Tarapore Report Will Help Forex Market Attain Greater Depth

A poll of authorised forex dealers, on their reaction to the Tarapore committee report on capital account convertibility (CAC), indicated that the forex market will acquire greater depth. This is because the number of market makers, products and instruments will increase.

The market feels that the RBI is likely to open the forward markets to non-resident Indians and foreign institutional investors. Opening the market to more players will increase liquidity, volatility and arbitrage opportunities. On the flip side, any perception of a rupee market could cause the market to react violently.

To prevent this, the dealers said the market should be opened to different players in phases. Mukund Santhanam, manager, treasury, Standard Chartered Bank, suggested: The RBI could open the forward market in a staggered fashion allowing the market to slowly adjust to various players. Another desirable fall-out of this would be the increased competition between the market makers. According to C P Mendes, assistant vice-president, treasury, Centurion Bank, The market makers will cut their rates to attract corporate clients. This will reduce the margin between the inter-bank rate and merchant rate.

 

While the market does not favour non-banking finance firms acting as authorised dealers, these companies will play a role in providing forex consultancy and risk management services to corporates without in-house treasuries. The market feels that RBIs intervention is likely to be limited to curtailing unusually large inflows or outflows in the markets. The RBI should follow a policy of tracking the real effective exchange rate.

Corporates have already begun the process of shoring up their treasury management functions. As the markets are getting prepared to meet the milestones suggested in the panel report on CAC, the corporates have to be well prepared to meet the new challenges and that require a systematic methodical and analytical approach to management of foreign exchange, said N S Paramasivam, senior vice-president, India Securities, Essar Group. Corporates will have to achieve greater productivity and efficiency, there would be lot of demand to hedge risk with foreign currency portfolio, and also financing cost hedges, said Kushang Sheth, analyst with Mecklai Financial and Commercial services.

However, the market feels that not all the measures are compulsorily required. According to Subir Biswas, ABN Amro Bank: The committee has suggested too much in too short a time. Not everything has to be implemented for convertibility. For instance, even if the fiscal deficit does not decline to 3.5 per cent, it will still be possible to implement CAC.