RBI’s Rate Pause, Weaker Dol­lar Bring a Bo­nanza for Re Ar­bi­trageurs

The Economic Times - - Markets: Beating Volatility - Saikat.Das1@ times­group.com

Mumbai: Re­serve Bank of In­dia’s al­tered pol­icy stance on credit costs has re­vived spec­u­la­tion in the ru­pee af­ter traders had set­tled for a re­stricted op­er­at­ing range for the lo­cal cur­rency against the dol­lar since the in­au­gu­ra­tion of Don­ald Trump as the US Pres­i­dent.

The dif­fer­ence be­tween on­shore for­wards and off­shore non-de­liv­er­able mar­kets is about six to 12 paise across con­tracts rang­ing from one to three months in ma­tu­rity. The gap was non-ex­is­tent un­til the Re­serve Bank of In­dia this week sig­nalled ei­ther an end or a long mora­to­rium on its rate-eas­ing cy­cle that had driven the cost of funds down by 150 ba­sis points in In­dia since 2015.

Af­ter the change in credit stance, traders have gone long on the dol­lar overseas, while short-sell­ing the unit on the fu­tures and for­wards mar­kets lo­cally, deal­ers said. The overseas mar­ket is trad­ing at a dis­count to the spot mar­ket in Mumbai.

“Volatil­ity is back in the cur­rency mar­ket with ar­bi­tragers turn­ing ac­tive,” said Anin­day Banerjee, cur­rency an­a­lyst at Ko­tak Se­cu­ri­ties. “The ru­pee has been range-bound with­out any sharp swing un­til the RBI pol­icy. But the new pol­icy stance has moved the ru­pee, which is also mir­ror­ing other emerg­ing mar­ket cur­ren­cies that are all gain­ing against the dol­lar, with the US Pres­i­dent ad­vo­cat­ing a weaker dol­lar of late.”

The global dol­lar weak­en­ing too has weighed on the ru­pee, which tracked other ris­ing emerg­ing mar­ket cur­ren­cies. The dol­lar in­dex, which mea­sures the unit against six ma­jor cur­ren­cies, was at 100.500 at the close of lo­cal mar­ket hours com­pared with 102.010 a month ago. The cen­tral bank has kept the pol­icy rate un­changed but changed its pol­icy stance to ‘neu­tral’ from ‘ac­com­moda­tive’, cap­ping pos­si­bil­i­ties of fur­ther rate cuts.

“RBI’s pol­icy stance has pri­mar­ily stirred up the cur­rency mar­ket af­ter a pro­longed lull,” said Keta Kurkute, VP, forex risk ad­vi­sory, at con­sul­tancy Meck­lai Fi­nan­cial. “For­eign en­ti­ties were mostly seen short­ing the green­back in do­mes­tic for­wards mar­ket through the week, tap­ping the ar­bi­trage op­por­tu­ni­ties.” The ru­pee may be in the range of 66.50-67.30 per dol­lar over the next few weeks, deal­ers said. In the past four trad­ing ses­sions, the ru­pee has strength­ened 0.79% ver­sus a 0.75% rise dur­ing five weeks be­gin­ning Jan­uary. The ru­pee was a tad weak on Fri­day clos­ing at 66.88 per dol­lar. The cen­tral bank is be­lieved to have in­ter­vened to stem the ru­pee’s sud­den rise, an in­ter­ven­tion that has helped shore up its forex re­serves.

“Re­cent RBI stance has limited the pos­si­bil­ity for fur­ther rate cuts, and this could well trig­ger overseas in­vestor in­flows back in the do­mes­tic mar­kets,” said Kurkute.

If In­dian rates do not fall fur­ther amid ex­pected US Fed­eral Re­serve rate rises, this helps main­tain gap or spread, a key trig­ger for for­eign port­fo­lio in­vestors (FPI) buy­ing In­dian se­cu­ri­ties.

In Fe­bru­ary, FPIs have net in­vested ₹ 5,827 crore worth of do­mes­tic se­cu­ri­ties com­pared with ₹ 3,496 crore net sold a month ear­lier, show data from NSDL.

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