RBI GUIDELINES FOR UNHEDGED FOREIGN CURRENCY EXPOSURE OF CORPORATES
February 2, 2012
All Scheduled Commercial Banks
Second Quarter Review of Monetary Policy 2011-12 –
Unhedged Foreign Currency Exposure of Corporates
Please refer to paragraphs 102 and 103 of the Second Quarter Review of Monetary Policy 2011-12 (extract enclosed) on ‘Monitoring of Unhedged Foreign Currency Exposure of Corporates by Banks’.
2. In terms of our circular Nos. DBOD. BP. BC. 37/21.04.048/2001-2002 dated October 27, 2001 and DBOD. BP. BC. 51/21.04.103/2003-2004 dated December 5, 2003 on ‘Unhedged Foreign Currency Exposures of Corporates’, banks were advised to monitor and review on a monthly basis, through a suitable reporting system, the unhedged portion of the foreign currency exposures of those corporates whose total foreign currency exposure is relatively large (say, above US$ 25 million or its equivalent). Further, they were also advised to extend foreign currency loans above US $ 10 million (or such lower limits as may be deemed appropriate vis-à-vis the banks’ portfolios of such exposures) only on the basis of a well laid out policy of their Boards with regard to hedging of such foreign currency loans.
3. The above instructions were reiterated vide our circular No. DBOD.BP.BC.96/21.04.103/2008-09 dated December 10, 2008 on ‘Unhedged Foreign Exchange Exposure of Clients – Monitoring by Banks’ and banks were further advised that their Board policy should cover unhedged foreign exchange exposure of all their clients including Small and Medium Enterprises (SMEs). Banks were also advised that for arriving at the aggregate unhedged foreign exchange exposure of clients, their exposure from all sources including foreign currency borrowings and External Commercial Borrowings should be taken into account and in the case of consortium / multiple banking arrangements, the lead role in monitoring the unhedged foreign exchange exposure of clients, as indicated above, would have to be assumed by the consortium leader / bank having the largest exposure. Banks have also been advised, vide our circular No. DBOD.BP.BC.94/08.12.001/2008-2009 dated December 8, 2008 on ‘Lending under Consortium Arrangement / Multiple Banking Arrangements’, to exchange information among themselves in respect of borrowers enjoying credit facilities from more than one bank, which should, inter alia, cover information relating to their derivative transactions and unhedged foreign currency exposures.
4. Recent events relating to derivative trades have shown that excessive risk taking by corporates could lead to severe distress to them and large potential credit loss to their bankers in the event of sharp adverse movements in currencies. In view of the importance of prudent management of foreign exchange risk, it has been decided that banks, while extending fund based and non-fund based credit facilities to corporates, should rigorously evaluate the risks arising out of unhedged foreign currency exposure of the corporates and price them in the credit risk premium. Further, banks may also consider stipulating a limit on unhedged position of corporates on the basis of bank’s Board approved policy.
5. Banks are also advised to adhere to the instructions relating to information sharing among themselves as indicated in our circular DBOD.No.BP.BC.94/08.12.001/2008-2009 dated December 8, 2008 on ‘Lending under Consortium Arrangement / Multiple Banking Arrangements’.
Chief General Manager-in-Charge
Extract from Second Quarter Review of Monetary Policy 2011-12 announced onOctober 25, 2011.
V. Regulatory and Supervisory Measures for Commercial Banks
Monitoring of Unhedged Foreign Currency Exposure of Corporates by Banks
102. Unhedged forex exposure of corporates is a source of risk to corporates and a source of credit risk to financing banks. If the unhedged position is large, it can have serious consequences for the solvency of corporates in the event of large depreciation of the home currency and can result in large credit losses to the financing banks. Considering that a significant part of corporates’ foreign currency commitments tended to remain unhedged, banks were mandated in October 2001 to monitor and review on a monthly basis the unhedged portion of the foreign currency exposures of large corporates whose total foreign currency exposure was relatively large (say, above US $25 million or its equivalent). Banks were further advised in December 2003 to put in place a policy that explicitly recognized and took into account risks arising on account of unhedged foreign exchange exposures of their clients. Banks were also advised that foreign currency loans above US $10 million, or such lower limits as may be deemed appropriate vis-a-vis the banks' portfolios of such exposures, could be extended by banks only on the basis of a well laid out policy of their Boards with regard to hedging of such foreign currency loans. These instructions to banks were reiterated in December 2008. Further, banks were advised in December 2008 to exchange information among themselves in respect of borrowers enjoying credit facilities from more than one bank, which should, inter alia, cover information relating to derivative transactions and unhedged foreign currency exposures of the borrowers.
103. Recent events relating to derivative trades showed that excessive risk taking by corporates could lead to severe distress to them and large potential credit loss to their bankers in the event of sharp adverse movements in currencies. The recent episode of volatility in rupee exchange rate when the rupee depreciated by more than 10 per cent in a short period of 6 weeks has sharply underlined the importance of prudent management of foreign exchange risk. It is, therefore, proposed that:
• while extending fund based and non-fund based credit facilities to corporates, banks should rigorously evaluate the risks arising out of unhedged foreign currency exposure of the corporates and price them in the credit risk premium. Banks may also consider stipulating a limit on unhedged position of corporates on the basis of their Board’s approved policy.
The following are some of the major factors which contributed to a swift rise in the rupee exchange rate from the beginning of January 2012. The rupee had appreciated by about 5% in the last 15 days.
1) Moderately improving fundamentals of the local economy.
2) Stiff regulatory guidelines from RBI eliminating the speculative activities in the market by corporates and Banks.
3) A correction to the overshoot in the rupee’s weakness over its neutral value of 49 or thereabout.
4) Falling WPI raising hopes of consecutive rate cuts in H1 2012 leading to a higher growth trajectory in the economy.
5) Portfolio flows (including debt and equity) starting to pour into the market giving optimistic expectations of a sharp increase in the quantum of portfolio flows in the near future.
6) FDI flows remaining robust as compared with the last year and allowing the foreign airlines to take a stake of 26 to 49% in the local carriers can be expected to be approved by the cabinet soon. This will boost the dollar inflows in the short-term.
7) Huge NRI inflows into NRE rupee accounts flowing in to take twin advantage of higher interest rates and the benefit of rupee appreciation over the tenor of the deposit.
8) Reform measures expected in full swing after announcement of the Budget in the middle of March 2012.
9) Correction to the underperformance of the rupee amongst the Asian currencies in CY 2011. Analysts expect the rupee to perform better in CY 2012.
10) Hedging by corporates and exporters to take the advantage of higher forward dollar premium prevailing now.
11) Deferment of hedges against imports beyond 3 months tenor to take advantage of the possible turnaround in the market sentiment.
12) Middle East funds like ADIA eyeing on India’s infrastructures sector.
13) Cheap valuation in local stocks tempting the foreign investors to invest in selective stocks which would boost the dollar inflows.
14) Crisis in the eurozone targeting re-direction of a portion of the investment flows into Asian emerging markets notably India, Korea, Indonesia, China and other markets.
The market now expects a gradual rise in the rupee breaching the 50 level before end-February 2012 and targeting 49 level before end-March. This view is valid barring any sudden adverse developments in the global financial markets.
Short Term Rupee Outlook
Short Term Rupee Outlook
Another week has passed with the rupee trading well above the 55 level on most of the days in the week. 54.80 mark provided the stiff resistance for the rupee. The dollar inflows were significantly lower than the outflows and the dollar demand dominated the market scenario. The strength in the euro and the positive global sentiment have not lent any support to the rupee as of now. The rupee was traded on a weaker bias within the 54.80 – 55.60 range during the week. Rupee touched a 10-week low of 55.60 on Friday on month-end demand for dollar from oil importers amid uncertainties over the Parliament sessions. The rupee is grinding lower to test the next key support at 56.20 after breaching the initial support at 55.50. At 55.50 level, there was intervention from RBI and the Rupee only made a moderate recovery before weakening again. The intervention was aimed to smoothen the rupee’s fall rather than to reverse the ongoing downtrend in the home currency.
16 -11 2012
In the latter part of the week, the rupee had significantly weakened on account of dollar purchases by some companies for redemption of FCCBs and for settlement of import bills for oil & gold. Also, as a result of euro weakness fuelled by persistent problems in Greece, the rupee was trading weaker. Uncertainties exist in Greece’s bailout funds ahead of an approval of the austerity budget to be presented to Parliament on November,11. The Government announced that it will meet Rs.300 billion disinvestment target by end-March. This is the welcome news as the foreign funds & NRI’s would pour in funds to acquire the shares in Government-owned PSU companies. Each stake sale shall commence with a gap of 2 to 3 weeks in between.
The rupee opened the week at 54.00 and tested a low of 54.7750 on Friday before ending the week at 54.76, a 1.7% fall in the home currency during this period. It has become amply clear now that the rupee’s trend is influenced by the quantum of demand & supply of dollars in the market, the other factors acting only as supplementary. The underlying pressure from importers could limit rupee’s gain below 54 level and we expect to see good bids from importers at that level. The rupee is also having good support at 55.20 which level is expected to hold in the current rally.
With inflation still remains at elevated levels, the rate cuts may be deferred to January. The possible easing of core inflation in the coming months will influence the Central Bank to cut the repo rate atleast by 50 bps in the last quarter of the financial year. Market consensus suggests for a definite rate cut in January with no announcement in the December policy meeting. The liquidity situation was tight with the Banks daily average repo borrowing at Rs.671 billion. Besides the repo borrowings, most of the Banks must have availed export refinancing entitlements estimated at around Rs.250 billion at 8% per annum. RBI may soon conduct the OMOs to ease the liquidity tightness. The overnight call rates ranged between 8 to 8.15% during this week. The CD rates have climbed higher to 8.50% for 3-month tenor and the CPs of corresponding maturities were quoted at 9% per annum. The 1-year OIS rate climbed higher to 7.77% a rise of 12 bps over the level prevailed in the previous week. The credit off-take remains low and the Banks have already cut their retail lending rates and waiting for the opportune time to reduce their base rates. The shift in policy stance from RBI is required to be signalled to enable the Banks commence with the rate cutting process on the lending side. The expected lending rate cuts will immensely benefit the corporates besides increasing the credit growth which is lacking at present.
Tracking weaker spot exchange rate and uncertainties over inflows amid global growth concerns, the premia for forward dollars traded flat across the maturities. The 1-year forward dollar premium ended the week a lot lower at 5.52% per annum.
Rupee was under pressure and it maintained a weaker undertone against the Dollar. On Wednesday, rupee touched a low of 54.2050 which level acted as a key support for the rupee with the exporters and Banks preferring to sell at that level. The rupee opened the week at 53.84 and ended almost unchanged at 53.82. The global cues were mixed after China’s manufacturing PMI rose and business activity in US fell for a second straight month. But October’s US manufacturing ISM had come out well above expectations at 51.7. On a daily basis, Rupee closed well below 54.00 on all the days in the week, signifying good short-term support at 54.20 for the rupee. The BSE sensex was flattish during the week which made the rupee to trade lower. FII flows into equities remained robust at USD 18.08 billion from January 2012 till date, as compared with the net outflow of USD 357 million in the whole of calendar year 2011. Going forward the expected capital inflows will reinforce a stable outlook for the home currency.
The RBI on expected lines cut the CRR by 25 bps and kept the repo rate unchanged at 8%. They have raised the inflation target to 7.5%, from 7% earlier, by the end of the current fiscal year and gave a forward guidance that the rate cuts could happen in the last quarter of the current fiscal. The 25 bps cut in CRR will inject Rs.17,500 crores of liquidity into the system effective 3/11/2012 which could ease the tight liquidity. The Central Bank maysoon conduct OMOs to relieve the tight liquidity in the market. As a result of the earlier CRR cuts, the Banks have reduced their lending rates and lowered the deposit rates by 25 bps to 50 bps across the maturities. Few Banks have also reduced their Base rates by 25 bps and many Banks are expected to announce reduction in their Base rates by 25 bps or so in the near future.
While the overnight call rates remained steady at 8-8.10% per annum, the long-term bond yields and OIS rates have climbed higher. The daily average repo borrowings of Rs.900 billion clearly suggests that the liquidity is tight in the system. As a result of tight liquidity, the short-term money market rates stayed at elevated levels. The 1-year OIS rate climbed to 7.78% pronouncing the possibilities of delayed rate cuts. The CP and CD rates were traded at 8.80 and 8.40% per annum for 3 month tenor. The yield on 10-year benchmark sovereign bond climbed to 8.19%, a good 5 basis points higher than the week’s opening level. The festival-related spending and higher cash balances of the Government with Reserve Bank of India had a telling effect on liquidity in the system, thus impacting the asset prices.
Tracking a weaker rupee exchange rate and on importers demand, the premia for forward dollars rose across maturities. The swap market will remain entrenched in a firm trend as the RBI is not expected to cut the key lending rate in December on the view inflation may remain elevated. The 1-year forward dollar premium ended the week at 5.72%,much higher from the last week’s close at 5.55% per annum.
Despite strengthening of the euro holding above 1.3050 and flattish local stocks, the rupee was on a weaker bias above 53.70 on higher demand for dollars from oil importers and on defence related payment. Though the exporters are currently selling the dollars at above 53.50 level, the expected dollar demand before the month-end may take the rupee to trade lower to test higher support at 54.40 or so. We strongly feel the rupee’s recovery above 52.70 is clearly unsustainable and the emergence of dollar demand at lower levels always move the currency to trade lower.
The rupee has now settled to trade in a range between 53.00 to 54.00 with clear downside bias. The divestment proceeds and the ECB dollar inflows expected under rupee refinancing for capital expenditure will favour an upmove in the rupee to the 52.50 level in a timeframe of 30 to 45 days from now. Any rate cut by RBI in their October 30 meeting will guide the rupee to rise, nay temporarily. Importers should note to hedge their payables on seeing any dip in the exchange rate. As of now, considering the various internal and external factors, the rupee is not expected to appreciate beyond 52.50 on a sustainable basis.
Liquidity remained tight during this week, as evidenced by an average daily borrowing of Rs.797 billion by Banks from RBI. The liquidity tightness was on account of higher demand for funds ahead of festive season There are growing expectations that RBI may embark of some form of policy easing measures to counter the current liquidity tightness in the banking system and also to support the Government’s recent reform initiative to boost growth in the economy. Some of the market participants are expecting a 25 bps cut in repo rate and CRR in the October 30, RBI policy announcement. The overnight call rates remained steady at above 8%. The OIS rates were flat across the tenor with the 5-year rate ending the week at below 7% as investors remained cautious ahead of the policy meeting of the Central Bank. The CP and CD rates have remained broadly steady in the last one month. The yield on benchmark 10-year sovereign bond ended at 8.13%. The 1-year OIS rate at 7.60% has already factored a 25 bps rate cut.
Tracking weaker rupee exchange rate and helped by selling of forward dollars by exporters, the premia for forward dollars fell across maturities. The inflow expectations also bolstered an easing trend in the swap market. The 1-year forward dollar premium ended the week sharply down at 5.45% from the previous week’s close at 5.82% per annum.
After registering a 6-month high of 51.34 on last Friday, the rupee progressively moved lower as the dollar demand from oil refiners and corporates triggered a quick downmove in the rupee to test the low of 53.15 on Thursday this week before closing the week at 52.8050. A fortnight ago the market’s forecast was the rupee to touch 51 but instead it is now ruling around 53. We have observed that given the current conditions and mood in the market, rupee will always be on a weaker bias and whenever we see an appreciation towards 51 or 52 level, we recommend to hedge a good portion of the short-term payables. The corporates are advised to understand the market’s logic and hedge their positions accordingly. We look at a range between 52 to 54 in the next 2 months with the possibility of an overshoot of 50 paise on the right side of the range. The forecast being given by the market participants is changing quite often with increasing uncertainties on various fronts and the best way to hedge the exposures will be to buy dollars on dips and to sell on rallies on the upside.
Except for Shanghai Stock Index which fell by 4.4%, all other Asian stock indices(including Japan) had risen during the period January 2012 till date. The BSE sensex recorded a sharp gain of over 20% during the period January 2012 till date and the currency posted a late gain of about 1% from the second-half of September 2012. Higher appreciation was seen in Singapore dollar with the currency gaining by 6.12% corresponding to a rise of over 15.5% in Strait Times Index. Though the Indonesia-Jakarta composite index climbed by over 12% from the beginning of January 2012 its currency showed a belated drop of 5.63% due to the country’s adverse external position.
During this month, the FII have brought in portfolio investments of USD 2.23 billion comprising of USD 2 billion in equity and the balance amount through debt. The year-to-date portfolio investments were USD 22.89 billion. Despite the rise in FII inflows, the BSE sensex recorded a fall of 1.38% during this week, the downmove triggered by corporate underperformance and overall negative investment outlook in the country.
The overnight call money rates hovered just above the repo rate of 8%. The Banks were disinterested in issuing CDs for 3 months beyond 8.3% while the rated CPs were traded at 8.75%. The spread between CPs and CDs for 3-month tenor were positive at 45 bps mostly unchanged in the last one month. The 10 year bond yield also remained flat and ended the week at 8.15% unchanged from the previous week’s close.
The forwards were a touch softer this week and the forward dollar premiums fell across the maturities after seeing the strength in the spot exchange rate in the recent weeks. The exporters were selling forward dollars for near-term maturities pulling the forwards down in those maturities. The 1-year forward dollar premium ended the week a tad softer at 5.84% a good 20 bps down from the previous week’s close at 6.04% per annum.
Rupee touched a 6-month high of 51.34 on Friday as foreign Banks and exporters sold dollars on hope rupee will appreciate further. The Government is keen to push more reforms to boost the economic growth and inflows. On Thursday India’s cabinet unveiled a second wave of policy changes intended to bolster a slumping economy. Government approved proposals allowing overseas companies to hold as much as 49% in insurance firms and permit for an investment of 49% in pension funds. These bills however will need the consent of the lawmakers in Parliament. The huge FII inflows combined with the flows on account of bond issuances of Indian companies and Banks hit the market and the bunching effect of dollar supplies enabled a swift upmove in the value of rupee against the dollar. A further rise in the rupee near the stiff resistance at 51.20 level will bring in huge amount of dollar demand from oil companies and corporates. We are of the view that the Reserve Bank of India may be looking to buy dollars at a lower rate near the above resistance level to replenish its forex reserves. The RBI may be thinking to reduce their forward sale contract liabilities estimated at over USD 10 billion at a time when the rupee liquidity situation is comfortable. All-in-all, a rise in the rupee beyond 51.20 level may not be sustainable in the near-term and that is our firm view on the currency.
While the announcement of successive reform measures by the Government and the cooling of crisis in the eurozone were cited as factors for the rupee’s meteoric rise, we find from our analysis the contributory factors as below.
1)FII inflows of over USD 4.5 billion into equity and debt from the beginning of September 2012.
2)ECB borrowing by Banks and corporates (including NTPC issue of USD 500 billion) to the tune of USD 2.5 billion in the last 45 days.
3)NRI remittances of over USD 1.5 billion in the last 2 months.
The reform measures only gave boost to the sentiment but the real flows are yet to come in. Therefore a rebound in the rupee back to 53 level can be expected in a timeframe of 15 to 30 days, in a situation wherein most of the inflows have come in and further inflows in the coming months may be shallow.
The overnight call rates hovered in a narrow range between 7.90 to 8.10% per annum on most of the days in the reporting fortnight as the liquidity situation in the market has significantly improved. The 3-month Bank CDs were quoted at 8.20% per annum and only very few Banks issued the CDs for a tenor of 3 months to rectify the mismatches in their short-term liabilities. The top-rated and liquid CPs were issued at 8.6% and the spread between the CPs and CDs for the 3 month tenor was about 40 bps, largely remaining unchanged in the last 3 months. The 5-year OIS rate dipped below 7% as the market is expecting the long-term rates to dip gradually and the swap spreads to tighten in the coming months, even as the short-term rates continue to remain stable at the current level. The rate cut in the remainder of the fiscal year, according to analysts, are estimated to be between 50 to 75 bps. The long-term rates will fall much faster than the short-term money market yields demonstrating an inversion in the medium and long-end of the yield curve.
Higher FII inflows and power-sector related inflows seen during this week provided the trigger for a sharp upmove in the exchange rate. The rupee quite easily broke the resistances at 53.20 and 52.70 and recorded a 4-month high of 52.49 before ending the week a tad weaker at 52.86. In the absence of any adverse internal factors, rupee clearly tracked the euro and the Asian currency movements. During this month the FII equity inflow was USD 3.56 billion and the large equity inflows had resulted in the exchange rate appreciating by 4.8% during the period. The rupee appreciation is clearly linked to the extent of equity inflows and as observed in the previous years, the higher the inflows the higher will be the appreciation in the exchange rate. The current account deficit in the first quarter (April to June) was USD 16.4 billion giving comfort that the BOP at the end of the current fiscal will end with the moderate surplus.
As compared with the RBI reference rate of 56.3090 at the end of June, the RBI reference rate as at close of September quarter was 52.6970 corresponding to a sharp appreciation over 6.4%. This is a welcome news to the corporates as most of them will be in a position to write-back a portion of the notional losses booked in the earlier quarters. The companies which had shown forex losses in consecutive three calendar quarters will now show translation gains and as the consequence the corporate results during this quarter will behealthy.
The Spanish Government announced an ambitious budget in an effort to contain the fiscal deficit which makes the nation adopt to the norms set by the ECB for a bailout, resulting in higher appetite for risk assets. It is interesting to note that from January 2012 till date all the Asian stock indices showed a big appreciation with the exception of Shanghai Stock Index. The Thailand index and Philippines Composite Index showed large gains of 26.69% and 22.28% respectively followed by 20.77% gain in the BSE sensex. Barring Indonesian Rupiah all the other Asian currencies including the rupee appreciated against the dollar during the current calendar year. Inspite of the Jakarta composite index gaining by 11.54% its currency had depreciated probably reacting to the rising external debt of the country.
The near-term forwards ruled high on the back of money market related paying interest. Exporters were seen selling forward dollars fearing more appreciation in the exchange rate. The 1-year forward dollar premium ended the week at 5.98% sharply higher than the previous week’s close at 5.69%. The forwards are expected to trend lower in the coming weeks as the money market situation improves and the exchange rate stablises.
Expectations of more economic reforms rekindled the optimism and confidence of investors as they speculate the Government will find support from other political parties to stay in power and implement reforms. After clinching support of Samajwadi Party and BSP to stay in power, the Government is expected to push with further key reforms including insurance bills. As a result of higher appetite in risk assets, the rupee gained on higher euro and a strong gain in domestic equities. The rupee touched a 4-month high of 53.32 and ended the week at 53.4600.
During this month, the FII equity inflow was USD 1672 million and a major portion of the inflows had come in during this week. The BSE sensex gained 7.59% in September taking the calendar year-to-date gain to a whopping 21.33%. The strong gain in the rupee was seen after the Finance Minister announced reduction in some of the taxes.The withholding tax on overseas loans was lowered to 5% from 20% earlier, effective for 3 years from July 2012 to June 2015. It is interesting to note that the currency futures in the exchanges were quoted at a discount to the inter-bank market rate. The differential between the November futures and the November inter-bank market rate was about 25 paise/USD, indicating the market positioning for an appreciation in the rupee exchange rate.
The mid-quarter monetary policy review contained no surprises as the RBI left the repo rate unchanged, while reducing the CRR by 25 bps. The reduction in CRR equivalent to an injection of Rs.17,000 crores into the banking system was aimed to soften the impact of tax outflows. After seeing the reform measures from the Government, the Central Bank would now be comfortable to reduce the repo rate by 25 bps in their October 30 policy meeting, despite persistence of inflationary pressures.
As the spot exchange rate appreciated, the forward dollar selling interest from exporters was seen to push down the premia across the maturities. The forward dollar premium for near-term maturities upto 3 months dipped well below 6.5%. The 1-year forward dollar premium was sharply down to 5.7% at close of the week, as compared with the previous week’s close at 5.9%. Further appreciation in the exchange rate and improvement in liquidity situation will draw more receivers into the market and we expect further softening in forward dollar premium levels for all the maturities upto 1 year.
A plethora of positive news from the global stock markets has helped the rupee to breach the strong resistance at 54.75 today. The rupee touched a 2 ½-month high of 54.29 before ending the week a lot firmer at 54.3100. The German Court ruling in favour of ESM facility permitting German contribution of euro 190 billion and the QE3 announcement by FED provided the fillip for a quick upmove in the rupee exchange rate. The QE3 announcement by FED on 13-9-2012 improved the risk appetite and the rupee benefitted alongwith the other Asian currencies. Having breached the resistance at 54.40, the rupee could possibly test the 53.80 key resistance in the current rally before rebounding.
The Government in a bold move hiked Diesel prices by Rs.5 per litre and limited the number of subsidised cooking gas cylinder. This move was aimed to contain the fiscal deficit inducing the Central Bank to cut the repo rate by 25 bps in the forthcoming meeting on September 17. The Government is still in the process of initiating reforms on a serious note, despite opposition from coalition parties. Disinvestment of public sector companies, FDI in aviation and FDI in multi-brand retail are some of the reform initiatives which the Government is planning now. India may consider sale of 9 to 12% stake in Oil India Ltd, Hindustan Copper, MMTC, Neyveli Lignite Corporation and NALCO. The Government may also allow 49% FDI in Airlines such as Kingfisher Airlines, Spicejet Ltd and others.
The headline inflation accelerated to 7.55% year-on-year compared with 6.87% in July, well above the 7% forecast of economists. The high inflation number has however removed all hopes of a possible rate cut on September 17 policy meeting. The OIS curve shows a steepening pattern at the near-end and inverted at the medium and long end, signifying the interest rate would come down over a period of time. After announcement of inflation data the OIS rates rose across the tenor by about 5 to 7 basis points. The overnight call rate was steady at 8 to 8.15% per annum. The advance tax payments have made the liquidity to moderately tighten and the Banks have borrowed higher amount from the RBI under the repo rate. The Bank CDs were issued at 8.3% and there were very few issuers at that level. The fuel price adjustment is a good news for gilts as it shows that the Government is hitting the right note on fiscal consolidation.
Tracking higher rupee exchange rate the forward dollar premia edged down across the maturities. The inflow hopes after the QE3 announcement have induced an all-round receiving interest in the market. Also exporter- selling was strong enough to push the near-term forwards down. The 1-year forward dollar premium ended the week at 5.9% per annum as compared with the previous week’s closing at 6.16% per annum. We expect to see a further downmove.
Tracking strong euro and regional stocks, the rupee recorded a high of 55.35 on Friday before ending the week at 55.39.The range during this week was between 55.35 to 56.0250. Despite the strength in the euro against the dollar and local stock market gains, the rupee could not appreciate beyond 55.30 as the dollar demand weighed on the currency. The BSE sensex recorded a strong gain of 253 points (1.45%) during the week aided by increased possibility of stimulus measures via QE3 by FED and hopes of US growth recovery. The portfolio on other capital inflows have slowed down leading to mismatch between dollar demand & supply and this has led the rupee to retain a weaker tone in the 55 to 56 range. While the chances of rupee’s strength beyond 54.80 is remote, the biggest risk is of the rating downgrade of the Country by S & P. In that event, quite unlikely as of now, the rupee may fall in a knee-jerk reaction to a new low of 57.60 before stabilizing.
On 6th September, ECB announced an unlimited buying plan of bonds in the secondary market. The buying will be restricted to short-term tenor of 1 to 3 years maturity and long-term bonds with the residual maturity of 1 to 3 years. Euro rose higher to 1.2830 encouraged by the favorable statement from the ECB. FOMC meeting on September 12-13 is keenly watched for any announcement of QE3, the probability of which is more than 60% in favour of new stimulus measures.
Liquidity position has significantly improved and the Bank’s borrowing through the repo route has reduced. The overnight call money rate was traded in the range between 8 to 8.30% per annum this week favored by comfortable liquidity. The CD rates have come down and there were very few issuers in the market. Some of the Banks have issued 3-month CDs at 8.35%. The top-rated CP rates also dropped at 8.8% per annum. Led by SBI, some of the Banks have started to reduce their deposit rates across the maturities and passed on the benefit to retail borrowers. A cut in the key rate in September 17 meeting is mostly expected and that would lead to a downward adjustment in the Base Rate of the Banks.
Despite easy liquidity situation, the paying interest from importers & corporates was evident. The forward dollar premia upto 4-month maturities were traded above 7% with the 1-month forward dollar premium traded at 7.65% per annum. The 1-year forward dollar premium ended the week a tad softer at 6.15%, from the week’s opening at 6.25% per annum.
The moderate improvement in the global situation mainly in the eurozone has helped the rupee to remain stable ranging between 55.40 to 55.80 during this week. The portfolio inflows of over USD 3.2 billion received in July & August have stabilized the rupee exchange rate. The macro-economic situation in India is not encouraging to facilitate a rise in the value of the rupee against the dollar. The higher current account and fiscal deficits and a dent in consumer and business confidence have contributed to the home currency retaining a weaker undertone against the dollar in the band between 55 to 56 per dollar.
In the 31-8-2012 meeting, Ben Bernanke expressed grave concern for the country’s stagnating job market and said the Central Bank was prepared to take further steps to strengthen the economy if necessary. His comments have raised hopes the stimulus measures are on the cards any time soon and the market is discounting the possible stimulus measures at the outset. Euro has gained against the dollar and the gold prices have risen by more than 6% and silver prices by more than 10% in the last three weeks and the gold/silver ratio is currently at over 51.
The first-half of September 2012 could give us more clues about the direction of rupee exchange rate over the medium-term. We firmly believe that any pull back in the rupee on account of any favorable news will have to be utilized for hedging the near-term payables. To a large extent, the macro-economic situation in India will broadly determine the rupee’s direction in the medium and long-term. In the short-term upto October & November, there is a possibility of the rupee to test the strong support at 56.50, while the medium-term forecast is for a recovery towards 53 in the last quarter of the financial year. The performance of the local stock market and the position of portfolio flows broadly sets the range in the dollar/rupee exchange rate.
The announcement about the extension of GAAR by three more years from March 2013 is a welcome news and the rupee can regain its strength boosted by favorable investor sentiment. The other reform measures are not forthcoming in the near-term and any recovery in the rupee provides a good opportunity to hedge the near-term payables for the importers.
Despite a moderate rise in Q1 GDP figure to 5.5% in the first quarter of the current fiscal, the market expectations have tilted in favour of a 25 bps cut in the September 17 policy meeting. The inflation still remains very high and showing no signs of tempering. The possibility is high for the Central Bank to maintain the status-quo on the interest rates.
The moderate improvement in the global situation mainly in the eurozone has helped the rupee to remain stable ranging between 55 to 56 per dollar. The macro-economic situation in India is not encouraging to facilitate a rise in the value of the rupee against the dollar. The higher current account deficit as a result of lower export growth, widening fiscal deficit, a dent in business and consumer confidence have all contributed to the home currency retaining a weaker undertone against the dollar. The portfolio inflows of over USD 3.2 billion in July & August have stabilized the rupee exchange rate.
Ben Bernanke’s speech at Jackson Hole symposium on 31-8-2102 would indicate if FED will choose to announce further stimulus in their monetary policy review on September 12/13. On the back of strong US economic data released in the last one week, many analysts are not expecting any hint at monetary easing in the meeting. The September 6, ECB meeting is also keenly awaited for their announcement to keep the sovereign bond yields of Spain and Italy in a 1 to 2% tight band to curb any speculative attack on the single currency. As a result of ECBs intent to operationalize the action process, the short-term and long-term bond yields have come down by more than 100 bps across the tenor and the euro has gained sharply on the back of this development.
Firmer euro has helped in rupee’s gain but the persistent dollar demand from oil companies was much higher to keep the rupee from rising above the 55.50 pivot.
The first-half of September 2012 could give us some clues on the direction of rupee exchange rate over the medium-term. We firmly believe that any pull back in the rupee on account of any favorable news will have to be utilized for hedging the near-term payables. To a large extent, the macro-economic situation in India will broadly determine the rupee’s direction in the medium and long-term. In the short-term upto October & November, there is a possibility of the rupee to test 56.50 level, while the medium-term forecast is for a recovery towards 53 before end of January-February 2012. The performance of the local stock market and the position of portfolio flows broadly sets the range in the dollar/rupee exchange rate.
The risk appetite faded after US, China and eurozone reported weak economic data this week and the rupee gave up a part of its recent gains enabled by month-end dollar demand from Banks returning today after two-day strike. Throughout this week, the rupee hovered between 55.12 and 55.61 and ended the week at 55.50.During this month till date, the FII equity inflows was strong at USD 1.216 billion which reinforced a stability in the exchange rate. The recent rupee/dollar exchange rate movements clearly suggests that supply and demand for dollars is a single dominant factor to influence the currency movement one way or the other.
Despite the sharp gains in the world stock indices and the euro’s rise against the dollar, the rupee’s undertone was weaker within the 55 to 56 range. Possible reform measures in the form of opening up of FDI in aviation from foreign airlines, multi-brand retail, opening up of the insurance and pension sectors etc combined with the resumption of FII equity inflows encouraged by the increased allocation to emerging markets notably to India, could increase the dollar supplies significantlyin the medium-termto trigger an upmove in the rupee to test the initial resistance at 55.10 and 54.80 thereafter. Subject to the concrete action from the Government, we could see the currency gains before the end of September 2012.
On the other side, the worsening global outlook and adverse local factors could push the rupee lower to test the previous all-time low of 57.32, the possibility of which is low at the moment. In any case, a sharper rupee fall beyond 58 could invite repeated intervention from the central bank to push it below 57. Statement from the Economic Advisor of the Government that the BOP shall have a surplus of about USD 4 billion at the end of the current fiscal is quite encouraging and make us to believe that the rupee is currently near the peak of its weakness.
From the beginning of January 2012 till date, we have observed no co-relationship between the stock market gains and the extent of currency appreciation in the Asian countries. The currency trend in the Asian region was generally guided by the global situation and the internal factors. The BSE SENSEX recorded a strong rise of 15% during the above period, but the rupee recorded a fall of 4.6%.The internal adverse factors like the rising fiscal and current account deficits dented thehomecurrency against the dollar. The weightage of the external position to the currency’s fall was low as compared with the impact driven by the local factors.
Forward dollar premia rose across the maturities as hopes of inflows into emerging economies faded after eurozone and China posted weak economic data. Hedging of payables by importers and corporates also triggered a paying interest in forwards. The 6-month forward dollar premium was quoted at an elevated level of 6.80% per annum giving a clue that the forward dollar premium for 6-month tenor overstates the expected level of rupee depreciation over the period. The 1-year forward dollar premium ended the week at 6.05% mostly unchanged from the previous week’s close.
The recent rupee/dollar exchange rate movements clearly suggests that supply and demand for dollars is the single dominant factor to influence the currency movement one way or the other.
Despite the sharp gains in the world stock indices and the euro’s rise against the dollar, the rupee’s undertone was weaker within the suggested 55 to 56 range. The dollar demand during this week was clearly evident and the rupee touched a low of 56.03 on Thursday before settling to trade on the higher side of the above range.
Possible reform measures in the form of opening up FDI in aviation from foreign airlines, multi-brand retail etc combined with the resumption of FII equity inflows encouraged by the increased allocation to emerging markets notably INDIA, could increase the dollar supplies significantly to trigger an upmove in the Rupee to test the intitial resistance at 55.25 and 54.80 thereafter. Subject to the action from the Govt, we could see the currency gains before the end of September 2012.
On the other hand, the worsening global outlook and adverse local factors could pull the rupee down to test the previous all-time low of 57.32, the possibility of which is low at the moment. In any case, a sharper rupee fall beyond 58 could invite repeated intervention from the central bank to push it below 57.
The statement from the Economic Advisor of the Govt that the BOP shall have a surplus of about USD 4 million at the end of the current fiscal is quite encouraging and make us to believe that the rupee is currently near the peak of its weakness.
The above review is applicable in the current context and currency environment and valid in the near-term upto September 2012.
Lack of policy reforms by the Government disappointed the markets and the rupee maintained its weaker undertone against the dollar. Deficit monsoon and lower growth prospects have raised concerns and effectively halted the sustainability of the rupee’s rise beyond the stiff resistance at 55.00. The rupee touched a high of 54.95 on Wednesday but could not breach that level as the pending dollar demand pushed the rupee back to trade on a weaker bias above the 55.25 level. The rupee ended the week at 55.28.
It is our experience observed over the years that whenever the rupee appreciates to test the resistance at a specific level, the importers and corporates prefer to wait for the next resistance level which may not happen 8 out of 10 times, particularly so in the prevailing currency environment. The same exposures(read payables) meant to be hedged at the first resistance level will eventually gets hedged at the first support level and most of the times at the second support level which is on an average 2%(110 paise/per dollar) higher than the first resistance level. This is our general observation made with the clients.
India’s industrial output contracted by 1.8% in June, the third fall this year on sharp drop in capital goods and manufacturing output. This weak data evidences a slowdown across all sectors raising the possibility of the GDP to fall below 6% in the current fiscal. We feel the Reserve Bank of India will be undeterred by the weak industrial output data and their anti-inflation stance will disapprove of any key rate cuts in the near-term. The market does not expect any rate cuts in the September policy meeting. Also the inflation numbers in the coming months are likely to stay at elevated levels to discourage any rate adjustments by the Central Bank. A cut in SLR by 1% has enabled the Banks to reduce their long-term deposit rates and facilitated a marginal cost reduction to benefit the retail borrowers. There is no change in the lending rate structure of Banks for non-retail lending as of now.
As the Industrial growth and the overall GDP growth is slackening, any measures to curb import demand would be considered negative for the currency. Tightening regulations can only be seen as a measure to contain volatility in the exchange rate rather than as a measure to curb forex demand. The fall in commodity prices, global oil prices and fall in gold & silver imports have impacted a reduction in the trade deficit, as evidenced by the trade data released for the first quarter of the financial year. We expect to see a moderate improvement in the trade & current account deficits in the remaining quarters of the current financial year which could possibly lead to a moderate surplus in the BOP during the year. This will improve the overall sentiment for the home currency. Barring any unforeseen developments in the external situation, we do not see a fall in the rupee beyond Rs.58/per dollar, while our short-term forecast is restricted to a range between 55 to 56 per dollar, allowing an overshoot of 50 paise per dollar on either side of the above range.
Despite the position of comfortable liquidity in the system and the reasonable stability being seen on the exchange rate front, the forwards remained firm on emergence of good paying interest from Banks & corporates at the near-end of the forward curve. The forward dollar premium in farther months also climbed higher in tandem with the firm trend in near-forwards upto 4 month maturities. The 1-year forward dollar premium ended the week at 6.05%per annum.
In the absence of any negative internal factors coming into recognition, the rupee movement was guided by the external developments specifically from the eurozone. After the market disappointed with the statement from the ECB chief on Thursday, the euro fell against the dollar and the rupee closely tracked the euro/dollar currency movements. The rupee touched a low of 56.1850 on Friday and ended the week at 55.75, on seeing a 1% recovery in the euro against the dollar from the low of 1.2135 seen on Thursday in European trading. A fall in the euro/dollar cross-rate below 1.18 or a rise above 1.26, we believe,could possibly trigger a 100 paise movement in the rupee on either side of 56 pivot level.
Most of the international Banks and leading analysts expect the rupee to post a recovery in the last quarter of the financial year and the recovery could extend upto 50 according to one economist from Crisil. Many of the local Banks flashed their currency forecast to range between 53 to 56 barrier during the current financial year. We feel that it will be too early to give a recovery call for the currency though the chances of any steep depreciation beyond the 58 level can be ruled out, barring any unforeseen developments in the domestic and the external situation.
The Reserve Bank of India had announced in their monetary policy that all the accruals in the EEFC accounts after meeting the remittance and conversion commitments, should be converted into rupees fully before the end of the succeeding calendar month. The stipulation shall apply for the future months going forward. The Reserve Bank of India partially relaxed cancellationand rebooking of forward contracts by exporters to the extent of 25% of the contracts booked in a financial year against contracted export exposures. This measure shall give a moderate flexibility to exporters to resort into booking and cancellation at appropriate levels to derive the advantage of higher export realization.
As widely expected, the Reserve Bank of India in their policy meeting had kept their key rates unchanged. A cut in SLR by 1% from 24 to 23% was a surprising announcement. The SLR cut is equivalent to CRR cut of 1% in terms of liquidity release. Liquidity deficit in the system would get significantly reduced as the Banks can utilize the OMO window efficiently to have the ample liquidity for lending. As a first step the Banks have started to cut the retail lending rates to pass the cost benefit to the retail borrowers. The short-term money market yields was almost flat and expected to nudge moderately lower backed by improving liquidity in the system.
The SLR cut was aimed to maintain constant credit flow to productive sectors. On account of reduction in SLR by 1%, some medium-sized Banks may opt to unload a portion of the G-sec stocks from their HTM portfolio and the expected increase in supply of Government papers has triggered a downside rally in the sovereign bond prices. The 10-year benchmark sovereign bond yield surged to 8.25% at close of the week. The improving liquidity in the system and the availability of short-term funds at cheaper rates would restrict issue of CDs by Banks and the CD rates for 3 to 6 month tenor can come down by 15 to 20 basis points from the current level of 8.70% for 3-month tenor.
Hopes of policy reforms by the Government have raised the prospects of investment flows into the market and the rupee exchange rate was seen traded with the firm bias in the range between 55.00 to 55.50. The external situation is relatively calm with less adverse factors to encourage any sharp downside movement in the exchange rate. During the month-to-date, the net FII equity inflows was 1.66 billion which has helped the rupee to pivot around the 55 level.
The mandated debt limit auction under the old limits by SEBI for foreign institutional investors is likely to see muted response given the tenor restriction and the current lack-of-clarity of GAAR. The estimated inflows of about USD 2 billion can be expected to come over a period of time to help a moderate recovery in the exchange rate to 54.80 or better in the coming weeks. The allocation of USD 1 billion to qualified foreign investors without any lock-in period for investment in corporate debt securities and mutual fund debt schemes may not click in the short-term given the investment scenario.
The corporates are now operating in a high currency risk environment and adoption of appropriate benchmark linked hedging approach is imminent to manage the exposures efficiently, to safeguard against any huge translation losses at the end of each quarterly accounting period. The cost-driven approach with stop loss trigger levels for management of short-term exposure maturities is to be adopted by the risk managers to mitigate the currency risk more specifically on the revenue payables.
The inflation is currently hovering well above 7% and not expected to drift below the 7% barrier in the next few months on account of high level of food prices prevailing. The imminent upward adjustment in the diesel and cooking gas prices could fuel the topline inflation to stay at elevated levels for sometime. In this background, the Reserve Bank of India may prefer to postpone the key rate cuts. Therefore it is very much possible that the deposit and lending rate structures of Banks could remain broadly unchanged. To bring down the funding cost of export financing, RBI has advised the Banks to lend to exporters in foreign currency (PCFC) to maintain price competitiveness with the exporters in the other Asian markets.
The rupee has breached the 55 key resistance and is now trading at 54.9500.
Following are the favorable factors internally to expect an appreciation to 54.50 level or so in the near future.
1.FII equity inflows remaining robust -- Till date in JULY, net equity inflow was USD 1.323 billion.
2.Headline inflation in June down to 7.25 pct from 7.53 pct in June, raising rate cut expectations over the medium-term.
3.Narrowing of trade deficit raises the hope that currency account deficit in the current fiscal shall be 3-3.5 pct of GDP.
4.Euro holding above 1.2200 and there are no adverse factors from the global front.
5.Government diluting the GAAR norms.
6.New reform measures expected to take-off after the Presidential election.
All the above positive factors have helped the Rupee to stage a modest recovery, the sustainability of such a recovery is in doubt.
We anticipate a range between 54.50 to 56.00 during this month.
Hedging of payables and receivables can be planned appropriately guided by the above range forecast in the very near-term.
During this week, there were no adverse developments seen in the overseas and local markets and on most of the days the rupee moved in the 1% range between 55.30 to 55.85, the week’s high and low being 55.11 and 56.07 respectively. In July till date the net equity and debt inflows were USD 1323 million and 309 million respectively, which has helped the rupee to stablise around the current level. The rupee has depreciated by 9.86% during the April-June quarter, the highest in any quarter after the post-liberalisation era. The other Asian currencies had depreciated by 1 to 3% against the dollar during the April-June quarter making the rupee as the underperforming currency in the region. It is interesting to note that the BSE sensex was almost flat in the first quarter of current fiscal and the net FII equity outflow was USD 340 million. Despite the sharp fall in the Taiwan Index, KOSPI Index and Indonesia-Jakarta Composite Index, the currencies of those had depreciated by far less than the Indian rupee in the above period.
The June trade deficit has narrowed down to USD 10.3 billion contributed by a fall of 13.5% in June imports. A major part of the fall in June imports was attributed to an average 15% decline in the global oil prices adjusted for incremental demand for oil. With the Government taking effective steps to reduce/limit the import of gold into the country the current account deficit in the current financial year is projected to be significantly lower at 3-3.25% of GDP. On the trade account, the cumulative figure for the period April-June 2012 shows exports at USD 75.20 billion equivalent to a negative growth of 1.7% while imports in the same period stood at USD 115.26 billion registering a negative growth of 6.10%. This trade data augurs well for the rupee and the trade deficit in the coming months if sustained at the current level could progressively lead to a gradual appreciation in the exchange rate.
The liquidity in the banking system has significantly improved, evidenced by the reduction in the daily average repo borrowings of Rs.444 billion by Banks. The cut in the key rates is dependent upon the inflation data in the coming months. However a much-needed and possible cut in the CRR by 0.50% in the July 31st RBI policy meeting will help the Banks to reduce their lending rates. The policy stance from the Central Bank is to be observed in the background of easy monetary policy being adopted by the developing nations and by most countries in the Asian region.
Forward dollar premia rose across maturities on Friday tracking the appreciation in the rupee exchange rate while some paying interest from Banks aided a moderate rise in forwards. The liquidity deficit in the system is still persisting and the money-market driven paying interest is keeping the forwards in a firm trend.
Buoyed by expected foreign investment inflows into Government debt and corporate debt instruments (including infra bonds), the rupee staged a sharp recovery during this week and tested a 45-day high of 54.17 on Wednesday before ending the week a tad lower at 55.42. The sudden weakness in the euro and the emergence of dollar demand from oil refiners and corporates have fuelled a strong rally in the rupee and the currency gave up 50% of its recent gains in the last 3 trading sessions. The volatility in the exchange rate has significantly increased and both the exporters and importers are confused on the hedging approach to be followed given the scenario of uncertain market conditions. In the next 3 months or so, we expect to see continued volatility in the exchange rate with the rupee possibly ranging between 54 to 56.50, witha 50-paise overshoot on either side of the above range. For near-term exposures upto 3 month maturities, we recommend the importers to hedge their payables at or near the 55 level and the exporters to cover at or above the 56.00 level.
Due to high long-term interest rates and absence of accommodative monetary policy stance from RBI, there is a stagnation in new investments and capital formation is very low. This will lead to severe job cuts and will stop creation of new employment opportunities. The existing high interest rate structure has increased the financing cost putting adverse pressure on topline and bottomline growth of corporates and SMEs. The economic power of the Country is also weakening due to high fiscal and current account deficits.
On account of steep depreciation of the home currency, the debt servicing cost of foreign currency borrowings(ECBs & ECAs) has significantly gone up. The Government has announced reduction effective from 1-7-2012 in withholding tax under the income tax Act from 20% to 5% and this will reduce the cost of borrowing to the corporates by about 1% per annum.
During this week, the daily average repo borrowings of Banks from RBI was Rs. 430 billion, which is reflecting a lower liquidity deficit in the system. We feel that the lower repo borrowings could be on account of availment of higher export refinancing entitlements of Banks which was recently increased. The overnight call rates was seen in the band between 8.10 to 8.40% per annum. The 3-month CD rate has dropped below 9%, as the deposit growth in the banking system is increasing and the Bank’s dependence on high cost borrowings has correspondingly reduced. The 3-month CP rates were quoted at 9.40%. In the RBI policy meeting on 31-7-2012, the key rates are expected to be cut by 25 bps amidst the global scenario of falling interest rates. Inflation is the key indicator for the RBI to announce any reduction in the key rates. In the next 2 to 3 months period, we do not expect the inflation to come down below 7% per annum and as such the quantum of rate cuts will be low.
Easy liquidity conditions and the recent rupee appreciation aided the downward movement of the premia. The rate cut expectations also helped to establish an easier trend in the swap market. The 1-year forward dollar premium ended the week at 5.62% per annum from the week’s opening at 5.82% per annum. A gradual fall in the forward dollar premiums across the curve can be expected in the coming weeks.
Buoyed by the recent measures announced by the RBI and Government to increase the dollar inflows, the rupee had appreciated by 2.11% on Friday and ended the week a lot firmer at 55.61 from a high of 57.24 at the beginning of the week. Friday’s gain in the rupee by 2.11% (120 paise per dollar) was the highest single day gain in the last 3 years and this favours the possibility of a further recovery in the rupee exchange rate towards the 55 level in the coming weeks. The currency fell by 9.3% in the April-June period, the highest in any calendar quarter of the post-liberalization era. It seems that that the rupee had reached a level at which importers and exporters have started to re-look their hedging strategies and this has provided a respite to the home currency. The fall in global oil prices and commodity prices will positively help to reduce the current account deficit to around 3.25% of GDP in the current fiscal from about 4% of GDP in the previous year. This augurs well for the performance of the rupee in the medium-term. In the very near-term, the import demand is more or less inelastic which could continue to exert pressure on the home currency. The unidirectional downslide in the exchange rate had created a fear in the mind of the importers causing a rush for import cover and the bunching effect of dollar demand has led to a steep depreciation in the exchange rate in a shorter span of time. During the month of June, the BSE Sensex posted a strong gain of 7.46% boosted by the net FII equity inflows of around USD 470 million in the corresponding period. On seeing any positive signs of increasing portfolio equity inflows, the rupee is poised to appreciate much faster than one can expect.
With the importers raising the tenor of hedges and the exporters waiting for further depreciation in the exchange rate, the dollar demand dominated the market trend leaving less scope for the rupee to recover. However the already pronounced measures and the new reform and stimulus measures expected to be announced by the Government and RBI will bring in the much-needed capital inflows over a period of time which would ignite a reversal in the currency’s trend in the medium term(beyond 3 months time frame)
Global players are waiting for cues from the EU summit and the market is expecting a strong commitment from the EU leaders to do what is necessary to ensure the financial stability of the euro area. The outcome of the meeting will decide the dollar’s direction for the next few days including the rupee’s trend.
Tracking weaker rupee exchange rate and persistent liquidity deficit in the system, the Banks and corporates initiated positions on the “pay side” in the swap market and the forwards inched higher across the tenor. The squaring of forward market positions before the end of calendar quarter also fuelled a sharp rise in forward dollar premiums at the short end of the curve upto 3 months. The 1-year forward dollar premium ended the week at 5.85% per annum from the week’s opening at 5.53% per annum.
During this week, the rupee held the key support at 56.00 helped by moderate intervention from the Central Bank, while the dollar demand from oil refiners and corporates has ensured its resistance at 55 is not breached. Despite the fall in global oil prices and significant reduction in gold imports, the average trade deficit for April & May 2012 was USD 15 billion which was equivalent to the monthly average trade deficit in the previous financial year. If the global oil prices and other commodity prices stay at or near the current level, one can expect the current account deficit to come down by USD 25 billion or more in the current fiscal supported by higher amount of private transfers and tourist flows expected to come in.
The NRI remittances remained robust from the beginning of January 2012. There was sizeable increase in NRE rupee deposits which had flowed in to take advantage of higher interest rates offered on the deposit and the favorable conversion rate for the rupee. Subject to portfolio inflows resuming in the second-half of the current financial year, the BOP deficit can be expected to be much lower than being projected now. The rupee’s under-valued status currently reflects all the adverse internal and external factors have been fairly priced in scoping to limit currency’s downside to about 2 to 3% from the current level. The rupee had dropped by more than 15% in less than 3 months and the currency is expected to take a breather before reacting to any deterioration in the global situation.
WPI rose to 7.55% in May compared with 7.23% previous month on higher prices of primary article and manufactured products. Part of the rise in inflation is due to the effect of sharp rupee depreciation seen in the last two months period. Some of the analysts have expressed their view that the Central Bank may postpone their rate cuts citing the overall higher inflation numbers. But most of the market participants anticipate a CRR cut of 50 basis points and a repo rate cut of 25 basis points. If the expected twin rate cuts materialize it would provide a boost to the stock market and the rupee can stage a moderate recovery towards testing the stiff resistance at 54.80 level, barring any adverse developments in the eurozone over the weekend.
Though the repo borrowings of the Banks have come down to a daily average of around Rs.700 billion the advance tax pay out is likely to drain around Rs.400-450 billion from the Banking system. A CRR cut of 50 bps at this juncture would help to ease the liquidity tightness in the system.
Forwards remained mostly unchanged during this week. The 1-year forward dollar premium ended the week at 5.20% per annum. The policy guidance by RBI on the rates would steer the forward market trend in the coming weeks.
The rupee exchange rate has now stablised, nay temporarily, and the rate was seen moving in the range between 55.20 to 55.50 on most of the days in the week. After closing at 54.97 on Thursday the rupee weakened to a low of 55.61 on Friday before ending the week at 55.45. The weaknessseen in the rupee exchange rate on Friday was attributed to the downgrading of Spain’s long-term rating by Fitch by 3 notches to BBB with a negative outlook. In the absence of Government policy reforms to address the twin deficits and encourage investments, the stability in the rupee exchange cannot be seen. In the circumstances, RBI intervention is only a temporary reprieve and developments in the external situation and gradual reduction in the current account deficit can only provide the much needed solution for the exchange rate to stablise.
From the beginning of January 2012, Indonesian Rupiah was the worst performing currency in the region having depreciated by 4.30% against the dollar followed by the Indian rupee with the depreciation of 4.02%. The moderate recovery in the rupee was influenced by the rise in BSE sensex by 4.71% during the week. The portfolio inflows were robust from the beginning of calendar year 2012 at USD 12.46 billion comprising of net equity inflows of 8.40 million and net debt inflows of 4.06 million. The BSE sensex rose 8.17% in the current calendar year.
The overnight call money rate remained stable at just above 8.20% per annum quite close to the 8% repo rate. The Banks daily borrowing from RBI under the repo route stood elevated at Rs.897 billion on an average during the week. The 3-month CD and CP rates were quoted at 9.30% and 9.80% per annum respectively and the swap spread between the CPs and CDs had widened by above 10 bps per annum. The yield on 10-year sovereign bond ended the week at 8.38% unchanged from the week’s opening at 8.38%. RBI at its mid-quarter policy review on June 18 is expected to deliver a 25 bps cut in the repo rate as the need to attain higher economic growth outweighs the inflation concerns.
Exporter-selling and rate cut expectations have pushed the forwards down across the maturities. The 6-month forward cover cost edged lower to 5.60% and the 1-year forward dollar premium ended the week at 5.01% per annum. The gradual reduction in liquidity deficit combined with expectation of further rate cuts by the RBI could influence a further fall in forward dollar premiums across the curve.
From the beginning of April 2012-13, the rupee had sharply depreciated by about 10%, the currency’s fall triggered by macro dynamics turning negative and the BOP position coming under greater pressure.
In the last one year period, Indian rupee was the worst performing currency in the Asian region and also one of the five worst performing currency in the globe(Rupee depreciated by 26.7% per annum from its high of 43.85 on 27/7/2011).
The moderate recovery now seen in the exchange rate is typically a technical correction to the overshoot in the exchange rate. The favorable comments (verbal comments) from the RBI Governor has helped nay temporarily to halt further weakness in the rupee exchange rate.
In the absence of announcement of any concrete measures to defend the currency, the recovery in the rupee exchange rate is unsustainable and further rupee weakness can be seen in the 1 to 3 months time zone from now.
Negatives to the rupee
1)India’s GDP growth in the current fiscal is being revised down by the analysts to 6.25-6.5% from 7% earlier.
2)Current account deficit to increase to 4% of GDP.
3)Slowing capital inflows putting BOP position under greater pressure.
A combination of the below-trend growth and an external deficit is a recipe for continued weakness in the rupee exchange rate.
A larger projected current account deficit for FY 2012-13 implies that India will require a greater amount of foreign capital to finance its international payments.
Capital inflows may prove increasingly challenging as the investment conditions onshore appear uncertain and India is likely to face capital flight as global risk-aversion intensifies.
Elections in Greece
The biggest event risk is the outcome of elections in Greece in the middle of June 2012.
A euro break-up could potentially be the catalyst for a severe BOP shock in India.
In such an event the rupee could fly to test the 60 mark in a knee-jerk reaction, before any sustainable recovery can be seen on the back of fire-fighting action by the monetary authorities to defend the currency. In such dire circumstances, the authorities can be expected to avert a “currency crisis”.
All-in-all the rupee outlook for the next 3 to 4 months is extremely bearish with the range forecast as
a) Between 53 to 56.50 in the normal circumstances.
b)52 to 55 in a favorable scenario.
c) 55 to 60 in an unfavorable scenario.
The market forecast is for a recovery in the rupee exchange rate from the September-December 2012 quarter.
Thelatest median forecast of top international banks is as below.
September 2012-> 56.00
December 2012-> 52-53
December 2013-> 49 to 50
In the past 6 months to 1 year, the currency forecast from international Banks, corporates, analysts and advisors have gone completely wrong and at best a very near-term forecast proved right.
At this juncture, forecasting the rupee over the medium-term (beyond 3 to 4 months) may prove to be incorrect as the favorable or adverse changes in the internal and external factors would be hard to predict.
From the beginning of May 2012 till date the rupee had sharply depreciated by 5.2%. The depreciation in the exchange rate was unidirectional and the recovery/technical pull back was almost absent till 24th May when the currency touched an all-time low of 56.38.The comments from the RBI Governor combined with the selling of dollars by the exporters have helped the rupee to moderately recover to end the week at 55.39.The market participants sincerely hope that the overly bearish sentiment on the rupee prevailing now should not turn into a fully blown currency crisis as we had seen in the Asian currency crisis in 1998 and believe that the authorities shall take the preventive measures to defend the home currency. From the beginning of April 2012 till date the rupee was the worst performing currency in the region having depreciated by 9.43% followed by Korean Won and Rupiah which had depreciated by 4.59% and 3.44% respectively against the dollar. The other Asian Currencies had depreciated by 2 to 3% except for Japanese Yen which recorded an appreciation of 4.13%against the dollar. The BSE sensex fell by 6.82% in the above period even though the net FII equity outflow was a mere USD 270 million during the period. The fall in the local stock market index was attributed to the overall negatives in the local economy including the rupee’s steep fall and higher inflation resulting in higher interest rates. The FIIs have pulled out funds from other Asian markets notably Korea and Taiwan. KOSPI fell by 9.84% and the Taiwanese stock index fell sharply by 10.8%, but the currency depreciation in the above two countries was far lower than the Indian rupee.
The sharp fall in the rupee exchange rate amply reflects the worsening external position viz., higher/widening current account deficit and ballooning fiscal deficit. The exchange rate can stabilize and modestly recover after widening of the current account deficit is corrected. The fall in gold and silver imports and lower global oil prices have to some extent raised the hopes of a reduction in the current account deficit over the medium-term. The austerity measures, quick announcement of measures to increase the inflows and imposition of regulatory controls are required to be adopted much sooner than later to enhance the confidence of the international investors and the local market participants.
Despite the dollar selling from exporters and limited forward dollar selling intervention from RBI, the forwards remained broadly stable as tight liquidity and importer-covering balanced the receiving interest in the market. The 1-year forward dollar premium ended the week at 5.40% almost unchanged from the previous week’s close at 5.36% per annum.
After a long period of time, RBI has given verbal support to the Rupee. Following are the comments from RBI Dy. Gov. Mr.Subir Gokarn on the rupee exchange rate.
1.CURRENT ACCOUNT DEFICIT A STRUCTURAL WOE; RUPEE FALL MOSTLY SPECULATIVE.
2.WILL TAKE ALL STEPS TO STABILISE RUPEE.
3.FOREX RESERVES ADEQUATE FOR RBI’S CURRENCY MANAGEMENT.
The verbal support from the authorities will help to lift the currency’s weak sentiment and remove the fear and panic to a large extent.
The announcement from RBI for opening a special window for selling dollars directly to PSU oil companies against Rupees from the forex reserves is expected anytime soon and this measure will help the home currency to post a good recovery to atleast 53 initially.
RBI and the Government are working on various steps to improve the inflows into the country, which may offer support to the Rupee.
Rupee currently trading at 54.50, well below the all-time low of 54.90 registered in early trades today.
We expect to see a gradual recovery in the rupee exchange rate in the coming week.
All the recent measures announced by RBI to increase the dollar inflows have only provided a temporary respite to the rupee and the currency’s downtrend remained intact for a possible re-test of the all-time low of 54.30 initially and key support at 55 level thereafter. The rupee opened the week at 53.67 and ended the week almost unchanged at 53.64 the high and low being 52.67 and 53.90 respectively. The net equity inflow during the month was USD 77 million but the BSE sensex dipped by 5.92% in the same period closing the week at around the 4-month low.
Industrial output unexpectedly contracted 3.5% in March from a year earlier with manufacturing which constitutes about 76% of industrial production shrank an annual 4.4% from a year earlier. The trade deficit in April showed a lower gap of USD 13.5 billion mainly on account of a fall in gold & silver imports. The increase in import duty and the drop in the international gold & silver prices have contributed to a fall in gold & silver imports in April as compared with the year-ago period. We believe a natural correction to the higher current account deficit can happen by way of an expected fall in gold & silver imports during the current fiscal and the global oil prices remaining well below USD 100/barrel for most of the year. To rectify the BOP deficit in the current financial year, the Government can also think of increasing the dollar inflows by way of floating NRI bonds through SBI and issue of sovereign bonds in the international market. The Reserve Bank of India and the Government are seemingly determined to defend the rupee to protect the economy from higher inflation and slower growth, amidst the prevailing unfavorable scenario in the current account and fiscal deficits.
During the period January 2011 till date, rupee was the worst performing currency in the region. The higher fiscal deficit, widening current account gap and unfavorable BOP position have all contributed to sharp weakness in the rupee exchange rate. We are convinced that most of the negative factors have already been factored in and discounted in the current exchange rate level, thus discouraging the possibilities of a further sharp fall in the exchange rate from the current level. The fall in the BSE sensex by over 16.5% had exhibited a strong co-relation with the rupee’s fall of 18% in the above period.
Forwards slipped lower across the tenor. The sharp weakness in the rupee exchange rate has prompted the exporters to sell forward their receivables. Also RBI was seen selling forward dollars to stem the rupee’s slide. As a result of RBI intervention in the forward market, the forward dollar premium levels for all the maturities have dropped. The 1-year forward dollar premium ended the week at a 4-month low of 5.15% from 5.75% per annum at the beginning of the week. A further downside correction in forwards can be expected in the coming weeks.
The rupee’s weaker tone was clearly evident as the currency is facing stiff resistance at 51.00 with initial support at 51.70. The rupee opened the week at 51.37 and ended at 51.29, the week’s high and low being 51.05 and 51.63 respectively. The absence of capital inflows and sustained dollar demand from corporates and oil refiners have led to a gradual weakening in the rupee exchange rate and a test of 52.00 is very much on the cards. During this week the BSE sensex fell by 2.23% partly triggered by the weekly FII net equity outflow of USD 288 million. The aggregate of portfolio inflows on year-to-date basis however stood at USD 12.74 billion.
In the current market situation, the intervention from RBI may be limited to counter any sharp fall in the exchange rate. There seems to be no reprieve for the rupee in the short-term upto end-June. Though the external developments are slightly favorable, the internal factors weigh on the currency sentiment and a further currency depreciation of 2 to 3% from the current level remains a possibility. The adverse internal factors among others include unfavorable BOP position, higher fiscal deficit and absence of reform measures to stimulate the foreign funds and other capital inflows. The forex exposure management for corporates in the current year will be more challenging in terms of managing the uncertainties and extreme volatilities in the rupee exchange rate.
With the commencement of Government spending and return of tax flows into the system, the liquidity position is gradually improving and the Banks have borrowed a daily average of Rs.800 billion during this week as compared with the daily average of Rs.1.75 trillion in the second-half of March 2012. With improvement in liquidity the CD rates have significantly come down and the Banks are now reluctant to issue the CDs at higher rates. The 1-year OIS rate slipped to 7.92%.The benchmark 10-year bond yield after registering a high of 8.79% on 3rd April ended the week a lot lower at 8.51%.
The RBI policy is keenly awaited for definitive clues on the direction of interest rates over the medium term. With the IIP data, consumer confidence, growth rate and other fundamentals staying on the weaker side it is imminent for the Central Bank to start the rate easing cycle with the 25 bps cut in the key rates. Few of the market participants anticipate a 50 bps cut in the key rates and we also believe that an aggressive rate cut of 50 bps is quite possible as the Government is keen to improve the sagging sentiment in the economy. The economic data in the coming months with focus on the inflation numbers would guide the frequency of rate cuts in the medium-term. The market forecast points out to a cut in the key rates between 100 to 150 bps during the current year. To rein in the persistent liquidity deficit in the system, a cut in CRR by 25 to 50 bps can also be expected in the policy.
With the reasonable stability in the exchange rate and the liquidity position in the system improving, the forwards fell across the tenor from the high level of over 9% in forwards upto 3 months. A drop of 75 to 100 bps in those maturities was seen in the current week. A further fall in forwards coinciding with the rate cut announcement by RBI is quite possible in the coming weeks.
During this week, the rupee remained volatile having touched a high of 51.48 from the week’s opening at 51.14 and closed the week a lot firmer at 50.87 registering an intra-week gain of 0.68%.However, the rupee posted a bigger loss of 3.81% in March. On Friday the rupee had gained on the influence of euro’s rise against the dollar as hopes of enhancing the eurozone bail-out fuelled a broad weakness in the dollar.
The rupee exchange rate was quite stable in the first half of the current financial year. In the third quarter, the rupee exchange rate was extremely volatile having recorded a high of 48.82 in October 2011 and an all-time low of 54.30 in December 2011. In the fourth quarter of the financial year the rupee had appreciated sharply in January & February but slipped to a low of 51.48 in March from a high of 48.60 registered in February 2012. On Friday, the Government gave an assurance that the tax on P-notes will be ruled out and this is a positive news for investors and inflows are expected to commence in near-term. The BSE sensex posted a sharp gains of 345 points on Friday with weekly net gain of 43 points. The FII equity flows remained robust at USD 1.68 billion in March with YTD net inflow of USD 8.85 million.
In the next financial year for a short span of 2 to 3 months we may see a spike in the exchange rate to 53 or so. Also it does not seem the rupee will appreciate above 48 on a sustainable basis. On an average the rupee is expected to trade in the wide range between 48.50 to 52.50 with an overshoot of 50-75 paise on either side of the suggested range.The rupee exchange rate can remain choppy in the holiday-filled coming week with only two working days.
During this week, the Banks have borrowed an average of Rs.1.79 trillion daily from RBI under the repo route. The overnight call rates jumped to a high of 15% which we feel was only a temporary aberation due to year-end consideration. The return of tax flows into the system in the first week of April and combined with government spending, the liquidity position in the system would significantly improve. The expected improvement in liquidity will also trigger the much needed correction in the elevated short-term money market yields. The Rs.100 billion OMO announced by RBI on Thursday will help ease liquidity condition. Expected repo rate cut on April 17 and further OMOs in the coming weeks would help to keep the G-sec yields range bound from the beginning of April 2012. The benchmark 10-year bond yield registered a high of 8.65% and ended the week at 8.56%.
The selling of forward dollars by exporters and good receiving interest from Banks saw the forwards to drop across the tenor. The 1-year forward dollar premium was traded at a high of 6.48% per annum and ended the week a lot firmer at 5.92% per annum. A further moderate drop in forwards can be expected in the coming weeks.
For the exchange market, the Budget announcement was a non-event and its impact on the exchange rate was at best neutral. During the week, the rupee was traded on a weaker note, with the market treading caution on the credit policy and Budget announcement. Despite the FII net equity inflow of USD 910 million during this month, the rupee fell by 2.4% and its fall was triggered by huge dollar demand from oil refiners and corporates. The rupee however remained as the best performing currency in the Asian region from the beginning of January 2012 posting gains of 5.87% against the dollar followed by 3.73% gain in ringgit and above 3% gain in Singapore dollar and Baht.
In the next financial year, the rupee is expected to trade with a weaker bias as the BOP position is not supportive for any strong recovery in the domestic currency. The recovery in the exchange rate can be seen in the second half of the financial year 2012-13 on the strength of capital inflows picking up and the global economy staginga moderate recovery led by India’s estimated growth projection of 7.5% in the whole of FY 2012-13. Global oil prices is the main driver to guide the currency trend. The prospects for capital inflows will be a vital factor in forecasting the BOP scenario in the forthcoming financial year. Till the end of March 2012, we expect the rupee to trade between 49.25 to 50.50, with the possibility of an overshoot by 25 paise on either side of the above range. In the background of uncertainties in the exchange rate, the best strategy for the corporates is to buy dollars on dips and sell on rallies to take advantage of the two-way movements in the currency.
During this week, Banks have borrowed an average of Rs.1 trillion daily from RBI at the repo rate of 8.5%. The overnight call money rates stayed just above 8.60% per annum. Considering the tight liquidity situation in the market and the expected fund outflows on account of tax payments from the middle of March, the Reserve Bank of India has announced after closing of business hours on Friday a 75 bps cut in the CRR from 5.5% to 4.75% effective from 10-3-2012. The CRR cut would release Rs.48,000 crores to the Banking system andhelp to improve the liquidity in a significant way. Even after the advance tax outflows, the repo borrowings could possibly be within 2% of the DTL of Banks. The liquidity position could gradually improve from the beginning of the new financial year when the tax flows return back into the system. In the policy meeting on 15th March, one can expect the RBI to cut the key rates by atleast 25 bps to onstart the cycle of interest rate cuts.
The forwards remained firm encouraged by weakness in the spot rupee exchange rate and the liquidity tightness in the market. After the announcement of CRR cut and the possible key rate cuts in the forthcoming policy meeting, we expect to see a moderate fall in forwards across the maturities. The 1-year forward dollar premium ended the week at 6.19% per annum and we strongly expect the premium to drop at 5.50% per annum or lower before the end of March 2012.
After making gains of 8% in the first two months of the calendar year, the rupee could not decisively breach the solid resistance at 49 and traded well above that level on all the days in the week. The FII equity inflow during the week was USD 252 million. The BSE sensex fell by 1.6% in this week after recording a sharp rise of over 15.25% from the beginning of January 2012 till the close of the previous week. As the capital inflows have now slowed down the rupee showed moderate signs of weakness with good dollar buying interest emerging at 49 level from oil refiners and importers. Ahead of key events like RBI monetary policy, Federal Budget and the results of the State Elections, the market remained in a cautious mode and importers were seen hedging their near-term payables to mitigate the currency risk. In the coming week, we expect the rupee to trade on a weaker bias in the range between 49.20 to 49.90.
The ECB’s 530 billion euros in cheap 3-year loans added to the financial system this week underpinned the markets and could spur the flight to riskier assets. Over the next 1-3 months timeframe, an amount of USD 50 billion or more can be expected to flow into debt and equities of Asian emerging markets, out of which flows into Indian assets could be projected at well over USD 10 billion. These inflows if materialized, would set a stage for a gradual appreciation in the exchange rate towards the 48 level.
During this week, Banks have borrowed an average of Rs.1.81 trillion through the repo route. The tightness in liquidity was attributed to absorption of rupee funds by RBI via intervention, lower Government spending, funds deployed for Elections and higher import bill on account of crude oil and gold imports into the country. The liquidity tightness in the system is structural in nature which can only be corrected over a period of time and there is no immediate solution available. The tax outflows in the middle of March are expected to tighten the liquidity further. In this background, one can possible expect to see 50 bps cut in the CRR even before the policy meeting on March 15th. Open market operations of Central Bank have so far exceeded Rs.1.1 trillion but the liquidity tightness has not softened. The overnight call money interest rates stayed below 9%. The short-term money market yields have zoomed higher withthe 3 month CDs and CPs traded at 11% and 11.5% per annum respectively. However the long-term bond and swap yields have remained broadly stable encouraged by the prospects of key rates cut in the forthcoming policy meeting of the Central Bank.
In relation to the weakness in the rupee exchange rate, the forwards fell moderately across the maturities. The forward dollar premiums upto 3 months maturities scaled higher and ranged between 8.5% to 9.2% per annum on the back of money-market related paying interest. The far forwards beyond the 6-month tenor were traded lower. The 1-year forward dollar premium edged lower to end the week at 6.09% per annum from the week’s opening at 6.37% per annum.
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