The Hindu Business Line : Exporters cancelling forward dollar cover

SEVERAL exporters have resorted to cancellation of forward cover to cash in on the depreciation of the rupee against the dollar during the last one month.

Bankers said that exporters seldom resorted to cancellation of their forward cover in the last two years since the rupee had appreciated against the dollar.

Bankers said that during the last few weeks the Reserve Bank of India's intervention in the foreign exchange markets was restrained. Since April the rupee has depreciated 3.5 per cent against the dollar and the euro.

The depreciation of the rupee was entirely prompted by FII exiting the equity market and oil companies sourcing foreign currency in the spot markets. The FII exit was in anticipation of an increase in US interest rates.

The US Federal Reserve on Tuesday hiked the funds rate to 4 per cent.

Bankers said that they had inferred that aggressive intervention by RBI would only happen in the event of a sharp appreciation, and not vice versa. This prompted some of the exporters to cancel their forward cover and take advantage of situation, and maximise their gains.

Exporters have benefited from cancellations. This was because under current guidelines of the Foreign Exchange Dealers Association, exporters are compensated on the basis of the prevailing rates for the cancellation.

However, bankers said that not many exporters were taking chances by leaving their positions open despite the dollar's appreciation. Bankers also said that some exporters had also rolled over their forward covers, implying that they had deferred their inward remittances to maximise their gains.

This was because any forward cover would be done on the basis of the current exchange rates. Sources said that the rollover by some of them had partly contributed to the current low forward premia.

Currently, forward premia for maturities up to one year is under one per cent.

In fact, the covering of the forward positions was also prompted by rupee's advance against the dollar in the non-deliverable forward markets (NDF).

(NDFs are over-the-counter foreign exchange derivative products. The counter parties of the NDF contract settle the transaction not by delivering the underlying pair of currencies, but by making a net payment in a convertible currency, typically dollar, proportional to the difference between the agreed forward exchange rate and the subsequently realised spot fixing).

Last month, in the NDF markets, the dollar was expensive by at least 30 paise, creating a large arbitrage opportunity for foreign banks and institutional investors. Bankers said that with the turnaround in the situation a reverse arbitrage opportunity had opened up, prompting exporters to cover their inward remittances.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
2,072 SHGs financed in AP

Exporters cancelling forward dollar cover

Rupee ends lower, bonds stay flat

HDFC to hold home loan melas in Kerala

Muthoot Finance re-launches gold loan scheme

Rs 8,000-cr auction on Nov 8

New BoI products for small businesses

AP to take Rs 50-cr equity in APSFC

T-bills auction fully subscribed

StanChart, OBC in trade services pact