Dollar hits Rs 113; dealers assured no more pressure from CB

Just as the dollar hit the Rs 113 barrier on Wednesday, forex dealers were assured by the Central Bank that the latter will not pressurise banks on foreign exchange trading and allow free operations, enabling the market to stabilise.

“The Forex Association requested the meeting from the Central Bank. We asked them what they wanted the interest rates and the dollar rate to be at the end of the year in order to make them understand that there will be a dollar liquidity crunch,” an association official told The Sunday Times FT.

The Central Bank this week strongly rejected claims that the rapidly depreciating rupee – at least in recent weeks – had anything to do with economic fundamentals.

The association official said banks have their own ways of taking a position where the rupee will be at the end of the year. “The banks decide on a rate at the beginning of the year – the premiums are where the dollar to rupee rate is going to be at on a forward date. The difference between this rate and the present dollar to rupee rate is called the premium. So because the predictions of the banks were not up to the mark and the dollar had depreciated somewhat, prompted them not to sell the dollars. They started buying back the dollars by mid year and covering their positions. As such the demand for the dollar was created without an actual demand such as letters of credits being opened up by the importers,” he said explaining why the dollar rose sharply this week.

He said when this happened the regulator came to a ‘conclusion’ that there were some unwarranted deals in the market. “They pulled up some bankers trying to defend the exchange rate which in turn put lot of pressure on the banks. “After some deal is concluded, Central Bank (which monitors the forex deals) more often than not complained about the dealers to their superior officers,” he said. According to the regulator, the banks’ speculative behaviour was excessive.

“They said it is ‘wrong’ for the dollar to go up and each one of us on our own stayed away from the market by quoting only a one way rate, allowing the market to settle, if the fundamentals are good, as the Central Bank said,” he explained.

Dr. H.N. Thenuwara, Assistant Governor told The Sunday Times FT that the Central Bank has the right to regulate the forex market. “We have been regulating the forex market. We have the right to interfere and intervene as the regulator,” he said.

The association official said usually the regulator has to release some of its reserves to the market to keep the dollar rate down. “But the Central Bank has sold more than what they have received in dollars, in trying to intervene to the market. They have to also maintain a certain amount of reserves and presently they are in a tight spot,” he said.

He said liquidity in the market came to a low ebb, because the customers who wanted to cover their ‘positions’ by having two rates were not getting them and the exchange rate spread was passed on to them. “The import demand picks up from July onwards, because the importers are booking their stocks now for the festive season in December. So the expectation in the market was high that the dollar will increase and exporters did not sell their dollars. With all this happening the banks did not know how to operate,” he said.