The Reserve Bank of Indias (RBI) decision to cap the interest rate offered on non-resident (external) rupee deposits to 100 basis points over Libor will slow down the pace of accretion of such flows. It will also mean that the rollover of maturing the $5.5 billion Resurgent India Bonds (RIB) will be affected to a great extent.
The indications are all there. After a long time, September dollars are quoting dearer than October: 4/5 paise as compared to 1.5/3.5 paise. The difference between the rupees opening and closing is showing a difference of nearly 10 paise. Tech-stocks are rallying, and there are whispers in the market that senior treasury heads are looking at Reliance Industries (RIL) $750 million forex loan, which has been cleared by the Ministry of Finance for support.
Given the sensitivity of the issue, few forex dealers were ready to go on record, but some say that a few corporates who had taken on forex loans and kept them unhedged may find themselves in a spot of bother. It has also been gathered that a few exporters apparently have over sold dollar-positions. Coupled with the typical month-end dollar payments, dealers say the rupee could weaken to 46.50 levels in October. Simply put, the rupee is set for a correction.
Furthermore, the RBIs move on Tuesday to derecognise with immediate effect overseas corporate bodies (OCBs) is also seen affecting sentiment. This decision is a follow up of the review of investment activities of OCBs in India, carried out by the RBI on the basis of the recommendations of the Joint Parliamentary Committee on security market scam.
While it is not clear as to what the extent of dollar inflow was on account of OCBs, dealers say that this will affect the market. Many point out that the RBI is going all out to ensure that the rally on the bourses is not upset by another scam on account of OCBs and is playing it safe, more so given that it is an election year.
A senior dealer pointed out that if one were to read together RBIs decision on the NRE deposits and RIB front and also the latest one on OCBs, there seems to be a hint that those with forex liabilities should cover now. In many ways, there is a sense of deja vu to all this.
In his last credit policy as RBI governor, Bimal Jalan had noted: ... for these reasons, it is of utmost importance, particularly in relatively thin developing country markets, that foreign currency exposures by corporates and others are largely hedged or covered against anticipated foreign currency earnings. It may be recalled that a part of the problem that many emerging economies have faced in the past has been due to excessive unhedged foreign currency exposures in a country during periods when movement in exchange rate was absent (due to fixed exchange rate policy) or currency was appreciating.
October will unveil the story!