Cash-spot spreads spike to record high of 46 paise over huge dollar supply

Massive dollar surplus increased demand for rupee liquidity

A huge surplus of dollars in the market shot dollar-rupee cash-spot spread to a record high of 45-46 paise, from its usual 3-5 paise on the last working day of the fiscal 2018-19, partly because banks that failed to swap their dollars with the Reserve Bank of India (RBI) on March 26 had to shed their dollar holding to get rupee liquidity. 

Cash-spot is an interbank market that witnesses huge volume of transactions. The market comprises three rates — spot, cash and tom (short for tomorrow). 

A “spot rate” is one at which a deal is settled in the second working day of the transaction (T+2). In other words, if a customer is selling dollars today, she will get the proceeds credited on her account on the second working day. 

Now, if the customer wants the money to be credited today itself, the rate she would be paying is “cash rate”. The difference between spot and cash rate is called cash-spot spread. Usually, the per day discount works out to be not more than 1-1.5 paise per day. 

Now there is another rate, called ‘tom rate’, or tomorrow rate. This is the rate at which the money is credited in the account on the first working day after the trade. So, in general course, if a customer has to receive the money on the next working day, she will receive Rs 69.125 — that is Friday’s spot rate Rs 69.14 minus 1.5 paise. 

Similarly, if she has to receive the money on a cash basis, or today itself, she will have received Rs 69.11 per dollar. 

However, the abnormal spike in spot-cash meant that customers who wanted to receive the money today itself, received it at Rs 68.68 a dollar. 

This situation is bad for an exporter (supplier of a dollar) and excellent for an importer (buyer of a dollar). 

“In my 20 years, I have never seen such high rates. I have seen this rate climb to 20 paise once, but the current one is a record high,” said a senior currency dealer with a foreign bank. 

Data for cash-spot is not readily available. Currency dealers say cash spot spreads do shoot up in the year-end because surplus dollars in the annual books beyond the permissible limit invites capital charge. And so, banks that have excess dollar, try to trade them for rupee before the year ends. This is also done to meet year-end liquidity and funding needs. 

However, this time the dynamics have been a little different. While foreign portfolio investors (FPIs) brought in about $6 billion in the Indian market, the bids received by the RBI in its auction was over $16 billion.

 This indicated that the market was flushed with dollar liquidity, as some banks, mainly foreign banks, might have brought in extra dollars from their overseas units to participate in the auction. 

“These banks must have bid at a good discount to the prevailing forwards rates, which got rejected as the RBI accepted near market rates. These banks, therefore, must have been left with excess dollars that they couldn’t square off so soon before the year ends, and so that explains the rush to sell dollars,” said the currency dealer. 

This arbitrage opportunity also distorts the market dynamics and give unfair advantage to a few entities that did win the Reserve Bank bids and transferred their existing dollars to the RBI, said a senior currency market player. 

By swapping their dollars with the RBI, their dollar limits were freed up, which they could use to deposit dollars (and lend rupee) in the cash market.

Though the situation will normalise in the first week of the new financial year, senior currency dealers said the phenomenon cast a doubt on the participation of banks in the next swaps auction, should that happen again, as banks will be circumspect in bringing extra dollars to participate in the auction.

Problem of plenty

•  Banks that lost out on the RBI swaps had to park their excess dollars
• Excess dollar holding by a bank is not allowed
• The spike may dent future of the RBI’s dollar-swap prospects