Foreign banks have been undertaking sell-buy swaps in the foreign exchange market i.e. swapping their Foreign Currency Non-Resident (Banks) Accounts [FCNR(B)] deposits for rupee resources in the first leg.
With the premiums steadily declining, some foreign banks have been swapping dollars for rupees in order to be prepared against hardening of interest rates in the money market. Premiums have declined with the one month, three month and six month premiums declining to 10.54 per cent, 11.30 per cent and 11.70 per cent respectively.
There are apprehensions that the money market would see a tightening of liquidity during the second fortnight of March due to outflows arising from advance tax and payment on the VDIS scheme. In a recent report, ICICI Securities had estimated that the outflows of Rs 15,150 crore over the next two months are balanced out by inflows amounting to Rs 15,551.79 crore.
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However, the second fortnight of this month is likely to see outflows exceeding inflows to the tune of Rs 4,942.67 crore mainly on account of advance tax plus VDIS outflows which are estimated to be Rs 5,000 crore.
The report had further suggested that on account of the maturing of swap transactions, undertaken earlier by the Reserve Bank of India as part of its intervention strategy, this month, there may be a further tightening of liquidity. While foreign banks have been paying, the rupee surplus public sector banks have been receiving premiums.
A section of the market believes that that the market is in a received position, and when the banks come in to take profits, the premiums during the course of the coming week could move up.
On the other hand, the existence of ample liquidity in the money market could imply that short term premiums need not necessarily increase.