Skip to main content

RBI builds Rs 31 bn forwards position as dollar tide rises

RBI builds Rs  31 bn forwards position as dollar tide rises
The Reserve Bank of India (RBI) has built upa Rs 31billion position in rupee dollar forwards as a continuous foreign fund inflow has necessitated active intervention by the central bank in the spot market.Forwards contracts are designed to buy foreign currencies at preagreed prices.
A buyer has to payafee, the forward premium, for the right to buy at that price.Economists and currency dealers said the RBI action could also beaform of insurance against an outflow of dollars as central banks around the world had begun normalising their easy money policie
In August and September, the markets witnessed outflows from the equity markets, highlighting the need to remain cautious on funds flow.Foreign investors brought Rs 31.33 billion into India in 2017, of which Rs 22.6 billion has moved into debt
This is almost equivalent to the RBI´s net forward position of Rs 31.13 billion, as of September.Of this, Rs 3.44 billion matures within months and Rs 28.2 billion withinayear. In the more than a year segment, the RBI hasa ´sell´ position of Rs 981 billio
The RBI´s foreign exchange reserves have swelled to over Rs 400 billion.With the current account deficit at a manageable level, the central bank is building reserves but it is not willing to increase liquidity by outright dollar purchases.The RBI mops up incoming liquidity by buying dollars, releasing an equivalent amount of rupees.
This can stoke inflation.Therefore, while buying spot dollars, the RBI also sells them over several tranches and buys dollars in the forwards market where physical delivery is not necessaryThese contracts are also squared off by slowly selling dollars in the forwards market
This helps the central to stabilise the exchange rate as well. “The RBI does not need to intervene always in the spot market.Whenever it buys or sells in the immediate term forwards market, say one or two months from spot, the market getsasense of the RBI´s mood and adjusts positions accordingly,” said Satyajit Kanjilal, managing director of ForexServe.
Importers are at present not buying forward premiums while exporters are selling them more than their underlying exports positions would suggest.With a stable or appreciating rupee, importers are not interested in being locked up at a particular exchange rate. “The RBI now has a problem of plenty
As it intervenes, its forwards position swells,” said Abhishek Goenka, managing director and chief executive officer of IFA Global.He said whenever the rupee depreciated to 65 a dollar, the RBI was squaring off its forwards position.With an appreciating bias to the rupee, the RBI had to keep raising its exposure in the forwards market, he added.
“Some accumulation in the forwards market is a compulsion for the central bank, but some of it could be conscious.It could beaform of insurance in case the fund flow reverses in the next year,” said the chief economist of a private bank.The economist pointed out exporters were over hedging and by being the dominant player in the forwards market, the RBI was controlling forward premiums.
Exporters, as suppliers of dollars, earn by selling forward premiums to importers.“The RBI´s target seems to be the real effective exchange rate (REER) of the rupee.It is closely watching the yen and the yuan and does not want the rupee to be overvalued or under valued beyond a certain extent,” Kanjilal said. The REER isameasure of the rupee´s relative strength against competing currencies.
On a 36 currency basis, the REER was 119.57 now, slightly lower than 119.61 in September.A figure above 100 indicates strength of the rupee.
The Business Standard, New Delhi, 5th December 2017


Popular posts from this blog

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…

New money laundering norms stump jewellery sector

New money laundering norms stump jewellery sector Dealers with turnover of Rs 2 crore and above covered; industry says threshold too low The central government has notified the money laundering rules for the gems and jewellery sector with immediate effect. Now, any entity deals in precious metals, precious stones, or other high-value goods and has a turnover of Rs 2 crore or more in a financial year will be covered under the Prevention of Money Laundering Act, 2002 (PMLA, 2002). The limit of Rs 2 crore would be calculated on the basis of the previous year’s turnover, said the notification. The directorate general of goods and service tax intelligence has been appointed under the Act. Sources said the government’s move to apply the PMLA to the jewellery sector was a fallout of income-tax raids on jewellers soon after demonetisation last November, when it was found that they sold gold and jewellery at a huge premium and accepted old currency notes as payment. The notification, issued on Augus…

Confusion over branded food GST

Confusion over branded food GST The GST Council's statement over the weekend on applying tax on branded food items has left most of the trade confused.

Even though the Council has not changed the rates on food -0 per cent on unbranded stuff and 5 per cent on brands -many small traders who didn't levy GST earlier said they could come under the 5 per cent slab after the clarification.

While they predicted some increase in consumer prices, large players said they can absorb GST in many ways and keep prices steady.

"Trade is confused and hence on behalf of our chamber, we have asked our members to go ahead and charge 5 per cent GST," said Sushil Sureka, general secretary of the Ahilya Chamber of Commerce and Industry in Indore.

The statement clarifying the application of GST came after some businesses were found deregistering their brands and selling under corporate brand name without paying tax, after the Council exempted unbranded food from the new all-encompassing indirec…