Dollar scarcity hits cash market

Banks' over-commitment to dollar loans and bunching of dollar payments by corporates have once again created a dollar shortage in the cash foreign exchange market.

Dealers said the cash spot rates, which usually track the overnight call money rates, slid to 1.58 per cent early this week.

In order to avoid a free fall in the forward premium that had turned the cash spot premium into discount during May, the Reserve Bank of India is understood to have been aggressively intervening in the near-term forward market through "sell-buy swaps".

The RBI is selling dollars in the spot market so as to buy it in the forward market across maturities ranging from one month to six months. In this way, it is supplying dollars in the cash market to ward off the shortage.

In addition to this, this operation is putting a pressure on the rupee in the forward market which, in turn, will prevent the fall in the forward premium.

As a result of this operations, cash spot premium now hovers around 3.76 per cent. Along with pulling up the cash spot, forward premium from one month-six month tenor has also gone up.

Dealers added that intervention is pushing the forward premium up which otherwise would have declined to new lows, tracking a rising rupee.

In addition to this, the redemption of Resurgent India Bonds, due from August, is also preventing the forward premium from falling drastically as swaps are being done to meet the dollar demand.

The foremost of the reasons adding to the bullish outlook on rupee is the fact that on a trade-weighted based index of Real Effective Exchange Rate (REER) the rupee stands overvalued after a long gap. On REER, rupee vis-a-vis other currencies, stood at 100.76.

The shortage in dollars in the cash market can be explained through excess demand for dollar loans. On the other hand, the lenders prefer buying in the spot market as rupee is gaining everyday.

"In fact both importers as well as banks are keeping open position and no one wants to be hedged", sadi dealers.

Therefore any demand for dollars or payments in dollars are met out of cash borrowing. Therefore there is absolutely no demand for dollars in the forward market, either near term or forward.

While importers remain unhedged, there are also instances of postponing the payments as rupee is expected to gain further.

"This is in contrast to exporters postponing their dollar payments in the time of rupee weakening," said dealers. On the other hand, exporters are selling dollars forward further adding to the supply.

Dealers said that lack of demand for dollars is, in fact, magnifying the picture of the dollar inflows which are making way into the indian maket in heavy amount.