Swap deals help banks pare forex loss

Market players are busy leveraging the arbitrage opportunity offered in money market instruments to cut losses in the foreign exchange market. Dealers said sell-buy swaps are rampant in the interbank market.

Forex dealers sell cash dollars in return for rupee with an underlying agreement to buy them back in the very short term, usually at tomorrow's (tom) or day after tomorrow's date (swap). The cost of the swap comes to around 3.38 per cent, said a dealer.

The funds (rupees) are then invested either in the overnight call money market or in repos with returns of 4.3-4.5 per cent.

Repos are a facility available in the interbank money market where banks can avail of funds for a certain period of time against the pledge of government securities.

These inter-market investments partially compensate for the losses incurred by forex dealers in the last week on account of the depreciation of the rupee. Each bank or market player has an internally set limit to the extent of which it can bear losses.

According to dealers, the cross market investments have caught up now with the availability of dollars with banks.

Even though dollar supplies have almost dried up, covering of future payments by importers has ensured supply of dollars to some extent. Moreover, the longer term sell-buy swaps contracted by banks earlier are getting matured gradually.

Meanwhile, the bonds market has heaved a sigh of relief as life insurance companies and some public sector banks have started buying heavily.

While these institutions are buying bonds at dirt cheap prices (with yields shooting up), it allows players with shorter duration portfolios an exit route. Duration is the average maturity period of the portfolio of a financial institution.