India Forex - Forex Trading in India

India Thursday 20 May 2010: A few leading banks, including some from the public sector, have been converting losses arising out of exposure to foreign exchange derivatives contracts into term loans for companies which had earlier entered into such contracts. In some cases, company officials from the textiles hub of Tirupur in Tamil Nadu alleged, banks had even armtwisted these companies into converting such losses into loans despite an order from the banking regulator Reserve Bank of India (RBI).

A few months ago, in affidavits filed in relation to a public interest litigation (PIL) in the Orissa High Court, RBI as well as the Central Bureau of Investigation (CBI) had accepted that several of those forex derivatives contracts had violated foreign currency rules, including Foreign Exchange Management Act (FEMA). In some cases, the banks have also gone to debt recovery tribunals (DRTs) against companies which had losses from these controversial contracts, alleged officials of exporters which had signed such contracts.

Speaking to TOI, Raja Shanmugham, president, Forex Derivatives Consumers’ Forum said that in Tirupur alone losses worth about Rs 132 crore have already been converted into long-term loans. These relates to forex derivatives contracts which were sold to textile manufacturers in 2007 and 2008. Interestingly, an RBI order of October 29, 2008, signed by the then chief general manager-in-charge, Prashant Saran, had barred banks from taking such steps. The banking regulator had asked such losses to be kept in a separate account.

“Any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallised or might crystallise in future and becomes receivable from the client, should be parked in a separate account maintained in the name of the client/counterparty,” the RBI had ordered.

It further added that the money, “even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant IRAC (Income Recognition, Asset Classification and Provisioning) norms. The classification of all other assets of such clients will, however, continue to be governed by the extant IRAC norms.”

India Monday 17 May 2010 - The Exim Bank has decided to join hands with commercial banks to offer comprehensive products to companies in foreign trade.

“We have decided not to get into a rate war with banks in the areas we operate, but rather complement them in offering services and products,” Exim Bank Chairman and Managing Director T C A Ranganathan told PTI.

“There are some products which commercial banks are not interested in, like country risk and cluster financing,” he said.

“We will try to offer single window service to an organisation where few products may be offered by commercial banks and we will offer complete solutions to trade without affecting our margins,” Exim Bank Executive Director Prabhakar Dalal said.

He, however, said that this did not mean that existing products would not be offered if required.

Dalal said the focus would also be in offering financing for overseas investments by Indian corporate entities.

Ranganathan said it would take time for the shift in strategy and in the next six to 12 months, some results would be seen.

Meanwhile, Exim Bank’s total borrowings for 2010-11 would be Rs 24,000 crore, 20 per cent higher than the previous year.

The bank would raise the amount through a mix of rupee and foreign currency loans.

It was close to raising $100 million from the Asian Development Bank (ADB) to provide funds to eligble SMEs.

“We are in the final lap to raise $100 million for small and medium enterprises in states like Assam, Madhya Pradesh, Orissa, Uttar Pradesh, Chhattisgarh, Jharkhand, Rajasthan and Uttarakhand,” Ranganathan said.

The bank intended to extend loans through development of clusters in different sectors.

The foreign trade development bank had also raised 150 million euro from the European Investment Bank to promote green energy and projects that reduce greenhouse gas emissions.

Another $200 million was raised through five-year bonds from the euro dollar market.

India Thursday 06 May 2010 - People going abroad have reasons to cheer as now they will be entitled to get foreign exchange up to $3,000 against the existing limit of $2,000.

Following changes in the forex rules, travellers going abroad can get up to $3,000 or its equivalent amount in other currencies from forex dealers without prior permission of the Reserve Bank of India.

“The existing limits have been reviewed and it has been decided to increase this ceiling, with immediate effect,” RBI said in a notification yesterday.

These provisions, however, will not apply to persons going to certain specified countries like Iraq, Libya, Iran, Russia and the CIS countries.

The notification further said persons going to Libya or Iraq will continue to get up to $5,000 or its equivalent in other currencies while the existing provisions for travellers to Iran, Russia and CIS countries will remain unchanged.

Forex dealers and money changers can also sell foreign exchange in other currencies other than American dollar up to $3,000.

India Tuesday 06 April 2010 - Given that companies today operate in a climate of increased global economic volatility, it is critical they hedge their exposure to foreign exchange risk, the Reserve Bank of India has said.

According to data from commercial banks compiled by RBI, the unhedged exposure of companies as a percentage of total exposure increased from 5.1 per cent as on December 2008 to 25.4 per cent as on March 2009.

“As this was a period of heightened volatility, unhedged exposures can impact the health of the corporate sector and translate into increased credit risks for the banking sector,” the report said.

The easy liquidity conditions and depressed risk premia in global markets before the onset of the crisis prompted many of these to explore cheaper sources of funding overseas.

A lot of Indian companies opted for foreign currency loans thought the External Commercial Borrowing route (ECB). They also sought to raise equity in foreign currencies by listing their shares on overseas stock exchanges in the form of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).

Indian companies have borrowed $15.16 billion (Rs 69,440 crore)from markets abroad so far during the current financial year, as compared to $16.8 billion (Rs 76,950 crore) borrowed during the same period last year. Both figures, though, pale in comparison to the $25.62 billion (Rs 117,350 crore) borrowed during the same period in 2007-08.

However, there has been a tendency among Indian companies to leave their foreign exposure unhedged.

To discourage this tendency, banks have been told their Board policy should explicitly recognise and take into account risks arising from unhedged foreign exchange exposures of all their clients.

Further, for arriving at the aggregate unhedged foreign exchange exposure of clients, banks’ exposure from all sources including foreign currency borrowings and ECBs should be taken into account.

India Tuesday 2 February 2010: The Lead District Bank, Indian Bank on Monday introduced Foreign Exchange Business in its Krishnagiri town branch. G. Muthappan, Assistant General Manager, Dharmapuri Circle, inaugurated the service.

Mr. Muthappan handed over the first Letter Credit to a leading importer of the town K. Murugan in the presence of D. Udaya Kumar, Chairman, Deveraj Group of Companies.

After inaugurating the Forex Biz section, Mr. Muthappan told reporters that the facility had been introduced to ease the tension of the business people in and around Krishnagiri and Dharmapuri districts.

It served the growing demand of the exporters and importers dealing in granite, mango pulp and other industries in Hosur in Krishnagiri district.

Till now these services were routed through banks in Salem, Coimbatore and Bangalore.

With the introduction of the Forex Biz services, export-import customers can do their forex settlements and transactions routed through this branch.

It will save cost and the precious time of the customers as the export-import papers will be processed in quick pace and export process will be given credit at the earliest. The service has been introduced for the first time in these two districts.

Besides servicing the businessmen and traders, normal customers can exchange their foreign currency, he added.

India Tuesday 26 January 2010: Despite having one of the largest current account deficits in the region, the Reserve Bank of India has been one of the few central banks in
the region to refrain from piling up its reserves by not purchasing dollars through intervention in the currency market.

Analysis of the trend in foreign exchange reserves pile-up across major Asian economies, post-Lehman collapse, indicates that while reserves pile-up in China, Hong Kong, Korea and the Philippines has been growing steadily, there have been some blips with respect to reserves pile-up in Indonesia, Thailand and Malaysia. Vietnam is among the few in the region to witness a perceptible slowdown in reserves growth. India’s reserve pile-up is one of the slowest.

The data on reserves pile-up by central banks is seen as a proxy for central bank intervention in the currency markets by many. RBI has built its foreign exchange reserves of $280 billion by buying dollars that foreign investors have been bringing in. However, reserves have gone up in dollar terms also because of the other currencies strengthening against the dollar.

According to Taimur Baig, Deutsche Bank’s chief economist for India, “Across Asia, central banks are pursuing varying strategies, depending on their concerns about inflation and growth. While Indonesia is intervening only occasionally and allowing the rupiah to appreciate as growth strengthens, the Philippines (which is largely export-dependent) is intervening aggressively to prevent its currency from steep appreciation, which could undermine its fledgling recovery.”

At a time when the central bank is faced with the challenge of surge in inflows and rising prices at the same time, it is considered prudent for the central bank not to absorb inflows and let its currency appreciate. This is because, on one hand a strong currency makes import of price inelastic commodities such as oil cheaper on one hand and reduces the demand side pressure on prices.

By not absorbing inflows, the central banks indirectly end up controlling the growth in money supply, pointed out an economist with a foreign bank requesting anonymity.

The Singapore economy is expected to act more like the Indian central bank. “We continue to believe the risk of a change to a gradual trend appreciation stance in April is rising, as inflation expectations start to pick up. In particular, we are likely to see a clearer shift in the Monetary Authority of Singapore’s focus towards food prices in the coming months,” said Rahul Bajoria of Barclay’s emerging market research, in a report released on Monday.

Another report by Moody’s released on the same day points out that “large capital flows in key Asian economies are putting upward pressure on exchange rates.’’ However, the central banks in many of these economies have also absorbed substantial inflows resulted largely due to rebound of exports and revival of the equity markets in these markets. This is reflected in the foreign exchange reserves pile-up in these economies.

India Tuesday 19 January 2010: A two-judge bench of the Orissa High Court has ordered a full fledged enquiry by Central Bureau of Investigation (CBI) into foreign exchange derivatives contracts sold by some Indian banks between 2007 and 2008. In the order the HC judges have indicated that the CBI could expose ‘a large financial scam affecting the economy’.

Earlier, through an interim enquiry report the CBI had told the court in Cuttack that banking regulator Reserve Bank of India (RBI) had already initiated an enquiry against a number of banks in the same matter. The interim report had also mentioned that there were several instances of violation of Foreign Exchange Management Act (FEMA) by these banks in India when they sold those exotic contracts to companies, importers and exporters, resulting in huge losses.

In its interim investigation report, done under court orders, the CBI had pointed out at least eight different types of FEMA violations by some of the banks in India, although it did not name any of the banks. These included selling contracts structured in a way that violated FEMA and led to increase in risks, and net inflow of premium to the company buying the contract. This the CBI contended were in violation of forex rules which permit use of forex derivatives for mitigation of forex loss and no inflow of premium to the buyer of the contract. The CBI also pointed out that there were instances of false declarations, made to enter into forex derivatives contracts.

During investigation, CBI had sought information relating to banks’ forex derivatives business and on some of the points raised in the petition, from eight banks: SBI, HDFC Bank, HSBC, Standard Chartered Bank, Citi Bank, ICICI Bank, ABN Amro Bank and Axis Bank. Speaking to TOI, a top banker at one of the banks said that all the eight banks, along with a bankers’ trade body, had replied to CBI’s queries. However, most banks that TOI spoke to, declined to comment on the matter at this stage.

The court order noted that a number of criminal offences related to forex derivatives contracts can not be ruled out. This included making false declarations deliberately by users/customers in making hedge transactions in excess of their exposures, IDG (Inter-departmental group of RBI) had identified violations which are serious in nature and appear to be intentional and deliberate, booking of contracts under past performance basis beyond 50% of eligible limit without obtaining chartered accountant’s certificate and misuse of transactions by using photocopies of the same underlying to enter into different contracts with different banks.

India Monday 21 December 2009: The Reserve Bank of India (RBI) is managing inflation expectations by minimising intervention in the foreign exchange market and thereby
controlling liquidity in the system. Even as foreign investors have brought in huge amounts, the funds have barely found their way to the central bank’s foreign exchange kitty.

Between August and October this year, foreign institutional investors have bought close to $8 bn into the country, according to the latest RBI data, but the central bank has absorbed only $336 million in the spot currency market and sold around the same amount in the forwards market.

Apart from FII inflows other major sources of dollars include FDI, ECBs, export earnings and remittances. However, there is huge dollar demand from importers and from investors to repatriate profits.

This is also helping the central bank contain inflation expectations as buying fewer dollars from the market results in less rupee funds being pumped into the system, while at the same time letting the rupee appreciate against the dollar in the process. RBI is already grappling with excess liquidity as banks are not lending much of the deposits they have mobilised. The system has excess liquidity of over Rs 50,000 crore these days.

According to Shubhada Rao, chief economist, Yes Bank, “The Reserve Bank has already indicated that it is comfortable with the current pace of capital inflows and has therefore not intervened much in the foreign currency markets. This also serves not to exacerbate inflation expectations.”

Spiralling food inflation in recent months has added to the central bank’s concerns as a section of the market feels that the easy monetary policy adopted to contain the impact of the global financial crisis is also in some way contributing to inflation, even though much of it is because of supply-side factors.

“India’s monetary exit will likely focus on first shrinking excess liquidity via multiple tools before normalising policy rates, probably from March/April 2010,” said Rajeev Malik of Macquarie Economic Research in a recent report.

Even though the country’s foreign exchange reserves have risen by around $13bn during Aug-Oct, much of this is believed to be due to revaluation of non-dollar assets in reserves such as euro, pound and the yuan. While some feel that the central bank could have also intervened by buying non-dollar currencies, these amounts are not reckoned to be significant.

The central bank’s policy of minimal intervention also helps it bring down the cost of managing foreign exchange, for if RBI continuously buys dollars from the market, it has to simultaneously infuse rupee liquidity into the system and later suck it out by selling bonds.

Money Supply (M3): India’s Money Supply (M3) is at Rs 4,938,278 Crores ($1.02 Trillion) while the M1 Money Supply is Rs 1,268,537 Crores ($262 billion) as of May 2009 growth of 20.57% from previous year.

Bank of India Forex - India to Use Rupee to Tackle Inflation ‘Problem,’ ABN Amro Says
India Friday 18 December 2009– India may allow the rupee to gain in 2010 to slow inflation that accelerated to a 10-month high because rising prices pose a “more serious problem,” according to ABN Amro Bank NV.

Letting the rupee appreciate is a better option for policy makers than slowing growth by raising interest rates, said Irene Cheung, the Singapore-based director of emerging-markets trading at the Dutch lender.

The rupee has declined 0.9 percent to 46.6656 per dollar in the past month, the second-worst performer among 10 Asian currencies tracked by Bloomberg, paring its gain for the year to 4.6 percent. Wholesale-price inflation accelerated to 4.78 percent in November from a year earlier, after a 1.34 percent gain in October, drawing protests from opposition parties.

“It makes sense for the central bank to allow the rupee to rise because it would help them in terms of containing inflation,” Cheung said in an interview yesterday. “If you tighten the monetary policy, particularly raising interest rates, it might have a negative impact on the broader economy.”

Jong-Wha Lee, the Asian Development Bank’s chief economist, said on Dec. 15 that the region should keep interest rates low to support the recovery. Reserve Bank of India Governor Duvvuri Subbarao earlier this month said the nation may need to use monetary policy to steady inflationary expectations should food price increases persist.

Prime Minister Manmohan Singh won a second five-year term in May vowing to alleviate poverty in a country where the World Bank estimates 800 million live on less than $2 a day.

India is taking measures to boost food stocks after the weakest monsoon since 1972 hurt farm output in the world’s second biggest producer of sugar, rice and wheat. Wholesale-food prices rose the most in 11 years in the last week of November.

“If food price inflation persists for a long time it can fuel inflationary expectations, and monetary policy will have to take a nuanced view on that,” Subbarao said.

Share of Exports

In the longer-term, improvements in the balance of payments will help the currency rise, Cheung said. “If the balance of payment is supportive of a gain, I don’t think the central bank will stand in the way,” Cheung said.

India’s balance of payments showed a surplus of $415 million in the first half of 2009 compared with a deficit of $22.6 billion in the previous six months.

Stock purchases by global investors totaled $16.6 billion this year, approaching the record $17.2 billion of net inflow in 2007.