Importers exit long-dollar positions

MUMBAI: Importers have started exiting long-dollar positions putting further pressure on the greenback, which they now expect to weaken further in the near-term.

A senior treasury official from a private sector bank pointed out, “Exiting long-dollar positions is clearly inevitable as the cost of carry has increased substantially. In a rising interest rate scenario, the local currency does tend to appreciate in the shorter run. We are currently witnessing traders selling the greenback and players have not been actively making dollar purchases. This trend is unlikely to reverse, at least till the end of this month.”

Traders expect the rupee to trade at 42.50 levels against the dollar over the next three months, given that RBI may not find it feasible to make dollar purchases as it would fuel inflationary worries. Also, the tight liquidity conditions in the domestic market have still not shown any signs of easing and this has also contributed substantially to the rupee’s gains as traders have been selling dollars to mobilise rupee resources.

The rupee has breached the 43.50 mark for the second time within a week on Monday, even as the central bank had aggressively intervened earlier in February to prevent it from crossing the 44-mark vis-à-vis the dollar in a bid to protect the competitiveness of local exports. Within the span of a fortnight, the rupee has gained about 2.6 % since the current rally began on March 8. It ended at 43.35 levels on Monday, as against 43.56 levels on Friday.

Rajesh Mehta, chairman of Rajesh Exports, said, “From an importer’s perspective, the appreciation of the rupee in the mid-term seems very much likely, given the dollar’s depreciation globally. On the other hand, exporters are the ones who could be affected the most, yet the rising premia on forward contracts offer them a significant hedging opportunity.”

Another leading importer pointed out that the rise in the rupee could well be a temporary phenomenon, fuelled by a tightening in domestic liquidity conditions and may ease off when cash flows resume normalcy. This could be comprehended from the fact that the rupee did come off the highs, once the news of state-owned banks going on a strike was called off last week.

However, the fact that China may make investments in foreign equity markets gives rise to fears of a dollar weakening in overseas markets. Importers are currently making repayments on external borrowings and other deferred payments. Once the local currency breaches the 43-mark against the dollar, it is quite possible to foresee a level of 42.50 in the near future.

The yields on the forward contract have risen sharply over the past few days. While the one-month forward premia has risen to 14.75% from 8.70% last week, that on the one-year contract has marginally gone up to 4.15% levels, from 3.37% levels last week.

The fund crunch in the money market was reflected in the overnight cash rates that ended at 14-15%, compared with 6-7% when cash conditions are normal. On Wednesday, RBI will be selling MSS bonds worth Rs 6,000 crore, which may squeeze cash further and could push the rupee higher.