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Informist, Thursday, Oct. 3, 2024

 

By Pratiksha

 

NEW DELHI – The Reserve Bank of India's stranglehold over the rupee's dollar exchange rate has seemingly led to some collateral damage for bankers. With little to no volatility in the exchange rate, trading opportunities in the dollar/rupee spot segment have dried up alarmingly, forcing multiple public sector banks to downsize their foreign exchange spot desks, market sources said.

 

According to the sources, several public sector banks trading in the dollar/rupee spot market have trimmed down their teams from six-seven to just two-three. The resources made operationally redundant have instead been deployed in trading cross-currency pairs and government securities. "There is no movement in the rupee, so that much headcount is not needed any more (for trading)," a senior treasury official at a big state-owned bank said requesting anonymity. "It's good that we put the resources at better use."

 

Since last year, intraday volatility in the rupee's dollar exchange rate has dropped sharply, with the RBI clamping down even on moderate fluctuations by intervening in the currency market. An unintended fallout has been underemployment among spot currency dealers who trade on movements in the dollar/rupee rate. "Nothing changes for me even if I am away from my desk and not tracking it (the dollar/rupee) for hours," said a currency dealer at a state-owned bank. "My trading calls will stay the same. At this point, we know they (RBI) will be there (intervening in the market) no matter what."

 

The average daily trading range for the rupee against the US dollar has been just 10 paise since September 2023, down from 22 paise in the preceding 12 months. The standard deviation, a measure of volatility, has fallen to 1.0% from 2.5%.

 

This is not the first time in recent months that the RBI's actions have led to a rethink on the number of staff employed on foreign exchange desks. Earlier this year, the central bank had pointedly reiterated that traders need to ensure the existence of an underlying exposure that backed long or short positions of up to $100 million in the exchange-traded currency derivatives segment. Spooked, brokerages began asking their clients to submit proof of underlying exposures. Volumes consequently dropped by 80% and the market turned illiquid, leading to brokerages aggressively cutting down on manpower in this segment.

 

SHIFTING JOBS

Following the RBI tightening its grip on the rupee's dollar exchange rate, banks have traded more actively in cross-currency pairs such as the pound sterling/rupee, euro/rupee, and yen/rupee. "The turnover in cross-currencies has gone up, so we are more active there now," said a dealer at another state-owned bank. "Everybody has to save their noses and make money somehow."

 

Some banks have also resorted to integrating their treasury operations, with foreign exchange dealers also trading in government securities and vice-versa. This has helped banks make the most of available manpower in the dealing room, sources said.

 

To be sure, banks can use an extra set of hands in the government securities segment following the implementation of the new investment guidelines that took effect on Apr. 1. The new norms have severely restricted the sale of bonds from the banks' Held-to-Maturity portfolio, an avenue which previously contributed significantly to treasury income of state-owned banks. To make up for this loss of income, state-owned banks have no choice but to trade more actively in gilts.

 

While the subdued rupee is a problem for all market participants, private and foreign banks haven't had to make changes to their trading desks as these anyway operate with leaner teams. Further, for private and foreign banks, specialisation in cross-currency products is more common than it is for state-owned banks. "We have (also) come up with specialised products for our clients. So, that is working out," said a dealer at a private bank.

 

The lack of volatility in the exchange rate has also had a relatively less impact on currency desks of foreign banks as they have dedicated client flows to manage. For large private banks, too, much of the income from the foreign exchange segment is generated through franchise operations and not proprietary trading.

 

End

US$1 = INR 83.94

 

Edited by Namrata Rao

 

 

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