The volume of rupee forward deals plunged 26% in May from the beginning of the year as companies expect a further reduction in their requirements for hedging against currency fluctuation in a slowing economy.
The number of transactions in the rupee forward market?where two parties agree to buy or sell a currency on a future date at a predetermined price?declined to 17,342 in May from a peak of 23,580 at the close of December, according to Clearing Corporation of India Ltd (CCIL). In April, the decline was 30% to 16,318 deals.
?This shows exporters took less cover against rupee depreciation as they lowered their earnings forecast,? said CCIL vice-president Golak Nath. Banks and large companies, most of them exporters, take forward cover against depreciation in the rupee, which reduces realisations.
Forex market participants are uncertain about the direction of the rupee, denting the forward market volumes further ahead of the Union Budget in July. ?If the Budget cuts the fiscal deficit and refrains from further subsidies, the rupee will appreciate. Or else, it will decline to 49-50 levels against the dollar,? said Hinduja group CEO Prabal Banerji.
?Most participants who sold the currency earlier are stuck at lower levels,? said a dealer. The decline in volumes in rupee forwards and on the over-the-counter currency derivatives market is because investors are becoming rapidly averse to taking risks when most currencies are volatile in the backdrop of a globally weak dollar and variations in crude oil prices.
?There is a reduction in risk appetite among investors. That is why volumes (in forwards) are not good,? said Axis Bank chef dealer RVS Shridhar. The rupee touched a record high of 39.883 against the dollar in September 2007. The currency then touched a record low of 52.185 on March 3, losing 23.5%.
It has since rallied almost 10% to 46.98 against the dollar on Monday.
The flow of funds into the stock markets by FIIs–Rs 18,000 crore this calendar year up to May–is strengthening the rupee, which closed at 46.98 against the dollar on Monday. The cost of carrying–or the cost of holding a position in–rupee forwards has come down because interest rates are low at present.
On the other hand, the number of trades in rupee futures on stock exchanges has increased by as much as 65% this calendar, partly because of heightened speculation in the value of the currency against a globally weak dollar and partly because some large corporates have shifted from the over-the-counter forward market to exchange-traded derivatives due to flexibility in the exchange-rate range.
A random survey of forex dealers carried out by FE forecast a rise in the rupee to 45 levels against the greenback in the short term. ?The dollar?s worldwide weakness must help the rupee. And the futures market also must pick up,? said Vijay Shah who heads currency derivatives at Prabhudas Lilladher.