More Stories

Informist, Friday, Nov. 29, 2024

 

Please click here to read all liners published on this story

--Dealers: RBI's net short outstanding NDF position estimated $60 bln-$70 bln
--Dealers: RBI sold nearly $20 bln in NDF market in last 2 weeks
--Dealers: RBI likely intervening extensively in NDF to support rupee
--Dealers: RBI likely sold dollars heavily in NDF to stop fall in FX reserves
 

 

By Pratigya Vajpayee and Pratiksha

 

MUMBAI/NEW DELHI - The Reserve Bank of India has sharply ramped up its defence of the rupee in the overseas market in recent weeks, so much so that the scale of its intervention in the offshore non-deliverable forwards dwarfs its local dollar sales by a wide margin, Informist has learnt. While the Indian central bank does not disclose figures relating to its offshore interventions, the RBI’s net short outstanding position in the NDF market is estimated to be $60 billion-$70 billion, according to seven NDF market participants Informist spoke to.

 

"They (RBI) have been using the NDF tool extensively (to support the rupee). Their (RBI) net short position in the NDF market is almost $60 billion-$70 billion," a Mumbai-based NDF dealer at a private bank said. Market players estimate the RBI may have sold nearly $20 billion in the last two weeks alone to counter the impact of foreign investment outflows and the dollar's global strength.

 

The rupee has touched multiple all-time lows in November, with the exchange rate falling to a record low of 84.50 a dollar. This was after the RBI’s interventions in the spot market led to its foreign exchange reserves posting their largest-ever weekly fall of $18 billion in the week ended Nov. 15, and total reserves falling to an over four-month low of $658 billion, as per the latest data.

 

According to dealers, the RBI’s activity in the NDF segment picked up last month, roughly around the same time it started intervening heavily in the spot market. Since Sep. 27, the foreign exchange reserves have declined a whopping $47 billion, with the depletion becoming a talking point in market circles. While some of the fall in reserves can be explained by revaluation losses and delivery against the RBI's outstanding forward dollar sales, the central bank is estimated to have expended at least $20 billion in the spot market to defend the rupee in recent weeks, dealers said. 

 

To be sure, the RBI's actions have seemingly had the desired effect, with the rupee weakening by only 0.8% against the dollar since October despite foreign outflows of almost $13 billion from Indian financial markets so far in Oct-Nov.

 

While the RBI does not make public its NDF activity, market participants have come up with ways to assess the extent of it on a day-to-day basis.

"Everyone knows the size of their own (NDF) arbitrage book, and has a sense of their own market share," a Mumbai-based NDF dealer with a foreign bank said. "By seeing one’s own book, one can extrapolate the (NDF) market size, and the increase is generally attributable to the RBI."

 

PREFERRED ROUTE

A key advantage of defending the rupee by acting in the NDF market is that it does not make a dent in the RBI's foreign exchange reserves. An NDF contract is a cash-settled derivative where the buyer and seller only exchange the difference between the contracted NDF price and the prevailing spot price for the agreed currency. As the notional amount of the principal is never exchanged, the RBI’s capacity to sell NDF dollars is, in theory, almost unlimited.

 

The level of a country's foreign exchange reserves is crucial. While India's stockpile of reserves has ballooned to the fourth-largest in the world, a rapid decline in reserves even from sufficiently high levels can hit investor confidence and spark talk of the central bank defending certain levels of the exchange rate. The RBI has repeatedly denied it has an exchange rate target in mind and that it intervenes only to curb volatility.

 

"See, no matter what anyone says, FX reserves have taken a lot of hit. NDF is the only tool that kind of helps them (RBI) in balancing the game," a Mumbai-based NDF dealer with a large private bank said.

 

The selling of dollars in the speculation-prone NDF market also allows the RBI to bring down the dollar-rupee NDF rate. This encourages arbitrageurs to buy dollars in the NDF market and sell them onshore, which in turn supports the spot rupee.

 

The spillover of offshore speculation to the onshore market has traditionally been a cause of concern for the RBI as the NDF market is beyond the purview of domestic policy and action. But by directly influencing NDF rates, the RBI can keep a check on speculative activity before it reaches the domestic market, helping anchor expectations about the value of the rupee.

 

Back in June, RBI Governor Shaktikanta Das had said the central bank's intervention in the NDF market has "...undergone a change. We are now very clear and explicit that the RBI is there in the (non-deliverable) forward market, and we are there".

 

KICKING THE CAN

While currency market participants currently do not see the RBI's massive outstanding NDF sales adversely impacting reserves, as NDF transactions do not entail any delivery of dollars, the accumulation of such a large position against a globally appreciating dollar could leave the central bank vulnerable to losses on the NDF contracts, dealers said.

 

At the current size of the RBI's NDF book, it does not seem to be a big problem. A back of the envelope calculation shows that if the rupee has depreciated to 85 per dollar at the time of expiry of the NDF contract, the RBI will incur a loss of nearly INR 43 billion or roughly $500 million on an NDF position of $60 billion. This assumes that the forward premium remains unchanged.

 

Moreover, the RBI may find it difficult to wind down this position in a hurry as doing so would lead to renewed pressure on the rupee in the spot market.

 

"Say, the RBI's counterparty is an interbank player when the NDF matures the long position of the interbank party goes away, and that is a net dollar-negative on its books. So this interbank party will again look to buy dollars onshore or offshore, which means the problem doesn't go away,"

a Mumbai-based treasury official, who deals in NDF, at another private bank, said.

 

The market this year has already seen multiple instances of rupee volatility because of the maturity of the RBI's NDF contracts. Given the current size of the RBI's NDF position, the central bank may have to keep rolling over a substantial chunk of its contracts until the time is right, dealers said. With the kind of uncertainty a Donald Trump presidential regime brings with it, the right time may not come anytime soon, they said.  End

 

US$1 = INR 84.49

 

Edited by Vandana Hingorani 

 

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.