Surge in NDF vol­ume drag­ging down ru­pee

Financial Chronicle - - FRONT PAGE -

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. “

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