The Hindu Business Line : Spot rupee slides; dollar sticky in the forwards

Mumbai, Feb. 19 Even as the rupee is showing signs of weakening in the spot market, the US dollar is going at a discount to the rupee in the short-end (one to seven months) of the forward market. Forex dealers attribute the phenomenon of a weak spot rupee to an acute shortage of dollars stemming from Foreign Institutional Investor outflows.

The scramble for the greenback has pushed banks to offer more rupees for the dollar. But the sub-prime crisis in the US economy is casting a bearish influence on the medium-term outlook for the dollar.

The rupee today plunged to close at 39.91/92, after opening the day at 39.74/76. The home currency has shed 26 paise in two consecutive days.

In the forwards market, the one-month premia closed at a discount (dollars commanding fewer rupees) of – 4.56 per cent , the three month at –1.38 per cent and the 6 month at – 0.25 per cent.

A currency (dollar, for example) is said to trade at a forward premium relative to the rupee when it commands more rupees on a future date than at the present moment. However, in this case, it has gone into a discount, which means that a customer will receive a lower price at the end of the forward contract than the current ruling spot price.

“FIIs have been pulling out of the Indian stock market. Globally, the sub-prime crisis and the resulting pressure on dollar supply has made it difficult for banks to secure the greenback,” said the treasury head at a foreign bank.

FIIs have been net sellers to the tune of Rs 3,242.94 crore in February. Foreign banks, which bring in dollars from their global parents, are seeing a lower supply.

The global shortage of dollars has meant that banks are also funding their overseas branch operations by increasing their purchase of dollars in India as they are not able to raise it in the local markets, said Mr Anel Bhalotea, Head-India FX and Options Desk, ICAP India.

The volatility in the local currency has now sparked rumours about a possible cut in the Cash Reserve Ratio by the Reserve Bank of India to free up liquid cash into the system.

Traders describe the current market situation as “peculiar” since rupees are also in short supply. The inter-bank call rates have been firming up to around 8 per cent, inching up from 6 per cent on Friday. Banks on Tuesday borrowed around Rs 27,000 crore from the RBI through the repo auction under the liquidity adjustment facility.

“The rupee is on a weakening trend and we see it crossing 40 soon. The lacklustre stock market and the high oil prices ($97.27 per barrel) have led to the rupee’s depreciation,” said Mr R.V.S. Sridhar, Senior Vice-President -Treasury, Axis Bank.