Banks are turning cautious about selling forward dollars to corporates in the foreign exchange market. The market is becoming increasingly illiquid and premiums, particularly for the near term, are ruling at uncertain levels, turning banks wary of covering their gap limits by buying forward dollars.
The increasing illiquidity in the forward market is a result of the Reserve Banks move to bring overseas overnight investments, other than those arising from banks own dollar deposits, within the ceiling of 15 per cent of unimpaired tier-I capital by January 7.
This is putting upward pressure on premium since banks reversing swap transactions to meet the RBI deadline, are buying forward dollars. Besides, importer demand for forward dollars is still alive.
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Normally, when banks sell forward to importers, they cover their position by buying spot. To take care of their gap (maturity) risks they transact a sell-buy swap with a bank willing to do a buy-sell.
However, a bank can do a buy-sell if it has bought forwards from an exporter or for trading. Exporters are few in the present market and the RBI norm restricts banks from doing buy-sell swaps for trading purposes. Besides, with premiums uncertain, banks are wary of making a loss by buying forward at a higher premium at which they sold to importers. Moreover, with many banks reversing overseas positions to meet the RBI deadline, there is likely to be only one way sell-buy interest in the market.
Banks are worried about covering their gap limits as prescribed by their board. Presently, some are buying spot dollars after forward merchant sales, placing in the nostro account (as there are no restrictions for placements of deposits arising out of merchant transactions), thus running the gap. On account of gap limit violations, even regular services such as foreign currency cash-credit facility is likely to be hit.
The central bank has eased the situation in the market somewhat by doing buy-sell swaps for the near term.
However, the surging demand for forward dollars combined with the bearish rupee sentiment has made RBIs task a tough one.
This may put pressure on the spot dollar also as importers which are not able to obtain forward dollars will buy spot as they have to account for payments and receipts as the close of the financial year is three months away. In fact, major banks, including the State Bank of India (SBI), are net buyers of dollars in the spot market.
The Foreign Exchange Dealers Association of India (Fedai) discussed the issue in a recent meet with RBI. The apex bank indicated its willingness to hear individual representations from banks. Through representations, leading banks have brought this to the RBIs notice over the last week.