The Hindu Business Line : Forward premium on dollar up on rupee liquidity

Mumbai, May 29 The forward premium on the US dollar in the shorter end has shot up significantly this week, as rupee liquidity has come under pressure.

A currency (dollar, for example) is said to trade at a forward premium relative to the rupee when it commands more rupees on a future date than at the present moment.

The six-month forward dollar rose to end at a premium of 2.57 per cent, against 1.80 per cent on Friday.

Treasury officials said that banks are making use of an arbitrage opportunity in the forward market since the call money rates have gone up.

“There is now an arbitrage opportunity between the call money market and the forex market,” said the treasury head at a public sector bank.

Arbitrage opportunity

Banks are buying dollars in the forex market and hedging by buying, for instance, a one- month forward contract. These dollars are converted into rupees and the effective cost of borrowing is not more than 7 per cent. This works out to be a good arbitrage opportunity since the call money rate is currently ruling at 7.75-8 per cent, explained the official.

The one-month forward on Thursday ended the day at 4.12 per cent, against Wednesday’s close at 3.86 per cent.

The inter-bank call rate has ranged higher at 7.75-7.85 per cent, from 6 last week.

Book forward contracts

The rise in the price of global crude to a high of $135 a barrel this week, has also prompted importers to book forward contracts. Exporters, who had cancelled their contracts in the past few weeks are also rebooking now.

“The rupee is now range bound and is expected to remain in the range of 42.50-43. So, importers and exporters are looking at booking their contracts now,” said a senior forex dealer.

Liquidity has been tight this week and banks have been borrowing over Rs 20,000 crore from the RBI through the repo window. On Monday, there were 22 repo bids under the Liquidity Adjustment Facility for Rs 20,790 crore, indicating the squeeze on funds with the banking system.

Sources said that the SBI, which is considered one of the major lenders in the call market, has also been borrowing from the RBI.

Lending norms relaxed

In view of the cash crunch, the RBI today relaxed the lending norms and has allowed banks to lend more to oil companies.

Banks are allowed to lend only up to 15 per cent of capital owned funds to a single borrower. This has now been raised to 20 per cent only for oil companies, with immediate effect.

Surplus cash in the system has also dwindled because the additional hike of 0.25 percentage point in the Cash Reserve Ratio set in from May 24.

This drained Rs 9,000 crore and has put pressure on call rates.