Rupee plunges to another low of 41.80

"The outlook on rupee is bearish which is why the NDF market is so active. Thus the sharp fall in rupee is mostly on account of NDF arbitrage, which has far exceeded buying of dollars by importers," said a dealer.

Besides the NDF arbitrage, oil companies continued to buy for import payments since crude oil ruled consistently at $122.78 per barrel.

However, on Thursday, the buying was mostly in the cash and spot market and not in the futures, which in turn kept the forward market in dollar rupee unaffected from the sharp depreciation of rupee, said a dealer.

Exporters did not sell dollars as they wanted the rupee to further depreciate. Dollars were sold only for a near term of 1-3 months.

Dealers said no export contracts, which were booked earlier at much higher levels, were cancelled as exporters would wait for the rupee to rule in the range of 42.50 to a dollar.

"Massive selling of dollars is expected when the rupee dollar rules in the range of 42-42.50. So it may not be easy for the dollar rupee to rule beyond 42.50 since a lot of resistance will be posed against the spot rupee to breach beyond 42.50, said a foreign banker.

NDF is a derivatives market where foreign investors take a position on the rupee dollar exchange rate in the overseas market. Currently, the view on rupee is bearish which may lead to notional purchase of dollars to be invested overseas.

These markets are mostly operative in Singapore and Hong Kong and banks or companies with active subsidiaries or branches in these countries could play in the market.

A dealer illustrated the operation in NDF by stating that the bank in India would buy dollars for one month at 41.90 (one month forward rate) and invest in the NDF at 42. He clarified that these were notional purchases and sales and the deal was settled only on the net positions.

For most of the maturities, the difference of spot rupee dollar in the NDF and Indian market is almost 2-8 basis points. One basis point is one hundreth of a percentage point.

Active buying of dollars in the spot market pulled down the rupee premia to be paid for booking forward dollars. The annualised premia for booking six-month and one-year forward dollars closed at 1.60 per cent and 1.40 per cent as against 1.75 per cent and 1.51 per cent respectively.