Banks have reduced proprietary trades in foreign exchange in view of the extreme volatility in recent days. Several treasury heads said they are squaring off their forex position by the end of the day to avoid any risk on their books. Over the past few days, the rupee has witnessed wide swings of 50 to 80 paise in a single day against dollar.
The wild swings in the exchange rate are largely because of the precipitous fall of the euro vis-à-vis the dollar. The flight of investment into the dollar has resulted in most currencies weakening against the greenback. These include even Asian currencies whose economies are outperforming those in the West.
Typically, whenever there is volatility of this scale in the rupee-dollar exchange rate, RBI begins to unload millions of dollars that it holds in its reserves. In fact, the intervention to stamp out volatility is a stated policy of the central bank. This time around, however, RBI’s intervention has been very subdued. Forex dealers said since globally the dollar is strengthening, the central bank has chosen not to intervene to support the rupee.
Overall, the local currency has depreciated from 44.92 since the beginning of this fiscal to 46.98 against dollar, a 4.5% fall against the greenback. Between its high of 44.44 on April 15 and low of 47.70 on May 25, the rupee fell 7.3%. This, dealers say, is a wide swing in the shortest span so far. On Wednesday, the rupee touched the intra-day high of 47.29 but recovered to close at 46.98. “We have been advising exporters and importers to stay away from speculation and book dollars to avoid risk in volatile period,” said the treasury head of a large commercial bank.
However, despite this, exporters who had already booked dollars in the forward contract in the April and early May are now seen cancelling these contracts and booking profits as the rupee has weakened. Importers, mainly the oil companies, had not expected such a huge drop in rupee. Traditionally, most government-owned oil companies have preferred to keep open position in the forex market. Which means that they do not enter into forward contract to buy dollars.
Most dealers feel the rupee would move in the band of 46.50 to 47.50 because of uncertainty in the overseas currency market. Also, volatility in the domestic equities market impacts the rupee movement against dollar. The rupee drops when there is a sharp fall in the equities market as foreign institutional investors sell equities and buy dollars to remit in their home country.
The wild swings in the exchange rate are largely because of the precipitous fall of the euro vis-à-vis the dollar. The flight of investment into the dollar has resulted in most currencies weakening against the greenback. These include even Asian currencies whose economies are outperforming those in the West.
Typically, whenever there is volatility of this scale in the rupee-dollar exchange rate, RBI begins to unload millions of dollars that it holds in its reserves. In fact, the intervention to stamp out volatility is a stated policy of the central bank. This time around, however, RBI’s intervention has been very subdued. Forex dealers said since globally the dollar is strengthening, the central bank has chosen not to intervene to support the rupee.
Overall, the local currency has depreciated from 44.92 since the beginning of this fiscal to 46.98 against dollar, a 4.5% fall against the greenback. Between its high of 44.44 on April 15 and low of 47.70 on May 25, the rupee fell 7.3%. This, dealers say, is a wide swing in the shortest span so far. On Wednesday, the rupee touched the intra-day high of 47.29 but recovered to close at 46.98. “We have been advising exporters and importers to stay away from speculation and book dollars to avoid risk in volatile period,” said the treasury head of a large commercial bank.
However, despite this, exporters who had already booked dollars in the forward contract in the April and early May are now seen cancelling these contracts and booking profits as the rupee has weakened. Importers, mainly the oil companies, had not expected such a huge drop in rupee. Traditionally, most government-owned oil companies have preferred to keep open position in the forex market. Which means that they do not enter into forward contract to buy dollars.
Most dealers feel the rupee would move in the band of 46.50 to 47.50 because of uncertainty in the overseas currency market. Also, volatility in the domestic equities market impacts the rupee movement against dollar. The rupee drops when there is a sharp fall in the equities market as foreign institutional investors sell equities and buy dollars to remit in their home country.
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