RBI’S LEF, fx intervention, Covid push up short-term premium

A glut of dollars in the interbank market has pushed up cash-spot forward rates higher as contracts matured and foreign banks, hit by rules coming in the way of sending the greenback to the US treasury, struggled to clear their dollars while public sector banks stayed put.

Cash-spot is an interbank market that sees huge transactions. The market comprises three rates — spot, cash, and tom (short for tomorrow).

“There is mayhem in forwards on account of dislocation in cash-spot points. Cash tom is trading at 3.25 paise, which is equivalent to a yield of 16 per cent,” said Abhishek Goenka, managing director and chief executive officer of IFA Global.

The usual cash-tom rate should not be more than 1.5 paise.

“The one-month premium surged to as high as 8.55 per cent. Nationalised banks are not receiving the premium and the entire market is a payer. As such dollar rupee was sold to 73.95 levels from a high of 74.32,” said Anil Kumar Bhansali, head of treasury, Finrex.

Rates spike when there are huge dollars in the cash market but not enough takers to swap for a future date. Therefore, the dollar supply in the future looks dubious. But it is coming together owing to factors that have caused the glut in dollars in the market.

The first issue is the initial public offering (IPO) of the Powergrid INVIT. It is estimated that anything between $1 billion and $1.5 billion has suddenly crowded in because of the IPO.

Second is the Reserve Bank of India’s (RBI’S) large exposure framework (LEF) for foreign banks, which kicked in on April 1. Before the norm, branches of foreign banks could do buy-sell swaps (buy dollars with their rupee liquidity and sell them later) in the local market. The dollars were sent to the head office to be deployed in the US treasury.

The LEF stopped that repatriation of dollars beyond a point.

With April coming to an end on Friday, contracts matured and the foreign banks are now flooded with dollars.

Dealers in foreign banks say they are not sure if they can directly deploy the dollars to

the US treasury. In the absence of clarity, the dollars have swelled in the cash market. Separately, market sources say, some large public sector banks have been told by a “higher authority” that local rupee liquidity should not be touched and if dollars are to be parked in the US treasury, it should be done from the foreign books, and not be creating synthetic dollars from local rupee liquidity. according to Amit Pabari, managing director and CEO of CR Forex, the IPO has caused investors to sell dollars in the spot market to get rupees and take a contrary position in the nearest May forwards, pushing up forward points by 10 paise to 34-36 paise.

Once IPO subscription and share allotment are done, the contra entry trade (buy forward) will be settled through selling the position. And then we will see premiums back to normal levels,” Pabari said.

Besides, the Covid crisis has also imposed severe restrictions on operations of public sector banks and they are not as active in the market as they used to be, say currency dealers.

The reason for this spike in forward rates is baffling. The RBI’S forward intervention may have a role to play as it intervened to cool the forward rates in March. This is a market dislocation that needs to be sorted out,” said Paresh Nayar, head of FX and fixed income at First Rand Bank.

According to a senior dealer with a foreign bank, this kind of disruption would be commonplace in the coming days because of the LEF.

Whenever the smooth movement of money is restricted, these disruptions flare up once in a few months. The RBI must have a relook on its LEF rules,” said the senior dealer, requesting anonymity. The elevated cash-tom points reverberated across the forward curve with one month forward yield at 7.5 per cent, while the one-year forward yield has risen from 4.70 per cent to 5 per cent over the last few trading sessions, according to Goenka.