Save my Rupee...Uncle SAM!!!!

Save my rupeee.... Save my Money.
Leave me Dollar, forgive me for appreciating against you...

The rupee posted its biggest fall in a decade on Tuesday 16th September 2008, hit by risk aversion and banks arbitraging a weaker offshore rate, although suspected central bank intervention stopped the slide just short of 47 per dollar.

Confused?????Let me Explain...

The recent attacks on the financial markets have turned out to be a money making opportunity for players with overseas presence. Multinational banks operating in India, large corporates and diamond houses have cashed in on the difference that has surfaced in the dollar-rupee exchange rate between the Mumbai currency market and the unregulated, unofficial, offshore markets Singapore, Dubai and London.

The difference (that reflects the arbitrage opportunity) was as high as 40 paise to one rupee last week. Its the outcome of hedging and foreign portfolio managers taking big bets that the rupee will slip further against the US currency. Such bets, which primarily boil down to these players shorting( Selling the rupee in the anticipation of a fall without actually owning it) the Indian currency, have made the rupee weaker in the overseas market than in India. In other words dollar has become stronger in offshore market than what is quoted here.

Corporates and Institutions that have the flexibility and the wherewithal have profited by buying the dollar in India and selling it on the offshore market- better known as Non deliverable Forward market(NDF).
As the name suggests, all deals in the NDF markets are forward deals settled in dollars.(Just for the readers-A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future. The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time of trade is not the time where the securities themselves are exchanged.).
Its not a spot market( immediate dealing market) since rupee, a non-convertible currency, cannot be 'delivered' on the offshore market. So the deals are settled in cash. On maturity of the forward contract, the differnce between the Forward rate( Future rate) and the RBI(local) refernce rate on the date of maturity is either paid or received in dollar by the party. The RBI refernce rate is based on the 12pm rates of the few active banks in Mumbai.

The following example might make it clearer...

The one month forward dollar was 45.83 in India against 45.96 on the NDF market. Many corporates will take advantage of this differnce- buying forward in India and selling forward abroad to lock in a gain of 13 paise.

Therefore this has lead to shooting up of Volumes and and therefore banks are ( Yes!!! banks have to be paid a margin for NDF positions) charging less margin for NDF trades. Its a billion dollar market which believes that rupee will fall faster than the official exchange rate.

Under the prevailing onslaught of arbitragers its only RBI who is selling the dollar and we can say it, without any doubt, that it is the intervention of RBI that accounts for the difference in the rupee rates.

Adding to it,there is lot of oil, equity and NDF-related dollar demand, and even importers are covering near-term imports.( Importers tend to loose by Dollar gain..Its easy Think!!!)



On a black Sunday for Wall Street, 10 of the world's biggest banks also agreed to establish a $70 billion emergency fund while the Federal Reserve said for the first time it will accept stocks in exchange for cash loans.
Such is the case where FED agreed to take the most unsecured form of collateral( Equity) for Cash loans. This depicts the pitiful situation of the Financial system across the globe. This would nothing but worsen the situation for the short term and hurt sentiments.
Hence, Uncle Sam is drowning so are the third world countries.....


Compiled By
Riddhiman Jain
For refernce please refer here