Sharp Fall In Forward Premia Points To Rush For Dollars, Say Experts
PNB fraud may have led to increased demand for dollars due to limited roll-over of Buyer’s Credit.
The fraud at Punjab National Bank appears to have broken a steady run for the rupee, inducing some volatility into the Indian currency markets.
The Indian rupee slipped to 65.04 on Thursday, falling 0.3 percent. In intraday trade, the rupee hit a low of 65.10 against the dollar.
However, its not the fall in the rupee’s spot rate which is drawing the attention of currency market watchers. It is the sharp drop in the forward premia for the dollar/rupee pair. The forward premia represents the extra that companies are willing to pay to either sell or buy dollars at a future date.
In a conversation with BloombergQuint, Ananth Narayan, professor at SP Jain Management Institute and former regional markets head for Standard Chartered in South Asia, highlighted the fall in forward premia and explained that it points to a sudden increase in demand for dollars.
The forward premia for dollar/rupee is down today and it’s down quite sharply by 20 paise. That’s a staggering amount for one day. That does suggest that someone is scrambling for dollars in the onshore market.Ananth Narayan, Professor, SP Jain Management Institute
Short-Term Stress?
Last week, India’s second largest state owned lender PNB disclosed that it had detected a $1.77 billion scam, linked to fraudulent ‘Letters of Understanding’ being issued via the lender. The detection of the fraud led to concerns that banks would get more reluctant to roll-over ‘Buyer’s Credit’ facilities using instruments like LoUs. This, in turn, could lead to a rush for dollars from importers who need to repay the credit rather than roll it over.
“One can speculate and say that it is probably Indian banks buying dollars on behalf of their clients. That’s speculation but that could be one reasonable explanation,” said Narayan. He explained that when forward premia comes down sharply, it leads to volatility in the spot market.
A currency market trader, who spoke on the condition of anonymity, said that there is some short-term stress in the system which led to a sharp fall in the forward premia. It reflects that demand for dollars has shot up but supply is not there, this trader said while adding that the Reserve Bank of India can easily calm the market through intervention, should it choose to.
Global Factors
In the spot market, the Indian rupee has fallen 1.7 percent over the past five days - the most in Asia. The turn in direction has been reflected in the offshore non-deliverable forwards market as well. The 12-month non-deliverable forwards are trading close to 67.80 against the U.S. dollar.
To be sure, global factors have played a role in the weakness in the rupee. Overnight, the dollar strengthened on expectation that the U.S. Federal Reserve may hike rates more than anticipated this year. A rise in U.S. bond yields close to the 3 percent level has also led to concerns around volatility in capital flows.
The sub-64/dollar level is certainly gone, said Jamal Mecklai, chief executive officer of Mecklai Financial Services Ltd. pointing to both global and domestic stresses. “Right now importers are not being able to roll over credits so there is increased demand for dollars...How much worse can it get? We have to wait and see the momentum. But looks like these are the levels we will have to live with for now,” he said.