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Cash dollars sold at discount
By siliconindia
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Friday, 30 May 2003, 19:30 IST
MUMBAI: Cash dollars were dealt at a 7.77 per cent (annualised) discount to the rupee today, in a market that witnessed a dollar shortage with demand exceeding supply. This was after the Reserve Bank of India (RBI) mopped up dollars over the past few days.
A dealer said cash dollar deals were struck in the morning at 1 paisa discounts translating into a 7.77 per cent annualised discount against a premium of 0.05 per cent yesterday.
Cash dollar usually commands a premium of about 3.75 per cent, the interest rate differential between the US dollar and the rupee. The overnight dollar interest rate is 1.25 per cent and the overnight rupee interest rate 5 per cent.
This essentially means that the implied overnight rupee interest rate (the return on a rupee loan lent for one day through dollar-rupee swap) is in the negative.
It may prompt the RBI to cut the one-day repo rate which, at 5 per cent now, is out of sync, a foreign exchange dealer pointed out. Theoretically, a currency with a lower interest rate always commands a premium, but the trend has reversed now.
Cash dollars deals are settled the next day and spot dollar deals on the second day. Todays phenomenon signifies that dollars bought for next-day settlement are cheaper than the spot dollar. With the US in a different time zone, all cash dollar deals take place in the early trading hours.
The demand for dollars by importers and short covering by banks led to the dollar going at a discount and the rupee fetching a premium. Importers needed dollars for payments today, which led to a panic situation because there was a shortage.
At the same time, nostro accounts where banks park their dollar funds overseas were nearly exhausted because most of the money in them had been lent as dollar-denominated loans. Market sources said the dollar loans had been given against corporate deposits in India in a rupee form.
Banks then had to borrow dollars in cash for selling back two days later from dollar-surplus banks, entering into buy-sell swaps on a cash-spot basis. With a huge demand for dollars in cash and with almost no demand for spot, cash dollars traded at a premium to the spot.
As the dollar started moving up, demand from inter-bank players also went up to cover short positions, created in the expectation of an appreciation in the rupee.
Corporate demand, coupled with short covering by banks, pulled the rupee down against the dollar. The spot rupee opened at 46.90/91, closed lower at 46.98, before reaching a low of 47 to a dollar.
Forward premiums on the dollar also firmed up, following the dollar appreciating against the euro. The six-month and one-year annualised forward premiums on the dollar closed higher at 0.81 per cent and 1.18 per cent (against 0.75 per cent and 1.05 per cent, respectively, yesterday).