On Thursday evening, the central bank asked banks to submit client transactions flows in the spot, forward, and offshore non-deliverable forward (NDF) market. For deals above $10 million, banks would have to give the names of clients and the purpose for the purchase or sell of dollars.
Banks would have to also give their respective open positions — which reflects their speculative positions – as well as the gross buy and sell positions in the inter-bank market.
“When the Reserve Bank of India collects such data, many banks interpret it as a hint to cut down speculative positions. However, there were no phone calls or instructions from the RBI. At present it has only asked for data,” a senior banker told ET. Even if RBI lets the rupee slide, it would want it at a desired pace, he said.
The pressure on the rupee can stem from multiple sources: large corporates, driven by a view that the rupee could weaken, buying dollars on anticipated imports – which is over and above their outstanding bills; corporates and large private and MNC banks cutting arbitrage deals – selling in the offshore NDF market and buying forwards in the onshore or local market; and banks increasing trading positions on the strength of their capital and board-approved limits.
When the rupee comes under pressure, the dollar typically quotes a little higher in NDF as hedge funds and corporates go long. This triggers arbitrage, and dollar strength spills over to the local market. The NDF trades are on non-convertible currencies with settlement happening in USD.
“In times like these, the data will help plan and manage currency fluctuations more effectively. RBI can take informed and timely decisions to control volatility in the coming days,” said Samir Lodha, managing director of QuantArt, a forex and interest rate advisor.For instance, the gross buy and sale trade details would indicate the level of intra-day activity which is determined by the bank management. When corporates buy dollars forward based on expected imports, it cannot book the gains unless documents of actual imports are subsequently produced. However, if the bet backfires, the company has to absorb the loss – a rule that acts as a deterrent.
Over the last six months, the rupee has depreciated from around 88 to nearly 92, closing at 91.74 against the dollar on Friday. The troubled geopolitics, US-Iran war, gold imports, and hears of hardening crude are adding to the pressure from current account deficit and absence of foreign portfolio inflows. Though it intervened, RBI has let the rupee weaken gradually instead of defending a level. This was also a phase when there was uncertainty over the India-US trade agreement. However, after the trade deal materialised, and the market sentiment improved to take the rupee back to 90.10 level, the Middle-East conflict now casts a shadow.
In the past few months, thanks to tight liquidity in the local money market, Reserve Bank of India refrained from aggressively intervening in the spot market (as dollar sales absorb rupee liquidity). Instead, it used the forward market, carrying out buy-sell swaps.
The fear now is that if geopolitical tensions persist and foreign inflows remain weak, the rupee may remain under pressure. Under the circumstances, a larger pool of information could help the monetary authority act faster.