On Thursday evening, the central bank asked banks to submit client transaction flows in the spot, forward, and offshore non-delivery forward (NDF) markets. For transactions above $10 million, banks must provide the names of the customers and the purpose of the dollar purchase or sale.
Banks must also give their respective open positions — which reflect their estimated positions — as well as gross buying and selling positions in the bank’s market.
“When the Reserve Bank of India collects such data, many banks interpret it as a signal to reduce speculative positions. However, there were no calls or instructions from the RBI. It has only asked for the data now,” a senior banker told ET. Even if the RBI allows the rupee to slide, it will want to do so at the desired pace, he said.
The pressure on the rupee can come from several sources: big companies, driven by the idea that the rupee could weaken, are buying dollars on anticipated imports – which are more than their outstanding bills; Corporates and large private and MNC banks are reducing arbitrage transactions – selling in the onshore NDF market and buying forwards in the onshore or local market; And banks increase trading positions by virtue of their capital and board-approved limits.
When the rupee comes under pressure, the dollar typically rates slightly higher in NDFs as hedge funds and corporates go long. This creates arbitrage, and the strength of the dollar reaches the local market. NDF trades are in non-convertible currencies settled in USD.
“In times like these, data will help in planning and managing currency fluctuations effectively. RBI can take timely decisions to control volatility in the coming days,” said Sameer Lodha, managing director of QuantArt, a forex and interest rate consultancy. For example, the details of gross buying and selling trades will indicate the level of activity set by the bank’s management. When companies deliver dollars based on expected imports, they cannot record gains unless documentation of actual imports is produced later. However, if the bet comes back, the company must absorb the loss – a rule that acts as a deterrent.
In the past six months, the rupee has depreciated from 88 to around 92, closing at 91.74 against the dollar on Friday. Turbulent geopolitics, the US-Iran war, gold imports, and rumors of tighter crude oil prices add to pressure on the current account deficit and foreign portfolio outflows. Although it intervened, the RBI allowed the rupee to weaken gradually rather than defend a level. It was also a phase when there was uncertainty about the India-US trade agreement. However, after trade deals materialized, and market sentiment improved to push the rupee back to the 90.10 level, the Middle East conflict is now overshadowed.
Over the past few months, thanks to tight liquidity in the local currency market, the Reserve Bank of India has refrained from aggressively intervening in the spot market (since dollar sales attract rupee liquidity). Instead, it used the forward market, conducting a buy-sell exchange.
The fear now is that if geopolitical tensions continue and outflows remain weak, the rupee will remain under pressure. In such situations, a large pool of information can help the monetary authority to act quickly.
