The forward segment of the forex markets are abuzz with banks and corporates actively arbitraging onshore as well as offshore. With paying pressure (demand for forward dollars) from various quarters, premiums of the forward dollar have shot up.
Banks are arbitraging between the domestic money and overseas forex market and are using surplus rupees to buy spot dollars, forgoing the overnight interest rate of eight per cent. These dollars are sold forward, earning the forward premium of around six per cent.
Till the forward contract matures, the dollars are held in the nostro accounts earning an overnight deposit rate of 5.7 per cent. Thus the banks enjoy a clear spread of three per cent approximately. Some banks are also reportedly buying forward dollar on expectations of selling the contracts to NRIs who are now allowed to cover their forex exposure with regard to their rupee denominated foreign currency accounts with banks.
Corporates who have been playing in the non-deliverable forward (NDF) market have been hit as rates have shot up.
Earlier, they had arbitraged between the local forex market and the NDF market by buying forward dollars locally and selling them through their representative office in Hong Kong or Singapore, earning a spread of around Rs 2 as the premiums.
However, these corporates are now required to buy in this market and square off their positions as these sales are non-deliverable. With the premiums having risen in the NDF market to over Rs 2, along with local premiums, they are running significant losses.
Most of the players in this market are the large foreign banks, private sector banks, and large corporates.
