Inter-Bank Forex Trades See Quantum Jump

The highly speculative inter-bank forex market has grown tremendously compared with the more sedate merchant transactions.

With new banks finding it difficult to go retail and spreads on corporate activity coming under pressure, players are increasingly looking at high-volume treasury operations, particularly inter-bank trading, to make quick profits.

While merchant dollar purchases rose only 9.63 per cent between January and September, inter-bank trading took a quantum leap of 93 per cent.

Earlier, local banks forayed into the foreign exchange market mainly on behalf of their corporate clients. However, the corporates do not venture into the market for cover if there is little volatility.

 

Additionally, since banks are better-equipped in terms of information and systems, they are increasingly trading to book profits by taking advantage of currency movements. Among the most active in this regard are the foreign banks and new private sector banks.

Poring through the forex market data released by the RBI for the period January 1997 to September 1997, it is quite clear that the biggest jump has been in dollar-rupee spot trade, which is traditionally the most active segment.

Given the economic slowdown, merchant dollar purchases showed a relatively small rise of 9.63 per cent to $4.6 billion from $4.2 billion.

However, during this period, inter-bank dollar purchases rose by a whopping 93.5 per cent to $12.9 billion from $6.67 billion. In the cross-currency segment, merchant purchases grew by 76.38 per cent from $288 million to $508 million and inter-bank transactions grew by 88 per cent to $20.7 billion from $11 billion.

The volumes have gone up particularly since RBI has increasingly allowed a number of new banks to set up treasury activities. The new foreign banks are not into retail banking and indulge only in corporate banking. Hence, they are augmenting their income by being active in the inter-bank treasury operations, said a dealer with a new private sector bank.

RBI has recommended that banks trade up to 12 times of their merchant volumes and proprietary limits.

However, this is not mandatory and many foreign banks go way above this limit trading upto 15 to 20 times their merchant volumes.

As of now, few public sector banks are looking at inter-bank trading. Bank of Baroda is trading in the foreign exchange market. Bank of India, which is at present developing its integrated dealing room, is not very active in this area. Even the State Bank of India (SBI) is mainly involved in merchant activity.

However, once these banks with their huge client bases integrate their treasuries and actively trade in the market, the foreign exchange market will develop more liquidity and depth.

Inter-bank trading which was earlier frowned upon by the authorities is now being encouraged as it imparts liquidity, and depth to the markets enabling banks to quote finer spreads which in turn benefits corporates.