Banks Lend Support To Rbi, Increase $ Sales

Leading public sector banks have been selling dollars in the market in a move seen akin to lending support to the RBI intervention strategy in the forex market. This could help bridge the dollar demand-supply gap.

Some PSU banks, after talks with the central bank, have been bringing in dollars held overseas, selling them in local markets and making a clean profit too in the process. Confirming this, SBI officials said the bank had sold $400 million over the last week after holding parleys with the RBI. The RBI, however, refused to term this as intervention.

Bank officials said the RBI has asked them not to indulge in speculative trading, that is arbitraging between the money and foreign exchange markets. The banks move results in a win-win situation. In case they sell dollars en masse the rupee will appreciate. This will mean that they can buy dollars later at a better price.

Moreover, the banks may also bring in their FCNR(B) funds held overseas and swap them for rupees, thereby increasing the supply of dollars. However, a bank chairman felt that that the RBI might have to compensate the banks in case of losses made through these swaps, as the near term premiums on the forward dollar are higher than overnight rupee interest rates.

The SBI has brought in around $150 million from its GDR issue of the $369 million raised by it. The SBI also purchased $210 million of the GDR proceeds and later sold it to the IOC in an off-market deal.

The selling of dollars by the SBI has for some days now lent stability to the market as it enhanced the dollar-supply position. It is clearly a case of the demand-supply mismatch continuously mounting, said a dealer.

The RBI had earlier indicated that it would intervene only in cases where there was genuine demand-supply mismatch, and not just to temper small degrees of volatility which was common.

However, the markets estimate that the central bank has intervened to the tune of at least $1.3 to $1.5 billion in November. In addition, the RBI has around $1.5 billion outstanding in forward transactions.

Market players say that while dollar demand, per se, is not much higher than usual, it is the virtual drying up of supplies, coupled with bearish sentiment, that is resulting in the rupees fall. They say that trading volumes in December are usually thin as supplies slow down via various routes on account of the financial year-end and holiday season overseas. However, this situation normally improves by January.

Market players feel that the RBI will try to sustain the rupee via administrative measures as well as by intervening through banks.