What is the interbank market
The interbank market is the network where banks buy and sell currencies, and lend short-term money, directly with each other.
Formal definition: it is an over-the-counter (OTC) wholesale market. There is no central exchange. Dealers at banks quote bid and offer prices to each other by phone, through electronic dealing systems and through brokers. Each deal is a private contract between counterparties. The term covers both:
- the forex interbank market, where banks trade spot, forward and swap deals in currencies;
- the interbank money market, where banks lend and borrow funds for short periods, often overnight.
- Central banks and governments set interest rates and sometimes intervene.
- Large banks trade currencies with each other (the interbank market).
- Liquidity providers stream buy and sell prices to brokers.
- The broker shows its clients a bid and an ask price.
- Retail traders, companies and funds trade through brokers and banks.
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A worked example (hypothetical)
Bank A in Karachi has received more US dollars from exporters than it needs. Bank B needs dollars to pay for an importer's letter of credit.
- Bank B's dealer asks Bank A for a USD/PKR quote.
- Bank A's dealer quotes a bid (the price at which it buys dollars) and an offer (the price at which it sells).
- Bank B accepts the offer for an agreed amount.
- The deal settles on the spot value date: Bank A delivers dollars, and Bank B pays rupees. See clearing and settlement.
Bank B then charges its importer customer a rate slightly above what it paid. That gap is why the rate a customer gets is not the interbank rate.
Where you see the term
- Pakistani news: reports say the rupee "closed at" a level "in the interbank market". This is the bank-to-bank rate. The open market (exchange companies serving the public) has its own rate, and the gap between the two is often reported as well.
- Central bank data: the State Bank of Pakistan publishes daily reference exchange rates. Check its official website for the current figures.
- Interest rates: the policy rate sets the corridor in which banks lend to each other overnight. The latest decision: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC).
- Trading platforms: retail forex quotes come from liquidity providers, such as banks and non-bank market makers. A broker's spread and execution model add to the raw price, so a retail quote is not an interbank quote. See A-book and B-book.
Retail forex and CFDs are traded with leverage. Losses can build quickly and can exceed what you expect. Read risk management before you trade.
Edge cases for experienced readers
- No single "interbank rate": each bank quotes its own price. Published figures are averages or fixes taken at set times.
- Non-bank participants: large electronic market makers now quote alongside banks. "Interbank" is often used loosely to mean the whole wholesale market.
- Forwards: forward rates are priced from spot plus forward points, which reflect the interest rate gap between the currencies. See covered interest parity.
- Quoting language: dealers speak in big figures and pips. Rates in the money market move in basis points.
Related terms
Frequent questions
What is the interbank market in simple words?
It is where banks trade currencies and lend money to each other directly, without an exchange.
Is the interbank rate the same as the open market rate?
No. The interbank rate is the bank-to-bank rate. The open market rate is what exchange companies charge the public, and the two can differ.
Can an individual trade on the interbank market?
Not directly. Access requires credit lines with banks. Individuals deal through a bank, an exchange company or a broker, and they pay a spread on top of the wholesale price.
Why does the policy rate matter for the interbank market?
Banks borrow and lend overnight around the policy rate. A change in it shifts short-term interbank rates and can affect forward pricing for the rupee.