Flood of dollars leaves currency market in a flap

A problem of plenty — an excess of dollars — jolted India’s currency market on the last working day of the financial year. The interest rate in the inter-bank, dollar-rupee, near-maturity swap market — where banks exchange the greenback against the local currency — surged to more than 73 per cent from 22 per cent levels at the start of the day before receding after likely central bank intervention.

Banks are flush with dollars after bidding for the central bank’s swap auction on Tuesday, dealers said, leading to the shakeup in the over-the-counter (OTC) market.

In the cash-tom market, a currency platform on which deliveries take place after the next working day, the rate hit a record 73.12 per cent (annualised implied interest rate), according to Clearing Corporation of India (CCIL) data. This means an institution pays 73.12 per cent to swap dollars on the next working day. The gauge opened at 22.48 per cent on Friday and ended below that level.

“The market was flooded with excess dollars,” said Ashish Vaidya, head of trading at DBS Bank.

“Volumes in the cash-tom segment shot up to about $10 billion compared with $5-7 billion (usually). Such a high rate over the financial year-end on Friday is itself a record in this particular segment.”

The cash-tom market ended at 19.85 per cent with the weighted average rate at 39 per cent, following likely intervention by the Reserve Bank of India in the cash market, dealers said. The buildup had started on Thursday, they said. The RBI doesn’t comment on market interventions.

“The central bank also intervened Thursday after 4 pm as it sought certain quantum of dollars by releasing rupees at public sector bank counters,” said a dealer, who didn’t want to be identified.

The action was reflected in the rupee’s spot market value. The local unit swung 0.60 per cent during the day, hitting an intraday low of 69.36 per dollar against 68.92 on Thursday. The rupee closed on Friday at 69.16 per dollar compared with 69.34 on the day before.

“The surge in near-maturity swap rates had a cost on the banking system,” said Anindya Banerjee, currency analyst at Kotak Securities. “Many banks, which are sloshing with dollar liquidity, tried to convert the greenback into rupees to deploy in different credits. Such conversion at the financial year-end caused havoc.”

Banks could not lend offshore either as many of them had reached their dollar-lending limits.