By Nimesh Vora
MUMBAI, – The surge in the Indian central bank’s position in the non-deliverable forward market (NDF) reflects the extent of pressure on the rupee and suggests that the currency, already at a lifetime low, will fall further, bankers said on Monday.
The Reserve Bank of India’s aggregate short foreign currency in forwards and futures position jumped three-fold to $49.2 billion from September to October, official data showed on Friday.
This likely climbed to $65-$70 billion through November, bankers estimate, with a large chunk of the total reflecting the RBI’s short position in the dollar/rupee NDF market.
The surge comes amid the RBI having to support the rupee after the rise in volatility since the U.S. presidential election and India’s faltering economic growth that has prompted foreign investors to pour out of the equity market.
“The huge jump in the NDF book shows how much they (the RBI) have to do to manage the rupee’s exchange rate. It testifies the kind of outflow pressures that the rupee is having to contend with,” said Dhiraj Nim, a forex strategist and economist at ANZ.
The NDF has become the RBI’s preferred market to keep the currency’s volatility at the desired level. The RBI did not immediately respond to an email seeking comment.
In an NDF contract, as the name suggests, there is no actual delivery of currencies, which means that the RBI’s intervention via this route does not impact India’s forex reserves but affects the central bank’s balance sheet based on the profit or loss when the contract matures.
The jump in the RBI’s NDF position means “that the incremental support” it can provide to the rupee “is less”, a senior treasury official at a large private sector bank said.
While, technically, the RBI can build an unlimited position, what needs to be considered is how that stacks up against the overall market’s position, said the official, who declined to be named as he is not authorised to speak to the media.
If the current challenging conditions persist, the rupee will fall at a “quicker pace than what we are used to” amid wider intraday ranges and higher volatility, he said.
The rupee slipped to an all-time low of 84.6825 per U.S. dollar on Monday, prompting the RBI to step in yet again.
The RBI is getting into a “slightly tricky spot” considering that it has already stretched itself on the NDF, ANZ’s Nim said.
“You can’t defend a currency too much when there are multiple headwinds. The rupee will most likely move further lower from here.” (Reporting by Nimesh Vora; Editing by Savio D’Souza)
