Public sector oil companies went in for a major dollar buying spree in the forward market on Friday last week. They were entering the foreign exchange market after a gap of three years.
The spot rupee shot up to a two-year high of 44.19 to a dollar on Thursday last week and ruled around 44.44 on Friday. “Even at a three-month premium of 6.4 per cent to be paid for booking dollars in the forward market, these companies got a decent deal, since these dollar-rupee levels are purely driven by foreign inflows, which may not continue in the same vigour beyond November-end,” said a bank dealer closely associated with PSU deals.
“This has wider market implications for dealers. First, it was product hedging, since the rupee is appreciating and the appreciation is not likely to breach beyond 43.50 to a dollar in the short run. It will be difficult if the FII inflows dry out in the first week of December, when most foreign funds close for the Christmas holidays. So, before that, they will book profit in whatever positions they have taken, since their financial year closes with the calendar year,” explained a forex dealer with a bank.
Second, it is widely perceived as more than a business decision, since oil companies generally do not hedge in the forward market. Dealers said they may have done it at the behest of the Reserve Bank of India, which is at present a bit reluctant to intervene in the forex market directly by infusing rupees in the spot market to buy dollars, for fear of stoking inflation.
Buying dollars in the forward market by these oil companies does not result in infusion of rupees immediately in the system; it also helps them in fixing the supply of cheap dollars in the future. Most of this forward buying is directed for delivery three to six months down the line. Thus, the rupee delivery for buying dollars is spread out over a period of three to six months.
The PSU oil companies book crude oil in the forward market in international exchanges to avoid price volatility. For delivery of the crude when the futures contract expires, these companies have to pay in dollars. Thus, the hedging in the forward market to buy dollars helps an oil company to pay less in rupees for the same dollars, while others pay more if the rupee-dollar rate, three months down the line, may have depreciated, explained dealers.
“The rupee’s appreciation seems far too swift for anybody’s comfort. I expect the rupee to touch 43.50 when inflows are chunky, but till December, the rupee is expected to be in the 44-45 band, as the country has a large current account deficit,” said the head of treasury at a large foreign bank.