Exporters Rush For Cover Fearing Re Rise

Panic-stricken exporters have begun taking forward cover in anticipation of a further strengthening of the rupee against the dollar.

At present, the Reserve Bank has been intervening in the market whenever the rupee has touched 35.80.

The rush for forward cover has also been triggered by massive FII inflows that have prompted importers to cancel or postpone their forward covers. Importers tend to benefit if the rupee strengthens.

This rush of forward cover by exporters has resulted in the pushing down the six-month annualised forward cover rates down to less than 3.7 per cent from 4.5 per cent on Thursday, unheard of in recent years.

 

Bankers said that in such a scenario there was a possibility of a levelling of dollar-rupee forward rates; that is, there is no difference between the spot and the six-month forward rates.

The bankers said that there have been occasions earlier when the rupee has been commanding a premium against the dollar in short forward transactions.

This would imply that the spot was cheaper than cash. The rates quoted were Rs 35.84 for cash and Rs 35.83 for spot.

This was a situation that was likely to recur whenever the short-term interest rates fell below the equivalent dollar rates. Until early this week, for instance, call rate at 3 per cent was lower than the equivalent Fed funds rate at 5.5 per cent.

A correction to this situation took place only after the RBI offered the 12.59 per cent on tap, when call rates went up to 9 per cent, and the State Bank of India entered the market on Thursday and picked up $70 million on behalf of the Indian Oil Corporation.