DOLLAR, RUPEE IN SHORT SUPPLY

Banks And Corporates Are Entering Into Buy-Sell Swaps To Tide Over The Dollar Crisis; No RBI Intervention Seen

Preeti R Iyer MUMBAI

THE Indian money market is witnessing a strange phenomenon since past few days. Both the rupee and the US dollar have been in short supply. On the rupee side, even as cash conditions have eased a bit, there has been a scramble for rupee funds ahead of a tighter liquidity situation, after advance tax outflows next week.
In the forex market, banks and corporates are entering into buy-sell swaps to tide over the dollar crisis, which entails buying dollars in the spot market and selling them in the forward market. So far, there has been no intervention seen from the Reserve Bank of India (RBI), which usually steps into the market whenever the dollar-rupee exchange rate fluctuates excessively.
According to forex market sources, the central bank feels that the dollar crunch could be resolved by exporters selling their dollarholdings, given that the rupee is on a weakening mode. On Monday alone, the rupee dropped to 40.33 levels against the greenback, triggered by a sell-off in the equity market. The dollar has been in short supply since the subprime crisis broke out in the US, dampening liquidity conditions across the globe. The Indian market has been facing a shortage of dollar availability for more than 2-3 weeks now. In fact, this has caused premia payable on forward contracts to trade at a discount up to the next eight months.
The current shortage of dollars has been caused by a host of factors, one being foreign institutional investors (FIIs) withdrawing from the equity market, in addition to oil companies buying dollars to make import-related payments. While dollars are in short supply, simultaneously, there has also been a scramble for rupee-funds. Banks are seen borrowing funds from the overnight market ahead of tighter liquidity conditions expected by next week.
On Monday alone, volumes in all the three overnight money markets went up sharply, reflecting ample demand for rupee funds at a time when the cash conditions are showing temporary signs of easing. A senior fund manager at a mutual fund pointed out that rupee funds could have entered the system through a host of channels. Mutual funds received large amounts of subscription money since Friday. Hence, they emerged as key lenders in the market for collateralised borrowing and lending obligations.
It may be recalled that asset management houses had been liquidating their bond holdings to mobilise rupee funds couple of weeks ago and remain liquid ahead of an expected crunch in cash conditions. Most MF houses had even refrained from investing in corporate bond offerings of the Rural Electrification Corporation (REC) and the Power Finance Corporation (PFC).
Sources added RBI had entered into sell-buy swaps in November. These swaps matured in February, causing funds to enter the market. This apart, there has been certain amount of spending by the government through payment of salaries.
There are also rumours that state governments could have drawn down their allocations from the Centre in end-February and could have parked these funds in the banking system.Despite funds having come into the system in so many ways, banks continued to borrow funds from the call money market, the market for collateralised borrowing and lending obligations (CBLO) and the repo market.
preeti.iyer@timesgroup.com