Traders Bullish In Long Term, Rising Currency Brings Relief To Exporters
BREAKING off from the almost one-year old appreciating trend, the rupee is now fast moving in the opposite direction. The local currency, which threatened to breach even the 39-mark versus the dollar barely a couple of months ago, dipped to 40.23 levels on Wednesday.
What’s more surprising is that a large number of importers and corporates, that has raised external commercial borrowings, have left their exposures unhedged. Possibly, they feel that the present slide in the rupee is only a temporary phenomenon.
According to a senior forex dealer from a multinational bank, in the current scenario, importers who have longertenor liabilities may not lose out much.
The yield on the annualised premia stands at around 11 paise, which means that if the rupee is trading at 41.22 in the spot market, one could buy dollars through a one-year contract at 40.34 in the forward market.
Players having to service liabilities immediately may be affected to a greater extent since near-term premia are trading at a discount. The long-term view on the rupee still remains bullish. While ECB borrowers typically have a longer-time horizon of around 2-3 years, importers, especially oil companies, could suffer if the rupee does not retract to below 40 levels in the spot currency market, said a forex strategist from a foreign bank.
Forex traders said that as long as premia on forward contracts trade at a discount, there will be plenty of incentive to maintain long positions on the dollar. On Wednesday, the rupee ended the day at 40.20 levels compared with the Tuesday’s closing levels of 39.91/92. The local currency dipped to a five-month low of 40.23 levels during the day, after opening at 39.94 levels.
Acute dollar shortage caused premia on forward contracts up to eight months, to continue trading at a discount. The yield on the one-month contract closed at a discount of 5.31% (4.56%) while that on the six-month contract ended at (0.53%). The annualised premia closed at 0.33% (0.56%).
However, exporters were seen selling dollars on Wednesday, in a bid to avail of the fall in rupee levels versus the dollar. Forex market officials feel that the inflows from foreign investors could be the way to ease out the situation, as the central bank is unlikely to intervene in the forex market at this juncture. Fearing a slowdown in the US, markets across the globe have turned risk aversion. This has caused most FIIs to trim their positions in emerging markets, thus leading to most currencies weakening against the dollar.
When FIIs exit the domestic markets, they end up ploughing back profits to their home countries. For this purpose, they purchase dollars from the local markets, thus causing the rupee to weaken against the dollar. It may be recalled that the rupee had breached the 40-mark against the dollar way back in September 2007, on the day when the US Federal Reserve announced the first cut in key interest rates in 2007.
Traditionally, it has always been the exporters who were at the gaining end, given that the rupee was more on a depreciating mode against the dollar. However, only in the past few years, the Indian rupee made its way to being Asia’s best performing currency as it rose by more than 11% against the dollar during the whole year. This had made importers and borrowers of foreign currency loans a greater beneficiary of the scenario in the forex market.