather than as a fact about the world.