According to dealers, the spot rupee opened a tad stronger at 41.98 after closing on Monday at 42 to a dollar. Demand from foreign banks to buy one-month dollars in the NDF market triggered the fall, which was further enhanced by dollar buying by oil companies.
Dealers explained that most of the custodian clients (foreign institutional investors) were booking profits on their investments in India but phasing out the repatriation of funds through NDF dollar purchases in forward market.
Since the buying is in the NDF forward market, the actual buying will happen after one month which they may manage by selling their holdings in the Indian equity markets.
While one-month forward dollar is ruling at a premium of 19/20 paise to the spot dollar rate in Indian market, the forward dollars are commanding a premium of 24/28 paise in the NDF market.
Therefore, if a bank buys in the Indian market and sells it in the NDF, it is earning a 3-8 paise arbitrage (spread). Dealers also explained that NDF is another route of outflows of the portfolio (FII) investments apart from actual FII outflows to avoid procedural hassles.
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Incidentally, aggressive dollar buying in the one-month forward market has consistently pushed up the premium for one-month dollars from 2.26/2.27 per cent last week to a high of 3.37 per cent on Tuesday.
Exporters, on the other hand, continued to sell dollars at 42.21 till the rupee finally reached a high of 42.03 to close for the day. On the other hand, exporters also cancelled their earlier contracts wherein they had booked their dollar receivable at 40/40.50.
"Even if there were massive cancellation of earlier contracts and rebooking of the same at 42.18/42.20, it was profitable for the exporters," said a dealer.