PNB scam fallout: Rupee forwards crash as banks stop issuing LoUs

Nirav Modi scam has resulted in disruption in cross-border trade as banks are unwilling to provide guarantees

The upshot of banks’ reluctance to issue letters of credit, letters of undertaking (LoUs) and such guarantees affecting normal functioning of cross-border trades is that one-year rupee forward rates have crashed in the currency market as importers scampered to buy dollars in the spot market to meet their payment obligations.

The crash in the one-year forward rates, about 50 paise in a matter of a few days to as low as 239 paise, reflects the acute dollar shortage in the market. This is accompanied by a spike in spot rates and in the immediate term, typically one month or less,