FOLLOWING the subprime crisis in the US, Indian firms are feeling the heat of a crunch in dollar-denominated credit lines, at least in the near term.
This has led to a sharp decline in dollar funds in the Indian banking system, although, concidentally, rupee liqudity is high. In this scenario, several exporters have been forced to buy dollars in the spot market, where the rupee is trading at 39.60 levels against the dollar, and then sell the dollars in the forward market.
This had led to a decline in yields on forward contracts. However, it has also resulted in the dollar posting small gains against the pound sterling and the euro in the past few days.
However, the marginal rise of the dollar against such currencies cannot be attributed to economic factors or cannot be perceived to be a longer-term phenomenon, as this is due to the surfeit of dollars being sold in the forward market.
Typically, domestic exporters receive postshipment credit denominated in foreign currency from banks in India, which receive dollar credit from banks abroad. However, the rate of interest on credit lines for a period of one to three months have risen sharply, as compared to credit lines for a tenor exceeding three months.
A senior treasury manager said that “many banks in India have exhausted their dollar borrowing limits, following a cap fixed by the Reserve Bank of India. That is why most of them prefer lending post-shipment credit in rupee terms rather than in dollar terms, as they prefer to retain the latter within their hands, in anticipation of a dollar shortage. Hence, it is seen that funds are borrowed in dollar terms and swapped into rupees, which is then used for lending to clients.”
Standard Chartered Bank MD & corporate sales head (global markets) Hemant Mishr pointed out that “despite the measures undertaken by the US Federal Reserve and the Bank of England, the tightness in monetary conditions continues. This is exemplified by the fact that the the threemonth repo rate is quoting at at 5.25%, a premium of 50 basis points ovber the Fed funds target rate.”
Treasury officials feel that even as overnight rates have been cut, rates in the money market have not fallen. This is only indicative of a dollar squeeze in the near term.
Market sources said that this is also to do with the fact that dollar interest rates are expected to dip further over the longer term. Within India, rupee flows have been abundant, due to two main reasons, one being the excessive intervention by the Reserve Bank of India, to prevent the rupee from rising too much and secondly because of government spending, in the wake of the advance tax outflows in mid-September.
Further, traders in the local forex market expect the liquidity to swell up further, given that there are some coupon payments likely to happen within this week.
With more and more traders selling the greenback on the forward market, the forward premia have dipped sharply in the local market. The premia on near- term contracts have remained below the 1% mark for a while now. In the short-term forward market, the cash-spot, cash-tom and tom-next are all trading at a discount.
Hinduja group group CFO Prabal Banerji said, “Exporters are facing a double-whammy situation. On one hand, the dollar-credits are getting increasingly restricted due to the subprime crisis and on the other hand, the rupee is showing no signs of weakening