Surge in NDF volume dragging down rupee
WITH the rupee touching new lows everyday, big corporate firms are using the advantage of arbitrage between offshore non-deliverable forward (NDF) and the domestic market to make some quick bucks.
The one-month onshore forward expiring at the end of September was priced at 72.83 while at the DGCX the September future rate was 72.94, a difference of 11 paise.
The premium for oneyear forward contract jumped 7 basis points on Tuesday to around 4.41 per cent compared to its previous close of 4.34 per cent. The traded value, which represents a notional turnover was Rs 21,00,934 lakh on National Stock Exchange. Salil Datar, chief executive officer and executive director of Essel Finance VKC Forex said, “Non-deliverable forwards market has seen more than 50 per cent increase in the volumes over the last one month. This certainly is having a huge pressure on the rupee.”
NDF is not illegal. However, only a bank that has its registered office outside India is allowed to place orders in the NDF market. Mostly big corporate institutions use the arbitrage opportunity to make money using the prevailing negative sentiments. They buy dollars and sell them in the overseas market. They place orders through foreign banks. However, taking positions in the NDF market impact the exchange rate.
The rupee on Tuesday crashed to new low hitting 72.70 against the dollar amid a fall in emerging market currencies fuelled by rising concerns of a trade war between the US and China, the world's two largest economies. It ended at 72.70 a dollar, down 0.34 per cent from its Monday’s close of 72.45. The home currency opened at 72.30 per dollar and touched a low of 72.74.
In this calendar year alone, the rupee's value has eroded 12 per cent against the greenback, making it one of Asia’s worst performing currencies. Despite a record-high stock market into a strong economic report in late August, India reported a balance of payments deficit, which the trade ministry blamed for the rupee’s fall. Real GDP growth hit a two-year high of 8.2 per cent year on year in the quarter ending June.
Unfortunately, it was accompanied by a wide current account deficit of 2.4 per cent of GDP in the same quarter. Externally, the rupee was also pressured by a stronger greenback underpinned by a Fed hike cycle, as well as emerging market stress in countries such as Argentina and Turkey.
“The government has started to take steps to address the rupee’s volatility. Private and state-run banks reportedly sold the dollar on behalf of the RBI. But there is general agreement that drawing down foreign reserves is not a sustainable solution. “