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Rupee crash sends importers rushing for forex cover

Hedging costs surged almost two percentage points over the weekend after Mumbai stocks made their worst retreat, plumbing the rupee to the level of 77 to a dollar.

, ET Bureau|
Last Updated: Mar 24, 2020, 08.33 AM IST
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The central bank is said to have intervened in the spot market as select state-owned banks were seen selling dollars in large quantities.
Mumbai: The rupee fell from a cliff on Monday, tipped over the edge by savage selling in Indian equities and other financial assets, sending harried importers to buy expensive foreign-currency covers for unhedged liabilities due for payments.

Hedging costs surged almost two percentage points over the weekend after Mumbai stocks made their worst retreat, plumbing the rupee to the level of 77 to a dollar. The one-month forwards premium is now at 8.67 per cent. Three- and six-month contracts quoted 85-38 basis points higher compared to last week.

“The forwards premium has risen recently due to uncertainty in availability of dollar and obviously rising interest rate differentials between the US and India, adding to importers’ cost of hedging,” said Bhaskar Panda, executive vice president, HDFC Bank.

The rupee opened on a weak note at 75.90 in the inter-bank forex market. Intraday, it plunged to 76.35, before settling 1.46 per cent down at 76.29 against the US dollar, its lowest-ever close.

“With the rupee touching record lows, the forwards contracts are now in high demand,” said Anindya Banerjee, currency analyst at Kotak Securities. “The currency market is turning illiquid, with many proprietary traders staying away. The cost of hedges is increasing, especially after the markets did not get the much-anticipated rate cut ahead of the policy.”

The central bank is said to have intervened in the spot market as select state-owned banks were seen selling dollars in large quantities.

“While most of the importing corporates would have covered their liabilities, small to medium-sized companies that remained uncovered are rushing to cover their nearterm imports,” Panda said.

The premium jumped 76-98 bps in six- and three-month contracts during the four-week period.

The central bank called an impromptu press conference last Monday, fuelling expectations of a rate cut. Instead, the local central bank announced liquidity measures via dollar swap and long-term repo operations, aimed at injecting dollar and rupee liquidity.

“We have asked all our importer clients to hedge fully after the rupee hit a new record low through options and forwards,” said Abhishek Goenka, CEO at IFA Global, a Mumbai-based consultancy firm. “RBI provides dollar through sell-buy swaps which lead to spike in premiums.”

This calendar year, the rupee lost more than 5 per cent to the dollar, ranking as one of the worst performing currencies. The rupee first hit a record low at 74.50 a dollar on March 13. It later extended its losses, hitting a newer low at 75.31 last Thursday.

“Unhedged importers seeking to cover now have to shell out more money both in spot move and forwards,” Goenka said.

RBI has already conducted two dollar-swap auctions to pump in dollar liquidity. The central bank normally buys dollars in forwards while selling it in the special swap windows. Foreign portfolio investors have sold a record net of ?95,485 crore in local securities in March, the highest ever.

“The depreciating rupee is a double-edged sword where the importers will end up paying a higher price for goods/services purchased, and exporters ending up receiving discounted credit,” said Sunil Kumar Katke, business head – commodity and currency, Axis Securities.

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