Traders lean towards RBI benchmark rate

'Deals on a fix' gain ground as volatility puts off clients

Traders, stung by the rupee’s volatility, are increasingly using as benchmark the reference rate declared by the Reserve Bank of India, as clients shy away from taking a call on a particular rate.

The trading community calls this “deals on a fix” or “fixing deals”. Such deals use RBI’s reference rates. RBI calculates reference rates after taking into account rates from several banks at around 12 pm. The rate is declared within the next hour.

“Typically, the reference rate is used by offshore participants to settle their futures or forwards contracts,” said the head of treasury of a foreign bank in Mumbai. A forex dealer with a domestic consultancy firm said: “As markets are so volatile, nobody wants to take a call. Clients, including smaller ones, also insist on the day’s RBI reference rate.” Bankers round off the rates to the nearest quarter, add commission and strike the deal on behalf of their clients, the dealer added.

“These days, there is no assurance on how the rupee will move,” said the official from the foreign bank. For instance, the rupee was seen nearing 58 a dollar. But it suddenly staged a recovery to 55-56 levels in a single session and closed with a record high gain last week.

CRISIL said in a report on Monday that the rupee had become highly vulnerable due to factors such as declining import cover of foreign exchange reserves, high private corporate debt servicing burden and slower growth. “Higher the vulnerability, greater is the impact of a shock on the currency. Even a lower shock, therefore, resulted in swift depreciation of currency in the last few months,” the rating agency said in a report.

The rupee has lost around nine per cent against the greenback since the start of the current financial year. On Monday, the rupee closed at 55.43 per dollar, 0.4 per cent up against the previous close.

The RBI reference rate for the day was 55.83 per dollar. Non-deliverable forwards for three months were at 56.47 and for 12 months were at 58.83 on Monday.

“The bearish expectations may percolate down to the spot rate through bank’s net overnight open position limits, though the impact would be less as the limits have been set by RBI,” said the head of treasury of a Mumbai-based large private sector bank.

On May 21, RBI said the position limit for banks for trading in futures and options had been set at 15 per cent of the outstanding open interest or $100 million, whichever is lower. Also, counter-positions could not be taken between exchanges and over-the-counter (OTC) market.

“The positions in the exchanges — both futures and options — cannot be netted or offset by undertaking positions in the OTC market and vice versa. The positions initiated in the exchanges shall be liquidated or closed in the exchanges only,” RBI said in statement on Monday.

The central bank had given time till June 30 to wind down positions.