Indian importers' forward dollar purchases fall 35% to $49.5 billion in October

The October total was down from a record high in September, clearinghouse data cited by Business Standard showed. Forward purchases let importers lock in exchange rates for future dollar payments. Exporters' forward dollar sales were $32.2 billion last month, the lowest since May, the data showed. Average monthly dollar purchases by importers have climbed around 40% to $62 billion this year, Business Standard reported.

RBI measures raise hedging costs

The drop followed measures the Reserve Bank of India announced last month to defend the rupee as it neared a record low. They include a China-style foreign-exchange risk reserve, Business Standard reported, and tighter foreign exchange trading rules, Business Times reported. The steps made it more expensive to build forward dollar positions.

The RBI also created a dedicated dollar window for Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation, Business Times reported on 13 October. The three refiners account for roughly 56% of India's crude imports. The window takes their dollar demand out of the spot market. The RBI supplies those dollars from its foreign exchange reserves. Srijit Dutta, a treasury consultant at Eforexindia, said the facility could meet $300 million to $350 million of their daily dollar demand. Avinash Singh of Emkay Research estimated it could divert $11 billion to $12 billion in monthly dollar demand from the spot market. Singh warned that the window could mask pressure on India's balance of payments if it closes before external conditions improve.

Citi analysts said the package would trigger a “knee-jerk” appreciation in the rupee followed by some consolidation and do little to ease India's balance of payments pressures, Business Times reported.

Importers face higher costs

Importers are likely to face higher costs as the new rules make currency hedging more expensive. Vikram Murarka, chief currency strategist at Kshitij Consultancy Services, said in the Business Times report:

“Increased hedging cost will impact the importers the most, making it costlier for them to hedge.”

Analysts cautioned that stricter documentation could prompt some importers to shorten hedges or shift transactions to offshore non-deliverable forwards, according to Business Times. Others may defer hedging and buy dollars in the spot market when payments fall due.

Rupee rebound and rate hike

The rupee has since risen about 2% against the dollar, Business Standard reported, though it remains among Asia's weaker performers this year. The cost of buying insurance against rupee weakness rose to multi-year highs last month and remains elevated, the same report said. Business World reported that the RBI raised the repo rate by 25 basis points to 5.50% on 7 October and shifted its stance from neutral to calibrated tightening. The rupee closed at 96.78 per dollar on 8 October, it said. Business Times put the 9 October close at 96.73 and said the rupee was around 95.2 on 13 October, up from near its record low.

Outlook

Dutta expects the rupee to trade between 95 and 96 per dollar in the near term before drifting towards 96 to 97 if external pressures persist, Business Times reported. The RBI has said it seeks orderly conditions in the foreign exchange market rather than defending a particular exchange-rate level, Business World reported. Governor Sanjay Malhotra has described the rupee as undervalued and noted that markets can behave irrationally in the short term.